F.

Corporate Powers (TITLE IV)

● Express Powers - granted by law, Corporation Code, and its Articles of Incorporation or
Charter
● Inherent/Incidental Powers – not expressly stated but are deemed to be within the
capacity of corporate entities
● Implied/Necessary Powers – exists as a necessary consequence of the exercise of the
express powers of the corporation or the pursuit of its purposes as provided for in the
Charter
1. General Powers: Theory of General Capacity - a corporation is said to hold such powers as are
not prohibited/withheld from it by general law ​(Sec. 35)
2. Specific Powers: Theory of Special Capacity - the corporation cannot exercise powers except
those expressly/impliedly given ​(Sec. 36-45)
a. Sec. 37. Power to extend or shorten corporate term
● When approved by a majority vote of the board of directors or trustees,
● Ratified at a meeting by the stockholders or members representing at least 2/3 of
the outstanding C/S or of its members
● Written notice of meeting (includes proposed action, time and place of meeting)
shall be addressed to each shareholders/member at his place of residence and
deposited to the addressee in the post office, or served personally, or when
allowed in by-laws or done with consent of the stockholder, sent electronically in
accordance with SEC rules on use of electronic data messages
b. Sec. 38. Power to increase or decrease capital stock or incur, create or increase bonded
indebtedness
■ Authority of corporation to increase or decrease exists only when expressly
conferred by law
■ Sec. 38 prohibits the procedure to be complied with
1. Increase or decrease is subject to SEC approval
2. Holders of non-voting shares are entitled to vote
3. Notice is mandatory and designed to protect interests of minority
stockholders
■ Limitations (P. 343)
1. Corporation cannot decrease cap stock if it will relieve existing
subscribers from the obligation of paying for their unpaid subscriptions
without a valuable consideration
2. Can’t be in excess of amount limited by AOI
3. Can take place only in manner and conditions prescribed
4. No prohibition for a corp to increase authorized cap stocks even if it has
not yet been fully subscribed
■ Necessity: increase corporate assets or issuance of stock dividends
■ Shall be made within six months from the date of approval of the BOD and
stockholders; can be extended for justifiable reasons
■ The Commission shall not accept for filing any certificate of increase of capital
stock unless accompanied by a sworn statement of the treasurer of the
corporation lawfully holding office at the time of the filing of the certificate,
showing that at least twenty-five percent (25%) of the increase in capital stock
has been subscribed and that at least twenty-five percent (25%) of the amount
subscribed has been paid in actual cash to the corporation or that property, the
 valuation of which is equal to twenty-five percent (25%) of the subscription, has
been transferred to the corporation
c. Sec. 39. Power to deny pre-emptive right
(As to treasury shares)
■ General Rule: All shareholders of a stock corporation have preemptive right to
subscribe to all issues or disposition of shares of any class, in proportion to their
respective shareholdings
■ Exception: If such right is denied by the Articles of Incorporation or an
amendment thereto Pre-emptive right shall not extend to:
1. Shares to be issued in compliance with laws requiring stock offerings or
minimum stock ownership by the public
2. Shares to be issued in good faith with the approval of 2/3 of the
stockholders representing outstanding capital stock, in exchange for
property needed for corporate purposes or in payment of a previously
contracted debt
d. Sec. 40. Power to sell or dispose of corporate assets ​(P. 355)
■ By action of BOD and supported by vote of shareholders or members
e. Sec. 41. Power to acquire own shares
■ For legitimate corporate purposes, provided that the corp has unrestricted
retained earnings in its books to cover the shares
1. To eliminate fractional shares arising out of stock dividends
2. To collect or compromise an indebtedness to the corporation, arising out
of unpaid subscription, in a delinquency sale, and to purchase delinquent
shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders
f. Sec. 42. Power to invest corporate funds in another corporation or business or for any
other purpose
(1) Must be approved by majority vote of the BOD/ BOT
(2) Ratified at a meeting by shareholders representing 2/3 of the outstanding
capital stock/ 2/3 of members of non- stock corporations
(3) Written notice of meeting (includes proposed action, time and place of
meeting) shall be addressed to each shareholders/member at his place of
residence and deposited to the addressee in the post office, or served
personally, or through electronic means
(4) Any dissenting shareholders shall have appraisal right
(5) Where the investment is reasonably necessary to accomplish the
corporation’s primary purpose, the approval of the shareholders/ members is not
necessary
■ NOTES: If it is for the same purpose, or incidental, or related to its PRIMARY
purpose, the board can invest the corporate fund WITHOUT the consent of the
stockholders. No appraisal right.
■ If the investment is in another corporation of different business or purpose BUT in
pursuance of the SECONDARY purpose, the affirmative vote of majority of the
board consented by stockholders/ members is required.
■ If the investment is OUTSIDE the purpose/s for which the corporation was
organized, Articles of Incorporation must be amended first, otherwise it will be an
Ultra Vires act.
g. Sec. 43. Power to declare dividends
 ■ Concept of dividends: A dividend is a payment made by a corporation to its
shareholders, usually as a distribution of profits. When a corporation earns a
profit or surplus, the corporation is able to re-invest the profit in the business and
pay a proportion of the profit as a dividend to shareholders.
■ Classes of dividends
1. Cash Dividend: Pro rata distribution of cash to stockholders - At the
amount of dividends declared
2. Stock Dividend: Pro rata distribution to stockholders of the corporation’s
own stock
3. Property Dividend: Distribution of the corporation’s properties to
stockholders - At the fair value of the property at the date of declaration
h. Sec. 44. Power to enter into management contract
■ Should be approved by the BOD and by shareholders owning at least the
majority of the outstanding capital stock or at least a majority of the members of
both the managing and the managed corporation at a meeting duly called for that
purpose
■ Should be approved by the 2/3 of stockholders owning outstanding capital
stock/members of the managed corporation when:
1. A stockholder or stockholders representing the same interest of both the
managing and managed corporations own more than 1/3 of the total
outstanding capital stock entitled to vote of the managing corporation; or
2. A majority of the members of the BOD of the managing corporation also
constitute a majority of the BOD of the managed corporation
3. 1-2 above applies to any contract whereby a corporation undertakes to
manage or operate all or substantially all of the business of another
corporation, whether such are called service contracts, operating
agreements or otherwise
4. Service contracts or operating agreements which relate to exploration,
development, exploitation or utilization of natural resources may be
entered into for such periods as may be provided in the pertinent laws
and regulations
■ No management contract shall be entered into for a period longer than 5 years
for any one term
i. Sec. 45. Ultra vires acts of corporations
■ Application of Ultra Vires Doctrine: The test to be applied is whether the act in
question is in direct and immediate furtherance of the corporation’s business,
fairly incident to the express powers and reasonably necessary to their exercise.
If so, the corporation has the power to do it; otherwise, not.
■ Consequences of Ultra Vires Acts
1. Executed contract – courts will not set aside or interfere with such
contracts;
2. Executory contracts – no enforcement even at the suit of either party
(void and unenforceable);
3. Partly executed and partly executory – principle of “no unjust enrichment
at expense of another” shall apply;
4. Executory contracts apparently authorized but Ultra Vires – the principle
of estoppel shall apply.
3. How Exercised ​(TITLE III) (P. 291)
 a. By the Shareholders
■ Stockholders have residual power of fundamental corporate changes in the
exercise of their right to vote
b. By the Board of Directors
■ Board of Directors alone exercises the powers of the corporation
■ The board exercises their power through board meetings
c. By the Officers
■ Corporate officers may exercise corporate powers via authority from:
1. Law
2. Corporate By-laws
3. Authorization from the board, either expressly or impliedly by habit,
custom or acquiescence in the general course of business
4. Trust Fund Doctrine
a. The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine
Trust Co. v. Rivera' provides that subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of their
claims. This doctrine is the underlying principle in the procedure for the distribution of
capital assets, embodied in Corporation Code, which allows the distribution of corporate
capital only in three instances:
■ Amendment of the AOI to reduce the authorized capital stock,
■ Purchase of redeemable shares by the corporation, regardless of the existence
of unrestricted retained earnings, and
■ Dissolution and eventual liquidation of the corporation
b. Trust Fund Doctrine means that the capital stock, properties and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors. Stated
simply, the trust fund doctrine states that all funds received by the corporation in payment
of the shares of stock shall be held in trust for the corporate creditors and other
stockholders of the corporation. Under such doctrine no fund shall be used to buy back
the issued shares of stock except only in instances specifically allowed by the
Corporation Code.
c. The creditors of a corporation have the right to assume that so long as there are debts
and liabilities, the BOD will not use corporate assets to purchase its own shares of stock
or to declare dividends to its stockholders when the corporation is insolvent.
d. The trust fund doctrine is not limited to reaching the stockholder’s unpaid subscriptions.
The scope of the doctrine when the corporation is insolvent encompasses not only the
capital stock, but also other property and assets generally regarded in equity as a trust
fund for the payment of corporate debts. All assets and property belonging to the
corporation held in trust for the benefit of creditors that were distributed or in the
possession of the stockholders, regardless of full payment of their subscriptions, may be
reached by the creditor in satisfaction of its claim.
G. Board of Directors and Trustees ​(TITLE III)
1. Doctrine of Centralized Management
> Corporation can only act through its board of directors or trustees
- To exercise powers, they need to have a meeting where there is a quorum - can only
bind the corporation through the actions made at their meetings
- Rationale: directors are not agents of the corporation per se, hence, have no power to
individually bind the corporation
- Exceptions:
 ● Directors are the sole stockholders
● Contract is entered into by any corporate officer who is authorized by BOD
● Transactions ratified in a subsequent board meeting; can be ratified silently or
through acquiescence
● By-laws can create an executive committee with authority to act on specific
matters
● Enter a contract where it delegates management of affairs to another corporation
● Close corporation: action by directors without a meeting or meeting improperly
held can be deemed valid or ratified
> Directors have sole authority to determine policy and conduct ordinary business of the
corporation within the scope of all the matters not requiring consent/approval of
stockholders → means that stockholders only have indirect control of corporation as
expressed through their votes
- Implications:
● Contracts: Corporation and 3rd person are made by BOD not stockholders;
stockholders act as advisers so if they contract with a third person in corporation
name, it’s not binding
● Stockholder not recognizing a contract that has been approved by BOD has no
effect because corporation can only act through the BOD
> Power to bind corporation in contracts can be delegated to other officers
- Exceptions:
● Discretionary powers that are exclusive to BOD or especially delegated to them
● Cannot delegate entire supervision and control of corporation
● Cannot delegate special powers
● Other restrictions provided by the by-laws
2. Business Judgment Rule
> Courts cannot undertake to control the discretion of the BOD about administrative
matters where they have legitimate power of action
- Exception:
● Provided by corporation code
● Act in bad faith
● Act against corporation causing conflict of interest
3. Tenure, Qualifications and Disqualifications of Directors or Trustees
> Tenure: hold office for 1 year and until successors are elected and qualified
- Hold-over: situation where no successor is elected due to valid and justifiable reasons i.e.
pending election protest on outcome of election; incumbent officers continue to function
> Qualifications
- Only natural persons can be elected
- No citizenship requirement under the corporation code; there are citizenship
requirements for corporations not under the code i.e. domestic bank - based on
foreign participation in the bank, rural bank - based on proportionate share in
equity of rural bank, registered investment companies and private dev’t banks -
all members of board must be citizens of the Philippines
- Constitution: aliens cannot be elected as directors of corporations engaged in
business or industries totally/partially nationalized
● Stock corporations
1. Must own at least one share of capital stock
 2. Share of stock must be registered in their name on the books of the
corporation
3. Must continuously own at least a share of stock during his term; if not,
ceases to be a director
4. Majority must be residents of the Philippines
● Non-stock corporations
- Must be members in good standing and majority are residents of the
Philippines
*Note: Independent director - corporations need to have at least 2 independent directors, people who are
independent of management and relationships that can interfere with own judgment
*By-Laws: can add qualifications required as long as they are not contrary to the requirements of the
corporation code
> Disqualifications
- Has been convicted and was imprisoned for more than 6 years
- Does not hold a share of the stock/transferred his share of the stock
4. Elections
● Requirements
1. Must have majority of owners of capital stock present or with written proxies
2. Must be by ballot if requested; voting by roll call (raising of hands) is valid
otherwise
3. Stockholder cannot be deprived in AOI or by-laws of right to use any voting
method
4. No delinquent stock shall be voted (Delinquent stock - unpaid subscription)
5. Quorum - candidate with highest number of votes is elected; requires plurality not
majority (Plurality - highest number of votes; majority - higher number of votes
than all other candidates combined)
6. Failure to hold elections - meeting can be adjourned from day to day or time to
time not indefinitely (sine die)
7. Requisite notice must be given
a. Cumulative Voting/Straight Voting
● Straight voting: every stock holder can vote the number of shares for as many
persons as there are directors ex. A owns 100 shares and there are 5 directors to
be chosen, entitled to 500 votes (100 x 5)
● Cumulative voting
○ For one candidate
- Stockholder is allowed to concentrate votes to one candidate
based on number of directors to be elected x stockholder’s
shares
○ By distribution
- Can distribute votes based on number of directors to be elected
x stockholder’s shares
*Note: Non-stock corporation - can cast as many votes as the trustees to be elected but not more than 1
vote for 1 candidate
b. Quorum
- Number of the membership of a collective body that is competent to transact
business or do any other corporate act
● Rules
 - Required for presence of a quorum: Majority of number of directors or trustees -
50%+1
- Required for approval of corporate acts: majority vote of directors/trustees
present at a meeting where there is a quorum; majority - 50%+1
- Code allows to require a number greater than majority to constitute a quorum
5. Removal
> Can be removed with a prescribed vote of stockholders or members
- Limitation: cannot be without cause
> BOD has no power to remove one of its members as director
> Court can remove and appoint a receiver due to mismanagement of directors
● Requisites:
1. Removal must take place at a regular meeting or special meeting called for the
purpose
2. Must have previous notice to stockholders or members of the corporation and
intention to propose the removal at the meeting
3. Removal must be through stockholders holding ⅔ of outstanding capital stock
6. Filing of Vacancies
- Vacancy can be filed by election at the same meeting without further notice/at any regular
or special meeting called for the purpose after giving the prescribed notice → those who
removed the director can choose replacement at same meeting
- Holds office only for unexpired term of the predecessor
- Can be filled
● By stockholders or members
1. Vacancy results from removal of stockholders or members or expiration
of term
2. Occurs through other factors - death, resignation, abandonment,
disqualification → remaining members are not a quorum
3. Vacancy can be filled by remaining directors or trustees
4. Vacancy is created by reason of an increase in number of directors or
trustees
● By members of the board
- If it constitutes a quorum, majority are empowered to fill any vacancy
occurring in the board other than by removal/expiration
- Cannot fill positions based on increase in number of directors
7. Compensation
> authorized to provide in by-laws the compensation of directors or trustees
- If there is no provision, directors will not receive any compensation unless authorized
through votation
> directors have no authority to grant compensation for themselves; entitled to
reimbursement for expenses incurred or for services beyond his duties (needs votation)
> compensation is limited to at most 10% of the annual net income before income tax of
the corporation from the previous year
> allowed to receive per diems (daily allowance) - not included in 10% limitation of the
total yearly compensation
● Corporate officers
○ Not directors
 - If they are elected or appointed for services with the intention &
expectation of payment, promise on the part of the corporation to
pay reasonable compensation
○ Directors
- Entitled to compensation as fixed by board resolution
*Note: compensation can take form of salary and fringe benefits
8. Rules on Fiduciaries’ Duties and Liabilities
● Duties
1. Under obligations of trust and confidence to the corporation and stockholders to
act in good faith and for interest of corporation; must perform due care and
diligence
2. Personally liable for any wrongful disposition of corporate assets, loss or injury to
corporation through gross negligence or unauthorized acts
3. Not liable for business losses from honest bad judgment
● Liabilities - jointly and severally liable
1. Willfully and knowingly votes to patently unlawful acts of the corporation
2. Guilty of gross negligence or bad faith
3. Acquires any personal or pecuniary (relating to or consisting of money) interest in
conflict with his duty
*Note: for secret profits, accountable for those that would have been accrued by corporation
9. Responsibility for Crimes - ​refer to pdf
10. Inside Information - ​refer to pdf
11. Contracts
a. By Self-Dealing Directors with the Corporation
> contract is voidable
● Exceptions
1. All conditions in Sec 32 are enumerated:
I. presence of the director or trustee in the board meeting which the
contract was approved was not necessary to constitute a quorum
II. vote of the director or trustee was not necessary for approval
III. contract is fair and reasonable under circumstances
IV. in case of an officer, contracts have been previously authorized by
BOD or BOT
2. Not all conditions are present but corporation elects not to question
validity without prejudice to liability of directors or trustees
3. If only 3rd condition is present - if contract is ratified by required vote at a
meeting
b. Between Corporations with Interlocking Directors
- Interlocking directors: one, some, all directors in 1 corporation are also directors
in another corporation
> valid as long as fair and reasonable
- If interest of interlocking director is substantial (>20% of outstanding capital
stock), Sec 32 applies
12. Executive Committee
- Group delegated by BOD to expedite action on important matters without need for a
board meeting
 - Must be provided for in the by-laws and cannot be composed of less than 3 members;
can act on specific matters as delegated by the Board but not those that can only be
acted on by the Board
- Should be distinguished from other committees
● Restrictions on power:
1. Approval of any action that requires shareholders’ approval
2. Filing of vacancies in the board
3. Amendment or repeal of by-laws or adoption of new by-laws
4. Amendment or repeal of any resolution by which its express terms are
not so amedable or repealable
5. Distribution of cash dividends to shareholders
- For restriction #4 - executive committee can amend/repeal any resolution unless it is
expressly not amendable or repealable (revoke or annul); authority to appoint an
executive committee must be stated in the by-laws because they are as powerful as the
Board
- Quorum - requires majority of the members, cannot delegate authority to one member
- Membership - all members must be directors of the corporation; alternate representation
is allowed in cases when there is a need for formal approval by BOD
13. Meetings - ​refer to pdf
a. Regular or Special
● When and where
● Notice
b. Who Presides
c. Quorum
d. Rule on Abstention
H. Stockholders and Members
1. Rights of Stockholders and Members
Doctrine of Equality of Shares - Where the articles of incorporation do not provide for any
distinction of the shares of stock, all shares issued by the corporation are presumed to be
equal and enjoy the same rights and privileges and are also subject to the same
liabilities.
2. Participation in Management
Proxy
1. Proxies shall be in writing and shall be signed by the stockholders or members;
2. The proxy shall be filed within 5 days before the scheduled meeting with the corporate
secretary;

3. Unless otherwise provided (continuing in nature) in the proxy, it shall be valid only for
the meeting for which it is intended; AND
4. No proxy shall be valid and effective for a period longer than 5 years at any one time.
Voting Trust - It is an agreement whereby one or more stockholders transfer their shares
of stocks to a trustee, who thereby acquires for a period of time the voting rights (and/or
any other rights) over such shares; and in return, trust certificates are given to the
stockholder/s, which are transferable like stock certificates, subject, to the trust
agreement.
Cases when stockholders’ action is required -
i. By a Two-Thirds Vote
Corporate Act​: Denial of pre-emptive
 Salient Points​: 1. Only if the AOI or amendment thereto denies
pre-emptive right
2. extends to shares issued in good faith in exchange for property
needed for corporate purposes
Corporate Act​: Delegation of the power to Amend, Repeal or Adopt New
By-Laws
Salient Points​: 1. Can be revoked by majority OCS
2. Non-voting shares cannot vote
Corporate Act​: Removal of Directors/Trustees
ii. By a majority vote
Corporate Act​: Fixing of compensations of directors
Salient Points​: 1. Reasonable per diems
2​. By-Laws may provide compensation
3​. not more than 10% of the net income before income tax
Corporate Act​: Adoption of By-Laws
Salient Points​: Non-voting shares can vote
Corporate Act​: Election of Directors/Trustees
Salient Points​: 1. The highest number of votes get elected
2. cumulative voting
3. non-voting shares cannot vote
Corporate Act​: Issued Price of No-Par value shares
Salient Points​: Stockholders/Members shall vote BOD/BOT are not
authorized by the articles of incorporation and the by-laws to fix to fix the
price
iii. By cumulative vote
Corporate Act​: Fixing the issued Price of No-Par value shares
If BOD is not authorized by the AOI
Corporate Act​: Amendment or repeal of By-Laws or adoption of new
By-Laws
Salient Points​: may be made by the Board only after due delegation by
the Stockholders
Corporate Act​: Management Contract
Majority vote of BOD of both managing and managed.
Majority of OCS/members both managing and some cases 2/3 of
OCS

3. Proprietary Rights
a. Right to Dividends - That he is a STOCKHOLDER
1. Cash Dividends- declared the pro rata shares
2. Stock Dividends- may be rescind at any time before the actual
issuance of stock.

b. Right to Appraisal - ​Demand payment of the fair value of shares, dissenting from
a proposed corporate action
c. Right to Inspect
1. Director, trustee, stockholder or member
2. Voting trust certificate holder
3. Stockholder of a sequestered company
 d. Pre-emptive right - ​share proportionately in any new issues of stock of the same
class
e. Right to vote
f. Right to first refusal - A stockholder who may wish to sell or assign his shares
must first offer the shares to the corporation or to the other existing stockholders
of the corporation, under terms and considerations which are reasonable, and
only when the corporation or the other stockholders do not or fail to exercise their
option, is the offering stockholder at liberty to dispose of his shares to third
parties.
4. Remedial Rights
a. Individual Sui - ​A suit instituted by a shareholder for his own
behalf against the corporation.
b. Representative Suit - ​A suit filed by a shareholder in his behalf and in behalf likewise of
other stockholders similarly situated and with a common cause against the corporation.
c. Derivative Suit - ​A suit filed in behalf of the corporation by its shareholders (not creditors
whose remedies are merely subsidiary such as in accion subrogatoria or in accion
pauliana) upon a cause of action belonging to the corporation, but not duly pursued by it,
against any person or against the directors, officers and/or controlling shareholders of the
corporation. If the suit is filed against a third person, the case is not infra-corporated in
nature. A derivative suit is a remedy designed by equity and has been the principal
defense of the minority stockholders against abuses by the majority. The real
party-in-interest in a derivative action is the corporation itself, not the shareholders who
have actually instituted it.
5. Obligations of a Stockholder
1. Liability to the corporation for unpaid subscription; ​(Secs. 67-70)
2. Liability to the corporation for interest on unpaid subscription if so required by the
by-laws; ​(Sec. 66)
3. Liability to the creditors of the corporation for unpaid subscription; ​(Sec. 60)
4. Liability for watered stock; ​(Sec. 65)
5. Liability for dividends unlawfully paid; ​(Sec. 43)
6. Liability for failure to create corporation. ​(Sec. 10)
6. Meetings
a. Regular/ Special
1. Regular- annually on a date fixed in the by-laws, any date in April
2. Special- any time deemed necessary or as provided in the by-laws
- When
1. Regular meeting- at least 2 weeks before the meeting
2. Special Meeting- at least one week.
- Notice
1. Issued by one who has authority to issue it
2. in writing
3. date, time and place unless otherwise provided in By-Laws
4. state business
5. at a certain time before scheduled
*Even if the meeting be improperly held or called, valid if within the
powers or authority of the corporation, all the stockholders or members of
the corporation are present or duly represented at the meeting.
b. Who calls the meetings - ​ President of the corporation has authority to preside at all
meetings of stockholders
c. Quorum - ​Number of the membership of a collective body competent to transact its
business (Stockholders representing a majority of the outstanding capital stock)
d. Minutes of the Meeting - ​Keep and carefully preserve at its principal office a record of all
business transactions and minutes of all meetings of stockholders or members, board of
directors or trustees, set forth in detail, time and space of holding the meeting, how
authorized, the notice given, regular or special, every act done or ordered done at the
meeting.