PRIVATE CORPORATIONS

CORPORATION, DEFINED

An artificial being created by

operation of law having the right
of succession, and the powers,
attributes and properties
expressly authorized by law and
incident to its existence.

Classification of corporations
As to organizers
Public

By State only

Private

By private persons
alone or with the
State

As to functions

Public

Private

Government of Usually for profita portion of the making

territory;

As to governing law

Public
Private

Special Laws Law on Private

Corporations

AS TO LEGAL STATUS
DE JURE

Organized in accordance with the

requirements of law.

DE FACTO
Organized with a colorable compliance
with the requirements of a valid law. Its
existence cannot be inquired collaterally.
Such inquiry may be made by the
Solicitor General in a quo warranto
proceeding

BY ESTOPPEL

Group of persons that assumes to act

as a corporation knowing it to be
without authority to do so, and enters
into a transaction with a third person
on the strength of such appearance. It
cannot be permitted to deny its
existence in an action under said
transaction. It is neither de jure nor de
facto.

BY PRESCRIPTION

One which has exercised corporate

powers for an indefinite period without
interference on the part of the sovereign
power.

As to existence of shares of stock:

Stock

A corporation

1) whose capital stock is divided

into shares and

2) which is authorized to distribute

to
shareholders
dividends
or
allotments of the surplus profits on
the basis of the shares held.

Nonstock

Does not
issue
stocks
nor
distribute
dividends
to
their
members
.

As to relationship of management and

control

HOLDING

One which controls another as a

subsidiary by the power to elect
management. It is one that holds
stocks in other companies for purposes
of control rather than for mere
investment.

SUBSIDIARY

One which is so related to another

corporation that the majority of its
directors can be elected directly or
indirectly by such other corporation.

AFFILIATE

Company which is subject to common

control of a mother holding company
and operated as part of the system.

PARENT AND SUBSIDIARY

Separate entities with power to

contract with each other. The board of
directors of the parent company
determines its representatives to
attend and vote in the stockholders
meeting of its subsidiary. The
stockholders of the parent company
demand representation in the board
meetings of its subsidiary.

AS TO PLACE OF INCORPORATION
Domestic

Formed,
organized, or
existing under
Philippine
laws.

Foreign

Formed,
organized,
or
existing
under
any laws other
than those of
the Philippines.

NATIONALITY OF CORPORATIONS

(1) Control test

Determined by the nationality of the

controlling stockholders or members.
This test is applied in times of war.

(2) GRANDFATHER RULE

Applied in determining the nationality

of a corporation. It traces the
nationality of the stockholders or
investors of corporations so as to
ascertain the nationality of the
corporation where the investment is
made.

The application of the test is limited

however to resolving issues on
investments. By the Foreign Investments
Act, the grandfather rule is merely an
ancillary rule to the main method of
determining nationality, wherein
corporations that are 60% owned by
Filipinos are automatically considered as
100% Filipino-owned. Only when a
corporation is less than
60% owned shall the grandfather rule be
applied.

Ex: MV Corporation and AC

Corporation have equal
interest in XYZ Company. MV
Corporation is 60% owned by
Filipinos, while AC Corporation
is 50% owned by Filipinos.

By the grandfather rule, MV

Corporation would have a 30%
Filipino interest in XYZ Company
(60% of 50%), while AC
Corporation would have a 25%
Filipino interest in XYZ Company
(50% of 50%). Hence, the total
Filipino interest is only 55%.

CORPORATE JURIDICAL PERSONALITY

(1) Doctrine of separate juridical
personality

A corporation has a juridical personality

separate and distinct from that of its
stockholders or members.

Used for purposes of convenience

and to subserve the ends of justice.
Consequences/significance:
1. Liability for acts or contracts
obligations incurred by a corporation,
acting through its authorized agents are
its sole liabilities. (Creese vs. CA, 93 SCRA
483)
2. Right to bring actions may bring
civil and criminal actions in its own name
in the same manner as natural persons.

3. Right to acquire and possess property

property conveyed to or acquired by the
corporation is in law the property of the
corporation itself as a distinct legal entity
and not that of the stockholders or
members. (Art. 44(3), Civil Code)
4. Acquisition of court of jurisdiction
service of summons may be made on the
president, general manager, corporate
secretary, treasurer or in-house counsel.
(Sec. 11, Rule 14, Rules of Court).

5. Changes in individual membership remains

unchanged and unaffected in its identity by changes
in its individual membership. (The Corporation Code
of the Philippines Annotated, Hector de Leon, 2002
ed.)
6. Entitlement to constitutional guaranties:
a. Due process (Albert vs. University
Publishing, 13 SCRA 84)
b. Equal protection of the law (Smith, Bell &
Co. vs. Natividad, 40 Phil. 136)
c. Protection against unreasonable searches
and seizures. (Stonehill vs. Diokno, 20 SCRA 383)
A corporation is not entitled to invoke the right
against self-incrimination. (Bataan Shipyard vs.
PCGG)

(a) Liability for tort and crimes

Liability for

Liability for

torts

A corporation is liable
whenever a tortuous
act is committed by an
officer or agent under
the express direction
or authority of the
stockholders
or
members acting as a
body, or, generally,
from the directors as
the governing body.

crimes

Since a corporation is a
mere legal fiction, it
cannot be held liable for
a crime committed by its
officers, since it does not
have
the
essential
element of malice; in
such case the responsible
officers
would
be
criminally liable.

(B) RECOVERY OF DAMAGES

A corporation is not entitled to moral

damages because it has no feelings, no
emotions, no senses.

In one case, though, the Supreme

Court recognized that corporations can
be entitled to moral damages if their
financial reputation had been harmed.

The Court held that in all cases of libel,

corporations can be awarded moral
damages. The Court, through Justice
Antonio Carpio said:
A juridical person is generally not
entitled to moral damages because,
unlike a natural person, it cannot
experience physical suffering or such
sentiments as wounded feelings,
serious anxiety, mental anguish or
moral shock. The Court of Appeals
cites Mambulao Lumber Co. v. PNB, et

Nevertheless, AMECs claim for moral damages falls

under item 7 of Article 2219 of the Civil Code. This
provision expressly authorizes the recovery of moral
damages in cases of libel, slander or any other form
of defamation. Article 2219(7) does not qualify
whether the plaintiff is a natural or juridical person.
Therefore, a juridical person such as a corporation
can validly complain for libel or any other form of
defamation and claim for moral damages.

Moreover, where the broadcast is libelous per se, the law

implies damages. In such a case, evidence of an honest
mistake or the want of character or reputation of the party
libeled goes only in mitigation of damages. Neither in such
a case is the plaintiff required to introduce evidence of
actual damages as a condition precedent to the recovery of
some damages. In this case, the broadcasts are libelous per
se. Thus, AMEC is entitled to moral damages.
ABS-CBN vs. Court of Appeals
Filipinas Broadcasting Network, Inc. v. Ago Medical and
Educational Center-Bicol Christian College of Medicine,
January 17, 2005

(2) DOCTRINE OF PIERCING THE CORPORATE VEIL

It means that while the corporation cannot be
generally held liable for acts or liabilities of its
stockholders or members, and vice versa because
a corporation has a personality separate and
distinct from its members or stockholders,
however, the corporate existence is disregarded
under this doctrine when the corporation is formed
or used for illegitimate purposes, particularly, as a
shield to perpetuate fraud, defeat public
convenience, justify wrong, evade a just and valid
obligation or defend a crime.

(A) GROUNDS FOR

APPLICATION OF DOCTRINE
(NOTE: MERE OWNERSHIP BY A SINGLE
STOCKHOLDER OR BY ANOTHER
CORPORATION OF ALL OR
SUBSTANTIALLY ALL OF THE CAPITAL
STOCK OF THE CORPORATION DOES
NOT JUSTIFY THE APPLICATION OF
THE DOCTRINE. THERE MUST BE
OTHER CIRCUMSTANCES THAT MUST
BE PRESENT.)

1. The parent corporation owns all or most of the capital

of the subsidiary.

2. The parent and subsidiary corporations have common

directors or officers.

3. The parent company finances the subsidiary

4. The parent company subscribed to all the capital stock

of the subsidiary or otherwise causes its incorporation.

5. The subsidiary has grossly inadequate capital.

6. The subsidiary has substantially no business except

with the parent corporation or no assets except those
conveyed to or by the parent corporation.

7. The papers of the parent corporation or in the

statements of its officers, the subsidiary is described as a
department or division of the parent corporation, or its
business or financial responsibility is referred to as the
parent corporations own.

8. The parent corporation uses the property of

the subsidiary as its own.

9. The directors or executives of the subsidiary

do no act independently in the interest of the
subsidiary but take their orders from the
parent corporation.

10. The formal legal requirements of the

subsidiary are not observed.

(B) TEST IN DETERMINING APPLICABILITY

Control not mere stock control

but complete domination not only of
finances, but of policy and business
practice in respect to the transaction
attacked and must have been such
that the corporate entity as to this
transaction had at the time no
separate mind, will or existence or
existence of its own.

Such control must have been used by the

defendant to commit a fraud or wrong to
perpetuate the violation of a statutory or
other positive legal breach of duty, or a
dishonest and an unjust act in contravention
of the plaintiffs legal right, and,
The said control and breach of duty must
have proximately caused the injury or unjust
loss complained of. (PNB v. Andrada
Electric & Engineering Company, 381
SCRA 244 [2002], Child Learning Center Inc.
v. Tagario (November 25, 2005)

CAPITAL STRUCTURE
Number and qualifications of
incorporators
Natural persons;
Not less than 5 but not more than 15;
Of legal age;
Majority must be residents of the
Philippines; and
Each must own or subscribe to at least
one share.

MINIMUM CAPITAL STOCK AND SUBSCRIPTION REQUIREMENTS

a. At least twenty-five percent (25%) of the

authorized capital stock as stated in the articles of
incorporation must be subscribed at the time of
incorporation;
b. At least twenty-five per cent (25%) of the total
subscription must be paid upon subscription, the
balance to be payable on a date or dates fixed in
the contract of subscription without need of call,
or in the absence of a fixed date or dates, upon
call for payment by the board of directors; and
c. In no case shall the paid-up capital be less
than five thousand (P5,000.00) pesos.

CORPORATE TERM
Shall not exceed fifty (50) years in any
one instance.

CLASSIFICATION OF SHARES
Common shares
The basic class of stock ordinarily and
usually issued without extraordinary
rights and privileges, and the owners
thereof are entitled to a pro rata share in
the profits of the corporation and in its
assets upon dissolution and, likewise, in
the management of its affairs without
preference or advantage whatsoever.

PREFERRED SHARES
Those issued with par value, and preferences either with respect to
(a) assets after dissolution,
(b) distribution of dividends, or both, and other preferences.
Limitations:
a. If deprived of voting rights, it shall still be entitled to vote on
matters enumerated in Section 6 paragraph 6.
b. Preference must not be violative of the Code.
c. May be issued only with a stated par value.
d. The board of directors may fix the terms and conditions only
when so authorized by the articles of incorporation and such terms
and conditions shall be effective upon filing a certificate thereof
with the SEC.

REDEEMABLE SHARES
Permits the issuing corporation to redeem
or purchase its own shares. Limitations:
a. Redeemable shares may be issued only when expressly
provided for in the articles of incorporation;
b. The terms and conditions affecting said shares must be stated
both in the articles of incorporation and in the certificates of stock
representing such shares;
c. Redeemable shares may be deprived of voting rights in the
articles of incorporation, unless otherwise provided in the Code.
Redeemable shares may be redeemed, regardless of the
existence of unrestricted retained earnings (Sec. 8), provided that the
corporation has, after such redemption, sufficient assets in its books
to cover debts and liabilities inclusive of capital stock.

TREASURY SHARES
Shares that have been earlier issued as fully paid and have thereafter
been acquired by the corporation by purchase, donation, and redemption
or through some lawful means. Sec. 9
If purchased from stockholders: The transaction in effect is a return to the stockholders of
the value of their investment in the company and a reversion of the shares to the corporation.
The corporation must have surplus profits with which to buy the shares so that the transaction
will not cause an impairment of the capital.
If acquired by donation from the stockholders: The act would amount to a surrender of
their stock without getting back their investments that are instead, voluntarily given to the
corporation.
Treasury shares need not be sold at par or issued value but may be sold at the best price
obtainable, provided it is reasonable. When treasury shares are sold below its par or issued
value, there can be no watering of stock because such watering contemplates an original
issuance of shares.
Treasury shares have no voting rights as long as they remain in treasury (uncalled and
subject to reissue). Reason: A corporation cannot in any proper sense be a stockholder in itself
and equal distribution of voting rights will be effectively lost.
Neither are treasury shares entitled to dividends or assets because dividends cannot be
declared by a corporation to itself.

FOUNDERS' SHARE
Shares issued to organizers and promoters
of a corporation in consideration of some
supposed right or property.
Shares classified as such in the articles of incorporation
which may be given special preference in voting rights
and dividend payments. But if an exclusive right to vote
and be voted for as director is granted, this privilege is
subject to approval by the SEC, and cannot exceed 5
years from the date of approval.

VOTING SHARES
With a right to vote.

NON-VOTING SHARES

Without right to vote.

The law only authorizes the denial of
voting rights in the case of redeemable
shares and preferred shares, provided
that there shall always be a class or
series of shares which have complete
voting rights.

These redeemable and preferred shares, when such

voting rights are denied, shall nevertheless be
entitled to vote on the following fundamental matters:
a. amendment of Articles of Incorporation
b. adoption and amendment of by-laws;
c. sale or disposition of all or substantially all of
corporate property;
d. incurring, creating or increasing bonded
indebtedness;
e. increase or decrease of capital stock
f. merger or consolidation of capital stock
g. investments of corporate funds in another
corporation or another business purpose; and
h. corporate dissolution

ESCROW STOCK
Deposited with a third person to be
delivered to a stockholder or his assign
after complying with certain conditions,
usually payment of full subscription
price.

OVER-ISSUED STOCK
Stock issued in excess of the authorized
capital stock. It is also known as spurious
stock. Its issuance is considered null and
void.

WATERED STOCK
A stock issued not in exchange for its
equivalent either in cash, property, share,
stock dividends, or services. Water in
the stock represents the difference
between the fair market value at the time
of the issuance of the stock and the par or
issued value of said stock. Both par and
no par stocks can thus be watered stocks.

It includes stocks:
a. Issued without consideration.
b. Issued as fully paid when the
corporation has received a lesser sum
of money than its par or issued value.
c. Issued for a consideration other
than actual cash, the fair valuation of
which is less than its par or issued
value.
d. Issued as stock dividend when
there are no sufficient retained

PAR VALUE SHARES

With a value fixed in the certificates of
stock and the articles of incorporation.

NO PAR VALUE SHARES

Have no par value but have issued value stated in
the certificate or articles of incorporation.
Limitations:
a. No par value shares cannot have an issued
price of less than P5.00;
b. The entire consideration for its issuance
constitutes capital so that no part of it should be
distributed as dividends;
c. They cannot be issued as preferred stocks;

d. They cannot be issued by banks, trust

companies, insurance companies, public
utilities and building and loan
association;
e. The articles of incorporation must
state the fact that it issued no par value
shares as well as the number of said
shares;
f. Once issued, they are deemed fully
paid and non-assessable. (Sec. 6)

STREET CERTIFICATE
A stock certificate endorsed by the
registered holder in blank and transferee
can command its transfer to his name
from the issuing corporation

CONVERTIBLE SHARE
Changeable by the stockholder from one
class to another at a certain price and
within a certain period.

FRACTIONAL SHARE
With a value of less than one (1) full
share.

CORPORATE POWERS
General

powers, theory of
general capacity

a. To sue and be sued in its corporate name;

This power (Section 36(1)) is an incident to corporate existence. (De
Leon 2006 at 319)
As a rule, suits are to be brought by or against the corporation in his
own name.
Corporation de facto may sue or be sued but a corporation which
has been dissolved after the expiration of 3-year winding-up period
ceases to exist de jure or de facto.

Under Sec. 36 of Corporation Code, in relation to

Sec. 23, where a corporation is an injured party,
its power to sue is lodged with its Board of
Directors. A minority stockholder who is a
member of the Board has no such power or
authority to sue on the corporations behalf.
(Tam Wing Tak v. Makasiar,350 SCRA 475 (2001);
Shipside Inc. v. Court of Appeals, 352 SCRA 334
(2001); SSS v. COA, 384 SCRA 548 (2002); United
Paragon Mining Corp v. CA, 2006)

Where the corporation is real party-in-interest,

neither administrator or a project manager could
sign the certificate against forum-shopping without
being duly authorized by resolution of the Board of
Directors (Esteban, Jr. v. Vda. De Onorio, 360 SCRA
230 [2001]), nor the General Manager who has no
authority to institute a suit on behalf of the
corporation even when the purpose is to protect
corporate assets. (Central Cooperative Exchange
Inc. v. Enciso, 162 SCRA 706 [1988]).

When the power to sue is delegated by the by-laws

to a particular officer, such officer may appoint
counsel to represent the corporation in a pre-trial
hearing without need of a formal board resolution.
Citibank, N.A. v. Chua, 220 SCRA 75 (1993)
For counsel to sign the certification for the
corporation, he must specifically be authorized by
the Board of Directors. (BP Leasing Corp. v. CA, 416
SCRA 4 (2003); Mariveles Shipyard Corp. v. CA, 415
SCRA 573 (2003), Metro Drug Distribution Inc. v.
Narciso,(2006 )

b. Of succession by its corporate

name for the period of time stated
in the articles of incorporation and
the certificate of incorporation;
c. To adopt and use of corporate
seal;
d. To amend its Articles of
Incorporation;
e. To adopt its by-laws not contrary
to law, morals, or public policy, and
to amend or repeal the same;

f. For stock corporations: issue and sell stocks

to subscribers and treasury stocks; for nonstock corporations: admit members;
g. To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and deal
with real and personal property, securities and
bonds
h. To enter into merger or consolidation with
other corporations;
i. To make reasonable donations for public
welfare, hospital, charitable, cultural, scientific,
civic or similar purposes, provided that no
donation is given to any (i) political party, (ii)
candidate and (iii) partisan political activity.

j. To establish pension, retirement, and other plans

for the benefit of its directors, trustees, officers
and employees; and
i. To exercise other powers essential or necessary
to carry out its purposes as stated in the articles of
incorporation.
Sec. 36
Enumerates some of the express powers of
corporations (many of which even if not expressly
provided for by law would constitute implied powers of
every entity. (p. 794 of CLVs CLR, 2007)
Enumerates 10 powers that a corporation enjoys in
addition to the special powers that may be provided for in
the purpose clause of the articles of incorporation, which
would also constitute express powers. (ibid., p. 795)

(2) SPECIFIC POWERS, THEORY OF SPECIFIC CAPACITY

(a) Power to extend or shorten corporate term

Requisites:
a. Approved by a majority vote of the board of directors or
trustees
b. Ratified by at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3) of the members.
c. Written notice of the proposed action and of the time and
place of the meeting addressed to each stockholder or
member at his place of residence.
In case of extension of corporate term, any dissenting
stockholder may exercise his appraisal right. Sec. 67

(B) POWER TO INCREASE OR DECREASE

CAPITAL STOCK OR INCUR, CREATE,
INCREASE BONDED INDEBTEDNESS
Requisites:
a. Majority vote of the members of the BoD
b. Ratification by 2/3vote of the outstanding capital
stock, in a meeting duly called for that purpose with
notice previously given
c. Certificate of said corporate act shall be signed by
majority of the members of the Board and the
Chairman and Secretary of the stockholders meeting

d. Certificate must be accompanied by the

Treasurers Affidavit certifying compliance
with the 25%-25% requirements as to
stock corporation. The corporation must
submit proof to the SEC that such decrease
will not prejudice the rights of creditors.
(SEC Opinion no. 05-10, July 12, 2005)
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.

SEC has limited the term bonded indebtedness to

cover only indebtedness of the corporation which
are secured by mortgage on real or personal
property. Debentures are issued on the basis of the
general credit of the corporation and are not secured
by collaterals, and therefore do not constitute
bonded indebtedness and will not require approval
of the stockholders. (Page 243 of CLVs Textbook)
A corporate bond is an obligation to pay a
definite sum of money at a future time at a fixed
rate of interest. (Page 347 of De Leon, 2006)

(C) POWER TO DENY PRE-EMPTIVE RIGHTS

All stockholders of a stock corporation shall enjoy pre-emptive right to

subscribe to all issues or disposition of shares of any class, in proportion
to their respective shareholdings, unless such right is denied by the
articles of incorporation or an amendment thereto.

Such 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; or

2. Shares to be issued in good faith with the approval of the stockholders

representing two-thirds (2/3) of the outstanding capital stock, in
exchange for property needed for corporate purposes or in payment of a
previously contracted debt. Sec. 39

A pre-emptive right is the shareholders right to subscribe to all issues

or disposition of shares or any class in proportion to his present
stockholdings, the purpose being to enable the shareholder to retain his
proportionate control in the corporation and to retain his equity in the
retained earnings and also in the net assets in the event of dissolution.
(p. 832 of CLVs CLR, 2007)
Whenever a capital stock of a corporation is increased and new
shares of stocks are issued, the new issue must be offered first to the
stockholders who are such at the rime the increase was made in
proportion to their existing shareholdings and on equal terms with other
holders of the original stocks before subscriptions are received from the
general public. For example, if a stockholder with pre-emptive right
owns 20% of the outstanding shares of the corporation, he may
subscribe 20% of any shares of stock issued by the corporation. This
principle is known as the right of pre- emption or pre-emptive right of
stockholders (Page 355 of De Leon, 2006)
The rule [on pre-emption] aims to safeguard the right of stockholder
to preserve unaltered and unimpaired his proportionate influence and
interest in the corporation and the relative value of his holdings. (p. 356
of De Leon, 2006)

(D) POWER TO SELL OR DISPOSE OF CORPORATE

ASSETS

Requisites:

a. The sale, etc. must be approved by the board of directors

or trustees;

b. The action of the board of directors or trustees must be

authorized by the vote of stockholding representing 2/3 of
the outstanding capital stock including holders of nonvoting shares or 2/3 of the members as the case may be;
and

c. The authorization must be done at a

stockholders or members meeting duly called for
that purpose after written notice. No ratificatory
vote needed:
a. If it is necessary in the usual and regular
course of business
b. if the proceeds of the sale or other disposition
of such property and assets be appropriated for the
conduct of the remaining business

(E) POWER TO ACQUIRE OWN SHARES

Instances:

a. To eliminate fractional shares out of stock dividends

b. 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

c. To pay dissenting stockholders

d. To acquire treasury shares

e. Redeemable shares regardless of existence of

retained earnings

f. To effect a decrease of capital stock

g. In close corporations, when there is a deadlock

in the management of the business In letters a-c,
there must be unrestricted retained earnings

(F) POWER TO INVEST CORPORATE FUNDS IN

ANOTHER CORPORATION OR BUSINESS

Requisites:

a. Approved by a majority of the board of directors or

trustees; and

b. Ratified by the stockholders representing at least

two-thirds (2/3) of the outstanding capital stock, or by
at least two thirds (2/3) of the members in the case of
non-stock corporations;

c. Written notice of the proposed investment

and the time and place of the meeting shall be
addressed to each stockholder or member.

Any dissenting stockholder shall have appraisal

right. The other purposes for which the funds
may be invested must be among those
enumerated as secondary purposes and must
further comply with the requirements of Section
42.

(G) POWER TO DECLARE DIVIDENDS

General rule: Dividends can only be

declared and paid out of actual and bona
fide unrestricted retained earnings.

Special rules:
a. Where a corporation sold its real property, which is not
being used for business, at a gain, the income derived
therefrom may be availed of for dividend distribution.
b. Increase in the value of a fixed asset as a result of its
revaluation is not retained earnings. However, increase in
the value of fixed assets as a result of revaluation may be
declared as cash or stock dividends provided that the
company:
1. Has sufficient income from operations from which the
depreciation on the appraisal increase was charged
2. Has no deficit at the time the depreciation on the
appraisal increase was charged to operations; and
3. Such depreciation on appraisal increase previously
charged to operations has not been impaired by losses.

c. Dividends can be declared out of the amount received in

excess of the par value of shares when:

1. Declared only as stock dividends and not cash;

2. No creditors are prejudiced; and

3. There is no impairment of capital.

d. Reduction surplus can be a source of dividends. Rule on

paid-in surplus is applicable.

e. No dividends can be declared out of capital except only in two

instances:
1. liquidating dividends; and
2. dividends from investments in wasting asset corporation.

f. Profits realized from sale of treasury shares are part of capital and
cannot be declared as cash or stock dividend as purchase and sale
of such shares are regarded as contractions and expansions of paidin capital.

g. Money cannot be borrowed for the payment of dividends because

indebtedness is not a retained earnings of the corporation.

h. Corporate earnings which have not

yet been received even though they
consist in money which is due, cannot
be included in the profits out of which
dividends may be paid. Dividends corporate profits set aside, declared,
and ordered to be paid by the directors
for distribution among shareholders at
a fixed time.

Forms:
a. Cash
b. Property
c. Stock
While cash dividends due on
delinquent shares can be applied to
the payment of the unpaid balance,
stock dividends cannot be applied as
payment for unpaid subscription.

General Rule: Stock corporations are prohibited

from retaining surplus profits in excess of 100%
of their paid-in capital stock
Except:
a. When justified by definite corporate
expansion projects approved by the board of
directors
b. When the corporation is prohibited under
any loan agreement with any financial institution
or creditor from declaring dividends without
its/his consent and such consent has not yet
been secured

c. When it can be clearly shown that such retention is

necessary under special circumstances obtaining in the
corporation, such as when there is a need for special
reserve for probable contingencies.
Revaluation surplus
paid-in surplus
Unlike par value shares, when no par value shares
are sold at a premium, the entire consideration paid is
considered capital; hence the same cannot be declared
as dividends.
It permits corporations solely or principally engaged in
the exploitation of wasting assets to distribute the net
proceeds derived from exploitation of their holdings
such as mines, oil wells, patents and leaseholds, without
allowance or deduction for depletion.

(H) POWER TO ENTER INTO MANAGEMENT CONTRACT

Requisites:
a. Approved by majority of the Board, by majority
of the stockholders, of both the managed and
managing corporation.
b. If a stockholder of the managed corporation
owns more than 1/3 of the managing corporation,
the management contract must be approved by
at least 2/3 of the stockholders of the managed
corporation. 1. Express power of a corporation

2. Management company must always be subject

to the superior power of the board to give specific
directions from time to time or to recall the
delegation of managerial power. (The Corporation
Code of the Philippines Annotated, Hector de Leon,
2002 ed.)
Management contract - any contract whereby
a corporation undertakes to manage or operate all
or substantially all of the business of another
corporation.
A management contract should not be valid for
more than 5 years for any one term. You can just
keep renewing it provided, that it is not for more
than 5 years at any one time

(I) ULTRA VIRES ACTS

An act which is beyond the conferred powers of a
corporation or the purposes or objects for which it
is created as defined by the law of its organization.

An act done by a corporation outside of the express

and implied powers vested in it by its charter and
by the law. Republic vs. Acoje Mining Co., Inc. 7
SCRA 361
Bar Review Materials in Commercial Law, Jorge
Miravite, 2002 ed.

1. Applicability of ultra vires doctrine

The ultra vires doctrine typically applies

to a corporate body so that any act done
by the body which is beyond its capacity
to act will be considered invalid.

2. CONSEQUENCES OF ULTRA VIRES ACTS

a. Executed contract courts will not set aside or

interfere with such contracts;
b. Executory contracts no enforcement even at the
suit of either party
c. Part executed and part executory principle of no
unjust enrichment at expense of another shall
apply; and
d. Executory contracts apparently authorized but
ultra vires the principle of estoppel shall apply. void
and unenforceable