CORPORATE POWERS (SEC.

41- 45)

A corporation is invested with three types of powers: (1) those expressly provided for under the
Corporation Code;(2) those which are implied which includes all powers necessary for the to
carry our the express power granted and the purposes of the corporation are implied and (3)
those which are incidental to the existence of the corporation.

This report discusses the express or specific powers under the Corporation Code of the
Philippines particularly Sections 41 to 44 and Section 45 which involves Ultra Vires Acts of the
Corporation or those acts which are beyond corporate powers.

SECTION 41

Sec. 41. Power to acquire own shares. - A stock corporation shall have the
power to purchase or acquire its own shares for a legitimate corporate
purpose or purposes, including but not limited to the following cases:
Provided, That the corporation has unrestricted retained earnings in its
books to cover the shares to be purchased or acquired:

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 entitled to payment for

their shares under the provisions of this Code. (n)

Section 41 of the Corporation Code allows a stock corporation to purchase or acquire its own
shares for a legitimate corporate purpose/s, provided that it has unrestricted retained earnings to
cover the shares purchased. Once these shares are purchased, they are now referred to as
treasury shares.
It must be noted that the list enumerated under Section 41 is not exclusive since the corporation
may have other legitimate business purposes in acquiring its own shares. The corporation may
exercise this power to (a) effect a decrease of capital stock; (b) to acquired redeemable shares
regardless of existence of retained earnings; and (c) in cases of close corporations, when there
is a deadlock in the management of the business.

The conditions for the exercise of the power are as follows:

1.The capital must NOT be impaired;
2. That it be for a legitimate and proper corporate purpose
3. That there shall be unrestricted retained earnings;
4. That the transaction is designed and carried in GOOD FAITH

The reason for the availability of unrestricted retained earnings is because the power to acquire
its own shares is a method of distribution or withdrawal of assets and may be subject to abuse
(Villanueva, Philippine Corporate Law 2013). This is also to avoid violating the Trust Fund
Doctrine.

TRUST FUND DOCTRINE:

This refers to the principle that the CAPITAL STOCK, PROPERTY and OTHER ASSETS of
the corporation are regarded as EQUITY IN TRUST for payment of corporate creditors and
which the corporation may NOT dissipate.

However, there are certain exemption to the general rule that a corporation can only purchase its
own shares when there are unrestricted retained earnings and these are (1) amendment of the
Articles of Incorporation to reduce the authorized capital stock; (2) in case of redemption of
redeemable shares as long as the corporation has sufficient assets to meet its liabilities and
dissolution and eventual liquidation of the corporation (Sec. 8, Republic Planters Bank vs
Agana Sr., G.R. No. 51765) and when the shares are reacquired by a close corporation in case
of a deadlock as provided for in Sec. 104 of the Corporation Code.
Note: The creditors may sue the stockholders directly for the latters unpaid subscription

The following are the instances wherein the the Trust Fund Doctrine is
applied:
1. The corporation has distributed its capital among the stockholders without providing for the
payment of creditors
2. When there is payment of dividends without unrestricted retained earnings;
3. Where it had released the subscribers to the capital stock from their subscriptions;
4. Where it has transferred the corporate property in fraud of its creditors; and
5. Where the corporation is insolvent

SECTION 42

Sec. 42. Power to invest corporate funds in another corporation or business

or for any other purpose. - Subject to the provisions of this Code, a private
corporation may invest its funds in any other corporation or business or for
any purpose other than the primary purpose for which it was organized
when approved by a majority of the board of directors or trustees and
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, at a stockholder's or member's meeting
duly called for the purpose. Written notice of the proposed investment and
the time and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with postage prepaid, or
served personally: Provided, That any dissenting stockholder shall have
appraisal right as provided in this Code: Provided, however, That where the
investment by the corporation is reasonably necessary to accomplish its
primary purpose as stated in the articles of incorporation, the approval of
the stockholders or members shall not be necessary. (17 1/2a)

Under Section 42 of the Corporation Code, a corporation may invest its funds in any other
corporation or business other than that of the primary purpose and secondary purpose stated in
its Articles of Incorporation, provided that for those investments involving the secondary
purpose, the board must seek approval from stockholders representing at least 2/3 of the
outstanding capital stock or in case of non-stock corporation, 2/3 of of its members, at a
stockholders or members meeting duly called for the purpose.

This is so because the law presumes that when stockholders or members invest in a corporation,
they expect that the latter, through its Board will only pursue the primary purpose indicated in
the Articles of Incorporation; and if the Board would pursue a secondary purpose, then it would
only do so if the stockholders or members approve that the supposed funds for pursuing the
primary purpose would be diverted to a secondary purpose (Villanueva, Philippine Corporate
Law 2013).

Investments of the corporation pursuing its PRIMARY PURPOSE involves only the approval
of the Board of Directors while those investments which is in line with its SECONDARY
PURPOSE the following must concur:

1.Resolution and approval of the board of directors

2. Ratification by the stockholders representing at least 2/3 of the outstanding capital
stock or 2/3 of the members in case of non-stock corporation
3. Ratification must be made at a meeting duly called for the purpose
4. Prior written notice of the proposed investment and the time and place of the meeting
shall be made, addressed to each stockholder or member by mail or by personal
service
5. Any dissenting stockholder shall have appraisal right
An appraisal right is a right given to any dissenting stockholder because he will be exposed to a
line of business which is not being pursued when he invested in the company.

According to SEC Opinion No. 54, Nov. 3, 2003, the term funds includes any corporate
property to be used in furtherance of business and it also includes donations received by the
corporation. Thus a, a non-stock, no profit corporation may invest its funds or subscribe to
shares of another domestic corporation.

SECTION 43

Sec. 43. Power to declare dividends. - The board of directors of a stock

corporation may declare dividends out of the unrestricted retained earnings
which shall be payable in cash, in property, or in stock to all stockholders on
the basis of outstanding stock held by them: Provided, That any cash
dividends due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses, while stock dividends
shall be withheld from the delinquent stockholder until his unpaid
subscription is fully paid: Provided, further, That no stock dividend shall be
issued without the approval of stockholders representing not less than two-
thirds (2/3) of the outstanding capital stock at a regular or special meeting
duly called for the purpose. (16a)

Stock corporations are prohibited from retaining surplus profits in excess of

one hundred (100%) percent of their paid-in capital stock, except: (1) when
justified by definite corporate expansion projects or programs approved by
the board of directors; or (2) when the corporation is prohibited under any
loan agreement with any financial institution or creditor, whether local or
foreign, from declaring dividends without its/his consent, and such consent
has not yet been secured; or (3) when it can be clearly shown that such
retention is necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for probable
contingencies. (n)

The Board of Directors has the discretion to declare dividends. If the dividends are in form of
cash or property then the board alone may declare the issuance of such. But if the dividends to
be issued are in form of stock dividends then under Section 43 of the Corporation Code, the
decision of the board is subject to the approval of the stockholders representing at least 2/3 of
the outstanding capital stock at a regular or special meeting duly called for the purpose. If the
Board of Directors does not want to declare stock dividends then the stockholders cannot
compel them to do so.

However, as provided for in the second paragraph of Section 43, by way of exception, stock
corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in
capital except 1) when justified by definite corporate expansion projects or programs approved
by the board of directors; or (2) the corporation is prohibited under any loan agreement with
any financial institution or creditor, whether local or foreign, from declaring dividends without
its/his consent, and such consent has not yet been secured; or (3)it can be clearly shown that
such retention is necessary under special circumstances obtaining in the corporation, such as
when there is need for special reserve for probable contingencies.

Under the SEC Rules Governing the Distribution of Excess Profits, any declaration of
dividends, whether cash or stock, shall be reported to the SEC within 15 days from the date of
declaration. For those corporations listed in the stock exchange or those registered under the
Securities Regulation Code, the report must be filed with the SEC before or simultaneously
with the release or publication of the notice of the declaration of dividends.

The following are the requirements for declaration of dividend:

1. Unrestricted retained earnings
2. Resolution of the board
3. If stock dividends are declared, there must be resolution of the board and the
 concurrence of 2/3 outstanding capital stock

Note: Unrestricted retained earnings are the retained earnings which have not been reserved or
set aside by the board of directors for some corporate purpose (SEC Memorandum Circular No.
11, Series of 2008). The undistributed earnings of the corporation which have not been
allocated for the managerial, contractual or legal purposes and which are free for distribution to
stockholders as dividends. Dividends are corporate profits set aside, declared, and ordered to be
paid by the directors for distribution among shareholders at a fixed time.

Generally, dividends cannot be declared out of the capital (Sec. 5, SEC Memorandum Circular
No. 11, Series of 2008) because following the Trust Fund Doctrine, the subscribed capital stock
of the corporation is trust for the payment of the debts of the corporation to its creditors.
However, there are certain exceptions - (1) Dividends from investments wasting assets
corporation (i.e. Mining or timber cutting corporations); (2) when it is to utilize a lease of
patent; (3) or in case of liquidating dividends.

The following are the different classes of dividends:

1. CASH DIVIDEND - dividend payable in cash
2. PROPERTY DIVIDEND - dividend distributed to shareholders in form of property, real or
personal
3. STOCK DIVIDEND - dividend payable in unissued or increased or additional shares of the
corporation; payable only to stockholders and not to strangers or non-stockholders
4. OPTIONAL DIVIDEND - dividend which gives the stockholder an option to receive
cash or stock dividend
5. COMPOSITE DIVIDEND - dividend which is partly in cash and partly in stocks
6. PREFERRED OR PREFERENTIAL DIVIDEND - dividend which is payable to one class of
stockholders in priority to that to be paid to another class.
7. CUMULATIVE DIVIDEND - dividend which is contracted to be paid at a certain rate at
stated times and if net earnings at any dividend period are sufficient to pay the contract divided,
it is to be made out of subsequent net earnings
8. SCRIP DIVIDEND - dividend in the form of a writing or certificate issued to a
stockholder entitling him to the payment of money, stock, or other benefit at some future
time inasmuch as the corporation at the time such dividends are declared has profits not in
cash or has no sufficient cash
9. BOND DIVIDEND - dividend distributed in bonds of the corporation to the stockholders
10. LIQUIDATING DIVIDENDS - dividends which are actually distributions of the assets
of the corporation upon dissolution or winding up of the same

TABLE 1. DIFFERENCE BETWEEN CASH DIVIDEND AND STOCK DIVIDEND

 SECTION 44

Sec. 44. Power to enter into management contract. - No corporation shall

conclude a management contract with another corporation unless such
contract shall have been approved by the board of directors and by
stockholders owning at least the majority of the outstanding capital stock,
or by at least a majority of the members in the case of a non-stock
corporation, of both the managing and the managed corporation, at a
meeting duly called for the purpose: Provided, That (1) where a stockholder
or stockholders representing the same interest of both the managing and
the managed corporations own or control more than one-third (1/3) of the
total outstanding capital stock entitled to vote of the managing corporation;
or (2) where a majority of the members of the board of directors of the
managing corporation also constitute a majority of the members of the
board of directors of the managed corporation, then the management
contract must be approved by the stockholders of the managed corporation
owning at least two-thirds (2/3) of the total outstanding capital stock
entitled to vote, or by at least two-thirds (2/3) of the members in the case of
a non-stock corporation. No management contract shall be entered into for
a period longer than five years for any one term.

The provisions of the next preceding paragraph shall apply to any contract
whereby a corporation undertakes to manage or operate all or substantially
all of the business of another corporation, whether such contracts are called
service contracts, operating agreements or otherwise: Provided, however,
That such service contracts or operating agreements which relate to the
exploration, development, exploitation or utilization of natural resources
may be entered into for such periods as may be provided by the pertinent
laws or regulations. (n)

A management contract is any contract whereby a corporation undertakes to manage or operate

all or substantially all of the business of ANOTHER CORPORATION, whether such contracts
are called service contracts, operating agreements or otherwise. It does not apply to
management contracts entered into by a corporation with natural persons which is called an
employment contract. No management contract shall be entered into for a period longer than 5
years for any one term.

Under this provision, a corporation cannot enter to a management contract with another
corporation unless such contact shall be approved by the Board of Directors and by
stockholders owning at least the majority of the outstanding capital stock or by majority of
members in the case of non-stock corporation.

The following are the requirements to enter into management contract:

1. Approval by a majority of the quorum of the board of directors;

2. Ratification by the stockholders owning at least majority of the outstanding capital stock
or the
members of BOTH the managing and the managed corporations, at a meeting duly called for
the
purpose;
3. Approval by the stockholders of the MANAGED corporation owning at least 2/3 of the
total
outstanding capital stock entitled to vote, or by at least 2/3 of the members in case of non-
stock
 corporation:

A.)Where a stockholder/s representing the same interest of BOTH the managing and the
managed corporations own or control more than 1/3 of the total outstanding capital stock
entitled to vote of the managing corporation; or B.) Where a majority of the members of the
board of directors of the MANAGING corporation ALSO constitute majority of the members
of the board of directors of the MANAGED corporation

Rationale for Ratification Requirements

A.) Managed Corporation - management contract is a deviation from Section 23 of the
Corporation Code that the corporate affairs shall be managed by the Board of Directors,
allowing an outsider to manage its corporate affairs needs approval from stockholders.
B.) Managing Corporation - deviation from Section 23 of Corporation Code; Board of Directors
will devote their time and resource towards the operation of another corporation

SECTION 45

Sec. 45. Ultra vires acts of corporations. - No corporation under this Code
shall possess or exercise any corporate powers except those conferred by
this Code or by its articles of incorporation and except such as are
necessary or incidental to the exercise of the powers so conferred. (n)

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 (Blacks Law
Dictionary)

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. 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.
 It 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.

TYPES OF ULTRA VIRES

1. Acts done BEYOND the powers of the corporation as provided in
the law or its Articles of Incorporation
2. Acts or contracts entered into in behalf of a corporation by
persons who have NO corporate authority (Ultra Vires Acts of
officers and NOT the corporation, Sec. 23 of the Corporation
Code)
3. Acts or contracts, which are PER SE ILLEGAL as being contrary
to law.

TABLE 2. ULTRA VIRES vs ILLEGAL ACTS vs IRREGULARLY

EXECUTED ACTS
EFFECTS OF ULTRA VIRES ACT

A corporation that is engaged in ultra vires business is liable for torts committed by its agents
within their authority in the course of that business

Fully executed on both sides- courts will not set aside or interfere with such contracts;
contract is effective and will stand as a foundation of rights acquired under it
Wholly executory on both sides - no enforcement even at the suit of either party (void
and unenforceable)

Executory on one side and has been fully performed on the other - the party who has
received benefits from the performance is estopped in claiming that the contract is ultra vires;
principle of no unjust enrichment at the expense of another shall apply

Executory contracts apparently authorized but ultra vires - the principle of estoppel shall
apply

CASES:

NAPOCOR vs VERA (170 SCRA 721)

This case involves a complaint for prohibition and mandamus against petitioner NPC alleging
that it had acted in bad faith in not renewing its contract for stevedoring services of Sea Lion
International Port Services. Respondent judge issued a restraining order against NPC enjoining
the latter from undertaking stevedoring services at its pier.. The respondent judge denied the
NPC s motion to dissolve the restraining order, asserting that respondent judge had no
jurisdiction to issue the order and private respondent, whose contract with NPC had expired
prior to the commencement of the suit, failed to establish a cause of action for a writ of
preliminary injunction and issued a TRO after finding that NPC was not empowered by its
Charter to engage in stevedoring and arrastre services.

ISSUE: Whether or not the undertaking of stevedoring services is empowered by the NPCs
charter powers.

HELD: YES. In determining whether or not an NPC act falls within the purview of the above
provision, the Court must decide whether or not a logical and necessary relation exists between
the act questioned and the corporate purpose expressed in the NPC charter. For if that act is one
which is lawful in itself and not otherwise prohibited, and is done for the purpose of serving
corporate
ends, and reasonably contributes to the promotion of those ends in a substantial and not in a
remote and fanciful sense, it may be fairly considered within the corporation's charter powers

PIROVANO v. DELA RAMA STEAMSHIP (96 Phil 335 , 1954)

 This case involved the issue of whether or not the defendant corporation performed
an ultra vires act by donating the life insurance proceeds to the minor children of Pirovano, the
deceased president of the defendant company under whose management the company grew and
progressed to become a multi-million peso corporation.

Held: NO.

The AOI of the corporation provided two relevant items:

(1) to invest and deal with moneys of the company not immediately
required, in such manner as from time to time may be determined; and

(2) to aid in any other manner any person, association or corporation of

which any obligation or in which any interest is held by this corporation or
in the affairs of prosperity of which this corporation has a lawful interest.

From this, it is obvious that the corporation properly exercised within its chartered
powers the act of availing of insurance proceeds to the heirs of the insured and deceased officer.

HARDEN v. BENGUET CONSOLIDATED (58 Phil 141)

A contract between Benguet and Balatoc provided that Benguet will bring in capital,
eqpt. and technical expertise in exchange for capital shares in Balatoc. Harden was a SH of
Balatoc and he contends that this contract violated the Corporation Law which restricts the
acquisition of interest by a mining corporation in another mining corporation.

Held: Harden has no standing because if any violation has been committed, the same can be
enforced only in a criminal prosecution by an action of quo warranto which may be maintained
only by the Attorney-General.
 A REPORT ON CORPORATE POWERS
(Sections 41 - 45 of the Corporation Code)

Submitted by:
BAUTISTA, CELINE SARAH
L-110365
3C

Submitted to:
ATTY. ROCHELLE DAKANAY
Corporation Law Professor

January 28, 2015