 REVISED CORPORATION CODE OF THE PHILIPPINES property, including securities and bonds of other corporations, as

(R.A. NO. 11232) the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations
 WUUUUUTT BAGO NAAA
prescribed by law and the Constitution;
 BAAE 2  SECTION 35
 BY SIR HABS (h) To enter into a partnership, joint venture, merger, consolidation,
 TITLE IV or any other commercial agreement with natural and juridical
persons;
 POWERS OF CORPORATIONS
(i) To make reasonable donations, including those for the public
 SECTION 35 welfare or for hospital, charitable, cultural, scientific, civic, or similar
purposes: Provided, That no foreign corporation shall give donations
Corporate Powers and Capacity. – Every corporation incorporated
in aid of any political party or candidate or for purposes of partisan
under this Code has the power and capacity:
political activity;
(a) To sue and be sued in its corporate name;
(j) To establish pension, retirement, and other plans for the benefit
(b) To have perpetual existence unless the certificate of of its directors, trustees, officers, and employees; and
incorporation provides otherwise;
(k) To exercise such other powers as may be essential or necessary
(c) To adopt and use a corporate seal; to carry out its purpose or purposes as stated in the articles of
incorporation.
(d) To amend its articles of incorporation in accordance with the
provisions of this Code;  Ekspleynasyon – Sec 35

(e) To adopt bylaws, not contrary to law, morals or public policy, Salient Points/ Remarks
and to amend or repeal the same in accordance with this Code;
 The New RCC includes the power to have perpetual
(f) In case of stock corporations, to issue or sell stocks to subscribers existence
and to sell treasury stocks in accordance with the provisions of this
 The power to enter a partnership and joint venture was
Code; and to admit members to the corporation if it be a nonstock
corporation; specifically enumerated in the RCC as part of the corporate
powers and capacity.
(g) To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage, and otherwise deal with such real and personal
  The RCC removed the prohibition of any DOMESTIC
CORPORATION to make a donation to a political party.
CHANGES: revision
 The prohibition on domestic corporations against giving
donations for political purposes has been removed. Now,
only foreign corporations are prohibited to give such
donations. (Article 35; Section 36)
INNOVATIONS:
 Corporations have now the express power to enter into a
partnership or joint venture with any person. (Section 35)
 Ekspleynasyon – Sec 35
Meaning of powers of a corporation
The term powers of a corporation refers to the right or capacity of a
corporation to perform all acts or things, except only those
forbidden by law and its articles of incorporation in furtherance of
its purpose or purposes.
 Ekspleynasyon – Sec 35
Distinguished from its franchise and objects
(1) The powers of a corporation must be distinguished from its
primary franchise, which is its right to exist as an entity for
the purpose of doing the things embraced within its powers
and from its secondary franchise, which is the right granted
to an existing corporation to use public property for a public
use, but with private profit.
(2) Neither must its powers be confused with its objects or
business. A corporation exercises its powers for the purpose
of attaining its objects.
 Ekspleynasyon – Sec 35
Relative powers of natural persons/partnerships and corporations
(1) Any act not prohibited. — An individual has absolute right
to fully use, enjoy and dispose of his properties, to perform
all acts and to make all contracts without any control except
when they are forbidden by the law.
(2) Only powers granted. — On the other hand, the civil rights
of a corporation are widely different. Under the doctrine of
limited capacity adopted by our corporation law (Sec. 2.), a
corporation has only such powers as are expressly granted
and those that are necessarily implied from those expressly
granted or those which are incidental to its existence.
 Ekspleynasyon – Sec 35
Classification of corporate powers
The three classes of powers of a corporation are:
(1) Those expressly granted or authorized by law (i.e., those
conferred by the Corporation Code and its articles of
incorporation);
(2) Those that are necessary to the exercise of the express or
incidental powers; and
(3) Those incidental to its existence.
 Ekspleynasyon – Sec 35
Determining whether an act or contract within scope of corporate
powers
(1) Sources of powers. — In determining whether a corporation
has power to do an act, it is necessary to:
a) first, refer to its special charter or its articles of
incorporation to see whether it is within the
express, implied, or incidental powers conferred;
b) then, to examine the statutes relating
corporations to see if the act is prohibited; and
c) then, in some cases, to consult the general statutes
to see if the act is illegal even in case of natural
persons.
(2) Express or implied grant of powers. — Unless the power to
carry on a particular business is either expressly or impliedly
conferred thereby, it does not exist.
 Ekspleynasyon – Sec 35
Express powers explained
Express powers are the powers expressly conferred upon the
corporation by law. These powers can be ascertained from the:
 special law creating the corporation; or
 in case the corporation is formed under the general
incorporation law, from such law:
 the general laws of the land applicable to
corporations; and
 its articles of incorporation
Section 35 contains an enumeration of powers expressly given to
corporations created under the general incorporation law. The
express powers may be exercised by the corporation whether or not
any such powers are stated in the articles of incorporation or by-
laws, for they are deemed vested in any corporation organized
under the Code.
 Ekspleynasyon – Sec 35
Implied powers explained
to
Implied powers are those powers which are reasonably necessary to
execute the express powers and to accomplish or carry out the
purposes for which the corporation was formed. (Sec 35, k)
Note: Powers merely convenient or useful are not implied if they
are not essential, having in view the purposes or objects of the
corporation.
 Ekspleynasyon – Sec 35
Implied powers classified
Sometimes it is difficult to determine whether a certain activity is an
implied power or not. However, the following rough classification
embraces most of the implied powers:
(1) Acts in the usual course of business — This includes such
acts as 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 running of the business. It is evident that all of such
acts, under ordinary circumstances, are necessary in order
to run a business;
(2) Acts to protect debts owing to a corporation — If a
corporation is a creditor, it may do such acts as may be
necessary to protect its right as such creditor. Thus, 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;
 Ekspleynasyon – Sec 35
(3) Embarking in different business — A corporation may not engage
in a business different from that for which it was created as a
regular and a permanent part of its business, (pero pwidi siyang
mag invest dun sa iba) This is especially true with respect to those
particular kinds of corporate activities which are governed by special
laws,
(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 — Thus, a corporation may conduct
contests or sponsor radio or television programs, or promote fairs
and other gatherings to advertise and increase its business.
 Ekspleynasyon – Sec 35
Express powers distinguished from implied powers
(1) The express powers have to do largely with the main
business, objects and purposes of the corporation; the
implied powers, largely with the means and methods of
attaining those objects and purposes.
(2) The former are determined once and for all by the language
of the corporate charter and the applicable law; the latter
may change according to time, place, and surrounding
circumstances.
(3) The test of the former is whether they are found in the
words of the charter or the law; the test of the latter is
whether they are fairly incidental to the former and
reasonably necessary to carry them out in furtherance of
the corporation's business.
 Ekspleynasyon – Sec 35
Incidental or inherent powers explained
Incidental or inherent powers are 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. As powers inherent in the corporation as a legal entity,
they exist independently of the express powers. These incidental
powers are expressly recognized by Sections 2 and 43.
Some of the powers enumerated in Section 35 are incidental
powers which can be exercised by a corporation even in the
absence of an express grant.
Examples of incidental powers are: 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; etc
 Ekspleynasyon – Sec 35
Power to sue and be sued
This power (Sec. 35[1].) is an incident to corporate existence. As a
rule, suits are to be brought by or against the corporation in its own
name.
(1) Dissolved corporation. — Corporations de facto (Sec. 20.)
may sue or be sued but a corporation which has been
dissolved ceases to exist de jure or de facto.
(2) Unregistered corporation. — A corporation not duly
registered in accordance with law has no legal capacity to
sue as such.
(3) Foreign corporation. — Neither can a foreign corporation
which transacts business in the Philippines without the
necessary license from the Securities and Exchange
Commission sue in the Philippine courts.
(4) Right to claim moral damages. — Obviously, an artificial
person like a corporation cannot experience physical
suffering, mental anguish, besmirched reputation, wounded
feelings, moral shock, social humiliation and similar injury.
Nevertheless, a corporation may have a good reputation or
business standing which, if besmirched or debased, may be
a ground for the award of moral damages.
(5) Real party in interest. - As a general rule, the right and
power of a corporation to sue in any court must be brought
by the board of directors or trustees that exercises its
corporate powers on behalf of the corporation or by any of
its duly authorized officer or agent.
 Ekspleynasyon – Sec 35
Power to adopt and use a corporate seal
A seal is a device (as an emblem, symbol, or word) used to identify
or replace the signature of an individual or organization and to
authenticate (as under common law) 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.
 Ekspleynasyon – Sec 35
Power to acquire and convey property
(1) As an incident to every corporation. — This power (Sec.
35[g].) which is also expressly conferred under the law has
always been regarded as an incident to every corporation. A
corporation needs properties or assets to carry on its
business.
(2) As necessary to the transaction of its lawful business. — The
power under Section 35(f) is qualified by the phrase "as the
transaction of the lawful business of the corporation may
reasonably and necessarily require.“
(3) As subject to limitations or restrictions. — The right or
power of private corporations to deal in real as well as
personal property is also subject to limitations or
restrictions prescribed by special laws and the Constitution.
 Ekspleynasyon – Sec 35
Power to acquire shares or securities
(1) Shares of other corporations. — Section 35(f) authorizes a
private corporation to acquire shares or securities of other
corporations. Such an act does not need the approval of the
 stockholders if done in pursuance of the purpose or
purposes of the corporation as stated in its articles of
incorporation but when the purpose is done solely for
investment, the approval of the stockholders as required in
this code is necessary.
(2) Shares of the acquiring corporation. — The Corporation
Code expressly authorizes a corporation subject to
limitations stated therein to acquire its own stocks.
(Unrestricted Retained Earnings)
 SECTION 36
Power to Extend or Shorten Corporate Term. – A private
corporation may extend or shorten its term as stated in the articles
of incorporation when approved by a majority vote of the board of
directors or trustees, and ratified at a meeting by the stockholders
or members representing at least two-thirds (2/3) of the
outstanding capital stock or of its members. Written notice of the
proposed action and the time and place of the meeting shall be sent
to stockholders or members at their respective place of residence as
shown in the books of the corporation, and must either be deposited
to the addressee in the post office with postage prepaid, served
personally, or when allowed in the bylaws or done with the consent
of the stockholder, sent electronically in accordance with the rules
and regulations of the Commission on the use of electronic data
messages. In case of extension of corporate term, a dissenting
stockholder may exercise the right of appraisal under the conditions
provided in this Code.
 Ekspleynasyon – Sec 36
Salient Points/ Remarks
The RCC provides that extension of corporate term may be sent
electronically in accordance with the rules and regulations of the
Commission on the use of electronic data messages.
CHANGES: revision
 Notice about the meeting on the proposed extension or
shortening of corporate term may now be given to the
stockholders and members electronically. (Section 36;
Section 37)
 Ekspleynasyon – Sec 36
Power to extend or shorten corporate term
(1) Unlike in Section 15 which governs the amendment in
general of articles of incorporation, the amendment under
Section 36 must be taken at a meeting of the stockholders
or members and upon a vote.
(2) 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.
(3) A voluntary dissolution of a corporation may be effected by
amending the articles of incorporation to shorten the
corporate term. The extension of the corporate term as
originally stated in the articles of incorporation is subject to
the limitations or conditions provided in Section 11.
 Ekspleynasyon – Sec 36
Appraisal right of dissenting stockholders
Section 36 grants appraisal right to a dissenting stockholder (right of
stockholder in the cases provided by law to demand payment of the
fair value of his shares) "in case of extension of corporate term."
Such right should also be available to a dissenting stockholder if the
corporate term is shortened as it is expressly recognized in this code
Note that the appraisal right applies only to a stockholder of a stock
corporation.
 SECTION 37
Power to Increase or Decrease Capital Stock; Incur, Create or
Increase Bonded Indebtedness. – No corporation shall increase or
decrease its capital stock or incur, create or increase any bonded
indebtedness unless approved by a majority vote of the board of
directors and by two-thirds (2/3) of the outstanding capital stock at
a stockholders’ meeting duly called for the purpose. Written notice
of the time and place of the stockholders’ meeting and the purpose
for said meeting must be sent to the stockholders at their places of
residence as shown in the books of the corporation and served on
the stockholders personally, or through electronic means recognized
in the corporation’s bylaws and/or the Commission’s rules as a valid
mode for service of notices.
 SECTION 37
A certificate must be signed by a majority of the directors of the
corporation and countersigned by the chairperson and secretary of
the stockholders’ meeting, setting forth:
(a) That the requirements of this section have been complied with;
(b) The amount of the increase or decrease of the capital stock;
(c) In case of an increase of the capital stock, the amount of capital
stock or number of shares of no-par stock thereof actually
subscribed, the names, nationalities and addresses of the persons
subscribing, the amount of capital stock or number of no-par stock
subscribed by each, and the amount paid by each on the
subscription in cash or property, or the amount of capital stock or
number of shares of no-par stock allotted to each stockholder if such
increase is for the purpose of making effective stock dividend
therefor authorized;
(d) Any bonded indebtedness to be incurred, created or increased;
(e) The amount of stock represented at the meeting; and
(f) The vote authorizing the increase or decrease of the capital stock,
or the incurring, creating or increasing of any bonded indebtedness.
 SECTION 37
Any increase or decrease in the capital stock or the incurring,
creating or increasing of any bonded indebtedness shall require
prior approval of the Commission, and where appropriate, of the
Philippine Competition Commission. The application with the
Commission shall be made within six (6) months from the date of
approval of the board of directors and stockholders, which period
may be extended for justifiable reasons.
Copies of the certificate shall be kept on file in the office of the
corporation and filed with the Commission and attached to the
original articles of incorporation. After approval by the Commission
and the issuance by the Commission of its certificate of filing, the
capital stock shall be deemed increased or decreased and the
incurring, creating or increasing of any bonded indebtedness
authorized, as the certificate of filing may declare: Provided, That
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: Provided,
further, That no decrease in capital stock shall be approved by the
Commission if its effect shall prejudice the rights of corporate
creditors.
 SECTION 37
Nonstock corporations may incur, create or increase bonded
indebtedness when approved by a majority of the board of trustees
and of at least two-thirds (2/3) of the members in a meeting duly
called for the purpose.
Bonds issued by a corporation shall be registered with the
Commission, which shall have the authority to determine the
sufficiency of the terms thereof.
 Ekspleynasyon – Sec 37
Salient Points/ Remarks
The RCC provides that the corporation if provided in the by-laws
and/or commission’s rules can send notices of the time and place of
meeting to vote for an Increase or Decrease Capital Stock; Incur,
Create or Increase Bonded Indebtedness thru electronic means.
CHANGES: revision
 Notice about the meeting on the proposed increase or
decrease of capital stock or increase of bonded
indebtedness may now be given to the stockholders
electronically. (Section 37; Section 38)
 The certificate executed in case of increase or decrease of
capital stock or increase of bonded indebtedness need not
set forth the actual indebtedness of the corporation on the
day of the meeting. (Section 37; Section 38)
 The application for increase or decrease of capital stock or
increase of bonded indebtedness shall be filed with the SEC
within 6 months from the date of approval of the board of
directors and stockholders, which may be extended for
justifiable reasons. (Section 37; Section 38)
 The treasurer’s sworn statement accompanying the
application for increase of capital stock now clearly provides
that the required 25% subscription is of the “increase in
capital stock” instead of “increased capital stock”. The new
rule is consistent with the current policy of the SEC. (Section
37; Section 38)
 Ekspleynasyon – Sec 37
Power to increase or decrease capital stock
Fundamental change in the corporation. The authority of the
corporation to take such action is not to be implied but exists only
when expressly conferred (express power).
Section 37 prescribes the procedure to be complied with to effect a
legal increase or decrease of the capital stock (not capital) which is
now subject to prior approval of the Securities and Exchange
Commission. Even holders of non-voting shares are entitled to vote
on the matter, (see Sec. 6, par. 6[5].
 Ekspleynasyon – Sec 37
Limitations on the power
(1) As a general rale, 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. (Must 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. (see Sec. 37)
The Corporation Code contains no prohibition for a corporation to
increase its authorized capital stocks even if the same has not yet
been fully subscribed.
 Ekspleynasyon – Sec 37
Necessity for increasing capital stock
(1) Increase of corporate assets. — An increase of the amount
of the capital stock may be for the purpose of effecting an
increase in the corporate assets by authorizing:
a) the creation of new shares to be offered and issued
at a fixed valuation; or
b) the increase of the par value shares authorized to
be issued.
(2) Issuance of stock dividends. — The capital stock may also be
increased without any corresponding increase in the
corporate assets by the issuance of stock dividends.
 Ekspleynasyon – Sec 37
Ways of increasing (decreasing) authorized capital stock
There are at least three (3) ways by which the authorized capital
stock may be increased (decreased):
(1) By increasing (decreasing) the number of shares authorized
to be issued without increasing (decreasing) the par value
thereof;
(2) By increasing (decreasing) the par value of each share
without increasing (decreasing) the number thereof; and
(3) By increasing (decreasing) both the number of shares
authorized to be issued and the par value thereof.
 Ekspleynasyon – Sec 37
ILLUSTRATION:
Assume that the authorized capital stock of X Corporation is fixed at
P1,000,000.00 divided into 100,000 shares with a par value of
P10.00 per share. The capital stock may be increased (or decreased)
as follows:
The number of shares is increased (decreased) to 150,000 (75,000)
shares with the same par value of P10.00 each share; or the par
value per share is increased (decreased) to P15.00 (P5.00) without
increasing (decreasing) the number of authorized shares; or the
number of shares is increased (decreased) to 150,000 (75,000) and
at the same time increasing (decreasing) the par value of each share
to P15.00 (P5.00).
 Ekspleynasyon – Sec 37
Effect of reduction on liability for unpaid subscription
(1) As against corporate creditors. — A corporation has no
power to release an original subscriber to its capital stock
from the obligation of paying for his shares without a
valuable consideration for such release, and as against
creditors, a reduction of the capital stock can take place
only in the manner and under the conditions prescribed by
the statute. Under Section 37, it is expressly provided "that
no decrease of the capital stock shall be approved by the
Commission, if its effect shall prejudice the rights of
corporate creditors."
(2) As between the corporation and the stockholders. — One
object of requiring capital stock to be diminished only at
corporate meetings formally called is to insure publicity and
to warn the public dealing with the corporation of the
intended change. This is incompatible with secret
arrangements and contrivances reducing capital stock by
buying in the shares or by other devices, so as to release
stockholders from their obligations to creditors.
 Ekspleynasyon – Sec 37
Power to incur, create, or increase bonded indebtedness
A corporate bond is an obligation to pay a definite sum of money at
a future time at fixed rate of interest.
(1) Stock and non-stock corporation. — A business corporation,
in the absence of restriction, may borrow money whenever
the necessity of its business so requires and issue security or
customary evidence of debt such as notes, bonds or
mortgages.
(2) Procedure and formalities. — The procedure prescribed in
Section 38 for incurring bonded indebtedness is the same as
the procedure for increasing or decreasing the capital stock
except that the certificate need not state the matters set
forth.
(3) Shares and members entitled to vote. — Even holders of
nonvoting shares or non-voting members, as the case may
be, are entitled to vote on the matter
(4) Prior approval of, and registration of bonds with, SEC. —
Any incurring, creating, or increasing by the corporation of
any bonded indebtedness is subject to prior approval of the
Securities and Exchange Commission.
 SECTION 38
Power to Deny Preemptive Right. – All stockholders of a stock
corporation shall enjoy preemptive 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: Provided, That such
preemptive right shall not extend to shares issued in compliance
with laws requiring stock offerings or minimum stock ownership by
the public; or to shares 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.
 Ekspleynasyon – Sec 38
Right of pre-emption or pre-emptive right of stockholders.
Whenever the capital stock of a corporation is increased and new
shares of stock are issued, the new issue must be offered first to the
stockholders who are such at the time 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
 Ekspleynasyon – Sec 38
Reason for the grant of right
The rule aims to safeguard the right of a stockholder to preserve
unaltered and unimpaired his proportionate influence and interest
in the corporation and the relative value of his holdings.
In other words, the purpose of the right is to protect from
impairment and dilution the basic rights of the existing stockholders
in the corporation, i.e., to voting control, to dividend payments, and
to the net assets of the corporation. Pero pwede niya iwaive ang
right huehue
 Ekspleynasyon – Sec 38
Shares to which right not available
Under Section 38, the pre-emptive right of stockholders to subscribe
to all issues or disposition of shares in proportion to their respective
shareholdings extends "to all issues or disposition of shares of any
class" (such as treasury shares) unless denied by the articles of
incorporation or an amendment thereto18 (in which case they are
deemed to have waived the right), and except to the following:
(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
stockholders representing 2/ 3 of the outstanding capital
stock in exchange for property needed for corporate
purposes; and
(3) Shares to be issued in good faith with the approval of the
stockholders representing 2/ 3 of the outstanding capital
stock in payment of previously contracted debt.
The pre-emptive right does not extend to the issue of shares in No.
(1) in view of the need to comply with a legal requirement which is
paramount to the exercise of the right; and in Nos. (2) and (3) for
reasons based upon practical convenience and necessity and the
exercise of discretion of the board of directors in making new issues
of shares to enable the corporation to carry on the corporate
business.
 SECTION 39
Sale or Other Disposition of Assets. – Subject to the provisions of
Republic Act No. 10667, otherwise known as “Philippine Competition
Act”, and other related laws, a corporation may, by a majority vote
of its board of directors or trustees, sell, lease, exchange, mortgage,
pledge, or otherwise dispose of its property and assets, upon such
terms and conditions and for such consideration, which may be
money, stocks, bonds, or other instruments for the payment of
money or other property or consideration, as its board of directors
or trustees may deem expedient.
A sale of all or substantially all of the corporation’s properties and
assets, including its goodwill, must be authorized by the vote of the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or at least two-thirds (2/3) of the
members, in a stockholders’ or members’ meeting duly called for the
purpose.
 SECTION 39
In nonstock corporations where there are no members with voting
rights, the vote of at least a majority of the trustees in office will be
sufficient authorization for the corporation to enter into any
transaction authorized by this section.
The determination of whether or not the sale involves all or
substantially all of the corporation’s properties and assets must be
computed based on its net asset value, as shown in its latest
financial statements. A sale or other disposition shall be deemed to
cover substantially all the corporate property and assets if thereby
the corporation would be rendered incapable of continuing the
business or accomplishing the purpose for which it was
incorporated.
Written notice of the proposed action and of the time and place for
the meeting shall be addressed to stockholders or members at their
places of residence as shown in the books of the corporation and
deposited to the addressee in the post office with postage prepaid,
served personally, or when allowed by the bylaws or done with the
consent of the stockholder, sent electronically: Provided, That any
dissenting stockholder may exercise the right of appraisal under the
conditions provided in this Code.
 SECTION 39
After such authorization or approval by the stockholders or
members, the board of directors or trustees may, nevertheless, in its
discretion, abandon such sale, lease, exchange, mortgage, pledge,
or other disposition of property and assets, subject to the rights of
third parties under any contract relating thereto, without further
action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any
corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge, or otherwise
dispose of any of its property and assets if the same is necessary in
the usual and regular course of business of the corporation or if the
proceeds of the sale or other disposition of such property and assets
shall be appropriated for the conduct of its remaining business.
 Ekspleynasyon – Sec 39
Salient Points/ Remarks
The new RCC emphasized that Sale or Other Disposition of Assets of
a corporation should be subject to the provisions of provisions of
Republic Act No. 10667, otherwise known as “Philippine
Competition Act”, and other related laws.
CHANGES: revision
 Notice about the meeting on the proposed sale or other
disposition of all or substantially all of the corporate assets
may now be given to the stockholders electronically.
(Section 39; Section 40)
INNOVATIONS:
 The sale or other disposition of assets of a corporation is
now subject to the Philippine Competition Act or RA
10667. (Section 39)
 In non-stock corporations where there are no members
with voting rights, the vote of at least a majority of the
trustees in office will be sufficient authorization for the
corporation to enter into any transaction involving sale or
other disposition of corporate assets. (Section 39)
 The determination of whether or not the sale involves all or
substantially all of the corporation’s properties and assets
must be computed based on its net asset value, as shown
in its latest financial statements. (Section 39)
 Ekspleynasyon – Sec 39
Power to sell, lease, etc. all or substantially all corporate assets.
(1) 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 stockholders
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.
*shall be subject to the provisions of existing laws on illegal
combinations and monopolies (RA 10667)
 Ekspleynasyon – Sec 39
Appraisal right of dissenting stockholder
It is to be noted that the exercise of the appraisal right of any
dissenting stockholder is predicated on the "sale or other
disposition of all or substantially all" of the corporate assets, the
phrase being defined as such which would render the corporation
"incapable of continuing the business or accomplishing the purpose
for which it was incorporated."
 SECTION 40
Power to Acquire Own Shares. – Provided that the corporation has
unrestricted retained earnings in its books to cover the shares to be
purchased or acquired, a stock corporation shall have the power to
purchase or acquire its own shares for a legitimate corporate
purpose or purposes, including the following cases:
(a) To eliminate fractional shares arising 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; and
(c) To pay dissenting or withdrawing stockholders entitled to
payment for their shares under the provisions of this Code.
 Ekspleynasyon – Sec 40
Power to acquire own shares
Section 40 expressly authorizes a stock corporation to purchase or
acquire its own shares subject to the limitation that the acquisition
is for a legitimate corporate purpose or purposes and that there be
unrestricted retained earnings in its books to cover the shares
acquired.
(1) Elimination of fractional shares. — A fractional share is a
share which is less than one (1) corporation share. Thus, if a
stockholder owns 250 shares and the corporation declares
25% stock dividend, his total shares will be 312 and 1/2
shares. Inasmuch as fractional shares cannot be
represented at corporate meetings (No. 1.), the corporation
may purchase the same from the stockholder concerned or
issue fractional scrip certificates to such stockholder who
may negotiate for the sale thereof with other stockholders
also owning fractional shares so as to convert them into full
shares.
(2) Satisfaction of indebtedness to corporations. — No. 2 of
Section 40 does not authorize a corporation to arbitrarily
purchase the shares it issued to any of its stockholders
indebted to it, whether at the prevailing market price or at
par value for the purpose of applying the proceeds thereof
to the satisfaction of its claim against them, and this is
particularly true where the consent of such stockholders has
not been secured. And even where their consent has been
secured, the corporation can buy their shares only if the
conditions for the purchase (infra.) are present, A
stockholder may avail of Section 63 which allows transfer of
shares to a third party.
 Ekspleynasyon – Sec 40
3) Payment of shares of dissenting or withdrawing stockholders. —
No. 3 of Section 40 refers to instances when a dissenting
stockholder is given appraisal right (see Sec. 80) and the right to
withdraw from the corporation as provided in this code.
4) Other cases
 Section 9 Treasury Shares
 Redeemable Shares (kahit wiz unrestricted retained
earnings)
 Shares may also be reacquired to effect a decrease
in the capital stock of a corporation
 Deadlock in a close corporation. SEC may order
reacquisition kahit wiz unrestricted RE
 Ekspleynasyon – Sec 40
Conditions for the exercise of the power
The right and power of a corporation to acquire or purchase its own
shares is not absolute, but depends upon the contingency of the
condition of its affairs and its relation to creditors at the time of the
purchase. (Fisher, op. cit., p. 287.) Briefly, a corporation's right to
purchase its shares according to the weight of authority is subject to
the following limitations:
(1) That its capital is not thereby impaired;
(2) That it be for a legitimate and proper corporate purpose;
(3) That there shall be unrestricted retained earnings to
purchase the same and its capital is not thereby impaired;
(4) That the corporation acts in good faith and without
prejudice to the rights of creditors and stockholders; and
 (5) That the conditions of corporate affairs warrant it.
 Ekspleynasyon – Sec 40
Trust fund doctrine
This doctrine, holds that the assets of the corporation as
represented by its capital stock are "trust funds" to be maintained
unimpaired and to be used to pay corporate creditors in the sense
that there can be no distribution of such assets among the
stockholders without provision being first made for the payment of
corporate debts and that any such disposition of it is a fraud on the
creditors of the corporation who extend credit to the corporation
on the faith of its outstanding capital stock and, therefore, void.
(1) Corporation generally without power to purchase its own
shares – to protect the interests of existing creditors who
might adversely affected. Kaya need compliance
(2) Repayment to stockholders a fraud on corporate creditors –
its like a repurchase ng Corp ng shares ng stockholders.
With that, it might affect the fund. sad
 SECTION 41
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, 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
nonstock corporations, at a meeting duly called for the purpose.
Notice of the proposed investment and the time and place of the
meeting shall be addressed to each stockholder or member at the
place of residence as shown in the books of the corporation and
deposited to the addressee in the post office with postage prepaid,
served personally, or sent electronically in accordance with the rules
and regulations of the Commission on the use of electronic data
message, when allowed by the bylaws or done with the consent of
the stockholders: 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.
 SECTION 42
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, 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 stockholders until their unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without the
approval of stockholders representing at least two-thirds (2/3) of
the outstanding capital stock at a regular or special meeting duly
called for the purpose.
Stock corporations are prohibited from retaining surplus profits in
excess of one hundred percent (100%) of their paid-in capital stock,
except: (a) when justified by definite corporate expansion projects or
programs approved by the board of directors; or (b) when the
corporation is prohibited under any loan agreement with financial
institutions or creditors, whether local or foreign, from declaring stockholders individually. They may be in cash as well as in
dividends without their consent, and such consent has not yet been kind.
secured; or (c) when it can be clearly shown that such retention is
Dividends received by a company which is a stockholder in another
necessary under special circumstances obtaining in the corporation,
corporation are corporate earnings arising from corporate
such as when there is need for special reserve for probable
investment.
contingencies.
 Ekspleynasyon – Sec 42
 Ekspleynasyon – Sec 42
Power to declare dividends
Concept of dividends
The board of directors of a stock corporation has the power to
A stock corporation exists to make a profit and to distribute a
declare dividends out of the "unrestricted retained earnings" which
portion of the profits to its stockholders.
shall be payable in cash, in property, or in stock to all stockholders
A dividend is that part or portion of the profits of a corporation set "on the basis of the outstanding shares held by them."
aside, declared and ordered by the directors to be paid ratably to
(1) Stock dividends. — In the case of stock dividend, it shall not
the stockholders on demand or at a fixed time. It is a payment to
be issued without the approval of stockholders representing
the stockholders of a corporation as a return upon their investment.
at least 2/3 of the capital stock then outstanding at a
It is a characteristic of a dividend that all stockholders of the same
regular meeting of the corporation or at a special meeting
class share in it in proportion to the respective amounts of stock
duly called for the purpose.
which they hold.
(2) Other dividends. — A mere majority of the quorum of the
 Ekspleynasyon – Sec 42
board of directors is sufficient to declare other dividends.
Dividends distinguished from profits or earnings The board may declare, other dividends other than stock
without need of stockholders' approval. The dividends are
(1) A dividend, as applied to corporate stock, is that portion of
paid to the registered owners of stock as of a record date
the profits or net earnings which the corporation has set
(infra.), usually a date different from the date of declaration.
aside for ratable distribution among the stockholders. Thus,
They are stated either at a given percent or a fixed amount
dividends come from profits, while profits are the source of
for each share. The record date determines the time when
dividends.
the stockholders of record shall be ascertained.
(2) Profits are not dividends until so declared or set aside by
 Ekspleynasyon – Sec 42
the corporation. In the meantime, all profits are a part of
the assets of the corporation and do not belong to the Dividends payable out of unrestricted retained earnings
Under the law, dividends other than liquidating dividends (which
are not really dividends as they are from capital) may be declared
and paid out of "the unrestricted retained earnings" of the
corporation. (Ibid.) A corporation cannot make a valid contract to
pay dividends other than from retained earnings or profits and an
agreement to pay such dividends out of capital is unlawful and void.
The power of a corporation to acquire its own shares is likewise
subject to the condition that there be unrestricted retained earnings
in its books to cover the shares to be purchased. (Sec. 41.)
For purposes of the general rule, the capital or capital stock which
may not be impaired or depleted by dividends is not the entire net
assets of the corporation; rather, it is the legal capital of the
corporation in the strict sense, referring to that portion of the net
assets directly or indirectly contributed by the stockholders as
consideration for the stocks issued to them upon the basis of their
par or issued value.
 Ekspleynasyon – Sec 42
Reasons for the rule
 Trust Fund Doctrine. (Security of Creditors)
 The rationale is that stockholders should only receive
dividends from their investment, and not from the
investment itself. (Right of Return, not Right to Return
charaught)
 Ekspleynasyon – Sec 42
Rule as to no par value stock
The Code makes it clear that with respect to no par value shares,
the entire consideration (including paid-in surplus, infra.) received
from the same shall be treated as capital and shall not be available
for distribution as dividends.
The theory is that the stockholders intended that all such
consideration shall constitute the basic business fund of the
corporation to be permanently devoted in the prosecution of the
corporate business.
Note: Diba walang share premium na nirerecord kapag No Par value
ang share na inissue
 Ekspleynasyon – Sec 42
Unrestricted retained earnings explained
(1) The retained earnings of a corporation is "the difference
between the total present value of its assets after deducting
losses and liabilities and the amount of its (outstanding)
capital stock.“ Retained earnings - Assets - liabilities and
legal capital
(2) Such retained earnings or portion thereof are said to be
unrestricted and, therefore, free for dividend distribution to
stockholders, if they have not been reserved or set aside by
the board of directors for some corporate purpose or for
some other purpose in accordance with managerial, legal,
or contractual requirements,
 Ekspleynasyon – Sec 42
Items affecting unrestricted retained earnings
1) Nominal or temporary or income statement accounts closed
to income and expense summary at the end of the period to
determine actual results of operations during the period
and further closed to retained earnings account;
 2) Effects of changes in accounting policy;
3) Foreign exchange gains and losses;
4) Actuarial gains or losses;
5) Share in the net income of associates /joint ventures
accounted for under equity method of accounting;
6) Dividend declarations during the period;
7) Appropriations of retained earnings during the period;
8) Reversals of appropriations;
9) Effects of prior period adjustments; and
10) Treasury shares.
 Ekspleynasyon – Sec 42
Existence of actual profits or earnings
To justify the declaration of dividends, there must be an actual bona
fide surplus profits or earned surplus over and above all debts and
liabilities of the corporation.
 Ekspleynasyon – Sec 42
Declaration of dividends
(1) Conditions. — A dividend declaration ordinarily requires the
concurrence of two things, namely:
a) The existence of "unrestricted retained earnings"
out of which the dividends may be declared and
paid; and
b) A corporate resolution of the board of directors
declaring the payment of a portion or all of such
earnings to the stockholders.
(2) Additional requirements for stock dividends. — Cash
dividends require only approval of the board of directors.
Stock dividends are issued by resolution of the board of
directors and approval of the resolution by the
stockholders. For the declaration of stock dividends, a
corporation must have also a sufficient number of
authorized unissued shares for distribution to stockholders;
otherwise, it must increase its capital stock to the extent of
the corporate earnings to be declared and distributed as
stock dividends,
 Ekspleynasyon – Sec 42
Discretion of the board of directors to declare dividends
The board of directors has the responsibility to declare dividends
and determine the timing as well as their amount.
1. Kahit na may profits or earnings, not required to declare
2. Court cannot compel in the absence of bad faith or clear
abuse of discretion
3. Bayad muna utang or may pambayad ng utang bago declare
dividends ukiebells
Limit on retained earnings
Stock corporations are prohibited from retaining surplus profits in
excess of 100% of their paid-in capital stock except when justified by
any of the reasons mentioned. If the requirement which is
mandatory is violated, the corporation may be compelled by the
Securities and Exchange Commission to declare dividends to its
stockholders.
 Ekspleynasyon – Sec 42
Payment of subscription from dividends
(1) From dividends to be declared — It has been held that a
stipulation to the effect that the subscription is "payable
from the first dividends declared on any and all shares of
said company owned by me at the time dividends are
declared until the full amount of the subscription has been
paid" is illegal for it "obligates the subscriber to pay nothing
for the shares except as dividends may accrue upon the
stock." In the contingency that dividends are not paid, there
is no liability at all.
(2) From cash dividends. — Where payment has been made on
stock subscription, the stockholder is still entitled to receive
cash dividends due on delinquent stock but the dividends
"shall first be applied to the unpaid balance on the
subscription, plus costs and expenses. "The cash dividends
may be applied as payment for the unpaid subscription of
all delinquent shares.
(3) From stock dividends. — A stockholder's indebtedness to a
corporation under a subscription agreement cannot be
compensated with the amount of his shares in the same
corporation, there being no relation of creditor and debtor
with regard to such shares,
 Ekspleynasyon – Sec 42
Liability of stockholders and directors for illegally received
dividends
In case dividends are wrongfully or illegally declared and paid, there
is ample authority for the rule that the stockholders who received
them can be held liable to refund them to the corporation or its
creditors. (immaterial ang good faith sa pagreceive)
 Ekspleynasyon – Sec 42
Right of stockholders after declaration of dividends
1) Cash dividends. — As soon as cash dividends are publicly
declared, the stockholders have the right to their pro rata shares.
(a) In the absence of a record date, the dividend
belongs to the person who is the owner of the
shares of stock at the time of declaration, and not
to the owner of the shares at the time of payment.
(b) ) It is the declaration of the dividends which creates
both the dividends itself and the right of the
stockholders to demand and receive it.
(c) When a cash dividend is duly declared, the amount
due a stockholder belongs to him and it cannot,
without his consent, be reverted to the surplus
account of the corporation.
2) Stock dividends. — The above rule does not apply to stock
dividends as the declaration of such dividends may be rescinded at
any time before the actual issuance of the stock.
 Ekspleynasyon – Sec 42
Total subscription basis of share in dividends
As a general rule, and as applied to any form of dividend
declaration, the participation of each stockholder in the earnings or
profits of the corporation is based on his total subscription and not
on the amount paid by him in account thereof.
For example, if a person subscribes for 1,000 shares of the par value
of P10.00 per share and has paid P5,000.00 on his subscription, he
will participate in dividends on the basis of 1,000 shares, not 500
shares.
The reason is that a stockholder's entire subscription represents his
holdings in the company for which he pays interest on any unpaid
portion. (exception, kapag delinquent, exception dyan is kapag Cash
Dividend)
 Ekspleynasyon – Sec 42
Classes of dividends
Dividends payable to shareholders may be classified as follows:
(1) Cash dividend. — It is dividend payable in cash.
a) Dividends on par value shares are made at a stated
percentage (e.g., 10%) of the par value although
they may also be paid as a fixed amount per share.
b) As to no par value shares, dividends are payable in
terms of so many pesos or centavos (e.g., P10.00,
P0.01) per share since there is no basis on which a
percentage can be stated.
c) If gift certificates are given to stockholders as share
in the profits earned by the corporation, they may
be treated as dividend subject to the requirements
of Section 42
(2) Property dividend. — It is dividend distributed to the
stockholders in the form of property, real or personal, such
as warehouse receipts, or shares of stock of another
corporation.
a) A dividend payable in property is actually a cash
dividend. The stockholder can take the property,
sell it, and realize the cash
b) If the property does not form part of the surplus or
retained earnings of the corporation, the same
cannot be declared as property dividends.
 Ekspleynasyon – Sec 42
(3) Stock dividend. — It is dividend payable in unissued or increased
or additional shares of the corporation instead of in cash or in
property out of the unrestricted retained earnings of the
corporation. A stock dividend may be declared only to the extent of
the maximum number of shares authorized in the articles of
incorporation.
(4) Optional dividend. — It is dividend which gives the stockholder
an option to receive cash or stock dividend;
(5) Composite dividend. — It is dividend which is partly in cash and
partly in stocks. Here, there is no option involved;
(6) Preferred or preferential dividend. — It is dividend which is
payable, by virtue of contract, to one class of stockholders in
priority to that to be paid to another class;
(7) Cumulative dividend. — It is dividend which is contracted to be
paid at a certain rate at stated times and, if net earnings at any
dividend period are insufficient to pay the contract dividend, it is to assets, even though the resolution provides that the
be made out of subsequent net earnings (Ibid.); dividend is payable of the stockholders in the corporate
assets.
 Ekspleynasyon – Sec 42
 Ekspleynasyon – Sec 42
(8) Scrip dividend. — It is dividend in the form of a writing or
certificate issued to a stockholder entitling him to the payment of Effect of declaration of stock dividend
money, stock or other benefit at some future time inasmuch as the
A stock dividend converts the surplus or profits of the corporation
corporation at the time such dividends are declared has profits not
covered by such dividend into the permanent account, thereby
in cash or has no sufficient cash, or has the cash but wishes to
placing it beyond the power of the board of directors to withdraw
reserve it for some corporate purposes. It is in the form of a
from corporate use and to distribute to the stockholders. Such a
promissory note or a promise to pay and may be issued to bear
capitalization of surplus or transfer of such surplus to the capital
interest;
account of the corporation adds nothing to and takes nothing from
(9) Bond dividend. — It is dividend distributed in bonds of the the corporation
corporation to the stockholders. The bondholder becomes a
The declaration likewise adds nothing to the interest of the
creditor of the corporation to the extent of the amount of the bond.
stockholders. After a declaration of stock dividends, the stockholder
(10) Liquidating dividends. — They are dividends which are actually receives no greater proportional interest in the assets of the
distributions of the assets of the corporation upon dissolution or corporation than he had before
winding up of the same. (Return of capital invested)
 Ekspleynasyon – Sec 42
Dividends may also be participating and non-participating.
ILLUSTRATION:
 Ekspleynasyon – Sec 42
A, B, C, D, and E organized a stock corporation with an authorized
Effect of declaration of cash dividend capital stock of P400,000.00 divided into 4,000 shares with a par
value of P100.00 per share. Each subscribed to and paid for 400
(1) When a corporation issues cash dividends, the assets of the
shares. Hence, the actual asset of the corporation at the beginning
corporation diminish by exactly the amount paid out and
of the business was P200,000.00.
correspondingly, the property of the individual stockholder
increases. After a few years of profitable business, the assets of the
corporation amounted to P400,000.00, with no debts. Instead of
(2) The declaration itself of cash dividends is considered
declaring cash dividends, it was agreed to increase the capital stock
effective to create a debt from the corporation to each of its
and for that purpose, to issue 400 additional shares each
stockholders and segregate the amount thereof from the
stockholder in the form of stock dividends with a total value of
P40,000.00 which amount represents the actual increase of his
share or interest in the business.
At the start of the year, each stockholder held 400 shares with a
total value of P40,000.00, which is 1/5 of the total corporate capital
of P200,000.00. At the close of the year, after stock dividends are
declared, each stockholder still holds 1/5 interest in the corporation
with his 800 shares worth P80,000.00 in relation to the increased
corporate capital of P400,000.00. But the proportional interest of
each share in the corporate assets is decreased because of the
increase in the number of shares, from 1/2,000 to 1/4,000.
The mere issuance of the stock dividends is not subject to income
tax as they do not constitute income to their recipients.
 Ekspleynasyon – Sec 42
Effect of declaration of bond or scrip dividend
(1) The declaration of a bond or scrip dividend makes the
stockholder a creditor of the corporation for the amount of
the bond or scrip issued as dividends, but the assets of the
corporation remain the same as nothing passes out of the
corporation to the stockholder.
(2) It has the effect of deferring the payment of cash dividends.
 Ekspleynasyon – Sec 42
Distinctions between cash dividend and stock dividend
They are as follows:
(1) A cash dividend involves a disbursement to the stockholder
of accumulated earnings, while stock dividend does not
involve any disbursement;
(2) Cash dividend declared and paid becomes the absolute
property of the stockholder and cannot be reached by the
creditors of the corporation in the absence of fraud, while
stock dividend, being still part of corporate property, may
be reached by corporate creditors;
(3) (3) Cash dividend is declared only by the board of directors,
at its discretion, while stock dividend is declared by the
board with the concurrence of the stockholders
representing at least 2/ 3 of the outstanding capital stock at
a regular or special meeting called for the purpose (Sec.
42.);
 Ekspleynasyon – Sec 42
(4) Cash dividend does not increase the corporate capital, while it is
increased by a stock dividend; and
(5) The declaration of cash dividend creates a debt from the
corporation to each of its stockholders who then hold such stock,
while no debt from the corporation to the stockholders is created by
the declaration of stock dividend, except in the sense that capital
stock constitutes a liability.
(6) Cash dividend is taxable as income to the stockholder, while
stock dividend is generally not subject to income tax.
 Ekspleynasyon – Sec 42
Distinction between distribution in liquidation and ordinary
dividend
The distinction between a distribution in liquidation and an ordinary
dividend is factual, the result in each case depending on the
particular circumstances of the case and the intent of the parties. If
the distribution is in the nature of a recurring return on stock, it is
an ordinary dividend.
However, if the corporation is really winding up its business or
recapitalizing and narrowing its activities, the distribution may
properly be treated as in complete or partial liquidation and as
payment by the corporation to the stockholder for his stock or as
return of the capital invested by him.
 SECTION 43
Power to Enter into Management Contract. – No corporation shall
conclude a management contract with another corporation unless
such contract is 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
nonstock corporation, of both the managing and the managed
corporation, at a meeting duly called for the purpose: Provided, That
(a) 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 (b) 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 nonstock corporation.
 SECTION 43
These 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.
No management contract shall be entered into for a period longer
than five (5) years for any one (1) term.
 Ekspleynasyon – Sec 43
Limitations on the power
(1) Ratification of the contract. — The contract must be
approved by a majority of the quorum of the board of
directors or trustees and ratified by the prescribed vote of
the outstanding capital stock entitled to vote (see Sec. 6,
last par.) or of the members, as the case may be, of both
the managing and the managed corporations, at a meeting
duly called for the purpose.
In either of the two cases mentioned in Section 43 (par. 1.), the
management contract must be approved by the stockholders of the
managed corporation owning at least 2/3, not merely a majority, of
the total outstanding capital stock entitled to vote, or in case the
managed corporation is a non-stock corporation, by at least 2/3 ,
not merely a majority, of the members. Where the contract is
between two corporations having interlocking directors, the
contract must comply with the requirements of Section 32;
 (1) Period of the contract. — The period must not be longer
than five (5) years for any one term except those contracts
which relate to the exploration, development, exploitation
or utilization of natural resources that may be entered into
for such periods as may be provided by pertinent laws or
regulations; and
 Ekspleynasyon – Sec 43
(3) Managerial power under the contract. — A management
contract cannot delegate entire supervision and control over the
officers and business of a corporation to another as this will
contravene Section 22, which lays down the fundamental rule that
the corporate powers of all corporations shall be exercised by the
board. In general, the management contract 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
board cannot surrender or abdicate its power and duty of
supervision and control for otherwise, it becomes a mere
instrumentality of the management company.
 Ekspleynasyon – Sec 43
ILLUSTRATIONS:
(1) Interlocking stockholders. — If A, B, and C, stockholders in
both X Corporation and Y Corporation, the managing and
managed corporations, respectively, own 35% of the total
outstanding capital stock entitled to vote of X Corporation,
the management contract must be approved by the
prescribed 2/ 3 vote of the stockholders of Y Corporation.
The same vote shall apply where A is the only stockholder in
both corporations and he owns more than 1/3 of the total
outstanding capital stock entitled to vote of X Corporation.
Only a majority vote is required if the more than 1/3
ownership of A, B, and C, or of A refers to the outstanding
capital stock of Y Corporation, the managed corporation.
(2) Interlocking directors. — If A, B, C, D, and E constitute the
majority of the members of the board of directors of X
Corporation and also of Y Corporation, the bigger 2/ 3 vote
by the stockholders of Y Corporation is necessary. This is a
case of a contract between two corporations with
interlocking directorates, (see Sec. 33.) The extent of the
shareholdings of A, B, C, D, and E in X Corporation is
immaterial.
In both illustrations, the management contract need only be
approved by the majority of the outstanding capital stock of X
Corporation, or in illustration No. 2, of the members, in case X
Corporation is a non-stock corporation.
 SECTION 44
Ultra Vires Acts of Corporations. – No corporation shall possess or
exercise corporate powers other than those conferred by this Code
or by its articles of incorporation and except as necessary or
incidental to the exercise of the powers conferred.
 Ekspleynasyon – Sec 44
Ultra vires and intra vires acts explained
It is well-settled that a corporation is not restricted to the exercise
of powers expressly conferred upon it but has the implied or
incidental powers to do what is reasonably necessary to carry out its
express powers and to accomplish the purposes for which it was
formed. Sections 35(11) and 44 give express recognition to these
implied and incidental powers possessed by private corporations.
According to the strict construction of the term, an ultra vires act is
one not within the express, implied, and incidental powers of the
corporation conferred by the Corporation Code or articles of
incorporation. It is an act which is not positively forbidden, but
impliedly forbidden because not expressly or impliedly authorized
or necessary or incidental in the exercise of the powers so
conferred.
Acts or transactions within the legitimate powers of a corporation or
are related to its purposes are said to be intra vires.
 Ekspleynasyon – Sec 44
ILLUSTRATIONS:
(1) A corporation was organized for the purpose of engaging in
the buying and selling of home appliances. The act of buying
and selling motor vehicles would be ultra vires although it is
itself lawful because it is outside the object for which the
corporation is created and, therefore, beyond its powers.
The buying and selling of refrigerators would be intra vires.
(2) A corporation was organized to engage in the business of
manufacturing a particular product. Marketing and selling
the product may be logically necessary to the business of
manufacturing, considering that there must be an end-user
for the goods manufactured or produced. A seller, trader,
dealer or importer of goods is not necessarily or
indispensably the manufacturer of the goods. Therefore,
manufacturing cannot be treated as reasonably necessary
to the business of the selling. (SEC Opinion No. 07-14, July
2007.)
Contracts intra vires entered into by the board of directors are
binding upon the corporation and courts should not interfere unless
such contracts are so unconscionable and oppressive as to amount
to wanton violation to the rights of the minority, as when a
stockholder avers that the board of directors has concluded a
transaction that will result in serious injury to him. (Gamboa vs.
Victoriano, 90 SCRA 40 [1979]; Ong Yong vs. Tiu, 401 SCRA 1 [2003].)
 Ekspleynasyon – Sec 44
Ultra vires acts distinguished from Illegal acts
When properly used, an ultra vires act means simply 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.
By itself, an ultra vires act is not necessarily illegal. On the contrary,
it may be lawful, moral, and even praiseworthy.
An illegal corporate act, on other hand, is an act which is contrary to
law, morals, good customs, public order, or public policy. The buying
and selling of contraband goods would not only be illegal but also
ultra vires.
The term ultra vires is distinguished from an illegal act for the
former is merely voidable which may be enforced by performance,
ratification or estoppel while the latter is void and cannot be
validated.
 Ekspleynasyon – Sec 44
Ratification of ultra vires acts
(1) Where the contract or act is illegal per se, it is wholly void or
inexistent. It cannot be ratified or validated. {Ibid., par. 2.)
 Inexistent contracts (supra.) defined in Article 1409 of the (3) When an ultra vires contract has been performed on one side
Civil Code cannot also be ratified. The doctrine of estoppel and the other has received benefits by reason of such performance,
cannot operate to give effect to an act which is null and recovery is permitted in most courts on behalf of the former (Ibid.,
void. p. 620.) on the ground that it would be unjust to sanction retention
of benefits coupled with refusal to perform. Other courts hold the
(2) Where the contract or act is not illegal per se but merely
contract unenforceable but compel the party who has received the
beyond the power of a corporation, the same is merely
benefits of performance to return what he has received or, failing to
voidable and may be enforced by performance, ratification,
do that, to pay its reasonable value. (Ibid., p. 613.)
or estoppel, or on equitable grounds.
The doctrine of ultra vires cannot be invoked when it would defeat
 Ekspleynasyon – Sec 44
the ends of justice or work a legal wrong. (Coleman vs. Hotel de
Effects of ultra vires acts which are not illegal France, 29 Phil. 323 [1915].) It cannot be allowed to prevail whether
the plea is interposed for or against a corporation when it will cause
The following rules are recognized: prejudice to a party who acted in good faith.
(1) An ultra vires contract, while executory on both sides, haba
cannot be enforced by either party thereto. It is in the
public interest that corporations do not transcend the END
powers granted to them by law and their assets be not
 Reperens
subjected to risks created by forbidden acts;
Books ni de leon
(2) When an ultra vires contract has been fully performed on
both sides, neither party can maintain an action to set aside
the transaction or to recover what has been parted with.
The well-settled doctrine is that the defense of ultra vires
cannot be set up or availed of in completed or
consummated transaction. (Ibid., p. 652.) Only the State
may challenge the contract on ultra vires grounds. No public
interest is involved here since both parties have already
received to their advantage the benefits of the contract
voluntarily entered into; and

 Ekspleynasyon – Sec 44