Powers of Corporation

Title IV
POWERS OF CORPORATION
y
Sec. 35. Corporate we rs an d Capacity. — Ever
Po der this Code has the power
corporation incorporated un
and capacity:
(a) To sue and be sued in its ¢ orporate name,
ss the ce rtificate
(b) To have perpetual existence unle
of incorporation provides otherwise; (N)
(c) To adopt and use a corporate seal; |
(d) Toamend its articles of incorporation in accordance

with the provisions of this Code; a
(e) To adopt bylaws, not contrary to law, morals,
or public policy, and to. amend or repeal the same in
accordance with this Code; _ ke
(f) Incase of stock corporations, to issue or sell stocks
to subscribers and to sell treasury stocks in accordance
with the provisions of this Code; and to admit members to
the corporation if it be a nonstock corporation;
(g) To purchase, receive, take or grant; hold, convey,
sell, lease, pledge, mortgage and otherwise deal with
such real and personal property, including secur
ities and
bonds of other corporations, as the transaction
of. the
lawful business of the corporation may reas
onably and
necessaril y require, subject to the limitations i
by law and the Constitution: prescribed
(h) To enter into a partnership, joi
or consolidahi ation or any other commer
» Joint venture, merger,
cial agreement are
natural and juridical persons; (N) :
(i) To make reasonable donations, j includi
: abla ee|
for the public welfare or for hospital, ns,
chalit
318
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Sec. 35 TITLE IV. POWERS OF CORPORATION
319
scientific, civic, a or similar Purposes: Provided, That

foreign corporation, shall give donations
in aid of be
political party or candidate or for u -
of partisan
purposes
political activity;
(j) To establish pension, retirement, and other plans
for the benefit of its directors, trustees. officers and
employees; and
(k) To exercise such other powers as may be essential
or necessary to carry out its purpose or purposes as stated
in the articles of incorporation.
Meaning of powers of a corporation.

The term powers of a corporation has reference to the corporation's
capacity or right under its charter and laws to do certain things. (6
Fletcher, p. 230.)
Distinguished from its franchise

and objects.
from
(1) The powers of a corporation must be distinguished
entity for the
its primary franchise, which is its right to exist as an
rs and from
purpose of doing the things embraced within its powe ing
ed to an exist
its secondary franchise, which is the right grant
c use, but with private
corporation to use public property for a publi
profit. (6-A Fletcher, p. 431.)
ed with its objects or
(2), Neither must its powers be confus the purpose of
business. A cor poration exercises its powers for
e, the power to issue promissory
attaining its objects. Thus, for exampl
bei ng obv iou sly con sisten t with the reasonably conducive to
notes, on, is a mere power
of the corporati
the furtherance of the objects (6 Fletcher, p. 231.)
and not an object orbusiness of the corporation.
persons/partnerships
Relative powers of natural
and corporations.
d. — An in di vi du al has absolute right
(1) Any act not prohibite his pr op er ties, to perform all acts
an d di sp os e of
to fully use, enjoy t an y con tro l ex cept when they are
s wi th ou
and to make all contract me is true of an ordinary partnership.
forbidden by the law. The sa

PHILIPPINES oec,
320 THE REVISED CORPORATION CODE OF THe aS
: hip do not owe the;

Since a natural person and an ordinary Part
existence to the State, they can perform any
ohibited by
law. si
e other hand, the civil rights.
(2) Only powers granted . — On th limitéd
:’ doctrine only powersy
such capacit
of limitea has
of a corporation are different. aire
adopted by our corporation law, a 0 d those that are necessarily
as are expressly granted on it by mk fea hich Meare ekincidental
eh a
implied from those expressly granted or those w
- ay ; ve
to its existence. (Sec. 2.) It is, therefore, not ore pliedly
corporation has the power to do all acts not expressly
prohibited.
the
In other words, the enumeration of corporate powers implies
exclusion of all other powers unless they are incidental or implied
in conformity with the generally accepted principle of statutory
construction “expressio unius est exclusion alterius.” The reason for
the doctrine is that a corporation owes its existence to the State and,
therefore, it has only such powers as are expressly and impliedly
granted by law. :
Classification of corporate powers.

A corporation exercises its power through its board of directors
(or trustees) and. through its officers and agents when duly
authorized by a board resolution or its bylaws. .
The three (3) classes of power
of a corporation are:
_ (1) Those expressly granted or authorized by law (Sec. 2.), ie.,
those conferred by the Revised Corporation Code and its articles of
incorporation; i PE eis :
(2) Those that are necessary to exercise the express or incidental
powers; and
(3) Those incidental to its existence. (Sec. 2.)
The powers of a corporation, how ever, frequent cut across
: , ’ ly
lines of the above classification:! oh vd ! }
sSesygrey princerns fOr 4 ; in :
directors in order is validly sign the certification, (BA Savings Bank vs. Sia, 336 SCRA ce

321
C annot exercise the powers, rights,

e ‘ ae,
registered with the SEC. Orporation Code to organizations
Determining whether an act or co

: ntract ithi
scope of corporate powers. wen
(1) Source of powers, —
In determining whethwhether a corporation
[
has power to do an act, it is necessary to: §
(a) first,.refer. to its special
charter. or its articles. of
incorporatioton see whether it is wi
thin the express, implied, or
incidental powers conferred; _
(b) then, to examine the statutes relating to corporations to
see if the act is allowed or 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. (see 6 Fletcher,
pp. 233-246; also Clark’on Corporations, p. 412.)
(2) Express or implied grant of powers. — Unless the power to
carry on a particular business is expressly or impliedly conferred, it
does not exist. It is illegal for a corporation to apply either its capital
or profits to business for purposes not contemplated by its charter.
(SEC Opinion, Jan.13 and 25, 1988.) Thus, it is important that the
corporation’s intended purposes are stated with sufficient clarity in
the articles of incorporation so as to define with certainty the scope
of its business.
(3) Essentialor necessary powers. Under Section 35, the corporation

can exercise such powers as may be essential or.necessary to carry
out its purposes or purposes as stated in the articles of incorporation.
is in direct
The test to be applied is whether the act of the corporation
TAL srporated vs. Court of Appeals, 352 SCRA 334 [2001]; BPI Leasing
Ce SE ie 416 SCRA 4 [2003]; Athena Computers, Inc. vs. Reyes, 532
SCRA 343 [2007]; Salenga vs. Court of Appeals, 664 SCRA 635 [2012].) The requirement
for signing the certificate applies even to corporation. The mandatory directions of the
Rules of eats make no distinction between natural and juridical persons. (Zulueta vs.
Asia Brewery, Inc., 354 SCRA 100 [2001].),

322 THE REVISED CORPORATION CODE OF THE PHILIPPINES Sec. 35
and immediate furtherance of its business, fairly incidental to the

express powers and reasonably necessary to their exercise. If so, the
corporation has the power to do it; otherwise, not. (6 Fletcher, pp.
198-199; Montelibano vs. Bacolod-Murcia Milling Co., Inc., 5 SCRA
36 [1962].)
Express powers explained.

Express powers are the powers expressly conferred upon the
corporation by law.
(1) These powers can be ascertained from the special law
creating the corporation, or if 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.
(2) 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
bylaws, for they are deemed vested in any corporation organized
under the Revised Corporation Code. ieee SEC-OGC Opinion No.
33-11,? July 29, 2011.) 7
(3) Unless otherwise provided by the. Revised Corporation
Code, the general powers conferred. by Section 35.are to be exercised
by the board of directors or trustees. (see Sec. 22.) :
(4) Other express powers of the corporation are specifically
provided in Sections 36 to 43, which also lay down the conditions
under which these powers are to be exercised.
The express powers mentioned in Nos. (b), (d), (e), (£), and (h) of
Section 35 are discussed under Sections 11 and 36, 15, 45-47, 61, and
75-79, TESpeCHVely,
Implied powers explained.

Implied powers are those powers reasonably necessary to execute
the express powers and to accomplish or carry out the purposes for
which the corporation was formed.
*Citing De Leon, The Corporation Code of the Philippines Annotated, p. 267 [1993].

323
(2) Powers merely

free loans) are not implie t or useful (e.2., giving of interest-
the purposes or objects of
d if th e
_~y ate not essential, having in view
the corporation,
Implied powers classified.
Sometimes it is difficult to determine whether

is an implie
a certain activity
d
nine pow er. How ey er, this rough classification embraces
most of the implied powers: 3
(1) Acts in the usual course of business. —
This includes such
acts as borrowing money; making ordinary contracts; exec
) uting
promissory notes, checks or bills of exchange; taking
notes or other
securities; acquiring personal property for use in conn
ection with
the business; acquiring lands and buildings to be used as place
s 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 to run the 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
tight 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;
(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. (see, however,
Sec. 41,) This is especially true with respect to those particular kinds
of corporate activities which are governed by special laws. (see
comments under Sec. 13[b].) Thus, a corporation not organized for
that purpose cannot go into the banking or insurance business but it
may do any isolated act of banking or insurance in connection with
Some express power.

Sec. 35
324 THE REVISED CORPORATION CODE OF THE PHILIPPINES
ly conduct an outside
A corporation may, however, temporari
business to collect a debt out of its profits;
loyees. — While the
(4) Acts in part or wholly to protect or aidh emp
suc acts as building homes,
cases are divided, the better view favors hin the
, etc. for employees, as wit
places of amusement, hospitals
corporate powers.’ (see Sec. 35[j].)
to incr ease busi ness . — Thu s, a corporation may conduct
(5) Acts
sion programs, OF promote fairs
contests or sponsor radio or televi rea se its business. (see 6
her ing s to adv ert ise and inc
and other gat
Fletcher, pp. 276-277.)
be
No fixed rules, however, can be laid down which could
cases of implied powers. The
applied mechanically in determining and circumstances
facts
question must necessarily depend upon t he
of each case.
Incidental or inherent powers explained.
ation can exercise
Incidental or inherent powers are powers a corpor essary to
or powers nec
by the mere fact of its being a corporation
granted. (Sec.
corporate existence and are, therefore, impliedly
35[a].) oh
l entity,
(1) As powers inherent in the corporation’ asa lega
44.) These
they exist independently of the express powers. (see Sec.
incidental powers are recognized by Sections 2 and 44.
(2) Some powers enumerated in Section 35 are: incidental
powers which can be exercised by a corporation even absent an
express grant.
3Under Sec. 35(a), a corporation, when necessary in the pursuit of its business,
may borrow money. In corporations other that those formed to engage in the business of.
loaning money, this activity is but incidental, and cannot be extended to purposes foreign
to the business and objects for which the corporation was related, However, they may
temporarily loan corporate funds provided certain conditions are complied with. (SEC
Opinion, Jan. 22, 1991; see note 2 under Sec. 42.)
‘In a case where the opening of a post office branch of the Bureau of Posts at a
mining camp of a corporation was undertaken at the request of the corporation to
promote the convenience and benefit of its employees and their families who have settled
at the mining camp, and after a resolution of the board of directors was passed wherein
the corporation assumed full responsibility for all cash received by the Postmaster, it
was held that the resolution adopted by the board is not an ultra vires act (see Sec 45 )
although it is outside the object for which the corporation was created since the re olution
covers a subject which concerns the benefit, convenience, and welfare of the c hs ation’s
employees and their families. (Republic vs. Acoje Mining Co., Inc., 7 SCRA 361 [1963] )

325
Construction of Po
wers granted.
Anactis presumed
to be within corporate powers and, therefore,
valid, unless clearly shown to be otherwise.
(1) In construing charters to determine the powers of

corporations, it is well-settled, as in other cases of legislative grants,
that they are to be construed strictly; any
ambiguity in the corporate
against the corporation and in favor of the
public.
(2) In determining what powers hav
e been conferred, the whole
instru ment is to be taken together, including provisos
final intention and purposes of the
as expressing the
part ies.
(3) On the other hand, since grants of corpor
ate franchises are
intended not only for private gain but also to subser
ve publicinterest,
they should be So construed as not to defeat the purpose
of their creation.
The intention of the legislature should always control,
it being the
gene ral rule that a thing within the intention of the legislatur
e is as
much within the statute as if it were within the letter.
(4) Charters are also to be construed in view of the circumstan
ces,
usages, and practices existing at the time they were granted and it is
not
the province of the course to enlarge the powers of a corporatio
n
beyond its charter limitations because circumstances have changed.
(5) If the charter is susceptible of two meanings, the one
restricting and the other extending the powers of the corporation,
that construction is to be adopted which works the least harm to the State.
(6) A general incorporation law may apply to corporations
Operating under special statutes with respect to the conduct or
government of such corporations as to which no specific provision
has been made. (19 Am. Jur. 2d 433-434.)
Application of rules.
(1) Acorporation incorporated as a railroad corporation has the
incidental power to build railroads because such power is necessary
for the accomplishment of the purpose for whi ch the corporation is
created.
(2) Acorporation expressly authorized to engage in agriculture
has implied authority to buy agricultural lands because such
authority is reasonably appropriate to carry outits express authority.

(3) A corporation engaged in the manufacture of cement could

sively
operate and maintain an electric plant for the purpose exclu
and to its employees
of supplying electricity to its cement factory the
living within its factory compound where it appears that
the business
operation of such plant is necessarily connected with
Inc. vs,
of manufacturing cement. (Teresa Electric and Power Co.,
.)
Public Service Commission, 21 SCRA 252 [1967]
r its articles
(4) Neither may a corporation authorized unde
in automobiles
of incorporation to operate and otherwise deal
in the transportation
and automobile accessories and to engage
land transportation
of persons by water, engage in the business of
such would have no
(e.g., operation of a taxicab service) because ness.
legitimate busi
necessary connection with the corporation’s 9].)
A 809 [196
(Luneta Motor Co. vs. A.D. Santos, Inc., 5 SCR
(5) Investment by a transportation company in an insurance
corporation with transportation operators as stockholders,
designed to reduce insurance costs, may be interpreted as an act
reasonably requisite and necessary to catry out the business of land
of the legitimate
transportation, because insurance costs form part
June 13, 1961.)
expenses 'of a transportation operator. (SEC Opinion,
uring
(6) °A ‘corporation engaged, among others, in manufact
ucts may
rubber ‘shoes, slippers, sandals, and other allied prod
pers to
be permitted to. buy. worn-out or, used shoes and, slip
be. used in
be.-reprocessed ' or reclaimed into raw materials: to
ement, it
manufacturing its products, and to manufacture rubber,c
same is
appearing that the main ingredient in manufacturing the
Dec.
rubber, and rubber cement is a rubber product. (SEC Opinion,
3 bre =
15, 1967.)
(7) Butacorporation engaged primarily in fishing, and to pursue
this, it is empowered by its articles of incorporation “to operate cold
storage plants xxx as may be necessary for the carrying on of the
said primary objective of all the corporation” cannot operate a cold
storage plant or an ice plant as a public service operator since it can
operate such plant only insofar as it may serve its primary ! purpose.
)
(SEC Opinion, Feb. 17, 1969.)
(8) The power to create or establish branch offices is generally
ws. In the
provided for in the articles of incorporation or in the byla
ion formed
absence, however, of such a provision, every corporat

sec. 35 TITLE IV. POWERS OF CORPORATION
eae
under the law has the im lied or inci tablish

or incidental. power to esta
the PhilipPpines or elsewhere as the needs and
Gisth in
branch “asoffices
exigencies of the business of the corporation may require. Thus, the
board of directors of a corporation may, even absent a provision
in
its articles of incorporation or bylaws, establish branch offices if it
is necessary or convenient for the Proper accomplishment of the
purpose for which the corporation has been created. (SEC Opinion,
March 2, 1970.)
(9) The Land Bank of the Philippines, being a commercial bank
clothed with authority to exercise all the general powers mentioned
in the Corporation Code and the General Banking Act, as provided
in its charter, among which is the power to write-off loans and
advances, has been held to also have the lesser power to charge
off or condone interests and penalties. (Land Bank of the Phils. vs.
Commission on Audit, 190 SCRA 154 [1990].) oe
(10) An educational institution is limited to developing human
capital through formal instruction. Hiring professors, instructors,
and personal acquiring equipment and real estate, establishing
housing facilities for personnel and students, hiring a concessionaire,
and other activities that can be directly connected to the operations
and conduct of the education business may be considered the
necessary and incidental acts of an educational institution. Securing
third party loans by mortgaging its properties does not appear to
have the remotest connection to the operations of the educational
institution’s conduct of business. (University of Mindanao, Inc. vs.
Bangko Sentral ng Pilipinas, 778 SCRA 458 [2016].)
(11) If “fund raising activity” is not embodied among the
corporation’s authorized purposes in its articles of incorporation or
is neither necessary nor incidental in the furtherance of its corporate
objectives, the same cannot legally be undertaken by the corporation.
(SEC Opinion, Jan. 17, 1995.) . Sica ro
Ratification of corporate acts.
_ (1) By stockholders (or
valid acts done or authorizmembe rs). — They may
ed by the board of direcratif
tors
y and render
(or trustees)
but which were beyond the powers of the direc
tors, or acts done or
authorized by the directors, provided the acts done are such as ma
be done or authorized by the stockholders. (2 Fletcher, p. 1103.) °°

: (2) By board of directors (or trustees).— Similarly, a transaction,

if within the powers of a corporation; may be consented to, ratified,
or acquiesced in by the board of directors (or trustees) if it could
be authorized ‘by them. If it is consented to or ratified with full
knowledge of the facts, it is finally and absolutely binding, and
neither the corporation nor individual stockholders (or members)
nor strangers can afterwards sue to set it aside or otherwise attack
its validity. (3 Fletcher, p. 361.)
Effect of ratification retroactive. |
Except as to intervening rights of strangers, ratification by
a corporation of an unauthorized act or contract by its officers or
others relates back to the time of the act or contract ratified, and
is equivalent to original authority. Omnis ratihabitio retrotrahitur. (2
Fletcher, pp. 1185-1188.) | Sees
Thus, if a corporation has, been empowered, as a secondary
purpose, to purchase stocks in other corporations by its articles of
incorporation, although the investment was made sans the prior
consent and imprimatur of the stockholders under Section 41 of
the Revised Corporation Code, this legal infirmity is cured by the
subsequent ratification of the required vote of the board of directors
and stockholders. (SEC Opinion, Dec. 5, 1963.)
Mode of exercising powers. 3 :

(1) No particular mode prescribed by charter. — If the charter of a
corporation prescribes no particular mode for exercising its powers,
they may be exercised in any mode, provided it is not contrary to
law, which the stockholders or officers may deem best. So, it has
been well said that corporations “may exercise all the powers within
the fair intent and purpose of their creation, which are reasonably
proper to give effect to powers expressly granted. In doing this,
they must have a choice of means adapted to ends, and are not be
confined to any one mode of operation.”
(2) Particular mode prescribed by charter. — If the charter requires
its powers to be exercised in any particular way by officers or agents,
they cannot be properly exercised in any other way, for the powers
of a corporation are measured by its charter, not only as to the things
which it may lawfully do, but also as to the mode of doing them.
However, as noticed in treating of the effect of ultra vires transactions

329
84-286.)
(3) Corporation organized und :
law —. Wher
er a special a
SEN ion mei a ranai s under a special law, the .rules governein
g
corp ganized or under the Rape
where the sp ec neral lawf have no application
ial statutes pro vide gemethods
control of the corporation. (19 Am. Juin ba 139). the regulation and
Power to sue and be sued.

This power (Sec. 35[a].) is an incidental to corporate existence.
As arule, suits are to be brought by or against the corporatio
n in its
own name.°
| “(1) Dissolved corporation. — Corporations de facto (Sec.

19.) may
sue or be sued but a corporation dissolved after the expiration of the
three-year winding-up period (Sec. 139.) ceases to exist de jure or de
facto.* yes W362 a 7
(2) Unregistered corporation. — A corporation not duly registered
in accordance with law has no legal capacity to sue. Foreign
corporation. — Neither can a foreign corporation which‘ transacts
business in the Philippines without the necessary license from the
SEC sue in Philippine courts. (Sec. 150.) i
(3) Right to claim moral damages. — An artificial person like
a corporation. cannot experience. physical suffering, mental
anguish, besmirched reputation, wounded feelings, moral shock,
social humiliation and similar injury. (see Art. 2217, Civil Code.)
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 (Mambulao vs. Phil. National Bank,
22 SCRA 359 [1968].) under the Civil Code, (Art. 2217 thereof.) But
in such case, it is imperative for the claimant to present proof to
*Lack
ete
acity to sue refers to'a + te
plaintiff's genera 1 disability too stie,
stie, such as on ac-
count pce ec Spokinh incompetence, lack of juridical personality or any other gen-
eral dis ualification of a party. A dissolved corporation no longer possesses juridical per-
aoKalite and, therefore, it has no legal capacity to sue because of lack of personality to sue.
(Alabang Development Corporation vs. Alabang Hills Village Association, 724 SCRA 321
(2014].) ;

justify the award by showing the existence of the factual basis of the
damage and its causal relation to the defendant's acts. (Development
Bank of the Phils. vs. Court of Appeals, 403 SCRA 460 [2005]; Manila
Electric Co. vs. TEAM Electronics Corp., 540 SCRA 62 [2007].)
(5) Real party-in-interest: — As a 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 (Sec. 23.) on
behalf of the corporation or by any of its duly authorized officer or
agent.6 (see Premium Marble Resources, Inc. vs. Court of Appeals,
264 SCRA 11 [1996]; Shipside Incorporated vs. Court of Appeals,
352 SCRA 334 [2001]; Philippine Rabbit Bus Lines, Inc. vs. Aladdin
Transit Corp., 493 SCRA 358 [2006]; Mufioz vs. People, 548 SCRA
473 [2008].)
(a) Under Section 35(a), read in relation to Section 22, where
a corporation is the injured party, its power to sue is lodged with
its board of directors or. trustees. A minority stockholder ,and
member of the board of directors has no such power or authority
to sue on the corporation’s behalf. (Tana Wing Tak vs. Makasiar,
350 SCRA 475 [2001]; see Mediserv, Inc. vs. Court of Appeals,
617 SCRA 284[2010].) = §
(b) Under. Section 3,; Rule 46 ,of, the);Rules of, Court, a
petitioner before the Court of Appeals must submit with the
of non-forum ‘shopping «and
- petition, a sworn certification.
failure to comply with the requirement is sufficient ground
for dismissal of the petition. The requirement applies even to
corporations, the Rules of Court making no distinction between
‘natural and juridical persons. A certification not signed by a
person not duly authorized by board resolution renders the
petition stibject to dismissal. (Gonzales vs. Climax Mining Ltd.,
452 SCRA 607 [2005]; MC Engineering, Inc. vs. National Labor
Relations Commission, 360 SCRA 183 [2001]; see Mediserv, Inc.
ys. Court of Appeals, 617 SCRA 284 [2012]; Cosco Philippines
Shipping, Inc. vs. Kemper Insurance Co., 670 SCRA 343 [2012].)
‘In a case, the corporate officer initially failed to show that she had the capacity to
sign the verification and institute the ejectment case on behalf of the lessor company. It
was held that “her act of immediately presenting the Secretary's Certificate confirming
her authority to represent the company may be considered as substantial .compliance
and call for the relaxation of the rules of procedure in the interest of justice. (Parichia vs.
Don Luis Dison Realty, Inc., 548 SCRA 273 [2008]; see Asean Pacific Planners vs. City of
Urdaneta, 566 SCRA 219 [2008].)
_ at

TITLE Iv. POWER
: RS OFC
ORPORATION
331
(c) Since the sion;

against forum shopping
e in Sve
: o
e
Verificatio NS and. cert

ifications
in behalf of a coy integral to the act
of filing cases
e Signing may not
be deemed as
to-cas
of the above corpora ing the authority
verification or certificate against
forum shopping is that they
are “in a position to verify the truthf
ulness and correctness of
theallegations in the petition.” (Cagayan Valley
Comm. of Intern
Drug Corp. vs.
al Revenue, 545 SCRA10 [2008]; South
Cotabato
Corp. vs. Sto. Tomas, 638 SCRA 566 [2010]
.) 34
_:(e) A. government-owned or controlled corporation can
act. only through its. duly authorized representatives. Ina
case in view of the absence of.a board resolution authoriz
in
petitioner’s officer-in-charge to represent it in the petition: for
review, the Supreme Court ruled the verification of non-forum
=o shopping executed by the officer failed to satisfy the Rules of
Court. (Public Estates Authority vs. Uy, 372 SCRA 180 [2001].)
(f) Where the corporate officer’s power as an agent of the
corporation did-not derive from a board resolution, it would
nonetheless be necessary to show a clear source of authority
from the charter, the bylaws, or the mnie acts otthe soveming
emium Marble Resources vs. Court of
ppeals, supra;
nee Cae vs. Commission on Audit, 384. SCRA 548
[2002].)
ing the rule that every action must be brought
or ie 3 qian name of the real party-in-interest (Rules
of Cok Rule 3, Sec. 2.), where a voting trust agreement was
executed by saeeain stockholders of a corporation which was not

a signatory thereto, the corporation is not real party-in-interest

in the suit to enforce the agreement. The action should be filed
the stockholders. (National Investment & Development
by
Corporation vs. Aquino, 163 SCRA 153 [1988].)
kholder
(h) In a derivative suit, however, the minority stoc
or stockholders may sue erring corporate officers in the name
of the corporation with the corporation as the real: party-in-
interest. (see comments under Sec. 63.)
(i) Although a criminal case can only be filed against
officers of a corporation and not against the corporation itself, it
does not follow from this, however, that the corporation cannot
be a real party-in-interest for the purpose of bringing a civil
action for malicious prosecution. (Comet vs. Court of Appeals,
301 SCRA 459 [1999].)
(j). While the power to sue and be sued is lodged with the
board of directors, the physical acts of the corporation like the
signing of documents can be performed only by natural persons
duly authorized for. the purpose by corporate bylaws or by
a specific act of the board of directors. Absent the said board
resolution, a petition may not be given due course. (Shipside
Incorporated vs. Court of Appeals, supra; United Paragon
Mining Corp. vs. Court of Appeals, 497 SCRA 638 [2006];
Republic vs. Coalbrine International Phils., Inc., 617 SCRA 491
[2010]; Esguerra vs. Holcim Philippines, Inc., 704 SCRA 490
[2013].)
(k) A resolution.of the board of directors may, authorize
a particular officer to represent the corporation in all suits
brought for or against it. (Grand Boulevard Hotel vs. Genuine
~ Labor Organizations, 406 SCRA 688 [2003].) The Supreme Court
has ruled that the subsequent submission of proof of authority
to act on behalf a corporation justifies the relaxation of the rules
to allow its petition for review on certiorari to be given due
course. (Pascual and Santos, Inc. vs. Members of Tramo Wakas
Neighborhood Assoc., Inc., 442 SCRA 438 [2004]; see Republic
vs. Coalbrine International Phils., Inc., 617 SCRA 491 [2010].)
(1) Where piercing the veil of corporate entity is justified,
a stockholder or corporate officer may be sued along with the
corporation. (see comments under Sec. 2.)

gee. 3
333
of Court, Rule 12, Sec. 2.); hehie immediate in character (see Rules
. : , they have 1 ‘ ‘
action for or against ; no right to intervene in
195 SCRA 740 (19911) * “otPoration. (Saw vs. Court of Appeals,
of the corpor
intervene in an action by a creditor to foreclose ati on was allowed to
the mortgage executed
by its officers, for “he is injuriously affected
by the mortgage” and
“is more virtually interested in the outcome of this case that [the
corporation].” (Phil. National Bank vs.
Phil. Vegetable Oil Co., 49
‘Phil. 857 [1927].)
(7) Service of summons. — The rationale of all rules with
respect
to service of summons on a corporation is that such service must
be
to an agent or a representative, in contemplation of Rule 14, Rules of
Court, so integrated with the corporation sued as to make it, a priori
supposable that he will realize his responsibilities and know what he
should do with any legal’ papers served on him; one who performs
vital functions in the corporation that it would-be reasonable to
presume that he would be able to discuss the importance of paper
delivered to him, and be responsible enough to transmit the same
to the corporation. (Villa Rey Transit, Inc. vs. Rapacon, 81 SCRA 298
[1978]; Vlason Enterprise Corp. vs. Court of Appeals, 310 SCRA 26
[1999].) |
(a). Therules onservice of processmake service onan “agent”
sufficient whether the agent be general or special: As such, it
does not necessarily connote an officer of the corporation'and
may include employees but not those whose duties are not so
~ integrated to the business that their absence or presence will not
toll the entire operation of the business. The job ofa bookkeeper
is so integrated with the corporation that his regular recording
of the corporation’s “business accounts and 5 essential facts
about the transaction of a business or enterprise” safeguards the

corporation from possible fraud. being committed ‘adverse to

its own corporate interest. Thus, service of summons was held
properly made to a corporation through a bookkeeper or a clerk
who was not even authorized to receive the same on behalf of the
the
corporation, since what is of paramount importance is that
the
purpose of the rule on summons has been attained thereby,
interest of speedy justice has been served. (Pabon vs. National
Labor Relations Commission, 296 SCRA 7 [1998].)
(b) Similarly, summons was held properly served on a
to
corporation through a claim employee who does not belong
the managerial staff, but whose role in the corporation is that of
a representative in relation to cases involving it, i.e., regularly
indorsing summons and complaints against the corporation,
following-up, and attending cases filed and against it. (Weena
Express, Inc. vs. Rapacon, 534 SCRA 288 [2007].)
(c) Although the corporation’s principal office and a
director’s residence are housed in the same building, the latter’s
housekeeper cannot be considered as a person-in-charge of
the corporation’s office authorized to receive a copy of a court
decision on behalf of the corporation and neither can the
housekeeper’s receipt suffice as service to the director absent
a showing that such housekeeper had been authorized by the
corporation to accept service. (Camper Realty Corp. vs. Najo
‘Reyes, 632 SCRA 491 [2010].)
(8) Failure to'implead corporation. — The filing of a complaint
against a ‘stockholder is not ipso facto a complaint against’ the
‘corporation. The failure to properly implead the corporation as a
‘defendant violates the fundamental principle that a corporation
has a legal personality separate and distinct from its stockholders.
Merely annexing a list of corporations ta the complaint is a violation
of their right to due process for it in effect be disregarding their
‘distinct and separate personality without a hearing.
Power to adopt and use a corporate seal.

A seal isa device (as an emblem, symbol, or word) used to
or organization and
identify or replace the signature of an individual
to authenticate (as under common law) written matter purportedly
emanating from such individual or organization. It may refer also

Gec. 35 TITLE] V. POWRRs
op CORPORATION
ts
to the impression 9 f su
stocks.’ (see Webste ice on do
r’s ae W‘ Int. D ~Ocuments like certificates of
(1) Any seal ado Ict., p.. 2046 .)
may be altered
by it atPted and useg b
Pleasure. Whe
for a special Occasion, different ¢ Te a corporation adopts a seal
adopted is the corporate S io
Words and Phrases 407.) eee
directory rather. than mandat ory. Ac : 3

g
withoutia seal. ty: Orporation may. exist even
(3) At common law, the rule prevailed for some

time that a
corporation could not make a parol contract
and could speak and
act only by its common seal. This technical rule of the common
law
soon gave way, however, and today in the transaction of its business
,
a seal is no more necessary to render valid the acts and contracts of a
purely business corporation.
But although it may not be necessary, the reason it is desirable
to attest all contracts and other acts of the corporation with its seal,
when this is possible, is that the presence of such seal establishes,
prima facie, that the instrument to which it is affixed is the act of the
corporation. (18 Am. Jur. 2d 689-698.)
Power to acquire and convey property.

(1) ‘As an incident to every corporation. — This power which is also
conferred under the law has always been regarded as an incidental
power. of every corporation. A corporation needs properties or
y its business.’
assets to carron . 1
“ "4 the same thing as a signature nor is it equivalent toa

jemi eh tte earn att of the formality of SSCHONS an aise Ae aera 8
filed on behalt of a corporation denying its signature on : no ‘i vee ection
‘
of the note is not admitted and the plaintiff is put to formal p
Words and Phrases 407.) the Supreme Court: “The owning of a business lot upon which
» {It has been held aie its offices is reasonably necessary to a corporation which
Ree oh an extent that its prospects of the future are such as to justify
its directors in making such acquisition. A different rule would compel important
irectors in

While a corporation may appoint agents to negotiate for the

purchase of real property needed by the corporation, the final say
will have to be with the board of directors whose approval will
finalize the transaction. (Firme vs. Bukal Enterprises & Dev. Corp,,
414 SCRA 190 [2003].)
(2) As necessary to the transaction of its lawful business. — The
power under Section 35(g) is qualified by the phrase “as the
transaction of the lawful business of the corporation may reasonably
and necessarily require.”
~ (a) Property obtained by a corporation whichis foreign to the
purposes for which it was organized is an unlawful acquisition.
For example, it is not within the power of a corporation engaged
in general shipping business to buy a provincial parcel
of land
purposely for redistribution to its stockholders, as the acquisition
is neither necessary nor incidental to further its business. (SEC
Opinion, Aug. 1,.1989.)
(b): A corporation may not validly purchase, sell, mortgage,
etc., assets if it is not in the legitimate furtherance of its purposes.
Accordingly, the exercise of such power cannot be validated thru
the inclusion of such purpose in the articles of incorporation has
no interest whatsoever in the subject transaction. (SEC Opinion,
_ Sept..25,:1991.) 2h
|. \(c). ‘The transfer or sale of shares owned by a‘corporation in
another corporation requires approval by the board of directors
of the seller corporation (Sec. 22.) and while a corporation is
empowered by Section 35(g) to dispose corporate “assets, such
power is subject to Section 39. (SEC Opinion, Aug. 21, 1995.)
(d) Inthe ordinary course of business, a corporation ‘can
borrow funds ‘or dispose of assets of the corporation only on
authority of the board of directors which normally ‘designates
one (1).or more corporate officers to sign loan documents or
enterprises’ to conduct their business exclusively in leased offices ~'a result which
would retard industrial growth ‘and be inimical to the best interests of society. Thus,
a corporation whose business may properly be conducted in a populous center may
acquire an appropriate lot and construct thereon an edifice with facilities in excess of its
own immediate requirement. If it has the power to acquire such lot, construct an edifice
and hold it beneficially, the beneficial administration by it of such parts of the building as
are let to a must necessarily be lawful.” (Government vs. El Hogar Filipino, 50 Phil.
399 [1927].

337
with the requirements prescribed.

(3) As subject to limitations or restrictions
. — The right or power
of private corporations to deal in real and personal proper
ty is also
subject to limitations or restrictions prescribed by spe
cial laws and
theConstitution. Thus: |
(a) Under the Constitution, no private corporation or
association may hold alienable lands: of. the public domain
except by lease for.a period not exceeding 25 years, renewable
for not more than 25.years, and not,to exceed 1,000 hectares in
area. (see Art. XII, Sec. 3 thereof.) Natural resources such as coal,
petroleum and other mineral oils belong to the State and cannot
be alienated. Their exploration, development and utilization
shall be under the full control and supervision of the State. (Ibid.,
Sec. 2 thereof.)
(b) Under the General Banking Law -of .2000, any. real
property acquired by a bank by way of satisfaction of claims
under the circumstances enumerated in the law shall be
disposed of by it within a period of five (5) years or as may be
prescribed by the Monetary Board. The bank may, after said
period, continue to hold the property for its own use, subject
to limitations with respect to ceiling on investments in certain
assets. (see Secs. 51, 52, R.A. No. 8791.) |
Power to acquire shares or securities. ~

(1) Shares
a private. of other. corporations. — Section 35(g) authorizes
corporation. to. acquire shares or securities of
other
corporations.
(a) Such an act. does. not need the ‘approval: of the
ose or purposes
stockholders if done in pursuance of the purp
of the corporation as stated in its articles of incorporation but

Sec, 35
the approval
when the purpose is done solely ‘for investment,
ssary. (De la
of the stockholders as required by Section 41 is nece
27 SCRA 247 [1969].)
Rama vs. Ma-ao Sugar Central Co., Inc.,
no power to
The prevailing view is thata corporation has ess it is one
purchase or hold stock in anothe r corporation unl
incorpora tion. (7 R.C.L.
activity permitted by its articles of
20, 1961.)
Corp., par. 535; see SEC Opinion, Nov.
other corporations
(b) The power to acquire ‘shares in
ablished by the Revised
is subject to specific limitations est
the Constitution. The
Corporation Code, special laws, and.
the provisions of Section
exercise of the power is also subject to
176.
and can be among
(c) Acorporation c an be an incorporator
a yet- to-be-incorporated
the initial subscribers:to the shares of
., corporation. (Sec. 10.)
Revised Corporation
(2) Shares of the acquiring corporation. — The
limitations stated therein
Code authorizes a corporation subject to last par., 76, 80, 104.) A
67,
to acquire its own stocks. (see Secs. 40, when ithas
ever, only
corporation may purchase its own stock, how shares to be purchased
ir anrestricted retained earnings” to cover the
or acquired. (see Sec. 40.)
ber.
Corporation as stockholder or mem
express provision
“’ The old Corporation Law contains no composed of other
prohibiting the organization of a corporation
a corporation with other
corporations. A corporation may organize hority in the
of aut
corporations. (Sec. 10.) ‘The decided weight a
United States supports the view that a corporation may become
n, Oct. 12, 1970.)
inember of another corporation. (SEC Opinio
subscription
(1) A private corporation may, either by original her
ber, of anot
or by purchase, become a. stockholder and. mem
g to such
corporation with all the rights and liabilities attachin
ute or its
relation, either when it is expressly authorized by stat
within
chatter to do So, ot when such subscription or purchase is
cising the
its implied powers as a necessary or proper means of exer
It may
other powers conferred on it. (Ibid., citing 18 CJ.S., Sec, 34.)
n any
enter into a partnership, joint venture, merger, consolidatio or
ons.
other commercial agreement with natural and juridical pers

339
Power to contribute to charity,
_ (1) Existence of power formerly unsettled. — Section 35(i) vests

in business corporations. the authority to. contribute for purely
ee purposes.’ Before, the existence of such authority was not
settled.
(2) Basis of power now expressly granted. —Section 35(i) recognizes
the growing tendency to regard charitable giftsas within the scope
*While donations to charities by business corporations have been sustained by

various courts in the United States, they were justified by the presence of some benefit
or advantage accruing to the corporations. The reason for this judicial attitude against
such power is most strongly expressed in a case as follows: “A business corporation
is organized and ‘carried on primarily for the profit of stockholders. The powers of the
directors are to be employed for that end. The discretion of directors is to be exercised in
the choice of means to’attain that end and ‘does not extend to a change in the end itself,
to the reduction of or to the non-distribution of profits among stockholders in order to
devote them to other purposes.” (Dodge v. Ford Motor Co., 204 Mich. 459, 507, cited by
Emiliano R. Navarro, “Corporate authority to contribute to charity,” 26 Phil. Law Journal
188-189 [Oct. 1951].)
“The uncertainty resulted from the absence of any provision in the former
Corporation Law vesting the power, although such authority was impliedly recognized
by the National Internal:Revenue Code of 1939 (C.A: No. 466, as amended.) in Sec. 30(h),
thereof which provision is also found in the National Internal.Revenue Code of 1986.
(PD. No. 1158, as amended.) Said Sec. 30(h) allows deduction of: “Charitable‘and other
contributions. — Contributions or gifts actually paid or made within the taxable year.to or
for the use of the Government of the Philippines or any political subdivision thereof for
exclusivel i oses, or to domestic corporations or associations organized and
seria TRatewiee religious, charitable, scientific, athletic, cultural, or educational
purposes or for the rehabilitation of veterans, or to societies for the.prevention of cruel
to children or animals, no part of the net income of which insures to the benefit of any
Private stockholder or individual to an amount not in excess of six per centum in the
case of an individual and three per centum in the case ofa corporation, of the taxpayer’s
taxable income as computed without the benefit ofthis paragraph. a i
Still, it, was not clear whether purely charitable gifts, . unconnected with the
corporation’s .business, could. be considered valid as constituting a, proper, use of
Corporate funds if made without stockholders’ authorization. Sec. 30(h) is now Sec. 34(H)
of the National Internal Revenue Code 1997. (R.A. No. 8424.)

340 THE REVISED CORPORATION CODE OF THE PH ILIPPINES Sec, 35
of corporate authority. It is based on the SE iew thatBrteiilees

aine business
corporations are not organized solely as pt a with-corresponding
but also as economic and social Se at ailiedeas
ublic responsibility to aid in bettering db are doing
nandlitions in the community in which such corpor
business."
ised Corporation
Limitations on power. — Under the Revise
Bie he only limitations imposed on the authority # ; Peet abie
to make donations are: (a) the amount thereof me geo ee a
and (b) the donations by a foreign corporation m SSA Sa ass
of any political party or candidate or for de ee edanieseinn
political activity. (see Sec. 95, B.P. Blg. 881 ! shinieaiines
Code].) Only’ foreign speorauans a ee ee o thibrslinar
iving such donations. Under the Corpo i /
absolute prohibition for corporations, both foreign and Somestic
from donating to any political party, candidate or,for ponte: an
political activity. (GSEC-OGC Opinion No. 08-15, July 27, :
It is not required by law that the donation should inure to the
direct financial benefit of the corporation if it is “reasonable under
the circumstances, considering the corporation’s financial
condition.
The limitation that the donations must be “reasonable”
provides
a check against scheming directors and officers who
‘may use the
authority as a screen to appropriate corporate
funds for personal
ends , —
"SEC-OGC Opinion No. 35-14, Nov

ember 27, 2014, citing De Leon,
Code of the Philippines Annotated, The Corporation
p. 332 [2002]. As has been better
“Many business have advoca ted social respo
stated:
-of business corporations

their public patronage, b
In the last analysis, corpor private enterprise.
ate donations, unless am
treasury, redound to the ben ounting to Piracy of the
efit of the corporation, the shareh corporate
public.” (E.R. Navarro, op. older, the creditors, and
cit., supra, pp, 191-192.) the
“As business is chiefly co
corporation, its nd uc te d thr o ugh the medium of cor
i shareholders, direct porations, it is the
ors, and officers, wh
social obliga tions to empl
oyees and customers; o are b eing mad e to realize their
n sistent with this develo
Co
pment is the
: ities. ». In times when so much
t to permit such associ , it is
Stevens on Co ations to mak.
rporations [1949], p. € contributions to charit clearly in the public
252.) y.” (Ih id., p. 191, citin,
Pee
F

Sec. 35 qT E Iv, POWERS
OF CORPORATION
oe
Power to establish Pension. reti

and other plans » retirement,
(1) Corporate purpose or
. urposes, — ‘
every corporation by Sectio n fag
35(j) t The‘ authority
‘ granted
j to
and other plans for the Bélichea te let Feo titecaaeceishae
Thus, it has been Tepeatedly held that granting bonus,

and incentive compensation to employees as gratuity,
a rewa
within the implied po Wers of a corporations. It is rd for work is
a well-established
practice of corporations. The implied power to build houses, scho
churches, and libraries for employees has also been ols,
sustained. (see
Wyat & Wyat
t t, Business Law: Principles and Cases [1963], p.
Lopez Realty, Inc. vs. Fontecha, 247 SCR 708;
A 183 [1995].)
(2) Better: relations with corporate employees. —
A corporation,
like an individual em ployer, is not limited to payment
of wages
to its employees. It may extend to them other benefits,
such as
paid vacations, sick benefits and medical treatment, and
pensions,
which are not necessaril y charitable acts but actually part of the
employment contract. — ,
Contributions by a corporation to programs directly benefiting
employees apart from the benefits granted under the Social Securi
Act (R.A. No. 1161, as amended.). are permitted by the Revised
Corporation Code on. the theory that such activities promote better
telations between the corporation and its employees..(19 Am. Jur.
2d 508-509.)
Power to act as guarantor.

(1) Power generally withheld. — The Revised Corporation Code
contains no provision authorizing a corporation to guarantee the
debt of another. The rule is that no corporation has the power, by
any form of contract or endorsement, to become a guarantor or
surety or otherwise lend its credit to another person or corporation.
(SEC-OGC Opinion No, 11-08," April 16, 2008.)
"Citing De Leon, The Corporation Code of the Philippines Annotated, p- 334 [2002].

THE PHILIPPINES Sec. 36
342 THE REVISED CORPORATION CODE OF
n. there is nothing in
—If
(2) Inclusion in the articles of incorporatiocorporation the power
its articles of inc orporation which confers a
suretyship, it is deemed that
to enter into a contract of guarantee or
so especially since such act
the corporation is not authorized to do
corporation. Entering into
could prove to be disadvantageous to the
according to the strict
such contracts would be ultra vires which,
the express, implied,
construction of the term, is an act not within
by the Revised
and incidental powers of the corporation conferred
tion: It is an act not
Corporation Code or the articles of incorpora
den for lack of express
positively forbidden, but impliedly forbid
1, April 16,
or implied authority. (SEC-OGC Opinion No. 08-1 of
If the articles
2008; SEC-OGC Opinion No. 16-14, July 7, 2014.) the corporation
ranty,
corporation do not provide the power to gua
even if it is provided in
does not have the power.to guaranty
il 16, 2008.) The
the bylaws. (SEC-OGC Opinion No. 08-11, Apr nion,
corporation must amend its articles of incorporation. (SEC Opi
March 24, 1982.)
may guarantee if it is one of its secondary
-A corporation
purposes. (SEC Opinion, July 30, 1987.)#»:
—
Sec. 36. Power to Extend or Shorten Corporate Term.
as
A private corporation may extend or shorten its term
approved by
stated in the articles of incorporation when
and
a majority vote of the board of directors or trustees
ratified at a:meeting by the stockholders or members
tanding
representing at ‘least two-thirds (2/3) of the outs
the
‘capital’ stock or of its members. Written’ notice of
proposed action and the time and place of the meeting
432 [2002].
8Citing De Leon, The Corporation Code of the Philippines Annotated, p.
ions of another
_ “The SEC has allowed mortgage of corporate assets to secure obligat
ion,
corporation: (a) when the mortgage is in furtherance of the interest of the corporat
to secure the debt
and in the usual and regular course of business, or (b) when it is made
of a subsidiary. (SEC Opinion, April 15, 1987.) Even if the third party mortgage does
restriction in
not fall under either of the two (2) instances, to wit: (a) there is no express
the articles of incorporation or bylaws; (b) the purpose of the mortgage is not illegal;
the
(c) the consent of all corporate creditors and stockholders has been secured; (d)
transaction is not used as a scheme to defraud or prejudice corporate creditors or result
in the infringement of the Trust Fund Doctrine; (e) the mortgage will not hamper the
continuous business operations of the corporation; and (f) the accumulated third party
involved in the mortgage is financially solvent and capable of paying the mortgagee/
creditor. (SEC Opinion, Dec. 10, 1991.)

343
, de s
in the post office wit Must be deposited to the addressee
h postage prepaid, served personally,
al roni in ordance with
n latio he Commission on the e of
r
| : - In case of extension of corporate
term, a dissenting stockholder may exercise the right of
appraisal under the Conditions provided in this
Code.
Power to extend or shorten
corporate
term. -—
The corporate term of a private corporation
created for a specific
period may be extended or shortened by an
amendment of the
articles of incorporation a pproved by the majority vote
of the board
of directors or trustees and ratified at a meeting of the
stockholders
or members representing at least 2/3.of the outstanding capita
l
stock or of its members incase of nonstock corporatio
ns.
(1) Unlike in Section 15 which governs the amendment
of
articles of incorporation, the amendment under Section 36 must
be
taken at.a meeting of the stockholders or members and upon a vote.
(see SEC-OGC. Opinion. No. 25-14, Sept. 4, 2014.) “Mere written
assent” would not be sufficient. However, the formal requirem
ents
in the second paragraph of Section 16 mustbe complied with.
(2) The provision on the taking effect of the amendment in the
third: paragraph of Section 15 upon its. approval by the
SEC is not
applicable because the date of approval by the SEC may be befor
e
the effectivity date’of the extension ‘or reductioofn the corporate
term. The effectivity of the amendment relates back
to the date of its
filing withthe SEC if 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 affected
by amending the articles of incorporation to shor
ten the corp orate
term. (Sec.136.)
|
pense Caranmummmiinpeenescmmsen gst cman
'Citing De Leon, The Corporation Code of the Phil“y3ippi:nes Annotate
d, p.'171 [2006].

Sec. 37
d in
(4) The extension of the corporate term as originally state
the articles of incorporation is subject to the limitations or conditions
provided in Section 11.
Appraisal right of dissenting stockholders.

stockholder
Section 36 grants appraisal right to a dissenting to demand
by law
(right of stockholder in the cases provided
of extension of
payment of the fair value of his shares) “in case ng
to a dissenti
corporate term.” Such right should also be available
recognized in
stockholder if the corporate term is shortened as it is
Section 80(a).
of a
Note that the appraisal right applies only to a stockholder
stock corporation.
tal Stock; _
Sec. 37. Power to ‘Increase or Decrease Capi
Create or Increase Bonded Indebtedness. — No
Incur,
stock or
corporation shall increase or decrease its capital
unless
incur, create or increase any bonded indebtedness
‘directors -
approved by a majority vote of the board’ of
al stock.
and by two-thirds (2/3) of the outstanding capit
ders’
Written notice of the time and place of the stockhol
meeting and the purpose said meeting must be sent to
the stockholders at their places of residence as shown
or
in the books of the corporation and served personally,
s
through electronic means recognized in the corporation’
bylaws and/or the Commission’s rules as a valid mode for
service or notice. (SA) e
A certificate must.be signed by a majority of the

directors of the corporation and. countersigned by the
chairperson and. the. 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 th

a
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

«ee 3 7
TITL E IV, POWERS
OR CORPORATION
345
of capital stock or. num

ber of no-par stock subscr
each, and the amount paid by ea ibed by
cash or property, or the amount ch on the subscription in
of shares of no-par sto of capital stock or number
ck allo tted to each stockhold
such increase is for the er if
Purpose of making effective stock
dividend therefor autho rized;
(d) Any bonded indebted
ness to be incurred, created
or increased;
(e) The amount of stock represented at the meeting:
and
(f) The vote authorizin g
the increase or decrease of
the capital stock, or the in curring, crea
ting or increasing
of any bonded indebtedne SS.
Any increase or decrease in the capital stock
or the in-
curring, creating or increasing of any bonded indebted
ness
shall require prior approval of the Commission
and where
ropriate, of the Philippine Competition Comm
ission.
lication with the Commission shall be made withi
n
six.(6) months from the date of approval of.the board
of
directors and stockholders. which perio d may be extended
for justifiable reasons. eee
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 increase[d] 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. (A)
increase
Nonstock corporations may incur, create or
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. (A)
Bonds issued by a corporation shall be registered
with the Commission which shall have the authority to
determine the sufficiency of the terms thereof.
Power to increase or decrease capital stock.

(1) Anincrease or reduction in the capital stock of the corporation
is a fundamental change in the corporation. The authority of the
is not to be implied but exists only
corporation to take such action
when expressly conferred. (Peck v. Elliot, 79 F. 10; 38 L.R.A. 616; 44
A.L.R. 1315.) The power is granted by Section 37.
(2) Section 37 prescribes the procedure to be complied with to
effect a legal increase or decrease of the capital stock (not capital).
(a) The increase or decrease is now subject to prior
approval of the SEC, and where appropriate, of the Philippine
Competition Commission. (par. 3.)
(b) Even holders of non-voting shares are entitled to vote
on the matter. (see Sec. ‘6, par. 3[e].)
(c) The written notice requirement (par. 1.) is mandatory
and is obviously designed to protect the interests of minority
stockholders.
(3) The Revised Corporation Code contains no prohibition for a
corporation to increase its authorized capital stock even if the same
has not yet been fully subscribed. Sent oe :
2An amended articles of incorporation is not required to be filed. with the SEC to
reflect an increase in the contributed capital of a nonstock/non-profit corporation. Such
requirement applies only to stock corporations. It is sufficient for purposes of updating
the SEC records, that such fact is reflected in the financial statements. (SEC Opinion, April
2, 1998.)

gec. 37 ‘TITLE IV. Po WERS OF CORPORATION
347
Limitations on the Power,
(2) The corporation: must submit

proof to the SEC that such
decrease will not prejudice the rights of corporate creditor
otherwise the SEC shall not approve s;
the dacietse::
(3) In: case of increase of capital stoc
k, at least 25% of such
increase has been subscribed and
at least 25% of the subscription
has been paidito the corporation in actual cash.
(4) 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
(5) 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.)
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 issuing stock dividends.’ (18 Am. Jur. 2d 753-755.)
tre KS AaB ' 3 : : .

It ig considered as a‘ cardinal rule in accounting that any business entity has to
teflect at all times the actual business transactions and/or events in its books as they
appen. For this reason, the corporation can already enter the increase in its authorized

348 THE REVISED CORPORATION CODE OF THE PHILIPPINES Sec, 37
Necessity of new subscription for increase.

(1) An increase in the authorized capital stock cannot be
lawfully accomplished without an actual increase in the assets of
the corporation and additional subscriptions unless such increase
is to effect a stock dividend (Sec. 37, par. 2[c]} see Sec. 42.) previously
authorized.
(a) If the actual capital is increased by accumulated profits
and such profits are distributed to the stockholders in the form
profits
of stock dividends, the capital stock is increased, for the
are reinvested in the corporation by transferring the same from
surplus account to a capital account.
(b) The amount corresponding to the stock dividends
declared may cover the required 25% subscription to increase
the authorized capital stock and, if sufficient, will obviate the
necessity of taking in new subscription.
(2) If the increase of the authorized capital stock is for the
purpose of making effective stock dividends previously authorized, the
law requires to be stated in the certificate the matters mentioned
in paragraph 2(c). It is, therefore, clear that stock dividends once
declared and issued are paid, and this rule admits of no exception.
(SEC Opinion, Sept. 9, 1977.)
Effectivity of increase or decrease.

(1). After approval by. SEC. — Under. Section 37 (par. 4.), the
capital stock ofa corporation stands increased or decreased only
from and after approval and the issuance by the SEC of its certificate
of filing of increase or decrease of capital stock. Before the issuance
of the certificate of filing of increase of capital stock, the subscribers
to the proposed increase cannot be considered ‘as stockholders and
be accorded the rights as such for the shares subscribed by each.
capital stock as well as the stock dividends declared:in its books as soon as the same
has been approved by the, stockholders of the corporation. As to the increase of its
authorized capital stock, however, such increase becomes effective only after its approval
and issuance of the certificate filing of the increase by the SEC, and it ‘retroacts to the
day of the approval of such increase by the SEC making valid the entries made in the
books, The stock certificates corresponding to the stock dividends should bear the date of
actual issuance, which must be after the increase in the authorized capital stock has been
approved by the SEC. (SEC Opinion, July 28, 1972.)

nese eh re ys | of funds I, foris its
already a going concern, “in
bustnece seecationa * it is
sel : capital
th epPat to allow the use of the amount representing
a al Teceived on account of the proposed
increase
of ete ofthe woe da to pesret its operations even during the
pe ication for increase of : ‘
SEC. (SEC Opinion, Jan, 30,1975) aPital stock with the
The funds must be utilized purely for business operations and
duly accounted for or recorded in the books of the corporation,
and further, no loans or cash advances must be exte
nded to any of
the oesubscribers to the pro posed increase
in the capital stock. (SEC
Opinion, Dec. 9, 1981.)
Over-issue of shares.
(1) An issue of stock by a corporation in excess of the amount
prescribed or limited by its articles of incorporation is ultra vires and
the stock so issued is void even in the hands of a bona fide purchaser for
value. (18 Am. Jur. 2d 757.)
(2) An over-issue of stock does not avoid the original issue. Where
the corporation is permitted by law to increase its capital stock,
mere irregularities in effecting such increase will not necessarily
invalidate the increased issue. (Ibid., 758.)
(3) There is no over-issue where shares have been surrendered and
new shares issued in their stead. The new issue in such case merely
replaces the shares surrendered nor is there an over-issue where the
corporate structure provides for conversion of one class of stock into
another at the option of a stockholder, or where a stock certificate is
issued to replace lost certificates. (Ibid.)
Unauthorized increase of capital stock.

An attempted unauthorized increase of capital stock amounts
to an over-issue and such stock is, therefore, void and. cannot be
validated by application of the doctrine of estoppel. The same is true
of an increase which is unauthorized because it is attempted under
such conditions or in sucha manner that is not within statutory
authority to make the increase.

~ rN ee?
It follows that:
(1) Subscriptions for such stock are likewise void both on the
ground of illegality and for want of consideration;
(2) Subscribers for or purchasers of such stock acquire none of
the rights of stockholders, although bona fide purchasers of certificates
therefor may have a right of action against the corporation for
damages;
for or purchasers of such shares do not
(3) Subscribers
g up
become liable.to creditors of the corporation or on a windin
to a
as stockholders for unpaid subscriptions, and. are not subject
and
statutory liability to creditors imposed upon stockholders;
for or purchasers of such shares from the
(4) Subscribers
their
corporation may recover from it, money paid to it under
n, or
subscription of purchase as upon a failure ‘of consideratio
are
breach of warranty of the existence of the thing sold, unless they
precluded from such relief as parties in pari delicto.
Failure to make'a specific offer to return dividends received has
no material bearing upon the subscriber's right of action. Where the
corporation cancels the illegal shares and repays to the subscribers
the money. paid by. them therefor, they are not liable to. or for
creditors for the amount so repaid. (18 CJ.S. 750.) . Pod
Subscription requirement in case of increase

in capital stock. :
(1) Subscription and payments based on the increase in capital stock.
— Under Section 37, the treasurer of the corporation must file an
affidavit showing that at least 25% of the increase in capital stock is
subscribed and 25% of the subscription is paid.‘
(a) If the corporation has an authorized capital stock of
P20,000.00 and it is proposed to increase. it,to P50,000.00,.an
increase of P30,000.00 subscriptions must be obtained for not less
‘Where the stockholders authorized the increased the increase of the capital stock of
a corporation but the minimum legal requirement of 257% subscription and 25% payment
could not be met so that no certificate of increase in capital stock was filed with the SEC,
the board of directors, acting in good faith, may authorize the refund to the subscribers
of subscription payments to the proposed increase. (SEC Opinion, Feb, 3, 1971, p. 262.)

351
3 Or purposes of increase of capital stock

that every subscribes Shall pay 25% of ‘his subscription. The
paid-up requirement is met if “25% of the amount
is paid although some subscrib subscribed”
even have not paid7 any amount. ers have paid paid | less than 25%,25% OF
ait (c) It would seem that the minimum 25% paid-up
" requirement applies only to par valu
e shares because a subscriber
~ to no-par value shares must pay in full his subs
cription since
under Section 6, par. 7), “shares of capital stock issued without
par value shall be deemed fy
lly paid and nonassessable and the.
holder of such shares shall n. ot be liable to the corporat
ion or to
its creditors in respect thereto.”
Ways of increasing or decreasing authorized

capital stock. —
_. There are at least three (3) ways
3 b y which the authorized capital
stock may be.increased or decreased: . )
(1) By increasing or decreasing the number of shares authorized
to be issued without increasing or decreasing the par value thereof;
(2)-By’ increasing ‘or decreasing the par value ofeach share
without increasing or decreasing the number thereof; and
| (3) By increasing or decreasing both the number of shares
authorized to be issued and the par value thereof.
ILLUSTRATION:
Assume that the authorized capital stock of X Corporation
is fixed at P1,000,000 divided into 100,000 shares with a par
value ‘of P10.00 per share. The capital stock may be increased
(or decreased):
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 atthe same time increasing (decreasing)
the par value of each share to P15.00 (P5.00).

THE REVISED CORPORATION CODE OF THE PHILIPPINES Sec. 37
352
Increase by way of stock dividends.

(1) Stock dividends (see Sec. 42.) are ordinarily declared
A
out of the authorized but unissued shares of the corporation.
by way of
corporation, however, may also increase its capital stock
if there are
stock dividends without touching its unissued shares
(see Sec. 61[e].)
sufficient retained earnings to cover the increase.
result in the issuance
(2) If the proposed stock dividend would
orized capital
of shares of stock in excess of the corporation's auth ion
declarat
stock, the over-issue is null and void. Such dividend
ly
may be validly done provided that the corporation simultaneous
increases its capital stock and applies the proposed stock dividends
as full payment of the subscriptions to the capital stock increase.
(SEC Opinion, July 30, 1969.)
Par value or no-par value shares for

the authorized increase.
Under the authority granted under Section 37 and under Section
6, the increased capital stock may be divided into par value shares
and no-par value shares. In other words, the increase in capital stock
could belong to any of these two (2) classes of shares or to both.
The issue of no-par value shares out of the authorized increase
affords a means by which the corporation may attract investors. In
the course of its business, the corporation may. meet reverses. Its
assets are reduced.and the true. money value of the.issued shares,
may be below their par value. Under the prohibition contained in
Section 61 (par. 1.), the unissued shares cannot be sold for less that
their par value. Buyers, however, will be reluctant to pay par value
because the outstanding shares have a book value or actual value
below par. Meanwhile, the corporation needs more capital. In this
particular case, it may issue no-par value shares, the selling price of
which may be fixed in the manner provided in Section 61 (last par.)
of the Revised Corporation Code. (C.G. Alvendia, op. cit., p. 199.)
Reduction of capital stock.

(1) By decrease of number of authorized shares. —.When a
compere is authorized to reduce its capital stock, it may do so
also: : | ah
(a) by redeeming redeemable shares (see Sec. 8.) OF
purchasing its shares (see Sec. 40.) and cancelling or retiring the
same, including treasury shares (see Sec. 9.);

TITLE Iv,
(b) by accepting a surrend

in exchange therefor a
provided no rights of cre
(c) by cancelling shares

not yet issued.
(2) By decrease of par value of
authorized shares. — When a
corporation lawfully redu ces its capital stock pursuant to Section
37, the shares which are reti
red
purpose. If'the = shares acquire or reduced ‘no longer
echexexist for an y
d are not retired or cancelled, no
decrease in capital stock is effected, for the shares exist as treasury
shares. (see Sec. 9.) The capital stock may be decreased, however,
without decreasing the number of authorized shares into which it is
divided as stated in the articles of incorporation by decreasing the
par value of such shares, |
The par value of shares. of stocks of a corporation may be
reduced to eliminate its deficit. shock |
The reduction or decrease surplus or surplus arising from the
reduction of capital stock under Section 37 in excess of the deficit
may be declared only as stock dividends since it partakes of the
nature or paid-in capital in excess of par value. (see SEC Opinion,
Aug. 8, 1991; see Sec. 139.)
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. (18 C.J.S. 746, 873-874.) Section 37 (par. 4.)
°A statute providing that a corporation, “at any meeting called for the purpose,
May increase or reduce its capital’ stock and the number of shares therein,” does not
authorize a corporation to reduce its capital stock by purchasing the shares of a particular ,
Stockholder, unless all consent. In order that such reduction may operate justly to all the
Stockhold
olders, each ‘stockholder should be allowed to surrender such proportion of his
O
Stock as the amount of the proposed reduction bears to the whole amount of the capital
Stock. (6-A Fletcher,
p. 385.)

provides “that no decrease of the capital stock shall be approved by

the Commission, if its efféect'shall prejudice ae fight of corporate
creditors.”
Hence, “a resolution adopted at a meeting of. stockholders
to the effect that the capital should be reduced by 50% and the
subscribers released from their obligation to pay the unpaid balance
of their subscription in excess of 50% of the same, was an attempted
withdrawal of so much capital from the fund which the company’s
creditors were entitled ultimately to rely and having been effected
without complying ‘with the’ statutory requirements,: was wholly
ineffective.” (Phil. Trust Co. vs. Rivera, 44 Phil. 470 [1925]. )
(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. But failure
to give the prescribed notice, will not. invalidate the reduction, if it
is,otherwise valid.as between the corporation and.the stockholders
where all the stockholders consent (18 CJ.S. -747.), abies to the
rights of corporate creditors. .
Distribution of surplus on reduction.

(1) Where there is no impairment of capital: —Upor‘a reduction
of
capital stock, if capital has not been impaired by losses, there occurs
a surplus of assets to the extent of the reduction. Unless the rights of
creditors will be affected or the capital impaired, the directors may
make an equitable distribution of such surplus or so much thereof as
may. not be required in carrying on the business for the best interests
of the stockholders,
(2) Where reduction is made to meet impairment. —In other words,
there can be a distribution of only those assets over and above the
amount equal to the par value of the outstanding reduced capital
and the amount necessary to discharge the. existing, corporate
indebtedness. Thus, as a rule, where capital stock is impaired and a
reduction is made merely to meet that impairment, there will be no
ae er of assets among the shareholders. (18 Am. Jur. 2d 764-

TITLE IV. PO
gee 7 WERS OF CORPORATION 355
(3) Distribution resulting from decreas

¢ assets OF properties of a ¢ ree As a rule, distribution
awful dissolution of the corp
°rporation can be done only upon
Sh and after payment of its debts
and liabilities. The Revised C Orati 4
may De a distribution of asse Poration Code recognizes that there
ms ‘
; ts or properti . after
es ofek Ne ae tas
q decrease of its capital stoc k. (seeSee 139,
The Trust Fund doctrine consi ders subscribed capital as a trust
fund for the payment of the debts of the ebporatlonl to which
the creditors may look for satisfaction, Until the liquidation of the
corporation, no part of the subscribed capital may be returned
or released to the stockholder without violating this principle.
However,
ea a release of a subscrib er from the payment of his unpaid
subscription may be effected through a reduction of the capital
stock, and as against creditors, such reduction can take place only in
the manner and under the conditions prescribed by Section 37. (SEC
Opinion, May 13, 2002.)
Persons entitled to question increase

or decrease of capital stock.
(1) An unauthorized increase or reduction of capital stock may
be attacked and avoided by the corporation itself or by dissenting
stockholders absent an estoppel; or by creditors of the corporation,
or by a receiver or assignee representing them, insofar as the
transaction affects their rights.
(2) An unauthorized increase of stock may be. attacked by
subscribers for or purchasers of such stock in avoidance of their
subscriptions, or for the purpose of recovering what they have paid,
unless precluded as being in pari delicto. (18 C.J.S..753; see National
Exchange Co. vs. Dexter, 51 Phil. 610 [1928]; Salmon Dexter Co. vs.
Unson, 47 Phil. 649 [1925].)
Meaning of bonded indebtedness.

(1) A corporate bond is an obligation to pay a definite sum of |
Money at a future time at fixed rate of interest.
_ (2) In an opinion, the SEC explains the meaning of “bonded
Indebtedness”: )
A comparison of Section 37 of the Corporation Code of the
Philippines with Section 359 of the Civil Code of California shows

that our law on the subject of creation and increase of “bonded

indebtedness” isan adaptation of the law of California. Unfortunately,
neither the statutory law of that state nor its judicial decisions afford
any guidance as to the meaning of the term “bonded indebtedness.”
The only decision bearing upon the question which has been
rendered by the California'court up to the time is one articulated
in Underhill v. Santa Barbara Land & Building & Improvement Co.,
93 Cal. 300, 307, which holds that a non-negotiable note issued by
a corporation, although secured by mortgage, does not constitute
a “bonded indebtedness” and therefore does not require the
consent of shareholders. (cited in Fischer, the Philippine Law of
Stock Corporation, sec. 313, par. 180). The two principal elements
of distinction are time element and division of the whole debt into
like aliquot part units of round, denominations, represented by
negotiable certificate of indebtedness, generally called. “bonds”,
the purpose being to enable the corporation to make use of the
borrowed money for a long period of years, to obtain it from a large
number of people, and to facilitate the transfer of the certificate
of indebtedness from hand to hand during the term of collective
obligations. Such bond issues are usually secured by the transfer to
a trustee of a specific property to secure the payment of debt. The
_ effect of the creation and issuance of such obligation is a borrowing
from the general public. Hence, whenever the corporation adopts
this method of borrowing funds, the resulting obligations constitute
“bonded indebtedness” subject to the statutory provision of the
corporation law as to increase or creation. (SEC Opinion, April 29,
1987.)
Thus, the term “bonded indebtedness” refers to negotiable
corporate bonds which are secured by mortgage on corporate
property.”
Accordingly, if the notes are not secured by mortgage on
corporate property, the same need not comply with the requirements
of Section 37 of the Revised Corporation Code. (SEC Opinion, July
13, 1994; see SEC Opinion, April 6, 1990.) Similarly, if the debentures
are not secured by collaterals, they are not bonded indebtedness in
the true sense and will not require approval of the stockholders
although it is good corporate policy to require it. (SEC Opinion,
April 19, 1987.) .

- 9
TIT LE ly, P
OWERS op
CORPORATI
ON
power to i oe
ncur, Crea
te, o -
bonded indebtednage 28° Ss,
debt such as notes, bonds or Mortgag

Section 37 (par. 5.), nonstock Corpor
ations are authorized to incur,
create, or increase bonded indebt
ed ness. ( (see SEC Opinion,
Opinion, Nov. Nov 20,
1986; SEC Opinion, April 22, 1981.)
(2): Procedure and formalities, —
The procedure prescribed in
Section 37 for incurring bonded in debtedness is the same
as the
procedure for increasing or decreasing the capital stock except
that
the certificate need not state the matters in Nos. (2) and (3) and is not
required to be accompanied by the sworn statement of the treasurer
of the corporation concerning the amount of the increased capital
stock subscribed and paid. The prescription of the formalities with
respect to “bonded indebtedness” only, implied of necessity a
distinction. between debts which are “bonded” and all other debts.
(Fisher, op. cit, p. 312.)
(3) Shares and members entitled to vote. — Even holders of

non-voting shares or non-voting members, as the case may be, are
entitled to vote on the matter. (Sec. 6, par. 3[d].) -
(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 SEC. (Sec. 37, par.
4.) The bonds issued by the corporation have to registered with the
SEC which is given the authority to determine the sufficiency of the
terms thereof. (Ibid., last par.)
The same considerations for stocks as provided in Section 62
insofar as they may be applicable may be used for the issuance of
bonds by a corporation. (Sec. 61, par. 3.)

When obligations constitute bonded

indebtedness.
(1) Notes and bonds. — When a corporation borrows money, its
indebtedness may be evidenced by notes or bonds as its primary
security.
(a) If the amount borrowed is small and if it is borrowed in
a single sum, or from a few persons, or for a short time, notes are
usually given.
(b) If, however, the amount is large and obtained from
a number of people and extends over a period of years, the
corporate obligation is preferably and’ usually evidenced by
bonds. :
(2). Distinctions. — The difference between a corporate note
and a bond is not always clearly marked. Both are promises to pay
money. : : ,
, (a) The phrasing of the bond is usually more formal than
that of the note. | e |
| (b) Also, payment of bonds is usually, though not invariably,
- secured as to both principal and interest by certain specified
property held for the purpose under.aformal. deed of trust.
(c)”A bond issue consists of anumber of bonds which, while
they may vary as to denomination, some may be registered and
some unregistered, are all of like general tenor and, if secured,
are all secured. 3 |
(3) Other characteristics of bonds. — The two principal elements of
distinction are time duration and the division of the whole debt into
like aliquot part units of round number denominations, represented
by negotiable or assignable certificates of indebtedness.
- (a) Such certificates are generally called “bonds,” the
purpose being to enable the corporation to make use of the
borrowed money for long period of years, to obtain it from
a large number of people, and to facilitate the transfer of the
certificate of indebtedness from hand to hand during the term
of the collective obligation.
(b) Such bond issues are usually secured by the transfer to a
trustee of specific property to secure payment of the debt.

359
(c) The bonds usually, b |

are transferable by delivery ut not necessarily, run to bearer and
credit/loan accommodatio
each evidenced by a Promissory’ ‘not
payment of the Promissory note, e. As’ security for the
'X Corporation constituted a
mortgage in favor of each creditor,
Z, a bank,‘was appointed '
by X Corporation with the consent
of the creditors'as'common |
Trustee-Mortgagee. The mortgage is ‘co
vered by’an agreement
_ denominated as Mortgage Trust Indent
ure executed by X
Corporation to Z. eng teccth SE eer
. Inadditiontothe mortgage contract, Mortga
ge Participation
Certificates (MPC) were issued by Z to creditors
to evidence
the extent of their interest in the mortgaged property. As each
promissory note or amortization is’ paid, the correspon
din
MPC covering the same ig cancelled: This process enables g
X
Corporation to borrow again, using the same mortgaged
property via MPC as security with the same or‘a’new creditor
~
» protected by a first lien on the mortgaged property to the extent)
/ of his interest. ae eee boy
Ts the issuance of the MPC subject to the requirements of
bonded indebtedness under Section 382. °° 0 03 :
No. Whena corporation secures its indebtedness whether by
notes or bonds, such notes. or -bonds,, being the, primary
security on the principal obligations, are created under Section
38. From the features of the MPC, it is clear, however, that they
are issued by Z (trustee-mortgagee)’ merely to evidence the
*Whenever a corporation resorts to this method of

borrowing funds
obligations constitute a“bonded indebtedness,” subject to the requiremen, the resulting
ts of Sec. 38 of
€ Revised Corporation Code as to creation or increase. (H.C. Bentley, Corp
nance and Accounting, cited in Fisher, pp. 315- orat ion Fi-
316. )
4gainst its general credit are not covered by the provOther bonds issued by a corporation
isions of Sec. 38, but the SEC Rules
Tequire their submission to the SEC for approval
before they can be issued to the public.
(SEC Opinion, April 6, 1990.)

Sec. 37
undivided interests of the creditors in the mortgaged prope

rty
covered by the Mortgage Trust Indenture. They strengthen the
claim of the creditors to the mortgaged property and in case
of
~ default of X Corporation (debtor-trustor), the creditor will have
recourse to the mortgaged ‘property in the ‘hands of Z. (SEC
Opinion, Sept. 6, 1977.)
(2) X Corporation will borrow from a few lenders the
amount of P50 million to be evidenced by interest-bearing
promissory, notes, to . finance | its subdivision/housing
development projects. The credit transaction will. be fora
term of ten (10) years payable in periodic installments and the
principal,-interest and premium due-on outstanding balance,
will be secured by.a guaranty to be executed by Y Corporation,
in its capacity as parent company of X Corporation, and a real
estate mortgage over certain properties of Y Corporation.
Z Corporation, an affiliate of X Corporation, will underwrite
the mortgage note issue for X Corporation.
“Is the mortgage note issue an ordinary term loan or a bond
issue?” PaTOUL OTS ye bene (NLA) HID
._ The features of the transaction characterize a term loan, as.
distinguished from a bond issue. (SEC Opinion, Nov. 18, 1977.)
The corporate bond contract. ah cSsilachigkeenn

~ (1) °Parties. ~ There are three (3) parties toa corpo
ration bond
contract: the borrowing corporation, the bondholders,
andthe
trustee. The trustee is a bank or trust comp
paid by the corporation but serves mainly toany, which is chosen and
protect the bondholders.
(2), Trustee's functions. + They usually include:
p
\ (a)! Countersigning the bonds to assure
authenticity: ;
_ Ab), Collecting: interest and ‘principal. paymen
debtor-corporat
ts from. the
ion and distributing them to those entitled
;
(c) Acting as mortgagee or collateral holder
if the bonds are
secured;
(d) Verifying the performance of the deb
tor-corporation’s
promiseson behalf of the bondholders; and
: (e) Taking legal action on behalf of the bondholders
“nece
‘if
ssary. : !

| (3) PO indenture. — The Contract itself, known
as the “bond
indenture, 15 a complete, lengthy legal document which constitutes
the agreement between € parties. The bonds themselves are
certificates of Participation in their contract. In the indenture the
,
corporation promises to pay principal and interest promises ts pay
the trustee, promises to pay
ene its taxes and other debts, and promises
to maintain its property and conduct its business prudently.
me provisions, — The bond indenture will contain many

(4) Usual
other provisions, including:
(a) the total amount of the bonds authorized to be issued
under the indenture or a statement that the amount is unlimited;
(b): a statement that additional bonds may be issued in the
future (open indenture) or that the first issue will be the only one
permitted (closed indenture);
(c) statement of the purposes for which the additional
bonds may be issued, such as for construction or acquisition of
property,
(d) stipulation that all bonds must be identical in terms
or that a series of issues, possibly having different interest
rates, maturity dates, and call prices, may be sold under the
‘basic indenture (in the latter case, each series would’ have a
supplemental indenture detailing its special features),
(e) details of the collateral or mortgage security. to be
provided;
(f), mechanics of interest payments, registration of bonds,
and principal repayments, and
(g) terms of special features such as sinking funds, ‘call
and conversion options. (G.A. Christy & J.C.
provisions,
ed. [1978], pp.
Clendenin, “Introduction to Investments,” ‘7th
138-139.)

Bond terminology.
Corporate bond issue are commonly given titles which
undertake to describe the terms of the contract. Thus:
(1) Promissory instruments running five (5) years or longer are
“bonds” or “debentures,”’ shorter maturities are “notes.
(2) An equipment obligation (Philadelphia plan) may be a
“trust certificate.” ne
(3) To identify the type of lien, the word “mortgage,” leasehold
mortgage,” “collateral trust,” and “secured” are used.
(4) For further clarification, adjectives such as “first,” “second,”
° . e IM
“refunding,” “consolidated,” “general,” “divisional,” “prior,” and

e oe ‘Shh Si 4”
“adjustment” may be used singly or in combination.

(5) To describe the pledged property, such words as “bridge,”
“terminal,” or “equipment” may be included. é
(6) Additionally, such: descriptive terms as “income sinking
fund,” “purchase. money,” . “extended,”., “series,” “serial,”
“participating,” and “convertible,” are used: (Ibid., op. cit., p. 154.)
Type of bonds. |
(1) Common types. — They may be secured or unsecured.
The major types of secured bonds are: .
(a) Mortgage bonds or debt instruments of financing secured
by a lien on specifically named property. Land, building,
equipment, and other fixed assets are the kinds of property
most commonly pledged as security; |
(b) Collateral trust bonds or debt instruments secured bya
pledge of either stocks or bonds, or both which are deposited
with a trustee; and EEO
'»(c) Equipment obligations or debt instruments to’ secure
financing loans on locomotives, railway cars, buses, large trucks,
and similar equipment. The most outstanding characteristics
‘/The normal distinction between a corporate “bond”. (bonded

indebtedness ) and
a corporate “debenture” or “note” is that the former is usually secured by:a
mortgage
on corporate property while the latter usually is not. (5-A Words and Phrases
, p.
Debentures are serial obligations or notes issued on the basis of the general credit 128.)
of the
corporation and since they are not secured by corporate property, they are not bonded
indebtedness as contemplated in Sec. 38.

sec. 3 7 TITLE IV,V. POWERS OF CORPORATION
363
of an equipment oblj gation

is the r ailroad equipment trust
certificate secured b Y title to
rolling stock, such as cars and
locomotives.
Examples of unsecured bonds are:

(a) Straight debenture bo nds or
general credit bonds not
secured by any specific Prope
rty. The earning of the issuing
corporation protects the debenture bondh
olders;
(b) Guaranteed bonds or that type for whi
ch one or more
individuals or corporations other than
the issuer guarantees the
paymen t of interest or principal or both; and
(c) Subordinated debenture bonds or debt instruments
specifying that the holder’s rights are inferior in the event
or liquidation. or recognition to any existing and future debt
defined in the indenture as senior debt. (Soldofsky & Olive, op.
cit., pp. 64-65.)... eae " |
(2): Special types. — Besides the common types of bonds, there
are hybrid securities or bonds which have features similar to those
characteristics of common stock or preferred stock. These até:
(a) Convertible debentureor
s bonds which may be exchanged
for the common stock of the issuing corporation at a fixed
price by a predetermined redemption rate at the option of the
bondholder;
(b) Income bonds, sometimes called adjustment bonds, or debt
‘instruments with a fixed rate of interest payable only if earned
and declared by the board of directors. They are hybrid secu-
rities combining some of the characteristics of preferred and
straight bonds;and = . ee 3
ee Sree ee
» Under the Philadelphia (or equipment lease) plan, a manufacturer builds, equipment
to a railroad’s specifications and then sells the equipment to the trustee who leases the
equipment to the railroad. Equipment trust certificates are sold by the trustee to investors
to pay the manufacturer. The annual installment payments over a period of
15 years
Or less are at rates calculated to be well within the economic life of the equipment, and
ere is a substantial down payment as further protection. (Soldofsky & Olive, “Financial
Management,” 1974 Ed., pp. 62-65.) aie a bree :
Under the New York (conditional sale) plan, the trustee receives the equipment from
€ manufacturer and sells it to 'the purchasing corporation in return for ‘a series of
€quipment trust notes. These notes are interest-bearing and of serial maturities; ‘when
Sold to investors, they provide the money to pay the manufacturer, When the notes are
Paid off by the purchasing corporation, the conditional sale becomes final and ‘complete.
isty & Clendenin, op. cit., p. 144.)

(c) Bonds with warrant or stock purchase warrant, or an option

or a right, exercisable by its holder, to purchase stock at a stated
price during a stipulated period of time. Bond warrant issues
are usually debentures, and the warrants are detachable or
non-detachable. Detachable warrants are preferred by investors
because such warrants may be sold or exercised apart from
the bond, whereas non-detachable warrants cannot be sold or
exercised separately from the bond. (Soldofsky and Olive, op.
cit., 65-69.)
Sec. 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 to be issued in compliance
with laws requiring stock offerings or minimum stock
ownership by the public; or to shares to be issued in good
faith with the approval of the stockholders representing
two-thirds (2/3) of the outstanding capital stock, in
exchange for property needed for corporate purposes or
in payment of a previously contracted debt.
Right of preemption 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. (see SEC-OGC Opinion No. 3-13,? April 7,
2013.) For example, if a stockholder with preemptive right owns
'The mere fact that the subscriber is entitled by right of preemption to only a portion
of the total shares subscribed for does not militate against nor vitiate the validity of a
subscription contract (see Sec. 60.) partially paid for and duly recorded in the books of the
corporation, (SEC Opinion, Dec. 17, 1964.)
The corporation may still allow its stockholders who failed to exercise their
preemptive rights within the prescribed period, to subscribe at a later time especially
when fault is not attributable to the latter and provided all previous non-subscribing
stockholders are given the opportunity again. (SEC Opinion, Oct. 9, 1990.)
*Citing De Leon, The Corporation Code of the Philippines Annotated, p. 360 [2002].

sec. 58 TITLE IV, POWE
RS OF CORPORA
TION
=
20% of the outstandin

g shares of the c
20% of any shares of stock issu he may subscribe
ed by dhe rcs on.
This is known as the 7 are
of
stockholders. right of preemption or preemptive right
Sametime whose names appear in the stock and transfer

book of the corporation on the date of the meeting authorizing the
issuance of shares are entitled to th € preemptive right under Section
38 of the Revised Corporation Code. (SEC-O inion No. No. 15-19,
15-19
March 13, 2019.) (SEC-OGC Opinion
(1) Availability of right to new issues of shares and unissued
shares. — The rule is that preemptive right is recognized only with
respect to new issue of shares, and not with respect to additional
issues of originally authorized shares. This is on the theory that
when a corporation at its first inception offers its first shares, it
is presumed to have offered all-of those which it is authorized to
issue. An original subscriber is deemed to have taken his shares
knowing that they form a definite proportionate part of the whole
number of authorized shares. When the shares left unsubscribed are
later reoffered,
he cannot therefore claim dilution of interest. (GEC
Opinion No. 03-05, April 27, 2005, citing Benito vs. SEC, 123 SCRA
722, 726 [1983].) |
(2) Acquisition by transferor of right. — When shares of stock are
sold by the holder after an increase of the capital stock has been
voted, the purchaser acquires, as an incident to the stock, the same
right of preference in subscribing for or purchasing the new stock as
was possessed by the transferor. (Hogg v. Eckhardt, 175 N.E. 382.)
This principle, however, does not apply to transfers
where the assignors. have exercised their preemptive rights to
subscribe to new. issues. To rule otherwise would allow the
preemptive right attached to the original stock to be exercised twice.
(SEC Opinion, Nov. 28, 1990.)
(3). Right subject to exceptions. — The application of the right of
Preemption in a stock corporation depends on a consideration of
all the surrounding circumstances of each case. In other words; the
tight is not absolute as it admits of certain exceptions.

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.
This right is based on the principle that a stockholder, in
subscribing to shares of stock, does so under the understanding
that his equity is fixed by the relation which the number of shares
he subscribes bears to the total authorized capital stock, issued or
unissued, subscribed or unsubscribed, at the time of his subscription,
as shown in the company’s articles of incorporation, and should
not, therefore, be diluted. by the issuance of additional shares as
to affect his rights to vote, to dividends, and to the distribution of
assets upon liquidation, without first giving him the opportunity to
subscribe to such shares in proportion to his shareholdings. (SEC-
OGC Opinion No. 17-11, March 22, 2011.)
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: However, a stockholder may
waive such right. The waiver should be given individually by the
stockholder concerned or by another by way of a special power of
attorney. Being a personal right, the waiver cannot be made by the
corporation itself through a stockholders’ resolution. (SEC Opinion,
Dec. 12, 1994.) :
Astockholder cannot be forced to waive the right even if majority
of the other stockholders opt to waive it. (SEC-OGC Opinion No. 08-
08, March 31, 2008.) eee
ILLUSTRATION:
X Corporation has an original stock of P100,000 divided
into 1,000 shares with a par value of P100 per share. A owns 500
shares. Subsequently, the ‘capital stock is increased to P200,000
ie 1,000 more shares). Both the old and new shares are voting
shares.
(1). Right to vote. — A must be given a right to subscribe to
500 of the new shares before they are offered to others. If A is
allowed to subscribe to only 100 shares of the increased stock,
his voting control would be reduced from 50 500/1,000) t to
% (500/1,000)
only 30% (600/2,000).

Se 38
’ \
367
(2) Right a
erpuieniGy ,
ars earnings as dividends. — Suppose. the
amount been dis net earnings of P50,000,00. Had this entire
each stockhol aa hae as cash dividends before the increase,
(P50,000.00/1,000 cluding A, would have received P50.00
Would Bex Sita Per share. After the increase, the dividend
to P25.00 (P50,000.00/2,000) per
share.
3) Right to net co rporate assets
after liq
j uidation. — Assume
new fee a total assets of the corpor
ation amount to P170,000,
with liabilities of P20,000.00 and surplus of
P50,000. Thus, its
| wt assets or net worth is P15
0,0 00.00. The
¥8 ue per share is P150.00 (P150,000.00 refore, the actual
/1,000). If the new
ares were to be issued at their par value of P100, the actual
value of the original shares would be reduced to P125.00
tis BE bi
(P250,000.00/2,000).
If the rule of preemption will not be observed, it is evident
that existing stockholders who are allowed to subscribe to..
more that their pro rata shares in the increase of the capital stock
_ and.new stockholders will unjustly benefit by P25.00 per share
_ at the. expense of the stockholders whose preemptive right is’.
violated. In the event of liquidation, each stockholder, old and.
new, will participate in the net assets of the corporation at the
rate of P125.00 per share.
Non-availability of preemptive right.

The preemptive right of stockholders of a stock corporation
of shares of any class in
“to subscribe to all issues-or. disposition
proportion to their respective shareholdings ‘may be “denied: by
the articles of incorporation or an amendment thereto” or may fall
under any of the exceptions.’ (Sec. 38.) .
(1) Unless so denied or excepted, the right should be granted to

a holder of shares although they are of a class different from those
issued or disposed of. For example, holders of Common “A” shares
are entitled to stibscribe to Common “B” shares in proportion to their
‘interest, but they cannot be required to subscribe to the Common
‘The SEC requires an explicit written waiver of the right of preemption from the
non-subscribing stockholders every time it processes an application for increase in capital
stock.

“B" shares, especially since the latter ate of a class different from the
class they are holding.
(2) A stockholder whose preemptive right is violated may
maintain an action to compel the corporation to give him that right.
If the denial is by an amendment to the articles of incorporation, he
may exercise his appraisal right under Section 80(a).
Shares to which right not available.

‘Under Section 38, the preemptive 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 thereto (in which case
they are deemed to have waived the right), and except to:
(1) Shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public;
(2) Shares to 'be issued in good faith with the approval of
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 preemptive right does not extend to the issue of shares
in No. (1) because 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.
‘4On granting preemptive rights to existing shareholders, the law makes no distinction
between newly-issued shares and previously unsubscribed shares from the original
authorized capital stock. The right, however, may not be exercised by shareholders who
have already exceeded the ownership threshold laid down in Sec. 33.2(c) of the Securities
Regulations Code which takes precedence on Sec. 38 of the Corporation Code. (SEC-
OGC Opinion No. 41-11, Oct. 5, 2011.) It is not clear whether common stockholders have
a preemptive right to acquire preferred shares and preferred stockholders to acquire
common shares. But if the preferred stock is convertible to common, holders of common
shares must be given the right.
Under the Old Corporation Law (Act No. 1459.), preemptive rights are recognized
only with respect to new issue of shares.

Sec. 38
TITLE Iv. ‘POWERS
p
9 F CORPORATION 369
o Owner. (SEC Opinion, Feb:’15, 1991; see

SEC Opinion, May 21, 1986; SEC Opinion, Feb, 12, 1985.)
Offering of remaining unsubscribed
ae
shares.
(1) To public or any. person acceptable_to corporation. — If the

unissued shares, whether from the original or increased. capital
stock, corresponding to one stockholder are not subscribed ‘or
purchased by him within the period fixed for the exercise of. his
preemptive right, he is deemed to. have impliedly waived his
tight to subscribe to the same or to the balance if he subscribes
only to.a. portion, It does not follow that the shares should again
be offered on a pro rata basis to stockholders who took advantage
of their right of preemption. This is because
if they exercise their
preemptive rights, their relative and proportionate voting strength
in the corporation will not be affected adversely. (SEC Opinion, Sept.
24, 1974; citing C.G. Alvendia, The Law of Private ‘Corporations,
pp. 172-173.) Seep atie USES nie
Thus, the remaining unsubscribed shares may be offered to the
public on first-come, first-served basis or to any person acceptable
to the corporation without violating the Prema rights of such
stockholders. a Die ee aa
of policy, the SEC
of record. — As a matter
(2) To stockholders
‘ders ita sound corporate practice to offer always the remaining
i -kholders of record whenever practical'and feasible
shares to the stor tn to the public (Ibid.; May 14, 1990, Dec. 6, 1994,
og
r a P Sone ), 1 although this F“right of first refusal” is not provided
for in the articles of incorporation. .

370 THE REVISED CORPORATION CODE OF
THE:PHILIPPINES Sec, 3g
ILLUSTRATION:
A owns, 20% of, the capital. stock of Corporation X. He
exercised his. preemptive right to new shares issued by the
corporation. B, another stockholder, did not exercise his right
with respect to the shares corresponding to him. His shares
were offered to and purchased by stockholder C.
Here, A still-maintains' his 20% interest in.the corporation
although C’s proportionate holdings increased. A has no cause
for complaint if his 20% interest is not reduced.
Time within which the right may

be exercised.
The time within which a stockholder must exercise his
preemptive right is generally fixed in the resolution authorizing the
increase of capital stock. ~~ meee
A majority of the stockholders have a right to fix the time to suit
themselves and the interests of the corporation. The only limitation
upon the exercise of the prerogative is that every stockholder shall
be treated alike and shall be afforded a reasonable opportunity to
subscribe. (Hayt v. Great American Ins. Co., 200 Pa. 516, 50 A. 154.)
Parenthetically, such resolution may also require the stockholders
desiring to exercise his preemptive right to pay a deposit on the new
“Stock at the time of subscribing. (SEC Opinion, Dec. 29, 1976.)
Preemptive right as to treasury shares.

.--(1) In close corporations, the preemptive right of stockholders
extends. to all) stock to be! issued (i.e, old or
new) including
re-issuance of treasury shares, whether for money
or for. property
or personal services, or in payment of corporate debts, unles
s the
articles of incorporation provide otherwise.
(Sec. 101.)
(2) In widely-held ‘corporations, it would
seem: that: existing
stockholders have also a preemptive right
as to treasury shares
(Sec, 9.) beca use of the use of the phrase “disposition. of shar
es of
any class” in Section 38. Note, however, that sale or disp
the treasury stoc
osition of
k is not considered a new issue, (see SECOpinion
Ne: 03-05, April 27, 2005, citing Benito vs. SEC,
[1983].) 123 SCRA 722, 726
: 7

Sec. 38
7 TITLE
I V. POWERS O
F CORPOR
ATION
371
Since the funds
used j #3
from the surplus Profits ofthe ctuizing the treasury
shares come
declared instead aS divide
nds uOheey which could have been
the preemptive Tights of stockholde a desirable policy
to recognize
Price of new s
tock Offerings
(1). Interests of th
— The concept of
The power to determine the pri

ce must be exercised for the
benefit of the corporation and in the
interests of all stockholders.
(2) Where price far below fair market
value. — When new shares
are iss ued at prices far below their fair val
ue in a corporation with
only a limited market for its shares, exis
ting stockholders who do
not want to invest or cannot invest additional
funds can have their
equity interest in the corporation diluted to the vanishin
g point.
(3) Right of stockholders to maintain proportionate equity and
at the same time not to acquire additional shares. — One part of the
stockholders’ right to maintain proportionate equity in a corporation
by purchasing additional shares is the right not to acquire additional
shares without being confronted with dilution of his existing equity
if there is no valid business justification for the dilution. This right
not to acquire is seriously undermined if the stock offered is worth
substantially more than the offering price. Any share subscribed or
purchased at this price dilutes his interest and impairs the value of
his original holdings.
(4) Right of stockholders to insist on legally adequate price. —
A corporation is not permitted to dispose its stock fora legall
inadequate price at least where there is objection. While a stockholder
has no right to block a disposition of new shares for a fair price
merely because he disagreed with the wisdom of the plan, he has
the right to insist that the price be fixed in accordance with legal
requirements. (Katzowitz v. Sidler, 249 N.E. 2d 359 [Ct. Apps. N.Y.
1969].)

Availability of right to additional issue

of originally authorized shares.
A shareholder’s preemptive right is his option to subscribe to
allotment of shares, in proportion to his holdings of outstanding
shares, before new shares are offered to others. This doctrine applies
when a corporation increases its capital stock by declaring a stock
dividend, in which case it cannot discriminate between stockholders,
(1) All originally authorized shares initially offered for subscription.
— When one subscribes for shares in a corporation, he realizes that
his position is fixed based on the proportion between the number of
shares subscribed by him and the total number of shares which the
corporation is authorized to issue. This presupposes, however, that
the corporation at its inception offered all its originally authorized
shares, although such should. be the presumption. (see Datu
Tagoranao Benito. vs. Securities and Exchange Commission, 123
SCRA 722 [1983]; Dee vs. Securities and Exchange Commission, 199
SCRA 238 [1991].)
(2) Number of such shares initially offered specified. — Where the
number of shares initially offered for subscription was specified, such
that the original subscribers could not have insisted on subscribing
for more, the corporation must first offer the additional issue of
shares from the unsubscribed portion of the authorized capital stock
preemptively to stockholders before the same is offered to third
parties. In this case, the original subscriber.is deemed to have taken
his shares in relation to the number of shares then initially allotted
for subscription rather than to the total number of authorized shares
at the time of his subscription.
The subscriber cannot claim:a dilution of interest if additional
issues of originally authorized shares are purchased by others.’
‘The shareholders’ preemptive rights do not generally apply where the shares
belong to the original (or increased) capital stock of the corporation unsubscribed or
undisposed of, inasmuch as such shares constitute a part of the assets, and may be
sold
either to stockholders or to strangers as the corporation may deem best even without
notice to stockholders. They are not new issues.
The issuance of shares out of the unsubscribed shares of the authorized capital stock
of the corporation may be authorized by the board of directors thru a board resolution
without need of stockholders’ approval. (SEC Opinion No. 03-05, April 27, 2005.)

ILLUSTRATION:
Here, Z is not entitled to re :

remaining unissued 60,000 sHares i they die lhe opie ue
cannot claim a dilution of interest. Pega nis |
where thenumber of shares initially offered for subscription
gine EON, then Z may exercise his preemptive right
ae remaining 60,000 shares are subsequently. offered for
subscription to the extent of 1/10, or 6,000 shares,
we See. 39. Sale or Other Disposition of Assets. — Subject to

‘the provisions of Republic Act No. 10667, otherwise known
as “Phili ine 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.
s
In nonstock corporations where there are no member
with voting rights, the vote of at least a majority of the
ation for the
trustees in office will be sufficient authoriz
ed by
corporation to enter into any transaction authoriz
this section. (N)
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,
ce anon Intl financi ements. 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 place of residence as
shown in the books of the corporation and deposited to
the addressee in the post office with postage prepaid, or
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 if appraisal right under the conditions provided
in this Code. (N) |
After such authorization or approval by the stock-
holders 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.
Power to sell, lease, etc. all or substantially

all corporate assets.
There are two (2) types of corporate acquisitions: asset sales and
stock sales. In asset sales, the corporate entity sells all or substantially
all of its assets to another entity. In stock sales;\the’ individual or
corporate stockholders sell a controlling block to new or. existing
stockholders. (SME Ban, Inc. vs. De Guzman, 707 SCRA 35 [2013];
see Secs. 75-78.) Section 39 deals with asset sales.

375
or trustees; approved by the board of directors
(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 non-voting
shares (see Sec. 6, par. 6[c].)
or 2/3 of the members, as the case
may be; and !
_ (c). The authorization must be do
neat the stockholders’ or
members’ meeting duly called for that purpose after
written
notice.
(2) ‘Other legal ‘limitations. — As a safeguard against abuse of
power, Section 39 provides that the sale, etc., shall be subject to R.A.
No. 10667, otherwise'known as the “Philippine Competition Act,”
and-other ‘related:laws such.as those on illegal combinations and
monopolies. (see Sec.:176.) Furthermore, under the Bulk Sales Law
(Act. No: 3952,:Secs.'3, 4,,5.), the-sale, etc. of-all or-any portion of
a.stock. of goods; merchandise, provisions or materials otherwise
than in the ordinary course of business is declared fraudulent and
void as to creditors of the vendor unless specified formalities are
observed such as the giving by the vendor to the vendee of a list of
creditors to whom said vendor may be indebted. |
(3)..Sale of all assets without dissolution.,— Subject to the above
legal limitations, a!.corporation may sell all its assets. without
necessarily dissolving or terminating its existence. If such sale is
made to another corporation and there is no intent to combine, the
selling corporation may continue
(Balla
in a state of suspe
nded anima
tion
ntine, p. 666.), subject to the effect of non-u
se of corporate
powers and’ continued inoperation ofia corporation provided in
Section 21. (SEC Opinion, July 8, 1987.) The rights of creditors must
not be overlooked or disregarded when a corporation sells its entire
assets and turns over its business to another. (Ballantine, p. 676.)

PHILIPPINES Sec, 39
376 THE REVISED CORPORATION CODE OF THE.
e to the
The only way the transfer can proceed without prejudic
ilities of the assignor,
creditor is to make the assignee assume the liab
transfer choose to
unless the creditors who did not consent to the
(Caltex [Phils.], Inc. vs.
rescind the transfer on the ground of fraud.
400 [2006].)
PNOC Shipping Transport Corp., 498 SCRA
Authority of the board.

only sale but
(1) Stock corporations. — Se ction 39 covers not
also lease, exchange, mortgage, pledge
or other disposition’ of its
properties. a Bt .
s
(a) The board is given the right to decide upon the termn
consideratio
and conditions of the transaction including: the
transaction is
for the property disposed of, for, at any rate, the
members.
still subject to approval by the stockholders or
rtheless, in
(b) After ‘such’ approval, the board ‘may neve
further action
its discretion, abandon the ‘transaction, without
subject 'to the
or approval by the stockholders or members but
thereto: (par.
rights of third parties under any contract relating
3) i85 3 . |
of
(c) If the property to be sold constitutes merely ‘a'part
the sale
the assets of the corporation, even if substantial, and
thereof will not render the corporation incapable of continuing
may
its business (par.'4.), the board of directors ‘or trustees
need
dispose of the same as it may deem convenient without
of approval of the stockholdersor members of the corporation.
(SEC Opinion, Dec. 4, 1990.)
(2) Nonstock corporations. — Under the second paragraph,
the vote of the majority of the trustees in office will be sufficient
authorization for ‘the-corporation to enter into any ‘transaction
authorized by Section 39 in the'case of nonstock corporations where
there ate no members with voting rights. © laaetb. yfina .9
1The words “or otherwise dispose of” in Section 39 is very broad and in a sense,
covers a merger or consolidation. (see Bank of Commerce vs. Radion. Philippines~
Network, Inc., 722 SCRA 520 [2014].) 0 Sarees

Sec. 39 TITLE Iv. - Pow POW
ERS OF CORPORATION 377
shareholders’ approval of
of corp Sale, etc,
orate assets,
The Revised
or substantially steam considers a sale, etc. to cover all
TO
ae if erty the “s
corporation would be rendered HoABAbI by
:
or accomplishing the pu ontinuing the business

other words,
i “© diCisposition
c if the was incorporate
whichnot it render
“Pose fordoes d.” In
the corporation
incapable of continuing its ordinary course
: of business, the sale
may not require stockh olders’ or members’ approval. Under the
last paragraph, the authorization by the stockholders or members
is not required. It is understood, however, that the transaction is not
tainted with fraud or bad faith or prejudicial to the interest of the
corporation.
When sale considered as involving all or
substantially all of corporate assets.
-, Previously, the. test is not the amount of assets involved but
the nature or effect of the disposition. (see SEC-OGC Opinion
rather
No. 13-13, Dec. 5, 2013; SEC-OGC Opinion-No. 01-19, Jan. 31, 2019;
SEC Opinion,’ Oct. 21, 2002.) However, the Revised Corporation
Code has added the requirement that the determination of whether
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. « _
Shareholders’ approval on sale of corporate

assets in publicly-listed companies
protection of
To promote good corporate governance and the r
power unde
minority investors, the SEC, pursuant to its regulatory
companies: ©
Section 179(d), issued these rules for publicly-listed
ty and assets
(1) ‘The'sale or disposal of corporate proper
total assets shall
amounting to at least 51% of the corporation’s
y all of corporate
be ‘considered as sale of all or substantiall
accrued in a single
property and assets, whether such sale
date of the
transaction, taking place within one (1) year from the
transactions).
first transaction (aggregate sale
; The Corpo ratio ilip ippine Annotated, p. 316 [1993].. ,

Code of the Phili
nration n Co
De Leon, p. 316 [1993]
Citing De Leon, The Corporation Code of the Philippine Annotated,
. Citing

(2) In sale of corporate assets or property falling under the

preceding paragraph, the vote of the stockholders representin
at least two-thirds (2/3) of the outstanding capital stock in a
stockholders’ meeting duly called for the purpose shall be
required prior to the execution of the sale transaction.
(3) In aggregate sale transactions, shareholder approval
shall be required for the sale transaction that breaches the 51%,
corporate asset threshold.
(4) The determination of whether or not the sale amounts
to at least 51% of the corporation’s assets must be computed
based on its total assets as shown in its latest audited financial
statements, provided that the computation may also be based
on the latest quarterly financial statement or a special purpose
financial statement prepared in connection with the execution
of the transaction.
If, after due notice and hearing, the SEC finds that any provision
of the Circular has been violated, it may impose any or all of the
sanctions provided under Section 158 of the Revised Corporation
Code. (SEC Memo. Circ. No. 12-2020, April 15, 2020.)
That the sale constituted at least 51% of the corporation’s total
assets should not trigger the need for stockholders’ approval. The
sale must render the corporation incapable of continuing the busine
ss
or accomplishing the purpose for which it was incorporated.
For
example, if a corporation engaged in the sale of services
decides to
permanently implement a work-from-home arrangemen
t because
of the pandemic, the sale of its’ office building constituting
at least
51% of the corporation’s total assets should not require
stockholders’
approval,
Appraisal right of dissenting stockholder.

It is to be noted that the exercise of the appraisa
l right of any
dissenting stockholder (par. 1; see Sec. 80[b].) 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
corporation “inc render the
apable of continuing the business or acc
the purpose for which it was incorporated omplishing
.” The determination of
whether the sales involve all or substantially all the corporation’
properties and assets must be computed s
based on its net asset value,
as shown in the corporation’s latest financial statemen
par. 4.) ts. (Sec. 39,
i

Sec. 39
379
Liabila ite
ytof puprc
utha
s sing corporPoatraiotion
n jin case
Bee(1) For adebts of sellin § Corporation. — As a rule, a corporation that

purchases. ne assets of another will not be liable for the debts of
the selling corporation, provided the former acte
d in good faith and
paid adequate consideration for such assets, except when any of the
circumstance s is present: _ 7 .
(a) the purchaser expressly or impliedly agrees to assume
the debts; )
(b) the transaction amounts to a consolidation or merger of
the corporations;
(c) the purchasing corporation is merely a continuation of
the selling corporation; and os ,
(d) the transaction is fraudulently entered into in order to
escape liability for those debts. (Nell vs. Pacific Farms, Inc., 15
SCRA 415 [1965]; Philippine National Bank vs. Andrada Electric
& Engineering Company, 381 SCRA 244 [2002];.Mclead vs.
National Labor Relations Commission, 512 SCRA 222 [2007];
‘see Bank of Commerce vs. Radio Philippines Network, Inc., 722
SCRA 520 [2014].) |
If any of the above cited exceptions is present, the transferee
corporation shall assume the liabilities of the transferor. The general
tule is referred to by the Supreme Court as the “Nell Doctrine.” (Y-1
Leisure Philippines, Inc. vs. Yu, 770 SCRA 56 [2015].)
(2) To affected employees of selling corporation. — In asset sales,
the rule is that the seller in good faith is authorized to dismiss the
affected employees, but is liable for the payment of separate pay
under the law. The buyer in good faith, on the other hand, is not
obliged to absorb the employees affected by sale, nor is it liable
for the payment of their claims. The most it may do, for reasons of
Public policy and social justice, is to give preference to the qualified

separated personnel of the selling firm. (SME Bank, Inc. vs. De

Guzman, supra.)
Liability of purchasing corporation

in case of stock sales.
In contrast with asset sales, the transaction in stock sales take
place at the corporate stockholder level. A shift in the composition
of its stockholders will not affect the existence continuity of the
corporation because the corporation possesses a personality separate
and distinct from that of its shareholders. This, notwithstanding, the
stock sale, the corporation continues to be the employer of its people
and continues to be liable for the payment of their just claims.
Furthermore, the corporation or its new majority shareholders are
not entitled to lawfully dismiss corporate employees absent a just or
authorized cause.
In a stock sale, there is no transfer of ownership of business. The
transfer of only involves a change in the equity composition of the
corporation. This being so, the employment status of the employees
is not affected by the stock sale.and, therefore, the change should
not result in the automatic termination of the employment of the
corporation’s employees nor give the new majority shareholders
the right to legally dismiss the corporation’s employees, absent just
or authorized cause. (SME Bank, Inc. vs. De Guzman, supra.)
Business enterprise transfer.

In the last exception (1, d, supra.), the transferee purchases not
only the assets of the transferor but also its business. This is the sale
contemplated in Section 39 which refers not to an ordinary sale of
all corporate assets but to a transfer of such degree that the selling
or transferor corporation is rendered incapable of continuing its
business or its corporate purpose.
Given that the transferee corporation acquired not only the
assets but also the business’ of the transferor corporation, then
the
liabilities of the latter are inevitably assigned to the former. To protect
the ‘creditors of the transferor corporation against unscrupulous
conveyance of the entire corporate assets, the transfer under Section
39 must likewise carry with it the transfer of its liabilities. Fraud is
notan essential element for the application of the business
enterprise
transfer. (Y-1 Leisure Philippines, Inc. vs. Yu, 770 SCRA
56 [2015].)

at 10
TI TLE Iv
. POWER
S OF CORP
ORATI ON
381
Sec. 40, Po
;
the corporation t.-
to cover the ae Own Shares,
— Provided, that
shares
a icted farnings
corporation sha| in its books
| have the Purch “eed acquired, a stock
its own shares fo, a legit nt ©
: ;
purposes, including Purchase or acquire
ate Gai
the following purpose or
; arising Compro
the corporation,
. p mise iindebtedness
an to
delinquency sale, and to Purc Unpaid Subscription,
in a
during said Sale; an
d
hase delinquent shares sold
Power to acquire Ow
n shares.
Section 40 authorizes a s
its own. shares! subject to
for a legitimate corporate
purpose or Purposes and
unrestricted retained earnings that there be
? ( See Sec. 42.) in its books
shares acquired. to cover the
(1) Elimination of fractional shares
whi ch is less that one (1) cor
, — A fractional share is a share
por ation s hare. Thus, if'a stockh
older
—_—
‘Although shares thus purchased

shares,” and, under a discredited met are, unless formally “retired,” treated as treasury
“ = a”
“
hod of accounting, are carried on

books as an asset or are applied to reduce the corporation’s
is Sued, it is obvious that, althou “capi tal,” “ sta ted capi tal, ” or “capital stock”
gh the selling shareholder has giv
Corporation has not acquired one. Its en up an asset, the.
own shares are of no value to it unless
are resold: What has actually happen and until they
ed is that the corporation’s assets have
by the amount paid for the shares, whil been reduced
e the proportionate interest of each of
shareholder in the diminished asse
ts have been decreased by dimini the other
Outstanding shares. Legal capital is not shi ng the num ber of
(see Sec, 38.) may be made only by the red uce d by the tran sact ion. Red uct ion of capital
methods prescribed in the statutes. Onl
Statutes include reacquisition of shares
as such a method and then only in excep
y a few
circumstances, (WL. Cary, Cases and Materials tional
on Corporation Law, 1969 ed., p. 1592.)
| is requirement applies to an incor
porated Sports club that operates as a stock
©rporation with an authorized capital stock
Operations of the club do not gener consisting of no par value shares. While the
ate profit, this does not necessaril
y make ita non-profit
°rganization, Although its operations do not
generate unrestricted retained earnings, it
il has the capacity to generate retained earni
its shareholders. (SEC-OGC Opinion No. 14-10,ngsMarc and authority to distribute the same to
h 31, 2010.)

S Sec. 40
382 THE REVISED CORPORATION CODE OF THE PHILIPPINE
nd,
owns 250.shares and the corporation declares 257 stock divideonal
as fracti
his total shares will be 312 and 1/2 shares. Inasmuch
the corporation
shares cannot be represented at corporate meetings,
concerned or issue
may purchase the same from the stockholder
negotiate
fractional scrip certificates to such stockholder who may
owning fractional
for the sale thereof with other stockholders also
.
shares so as to convert them into full shares
. — Section 40(b)
(2) Satisfaction of indebtedness to corporations shares
se the
does not authorize a corporation to arbitrarily purit,chawhether at the
‘to
it issued to any of its stockholders indebted pose of applying
for the pur
prevailing market price or at par value
of its claim against them,
the proceeds thereof to the satisfaction
stockholders
and this is particularly true where the consent such bee
has n secured,
has not been secured. Even where their consent
conditions for the
the corporation can buy their shares only if the
. 11, 1961.)
purchase (Infra.) are present. (see SEC Opinion, Aug
holders. —
(3) Payment of shares of dissenting or withdrawing stock
kholder is
Section 40(c) refers to instances when a dissenting stoc
from
given appraisal right (see Sec. 80:) and the right to withdraw
les
the corporation as provided in Section 15 (Amendment of artic
corporate
of incorporation), Section 36 (Power to extend or shorten
e -assets),
term, Section 39 (Sale or other disposition of corporat
ion
Section 41 (Power to invest corporate funds in another corporat
or business or for any other purpose), Section 67 (Delinquency sale),
Section 76 (Stockholders’ or members’ approval [of plan of merger
or consolidation]), and Section 104 (Withdrawal of stockholder or
dissolution of [close] corporation).' int
(4) Other cases. — This power of the corporation to acquire its
own shares is not limited to the cases enumerated in Section 40.
(a) It may also be exercised under Section 9 (treasury
shares), eae | Ning HERON
(b) With respect to redeemable ‘shares, they may be
purchased by the corporation regardless of the existence of
unrestricted retained earnings in the books of the corporation.
(see Sec. 8.)
‘Fractional shares standing in the name of a stockholder may not be used as a basis
of voting for directors at a shareholders’ meeting, either cumulatively ‘or otherwise.
(Ballantine, p. 401.)

Sec. 40
383°,
(c) Shares
als
capital stock of a corporate
ited Bey at a decrease
in the
(d) Inclose Cor

poration where
there is a deadlock re
t
ines specting
s
8, 2009.) 7
Parar.
. 1[d]
1[d];; SEC-OG
a
Conditions for the exer

cise of the power.
_ The right and power of a Corpor
ation to acquire or purchase its
own shar es is not absolute, but de
pends upon the contingency
the condition of its affairs and
its relati of
on to creditors at the time of
the purchase. (Fisher, op. cit,
p- 287.)
‘Briefly, a corporation’s ri ght to purc
hase its shares according to
the weight of authority is s ubject to these
limitations:
_ (1) its capital is not thereby impaired;
(2) itis fora legitimate and proper corporate pur
pose;
, (3) there shall be unrestricted retained earnings (see Sec. 42.)
to
purchase the same;3
| (4) the corporation acts in good faith and without prejudice to
the rights of creditors and stockholders; and
‘Citing De Leon, The Corporation Code of the Philippines Annotated, p. 318 [1993].
5No corporation shall redeem, repurchase or reacquire its own shares, or whatever
class, unless it has an adequate amount of unrestricted retained earnings to support the
i , except:
a . The Geos ae reacquired in the redemption of redeemable shares of the
corporation or pursuant to the conversion right of convertible shares of the corporation,
in accordance with the provisions expressly provided for in its articles of incorporation
if k representing said shares;
ue beh ate wites are reacqiied to effect a decrease in the capital stock of the
ati the SEC;
ae Haare are reacquired by a close corporation pursuant to the order
of the SEC Hr to arbitrate a deadlock as provided for under Section 104 of the Cor-
poration Code of the Philippines. (Sec. III, CCP No. 1-Rules Governing Redeemable and
Treasury Shares, 1982; see Sec. 8.)

\
~
(5) ‘That the conditions of corporate affairs warrant it. (SEC-

OGC Opinion No. 11-09,” May 8, 2009; SEC Opinions, Sept. 11, 1985,
Oct. 12, 1992, and April 11, 1994.)
Although the existence of legitimate corporate purposes may
justify a corporation’s acquisition of its shares under Section 40, such
purpose cannot excuse the stockholder from the effects of taxation
arising from the redemption of stocks by the corporation. If the
issuance of stock dividends is part of a tax evasion plan and thus,
without legitimate business reasons, the proceeds of the redemption
may be deemed as taxable dividends.’ (Comm. of Internal Revenue
vs. Court of Appeals, 301 SCRA 152 [1991].)
Trust fund doctrine.

This doctrine, first enunciated by the Supreme Court in the case
of Philippine Trust Co. vs. Rivera (144 Phil. 469 [1923].); 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
its assets to the prejudice of the creditors of the corporation who
extended credit to the corporation on the faith of its outstanding
capital stock is null and void. }
(1) Subscription to capital stock. — It is established doctrine
that subscriptions to the capital of corporation constitute a fund to
which creditors have a right to look for satisfaction of their claims
and that the assignee in insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets for the payment
of its debts. (Donna C. Halley vs. Printwell, Inc., G.R. No. 157549, 30
6The SEC has exclusive supervision, control, and regulatory jurisdictio nto investig
ate
whether the corporation has unrestricted retained earnings to cover the payment for the
shares, and whether the purchase is for a legitimate corporate purpose as provided in
Secs, 40 and 139. (Boman Environmental Dev. Corp. vs. Court of Appeals, 167 SCRA 540
[1988].) Thus, if the aforementioned conditions are present, a corporation may acquire
requirements
the shares of alien stockholders to comply with ‘constitutional or legal
citizens'in
prescribing the minimum percentage of capital stock ownership of Filipino
nowy
certain corporations. (Ibid.; see Sec. 12.)
11, 1985, Oct. 12,
7(SEC-OGC Opinion No. 11-09, May 8, 2009; SEC Opinions, Sept.
1992, and April 11, 1994.)
8”Tax treatment of stock dividends,” under Sec. 42.

may be distri
y
buted ©
<P procee
akods Sbtin; ed i ee li
No. 60-19, Dec. 20, 2019.) olders,
annot be cancelled by the

‘ectors without justifiable cau
‘to “relieving an: original subs se. This is tantamount
criber from the subscription, a
“contractual obligation, whic
h a’ co rporation has’ no’ power
“to-do so." Thus, a corporation may.
not condone subscription
receivables due from shareholders a S it
violates the trust fund
.. doctrine. 4 a .
-\(c) Additional ‘paid-in capital (APIC) alread
y forms part
of equity emanating from the original subscript
ion agreement.
| APIG, asa premium, forms part of the capital
of the'corporation
“and therefore, falls within the purview of the trust fund doc
trine.
- Thus, APIC:is also governed ‘by the doctrines and restri
ctions
enunciated in the above-stated jurisprudence. (SEC-OCGC
Opinion No. 50-19, Oct. 11, 2019.)
Thus, the nullification of ‘APIC and:its subsequent conversion
into a loan violates'the trust fund doctrine. This is because the APIC
is considered a:contribution of a stockholder over ‘and above the
Par value of:shares:and falls under the concept of corporate trust
fund upon its recording in the books of the corporation. (SEC-OGC
Opinion No. 13-14, June 11;.2014.) robe 1
Similarly, the reversal ofthe APIC an dits conversion tosubscribed
capital mies the trust fund doctrine, When corporate funds will
be used for purposes other than those enumerated in Ong Yong,

l.e., to pay for the stockholders’ additional subscription to capital

stock, it will effectively result in the unauthorized distribution of
the corporate trust fund, thereby violating the Trust Funds doctrine,
If the reversal of the APIC and its conversion into subscribed capital
are allowed, the same would be tantamount to the corporation using
its corporate trust fund to pay for the subscription of its stockholder
for the issuance of its own shares. (SEC-OGC Opinion No. 13-14,
June 11, 2014.)
(2) Corporation generally without power to purchase its own shares.
— Jt could be inferred from our law that a corporation has generally
no power ito purchase its own shares of stock except otherwise
provided inthe Revised Corporation Code. This rule is dictated by
the necessity -of protecting the interests of, existing creditors who
might be adversely affected by the stock, purchase which, in effect,
may operate to reduce its capital stock to the.extent of the shares
purchased without complying with the formalities required by
Section 37. | in “ee
A stockholder has no right to demand refund of his investment
without complying with.the requirements, of Section 41 since this
will constitute acquisition by the corporation of its.own shares. (SEC
Opinion, Jan:'3, 1985.) ° 3 if
(3) Repayment to stockholders a fraud on corporate creditors. —
The purchase, in effect, constitutes fraud on corporate creditors as
it amounts to:repayment;to the stockholder ‘of his proportionate
share from the corporate assets and hence,:an. impairment of the
capital available for the benefit and protection of creditors who
are preferred over the stockholders in the distribution of corporate
assets. (see Sec. 139, last par.) > “4
(4) Existence of unrestricted retained earnings. — A corporation

must have restricted earnings before it may acquire its own shares,
based on the trust fund .doctrine that the capital! stock, property
and other assets of a:corporation are regarded as equally in trust
for the payment of corporate creditors. The prohibition against the
distribution of the capital of a corporation as cash dividend is also
based on the same doctrine. (see Sec. 42.) °
prohibited
Note 'that ‘under the doctrine, the corporation ‘is not
to use its assets for purposes of its business. °°" GUE!
I

Se c. 40 T ITLE
IV. POWERS OF CORPOR
ATION
387
Effects of purcha
se On cor
POrate Credi
(1) Impairment 0if tors.
capital,
, OF if th ve unresttict ed retain
i ed earnin
sngs
or
the surplus, the purc
hase
the selling shareholde
rs o bgt t
impairs capital. * Part of the capital, and to that extent
2 The impairment may be

unintentionally permanent
to the full amount paid, as wher
e the corporation finds itself
unable to resell the
th: shares, or to the extent of part of
' paid, as where it is unable to resell the amount
except at a lower price.
(2) Current creditorsandlong-termcreditors.—T
hese consequences
affect creditor
. s. But there ma y be a difference between curre
nt
creditors and long- term creditors. If the corporation
is solvent, the
former can enforce their claims. But the latter take the risk
of future
insolvency as they await maturity of their claims. (see WL. Cary,
Cases and Materials on Corporations, p. 1592 [1969] Ed.].)
Effects of purchase on remaining

stockholders.
In addition to diminishing assets and. thereby reducing the
creditors’ margin of safety, the purchase of shares by a corporation
is objectionable also in that it injures the rights of remaining
shareholders, although it may be advantageous also to those who
do not sell. 3
(1) In general. — The impact of this purchase on the rights of
remaining shareholders is discussed below:
“A reduction of capital must be an all-around affair; that
is, where capital is to be paid off or to be cancelled as lost or
unpresented by any available assets, or where the liability
of unpaid capital is to be reduced in each share this ratable
reduction would leave each shareholder the same proportionate
interest and rights which he had before. Any other scheme
would disturb or alter the relative positions of the members.

The purchase by a corporation of its own shares withdraws

part of the original capital from the venture and redistributes
and changes the relative rights of the remaining members,
Shareholders should have the right to insist on the preservation
of all the contributed capital for the prosecution of the venture,
except in case of legitimate reduction of capital which statutes
authorize and which shareholders are presumed to have
made part of their contracts with the corporation. The capital
subscribed is considered to be permanently devoted to the
enterprise by the shareholders and it constitutes a basic business
fund which must not be paid back except in entire or partial
liquidation of the corporation.
It might be said that when a corporation purchases its own
stock, a situation is created which is analogous to the non-
issuance of authorized stock. Non-issue of authorized stock is
one thing, retirement of issued, another thing. Issued capital
has contributed to the growth of the corporation on which the
public in giving credit, by purchasing or loaning on shares or
bonds or in many other ways, may rely.” (Jose S. Campos, Jr,
“The Purchase by a Corporation of its Own Shares,” Phil. Law
Journal, Oct. 1952, p. 707, quoting Prof. Nussbaum, “Acquisition
by a Corporation of its Own Stock,” 35 Col. L: Rev. 976, 982.)
(2) Share in dividends. — The stockholders would also be
adversely affected in the field of dividends. How a purchase
of shares by a corporation affects the rights to dividends of the
remaining stockholders is explained below:
“tf the shares are purchased at a price above the actual value.
of the shares, the remaining members’ share in the undivided
surplus is impaired and money is actually being taken from the.
ockets of the remaining members for the benefit of the retiring
shareholders. If the purchase is made at a price ‘commensurate
with the actual value of the shares, the surplus which would
ordinarily be devoted to dividends is instead tied up to effect
either an indirect and unauthorized reduction in capital, or
else the possibility of dividends is postponed until such time
as she treasury stock can be and is resold at an adequate price.
_And even when the price paid is less than their intrinsic value
and a profit is later realized when they are reissued at a higher
been
price, the distribution of the surplus as dividends has still

Get: 41 TITLE IV : POWER |
S OF CORPORATION 389
postponed.” (Ibid., quotin

its Own Stock” [1930], 15 Minn ieee by a Corporation of
(3) Share in possible losses, — e diminuti th ber of
shareholders may entail still other da SHEGE OF Oe MSS
. per e ngers. As treasury stock does
not Le me ene it may be contended that ie remaining
share as a result get a bigger individual share therein
by way of increased div per sh j
idends
shareae of possible losses: is ofeofr:h
prare,On asthe part
eel , inasmuch andy-tett
the workin
capital disappears. With this decrease in wworidng capital the chances
are, the profits will be less and, therefore, the proportionate share of
the remaining shareholders would also be decreased. (Ibid.)
(4) Others. oz The purchase has or may have a variety of other
consequences with respect to shareholders.
(a) On the one hand; it diminishes the number of shares,
so that each shareholder who does not sell has a larger interest
in a smaller total of assets. By reducing the number of shares, it
affects voting control, if the shares purchased are voting shares.
(b) If the shares are purchased at less than their value, it
benefits those who do not sell, and on the other hand, if the
price is unduly high, it enables the selling shareholders to retire
from the enterprise with corresponding disadvantage to other
shareholders.
(c) It enables the management to use corporate funds to
rid themselves of shareholders whose activities are believed by
venient to the
them to be detrimental to the enterprise or incon
management. (W.L. Cary, op. cit. p- 1592.)
in Another
Sec, 41. Power to Invest Corporate Funds
Corporation or Business or for Any Other Purpose. — Subject
to the provisions of this Code, a private corporatisson ormay
for
invest its funds in any other corporation or busine
any purpose other than the primary purpose for which rdit
was organized when approved by a majority of the boa
“re dire
of pre sen tinsg orat trus
ctor tees and ratified by the stockholders
least two-thirds (2/3) of the outstanding
of the members
capital stock, or by at least two-thirds (2/3)
a meeting duly
in the case of nonstock corporations, at ment
ed invest
called for the purpose. Notice of the propos

THE REVISED CORPORATION CODE OF THE PHI LIPPINES Se,—
390
and the time and place of the mee ting shall beaf. add ressed
residence
to each stockholder or member at the nae Senate te
as shown in the books of the corporation an S Hegas
the addressee in the post office wit Peat F P ag
ersonally, nical
the niles dt ions of th mission a e of
roni when allow he bylaws or
one with the consent of ckholders: Provided, That
any dissenting stockholder shall have appraisal ane
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.
Power to invest funds in other corporations

or for other purposes.
(1) Scope of the term “funds.” — The term, as used in Secti
on
41, includes any corporate property to be used
to further the
business: Thus, idle corporate property may be
temporarily leased
to make it productive absent express restrictio
ns in the articles of
incorporation or bylaws and the leasing
is not used as a scheme to
Prejudice corporate creditors, subject to
the requirements of Section
41. The term also includes “donation
s” received by the co
from other enti ties. (SEC Opinion, Nov. 3, 2003.)
(2) Compliance with requirements,
may invest its funds in any other cor In order that a corporation
—
poration or business or for
any purpose oth er than the pri

A corporation may be orean:
so long as the prima “anized wi
y hel Pinion No. 47-11,1 Nov. 25,

ae € corporation whethe t
power Sa
is is its articles of incorporation or lds GEC-OGCsuch
Se ont)
inion No. "2? June 24, 2019; : SEC-OGC
22-19, ys f
Opinion No. 33-11, July
A nonstock, Non-profit foundation-‘may invest its funds in
subscribe: tosh ares of another domestic corporation. Howeve or
r,
its pow
PS er to invest is limited b y its articles of incorporation. (SEC
Opinion No. 54, Nov. 3, 2003.):: OMe =
Purpose of the investment.

(1): Primary purpose. — Where the investment by the corporation
is reasonably necessary to accomplish its. primary purpose as stated:
in‘its articles of incorporation, the approval’only of the board of
directors or trustees is necessary. (Sec.:41; sec SEC-OGC Opinion
No. 03-20, Nov. 23, 2020; SEC Opinion, Nov. 3, 2003.)
Thus, the purchase of beer manufacturing facilities by a
corporation
in a foreign country for the manufacture and marketing
of-beer thereat was held’ as an.investment.in ‘the same business
Stated. as, its main purpose in its articles
of incorporation, which
is. to. manufacture and, market beer and, therefore, does not need
the approval of the stockholders. (Gokongwei, Jr. vs. Securities and
Exchange Commission, 89 SCRA 336 [1979].)
(2) Other than primary purpose. — Where the investment of funds
is made in any other corporation or business or for any purpose
other than the primary purpose for which the investing corporation
was organized, the approval by the majority of the board of directors
it oration Code of the Philippines Annotated, p. 327 [2002].

ate <i ib be Cieatiod Code of the Philippines Annotated, p. 267 [1993].

or trustees need the ratification 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 case on nonstock corporation.
Corollary thereto, other purposes not allied or incidental to its
primary purpose shall be classified as secondary purposes. (SEC-
OGC Opinion No. 03-20, Nov. 23, 2020.)
(3). Not among the secondary purposes. — The other purposes for
which the funds may be invested without amending the articles
of incorporation must, be among those enumerated in the articles
of incorporation. In order.to legally engage in any of its secondary
purposes, the corporation must comply with Section 41.
A corporation is not allowed to engage in a business distinct
from those enumerated in the articles of incorporation without
amending the purpose clause of the articles* (see Secs. 13[2], 15.) to
include the desired business activity among its secondary purposes.
Ratification of defective investment.

(1) By stockholders. — A corporate transaction or contract
which is within the corporate powers, but which is defective from
a‘purported failure to observe ‘in its execution the requirement of
Section 41 that the investment must be authorized by the affirmative
vote’ of the’ stockholders ‘(or members), may be» ratified. The
requirement
is for the benefit of the stockholders who'may ratify
the investment and its ratification obliterates ‘any defect which ‘it
may.have had at the outset. (Ibid.) .
(2) ‘Investment merely vires, not illegal:— Mere ultra vires acts (see
Sec.'44.) or those which are not illegal and void ab initio, but are not
merely within the scope of the articles of incorporation, are merely
voidable and may become binding and enforceable when ratified by
the stockholders. (Pirovano vs. De La Rama Steamship Co., 96 Phil.
335 [1954].) TUN, * |
_ Corporate funds may be temporarily loaned even to stockholders, provided the fol-
lowing conditions are observed: (1) The funds are not presently used by the corporation
and the loaning is not made on a regular basis; (2) By lending the funds, the corporation
will make them productive instead of allowing them to remain idle; (3) There is no ex-
press restrictions in the articles of incorporation or bylaws; (4) There must be a collateral
or assurance that the borrower is capable of paying them at maturity date; (5) The lend-
ing is not used as a scheme to prejudice corporate creditors or result in the infringement
of the trust fund doctrine; and (6) Sec. 41 is complied with. (SEC Opinion, Jan. 11, 1991.)

393
ae cakes retained earnings which shall be

on the basis of outs ara » Or j n stock to all stockholders
» Prope
stockholders repres
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 exp ansion projects
approved by the board of directors; or ,
rams or prog
(b) when the
corporation is prohibited under any loan agr
eement with
financial institutions or creditors, whether
local or foreign,
from declaring dividends without their consent,
and such
consent has not yet been secured; or (c) whe
n 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. (A)
Concept of dividends. : |
A stock corporation exists to make a profit and to distribute a
portion of the profits to its stockholders.
(1) Adividend is that part or portion of the profits of a corporation
set aside, declared and ordered by the directors to be paid ratably
to the stockholders at a fixed time. (Fisher vs. Trinidad,
43 Phil.
480 [1922]; Nielson & Co., Inc. vs. Lepanto Consolidated
Mining
Co., 26 SCRA 540 [1968].) It is a payment, ordinarily in cash,
to the
Stockholders of a corporation as a return upon their inve
stment. (see
Cojuangco vs. Sandiganbayan, 586 SCRA 790 [2009].) ;
= > ‘ ra. 4
‘Citing De Leon, The Corporation Code of the Phi1 :
lippines Ann
A
otated, p. 384 [2002]

(2) A dividend is a sum which can be divided among

stockholders without touching the capital stock. (Lockhart v. Van
Aestyne, 31 Mich. 76.) The term has been regarded as indicating
that there must be a surplus or profits to be divided. However, the
word has also been used with no reference to surplus or net profits,
e.g., to describe distributions made to stockholders on liquidation of
the corporation, and to distributing assets upon a reduction of the
capital stock. (19 Am. Jur. 2d 283.)
(3) A partnership has neither shares of stocks or. capital stock,
nor does it have a'board of directors that can declare dividends
out of its unrestricted retained earnings. Dividends’ are property
of the corporation and is payable only when the board of directors
declare them as dividends even if there are existing profits of the
corporation. On the other hand, in partnerships, profits are already
due to the partners during the life of the partnership /joint venture
in proportion to their interest as set forth in their agreement, and are
deemed to have been actually or constructively received in the same
taxable year. (SEC-OGC Opinion No. 13-17, Nov. 3,.2017.)
Valuation of, and share in, dividends.

(1)’ Dividends, regardless of the form these are declared, that is,
cash, property, or stocks, are valued at the amount of the declared
dividend taken from the unrestricted retained earnings of the
corporation. (PLDT vs. National Telecommunications Commission,
539 SCRA 365 [2007].) , |
(2) It is a characteristic of a dividend that all stockholders of
_ the same class share in it in proportion to the respective amounts of
stock which they hold. (18 Am. Jur. 2d 281-283.)
Concept of profits.
(1) In its usual and ordinary meaning, the term profit means
the “return to capital rather than earnings from labor performed
or services rendered.” (U.S. Employees Association, Employees
Association [USEAEA] vs. U.S. Employees Association [USEA], 107
SCRA 87 [1981], citing Ballantine’s Law Dict., 3 Ed.)
(2) It has also been defined as “the excess of return over
expenditure in a transaction or series of transactions,” or the
“excess of an amount received over the amount paid for goods and

TITLE IV. Pow
ERS OF CORPORATION 395
; . tof Appeals, 288 SCRA 307 [19

98], citing
9.1991.) -Dict,, p. 1986 and Barron’s Law Dictionary,
oxcepentonSoneyond& Co., 238 pen P. 289, 831, 41 ALR.oe 868.) It is the

e
en baie ts of anv
S Over, expenditures,
kj
citing American cases.) R that is, net earniings. (Ibid.,

To make profits is the main purpose or goal of a business
corporation. |
Dividends distinguished from profits

or earnings... ae ; :
(1) A dividend, as applied to corporate stock, is that portion of
the profits or net earnings which the corporation has set aside for
ratable distribution among the stockholders. Thus, dividends come
from profits, while profits are the source of dividends. — :
(2), Profits are not dividends until so declared.or set aside by the
corporation. They may, be,paid out in whole or.in part, in dividends.
In the meantime, all profits are’a part of the,assets of the corporation,
and do not belong to the stockholders individually. (19 Am. Jur. ad
284.) They may be incashandinkind. _ : ,
Nature of dividends received _

by a corporation.
kholder in’
Dividends received by a company which isa stoc corporate
another corporation are corporate earnings arising from :
investment.
The right to a share in such dividends, by way of salary increases,
may not be denied its employees when they are entitled thereto. It
is not a case of a corporation distributing dividends in favor of its
stockholders, in which case, such dividends would be the absolute |
property of the stockholders and hence, out of reach by creditors of
the corporation. (Madrigal & Company, Inc. vs. Zamora, 151 SCRA’
355 [1987].) |

Power to declare dividends.

The board of directors of a stock corporation has the power to
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 the outstanding shares held by them.”
(1) Stock dividends. — In the case of stock dividend, it shall not
be issued without the approval of stockholders representing at least
2/3 of the capital stock then outstanding at a regular meeting of the
corporation or at a special meeting duly called for the purpose. (Sec.
42, par. 1.)
If the requisite vote for the declaration of stock dividends has
been secured, the stockholders who are opposed cannot legally
refuse to receive their participation in the stock dividends. However,
before stock dividends represented by one class of shares may be
given to holders of another class of shares, it is necessary that the
consent of such holders be first secured, they being given a class
of shares different from the class they are holding. (SEC Opinion,
March 1, 1973.) Thus, a corporation may declare stock dividends
to both holders of founders and common shares, since there is no
prohibition on the matter either in the Revised Corporation Code or
jurisprudence, provided the stockholders affected will agree to such
declaration. (SEC Opinion, Sept. 15, 1972.)
(2) Other dividends. — A mere majority of the quorum of the
board of directors is sufficient to declare other dividends. The board
may declare, other dividends other than stock without need of
stockholders’ approval. (Sec. 42, par. 1.)
Payment of dividends.
The dividends are paid to the registered owners of stock
as of a record date (Infra.), usually a date different from the date
of declaration. The record date determines the time when the
stockholders of record shall be ascertained.
The dividends are stated either at a given percent or a fixed
amount for each share.
2Dividends are declared and paid on the basis of the paid-up stock. The basis is the
number of shares held by the stockholders, not the amount paid in consideration thereof.
(see Sec. 137.)

Sec. 42
TITLE
hha?
Tv, POWERS of CORPORATION
407
Dividends Payable onl
retained earnings, Out of unrestricteg
par or issued value.
Reasons for the rule.
_(1) The main reason for the rule is that the

outstanding capital
stock: of a corporation, including unpaid
subscriptions, is.a trust
fund (supra.) for the se curity of creditors and cannot be
distributed
‘The Revised Corporation Code, in Sec. 42, adopting the chan ge made in accoun
ting
terminology, substituted the phrase “unrestricted retained earnrings,” which:
may ‘be
considered a more precise term, in place of “surplus profits arising from
its business,”
in the former law. “Surplus profits” was used in the past to mean “retained
earnings”
as presently understood. Indeed, the Revised Corporation Code still speaks of
“surplus
Profits” in the second paragraph of Sec, 42 in fixing the maximum earnings which may
be
retained by a corporation and in ae in defining stock corporations. The
Revised Code
eee ee beri “arisingi from its business. eit
t the term “unrestricted earnings,”
as used in the Revised
Corporation Code, refers to all the excess of assets of the corporation
over its liabilities
including the amount of the legal or
Profits of the corporation “arising fromstated capital. Hence, it is limited to accumulated net
its business” but may now comprehend also
other
gain such as those derived from the sale of fixed assets. But the term does not include the
unrealized increase in the value offixed assets. (Infra.) fre
‘For definition of “legal capital,” see comments under Sec.
6,

Sec. 42
CODE OF THE PHILIPPINES
398 THE REVISED CORPORATION
ditors
; : di to the sto ckh olders as dividends, the cre;
to their prejudice holding the stockholders personally liable of
being precluded from
their claims.
bee n sta ted to be that the capital stock ofa
The reason has also
be div ert ed or wit hdr awn to the prejudice of its
corporation cannot for
and sto ckh old ers . Thi s latter statement of the reason
creditors for although a court will tre
at
we ve r, has bee n cri tic ize d,
the rule, ho
as a trust fund for its creditors
the assets of an insolvent corporation old of its
and stockholders, a corporation can , not be said to hold any
t and going concern.
property subject to a trust while it is a solven
retained earnings to cover
(2) The requirement of unrestricted ans that the
trine which me
the shares is based on the trust fund doc arded
ty and other assets of a corporation are reg
capital stock, proper
creditors. Hence,
as equity in trust for the payment of corporate ice of creditors is
any disposition of corporate funds to the prejud right to assume
null and void. Creditors of a corporation have the
ities, the board
that so long as there are outstanding debts and liabil se
ration to purcha
6f directors ‘will not use the assets of the’corpo
idends ‘is
its own stock: On this premise, “the declaration of’ div
estricted
dependent upon the availability of surplus profit or unr
retained earnings, as the case may be.” (SEC-OGC Opinion No. 03-
19, February 14, 2019.) si
- (3) Moreover, each stockholder is entitled as'a matter of right

to have the capital of the corporation unimpaired to carry out the
‘purpose for which the corporation has been created. The rationale
is that stockholders should receive dividends only from their
investment, and not from the investment itself. (18 C.J.S. 1097.)
Rule as to no-par value stock.

The Revised Corporation. Code makes it clear that with respect
to no-par values 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, (Sec. 6, pat- 7.)
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. | | +

Sec. 42 TITLE IV. POWERS OF
CORPORATION
399
Dividends from pro
capital ise hi
e 8 pe
vestea. in i
which
— In the case of corporations

such as mining or timber-cutting,
‘iba cil in the regular course of operation,
eee: to the so-called “wasting assets”
assets” ” corporation,
:
the Capital
on an Engli
tines
8
ets exhausted
which is necessarily ye
in the carrying on of
of its Operations i
dividends out of net income without inal S
capital which is th kingDup fora ae
theic e ofaie
loss its
298.) us being constantly diminished.’ (19 Am. Jur. 2d
: aa. dividend payment represents a liquidation of

capital
assets.
(2) To utilize a lease or patent. —The same is true of a corporation
created for the purpose of utilizing a lease for a term of years, or a
patent:
(3), To liquidate a business. — Similarly, where a corporation is
formed for the purpose of liquidating the business of a partnership,
and selling all of its property and dividing the proceeds among its
stockholders, such as property is, in no ‘proper sense, its capital
stock within the meaning of the rule prohibiting a corporation from
distributing its capital in the form of dividends, but is rather to be
‘regarded as property held'by the corporation in trust for the benefit
of its stockholders, and which may be distributed by it to them in
the manner prescribed in the articles of incorporation,
at least where
the rights of creditors are not involved. (11 Fletcher, pp. 1079-1083.)
-\'5In other words, when a corporation is created for the purpose of investing its capital
_in property which will necessarily be consumed or exhausted in the ordinary course of
its operations, so that the depreciation in the value of the property cannot be repaired, it
is not subject to the same rules as other corporations. A mining company, for example,
of permanently using the property in which its capital
is not informed for the purpose
is invested, but for the purpose of investing in property which, in the nature of things,
“will be gradually consumed in making profits, and, in estimating the profits of such a
corporation for the purpose of determining whether it may lawfully declare a dividend,
of its use
no deduction is to be made for depreciation in the value of its mine by reason
and consumption in taking out the ore or other minerals. Dividends may. be lawfully
declared out of the net proceeds of its operations after deducting expenses anda debts and
p. 1079.)
a reasonable fund for contingencies. (11 Fletcher,

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 capital stock.” (11 Fletcher, p,
1041.) Capital stock, in this instance, should be understood to refer
to outstanding stock (see Sec. 137.), and not to the stated or nominal
(authorized) capital stock. (see Secs. 12, :13[h]:)
Stated otherwise, the ordinary way of determining whether
or not a corporation has retained earnings is to compute the value
of all its assets and deduct therefrom all of its debts and liabilities,
including legal capital. This may be expressed in the following
equation:
Retained earnings = Assets — Liabilities and Legal Capital
The difference: between the total assets and liabilities of a
corporation represents its net worth:or net assets or the stockholders’
equity consisting of the capital investing and the retained earnings.
Thus, the retained earnings will be the balance of the net worth or
net assets after deducting the value of the corporation’s outstanding
capital stock. They refer to the accumulated undistributed earnings
or profits realized by a corporation arising from the transaction of
its business and the management of its affairs, outof current and
prior years. : Sas
' Section 42 does not categorically state that the retained earnings
of a corporation from which dividends may be declared should arise
from its business as required by Section 16 of the former Corporation
Law.' However, sound accounting principles dictate that dividends
may be declared only out of the actual earnings or profits realized
from the business of the corporation.
' (2) Suchretained earningsor portion thereof are said tobe restricted
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 Se legal, or contractual requirements.’ (see Sec. 42,
par. 2. Wain !
‘Dividends from the profits may come from the current net profits, i.e., those earned in
the preceding year, or from the undistributed profits or earned surplus, i,e., the accumulated
profits realized during all prior years.

Gec. 42 TITLE IV, P
OWERS OF
CORPORATI
ON 401
SEC rules.
Provides these guidelines in

available for dividend declar
(1) Definitions, — ation.
The Circular
ae e amountas show in n
the financial statements
y the company’s independent
such amount shall] refer auditor. If applicable,
to’ the Tetained earnings’ of the parent
company but not the consolidated financial statements
.”
(b) The term “unrestricted retained earnings” refers to “the
amount of accumulated’ profits and ‘gains realized out of
the
on normal and continuous Operations of the business after deducting
se therefrom distributions to stockholders and
transfertos capital
~ Stock or other accounts, and which is: (1) not appropri
ated by its
boar d of directors for corporate'expansion projects or prog
rams:
(2) not.covered by. a restriction for, dividend declaration
under
a loan. agreement; and) (3) not Tequired. to, be retained. under
special circumstances obtaining in.the corporation such as,when
_ there is a need for a special reserve for probable contingencies.
(2) ‘tems affecting unrestric
' retai
ted ned earnings.'— These items
affect the unrestricted retained earnings account from ‘an accounting
ee eee eee ee :
~ (a) 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 RS ah
: (b) Effects of changes in accounting policy; _
(c) Foreign exchange gains and losses;
(d) Actual 'gains or losses; ©
(e) Share in the’net income of associates/joint” ventures
accounted for under equity method of accounting; 9. |
_(£) Dividend declarations during the period; a
(g) Appropriations of retained earnings during the period;

(h) Reversals of appropriations;

(i) Effects of prior period adjustments; and
(j) Treasury shares.
(3) Retained earnings available for dividends. — Dividends,

whether cash, property or stock, shall be declared out of unrestricted
retained earnings of the corporation. Accordingly, ,a..corporation
cannot declare dividends when it has zero or negative retained
earnings otherwise known as retained earnings deficit. For such
purpose, the surplus profits or income must be a bona fide income
founded upon actual earnings or profits. The existence, therefore, of
surplus profits arising from the operation of corporate business is a
condition precedent to the declaration of dividend.
(4). Actual earning or profits. — For purposes of the Guidelines,
the phrase “actual earnings or profits” as mentioned refers to the
net income for the year based'on the audited financial statements,
adjusted for unrealized items discussed below, which are considered
not available for dividend declaration.
(a) Share/equity in-net income of the associate or joint
venture accounted for equity method as the same is not yet
actually earned or realized. It is only after the investee company
declares such income as dividend that said income is actually
realized or the earnings becomes, available, for dividend
declaration. Due tothe effect on the investment account, only
cash or property dividends declared by the investee company
shall be considered as earnings declarable as dividends by the
investor company;
(b) Unrealized foreign. exchange gains, except .. those
attributable to cash and cash, equivalents, for the time being
that they are not yet actual income prior to realization of such
foreign exchange gain;
(c) Unrealized actuarial gains which is the result when the
company chooses the option of recognizing actuarial gains or
losses directly to profit or loss statement;
(d) Fair value adjustment or the gains arising only from
marked-to-market valuation which are not yet realized;

Sec. 42
TITLE Iv, Pow ERS OF CORPORATION
403
(e) The amo

reduced the inti o recognized deferred tax asset that
net income and retainedennn tax expense and increased the
audit(f)ed Adj ustment due

financ ial stshein to deviation from PFRS/GAAP of the
ents which results to ga
in;
earnin
: under
foie ce pee about by certain transactions accounted for
en Stich as accretion income under IAS 39, Day
Tecognition of financial j
of revaluation incre : ancial instruments, reversal
ate ment to retained earnings, and negative
goodwill on investments in associate;
(h) Other adjustments that th
amending the Annex. at the SEC may prescribe by
“A” of these Guidelines.
The items above are defined in accordance with
the financial
reporting framework, “Le, Generally Accept
ed Accounting
Principles in the Philippines or Philippine Financial Report
ing
Standards (PFRS), followed by the company.
(5) Additional paid-in capital. — Additional Paid-In Capital Stock
shall neither be declared as dividend nor shall it be reclassified to
absorb deficiency except through an organizational restructuring
duly approved by theSEC. :
1982 rules on redeemable shares.
(1) The 1982 SEC Rules Governing Redeemable and Treasury
Shares provides that generally, treasury shares shall be deducted
from the unrestricted retained earnings to arrive at the ‘Retained
Earnings Available
for Dividend Declaration.’ “The reason for this
is that such amount of earnings equivalent to the cost of treasu
shares is not considered part of earned or surplus profits that ‘is
distributable as dividends.” Also under the same 1982 rules, an
exception has been drawn under section 4 (1) in relation to section
3 (1). Under the provided exception, redeemed redeemable shares,
although part of the treasury shares, is not: subtracted from: the
unrestricted retained earnings to arrive at the ‘Retained Earnings
Available for Dividend Declaration.’ (SEC-OGC Opinion No. 03-19,
Feb, 14, 2019.)
(2) There is no conflict between the general guide formula as
provided for in 2008 Guidelines and the explicit exception under

aN Se BE EEA ONDA N BPRS NINE OINAAIIUIN DUE UF LAB PFRILIPPINES Sec 42
the 1982 Rules, “It is well settled that a special and local statute or
rules, providing for a particular case or class of cases, is not repealed
by a subsequent statute or rule, general in its terms, provisions ang
application, unless the intent to repeal or alter is manifest, although
the terms of the general act are broad enough to include the cases
embraced in the special law.” Under this premise, the Tepealing
provision under the 2008 Guidelines, did not repeal previoys
guidelines and rules of the SEC which are not in conflict with the
current rules. In this regard, it is appropriate to note that the 2008
Guidelines, although making no distinction as to the manner in which
treasury shares are acquired, only enumerates “treasury shares” ag
one of the items affecting the unrestricted retained earnings account
from an accounting perspective. It does not specifically state that all
types of treasury shares, regardless of the nature of their acquisition,
should be deducted from the unrestricted retained earnings to arrive
at the ‘Retained Earnings Available for Dividend Declaration.’ In
this regard, no conflict is present.
As a summary, the annexes in the 2008 Guidelines and SEC
Rule 68 should be read in harmony with the 1982 Rules. The cost
of. treasury shares acquired from the redemption of redeemable
shares is not deducted; rather, it forms part of the ‘Retained
Earnings Available for Dividend Declaration.’ In effect, a dividend
declaration from the unrestricted retained earnings gross of the cost
of redeemed preferred shares acquired pursuant to the Articles of
Incorporation is considered as valid. (GSEC-OGC Opinion No. 03-19,
February 14, 2019.)
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. (Steinberg vs. Velasco, 52 Phil. 953
[1929].) Hence: | :
(1). Earnings of the corporation which have not yet been received
even though they consist in money which is due cannot be included in
the profits out of which dividends may be paid.’ (11 Fletcher, p. 1064.)
’Corporation X owns more than 20% of the voting common shares of Corporation Y.
Under the equity method of accounting, Corporation X is required to book its share in the
net earnings or loss of Corporation Y. Can Corporation X declare cash or stock dividend or
both from its recorded equity earnings in Corporation Y which are not yet receive in cash?

TITLE IV, po
WERS OF CORPORATION 405
(2) Asfor a borrowe

money,
rule, divd idepe
nds Cannot be declared out of borrowed
porrowed temporaril
make im
borrowed money, (18 Cj.s. 1102.)
(3) A corporation ma.
ac Y Properly pay dividends from
orpcu
titmufro
lam.
tedearsur
ninplu
gs,s out of Previous years although realiz
a
ing no
Sed the other hand, it cannot pay divi

dends although it has
realize actual Profits for the year in which dividends are
declared
until a has eliminated a deficit resulting from its operation of
preceding years. alk(William v. Western
Union Tel. Co., 93 N.Y. 162.) In
other words, dividends may not be declared if deficit exists. (Infra.)
(5) Treasury ‘shares (see Sec. 9.) not being part of earned or
surplus profits, are not distributable as dividends but if there are
retained earnings previously held to support their acquisition, they
may be declared as property dividend out of the earnings. (see infra.)
Deduction of expenses.
In addition to deducting the amount of the capital stock from the
value of the assets of the corporation, deduction must also, as a rule,
be made for all expenses incurred in the conduct of the business of
the company.
(1) Generally, net earnings are what remains of gross receipt
after deducting the expenses of producing them. The Supreme
Court of the United States has said: “The term ‘profits’, out of which
dividends alone can properly be declared, denotes what remains
after defraying every expense, including loans falling due, as well
as the interest on such loans.”
No. Retained earnings or surplus profits referred to under Sec. 43 from which dividends
can be legally declared do not include participation or share of a corporation in the profits
of its subsidiaries and affiliates, unless and until such profits are actually received in the
form of cash or property dividends. Thus, while for purposes of management account,
Corporation X can recognize as income its equity in the net earnings in Corporation Y,
€ same cannot be declared as dividends since it is not yet actually realized as income
as much as Corporation Y has not yet declared the same as dividends. (SEC Opinion,
Oct. 6, 1995.) s

406 THE REVISED CORPORATION CODE OF THE PHILIPPINES ge, 45
(2) Depreciation in the value of the corporation’s plant is a

proper expense charge and the same is true of expenditures for
maintenances and upkeep. And a reserve fund may be accumulated
for the purpose of making repairs and renewals.
(3) Taxes are properly treated as a part of the company’s
operating expenses, to be paid out of the earnings, and this is true
even though they are found upon an erroneous valuation of the
property upon which they are assessed.
Only such expenditures as have actually been made can properly
be claimed as a deduction from earnings. (11 Fletcher, pp. 1056-1060,
see also 18 C.J.S. 1100-1102.)
Distribution of paid-in surplus as dividends.

Under Section 16 (now Sec. 42.) of the former Corporation Law,
(Act No. 1459.) which reads: “No corporation shall make or declare
dividends except from the surplus profits arising from business, or
divide or distribute its capital stock or property other than actual
rofits...” dividends whether cash or stocks, must be declared only
out of surplus profits arising from corporate business.
The SEC has expressed the view that paid-in or premium surplus
(difference between the par value and higher price for which stock
is sold by the corporation) cannot be declared as cash dividends
No.
under Section 15 (SEC Opinion, May 7, 1968; see SEC Opinion
dividends
51-03, Oct. 21, 2003.) or even as stock dividends because
gs.® (SEC
can be declared only from the unrestricted retained earnin
Opinion, April 16, 1988.)
The SEC has allowed the declaration of the dividends from paid-
only
in surplus subject to thes e conditions: (a) they shall be declared
as stock dividends; (b) n o creditors shall be preju
diced therefrom,
and (c) there shall be no resulting i mpairment
of capital. (SEC
Opinion, Oct. 19, 1989; SEC Opinion, Oct. 2,
2001.) The reason is
sales of a corporation of its own

’The reason given is that “the entire proceeds of
are part of its capital stock (i.e., to be
stock, even when sold for more than par value be
earnings) and, therefore, cannot
regarded as paid-in capital, rather than as retained paid .:
of which dividends may be
profits earned through the conduct of its business out P. 540.) It also said that to per™
, 178
(Merchants and Insurance Reporting Co. v. Youtz dividend is a “fraud upon creditors wn?
this capital surplus to be distributed as cash Sec. 1210, p. 801.)
extend credit on the faith of its capital stock.” (14 CJ.

407
capital account and. issues share

(SEC Opinions, Aug. 16, 1993 an
Distribution
of the revaluation
as dividends. Someta
A corporation can have its fixed assets
like real estate revalued
to determine its current market value. The exce
ss increment on
the property ‘over the stated cost is credited to an
account called
revaluation or appraisal surplus to ‘show that such is the result of an
estimated increase in the value of the
| pani . (se Opininon,
(seee SEC Opinio
May 14, 1970.).. .
(1) General rule. — An increase in the value of the fixed assets
such as land as a result of mere valuation cannot be counted in the
computation of a surplus as basis for a dividend declaration.
The reason why purely conjectured. increase in valuation
cannot be considered for dividend declaration is because such
appraisal, however, justified for the time being, is subject to market
fluctuations, is merely anticipatory of future profits and may never
be actually realized as an asset of the corporation by the sale of the
property at the value it was appraised. The surplus of a corporation
which may be used for the payment of dividend must be a bona
fide and not ‘an artificial or fictitious one'and not be dependent for
its'existence'upon a theoretical estimate of an appreciation in the
value of the corporation’s assets. (SEC Opinion, Oct. 15, 1973, citing
Berkes Broadcasting Co.:v. Crawmer, 356 Ph. 620.)
Sound accounting ‘requires: that such unrealized appreciation
shall not be confused with’a paid-in surplus or an earned surplus
due to accumulated profits arising from the successful conduct of
, 541 :)
the business. (SEC Opinion, Dec.:7, 1971, citing Ballantinep:
(2) Bxcoetions! ‘The above ruling is not absolute as the
SEC allows certain exceptions making revaluation mnicrement\ Or
reappraisal surplus available for cash and stock dividend. Thus,
where a fixed asset is! being: depreciated based ‘on its appraisal
value, and the depreciation on the appraisal increment is charged
against operations, the earnings from operations in that period are

408 THE REVISED CORPORATION CODE OF THE PHILIPPINES Sec. c. 4 42
diminished by the amount of such depreciation which amount

therefore, is actual income shifted to and lodged in another account,
Whether such amount is restituted to retained earnings or not is of
no consequence. In such event, the portion of increase in the value
fixed assets as result of revaluation thereof may be declared as
dividends provided these conditions exist:
(a) The corporation has sufficient income from operations
from which the depreciation on the appraisal increase was
charged; :
(b) It has no deficit at the time the depreciation on the
appraisal increase was charged to operations; and
(c) Such depreciation’ on’ appraisal increase “previously
charged to operations has not been erased or impaired by
. subsequent losses; otherwise, only that portion is not.impaired
by subsequent losses is available for dividend. (SEC Opinion,
Oct. 2, 1981 and: March 19, 1992.)
Declaration of dividends. Ecueecen

(1) Conditions. A dividend declaration ordinarily requires the
Baurlbu
concurrence of two things, namely:
out of
(a) The existence of “unrestricted retained earnings”
which the dividends may be declared and paired; and
. of ., directors
(b), A..corporate _resolution:: of » the, board
ngs to the
declaring the payment of a portion or all of such earni
32) ca | ;
stockholders.
-- Cash dividends
(2) Additional requirements for stock dividends. are
Stock dividends
require only approval of the board of directors.
s and approval of the
issued by resolution of the board of director
of stock dividends,
resolution by the stockholders. For the declaration
number of authorized
the corporation must have also a sufficient
; otherwise, it must
unissued shares for distribution to stockholders
of the corporate earnings to be
increase its capital stock to the extent
37.)
declared and distributed as stock dividends. (see Sec.
uce the r etained
The distribution of the dividends ‘will: red out ‘to
unt paid
earnings of the: corporation by exactly ‘the’ amo
sferred to capital
stockholders in the case of cash dividend, or tran
account in the case of stock dividend. (Infra.)

Sec. 42
TITLE Iv. POW
ERS OF CORPOR
ATION
409
(3) SEC approval
. *—— It} is;
seek prio not atory for the corporation to
r approval/ advi
ce from chest EC
to
ollowing are ¢ omp declare cash and stock
(a) For cash divi lied with:
dend declaration:
1, :
fe enone OF Directors approval of the cash dividend
2.. Sufficient unrestri

cted ' retained earnings
last fiscal or cale
n dar yea
as of the
r.
(b) For stock dividend
declaration:
1. Board of Directors
approval of the stock
declaration: dividend
: 2. Stockholders’ approval repres

enting at least two-
thirds (2/3) of the outstanding capital and suf
of the present ficient portion
authorized capital; and
3. Sufficient. unrestricted Tetained
earnings as of the
last fiscal or calendar year
However, corporations may, at their option,
apply for
acknowledgment notice of their declaration of
the cash and/or stock
dividend out of the unissued portion of their previousl
y approved
authorized capital stock for what ever legal purpose
it may serve.
If they avail'of such option, they must submit the doc
umentary
requirements stated in the SEC’s website (Other Applications
—
Documentary Requirements) and pay the filing fee.
Further, if the stock dividend declaration requires an increase of
authorized. capital stock, an application therefor is mandated to
be
filed with the SEC pursuant to Section 37 of the Revised Corporation
Code. (SEC-OGC Opinion No. 23-19, June 17, 2019.) ©
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 subject to the
tights of stockholders as to the order or preferences for the payment
of dividends on various classes of stock (e.g, preferred stock) as
fixed by the articles of incorporation.

410
prosecution
(1) That profits or earnings have accrued in the the
impose upon
of the corporate business does not necessarily
directors the duty to declare them as dividend s. (Wabask R. Co. y,
discretion over whether
Barclay, 280 U.S. 197.) They are given wide
dividends will be declared and paid.
honest judgment the directors reasonably
(2) If in their
the business, no court
determine that the profits should be kept in ribution in the
dist
has the power to compel them to make the
discretion, or such arbitra
absence of bad faith? or clear abuse of
breach of trust. The
or unreasonable conduct as amount to a
of dividends is
apportionment of the net earnings to the payment
retion of the board
largely a question of policy trusted to the disc
aring
of directors. If there is any doubt about the propriety of decl
nst
dividends, the directors are justified in resolving the doubt agai
such action. (19'Am. Jur. 2d 322-323.)
(3) So long as the board of directors acts in good faith, it is at
liberty to distribute at all any dividend subject to the prohibition in
the second paragraph of Section 42."° (Infra.)
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 the reasons mentioned. (Sec. 42, par. 2.) The prohibition
on retention ‘of profits provided in Section 42 ‘applies'to,all stock
corporations, -including wholly-owned subsidiaries..Section 42
°There are no infallible distinguishing earmarks of bad faith. The following facts
are relevant to the issue of bad faith and are admissible in evidence; intense hostility of
the controlling faction against the majority; exclusion of the minority from employment
by the corporation; high salaries or bonuses, or corporate loans made to the officers in
control; the fact that the majority group may be subject to high personal income taxes if
substantial dividends are paid; the existence of a desire by the controlling directors to
acquire the minority stock as cheaply as possible. But if they are not motivating causes,
they do not constitute bad faith as a matter of law. tt
The essential test of bad faith is to determine whether the policy of the directors
is directed by their personal interests rather, than the. corporate. welfare. Directors
are fiduciaries. Their cestui que are the corporation and the stockholders as a body.
Circumstances as those mentioned and any other significant factors, appraised in the
light of the financial condition and requirements of the corporation, will determine the
conclusion as to whether the directors have or have not been animated by personal,
distinct from corporate, considerations. (Gottfried v. Gottfried, 73 N.Y.S. 2d 696.)
In view of the restrictions imposed by Sec. 42, the “business judgment” rule whi
upholds judicial non-interference in corporate management (see Sec. 22.) has limited
application with regard to dividend declarations.

411
makes NO qualificati
(SEC Opinion, July 22, 1993 ) ing the words “
There may be som,
of profits is justified bi tice as to whether or not the retention
discretion ower of
te earnings. ary P
Action to enforce declaration of div
idends
i pe pags rite =. Since a stockholder has no individual

. s profits of a corporation until a dividend has been
decree the rule 1s that, before the declaration of a dividend, a
stockholder cannot maintain an action at law to recover his share of
Se profits. Mandamus is not a proper remedy in sucha
case.
(2) Where there exist sufficient net profits. — An action at law may
be maintained where it is alleged that sufficient net profits have
been earned to obligate the corporation to pay the amount agreed.
(a), The stockholders may sue the directors to compel them
to declare and pay dividend if they unreasonably accumulate
profits of the corporation but they must prove the justification
of declaring dividends.
(b) Before an action to compel the declaration and payment
of a dividend can be maintained, it maintained, it must appear
that the complaining stockholder has made application to the
directors of the corporation for the relief sought. |
(c) Where, however, it appears that the directors of a
corporation have wantonly violated their duty, and that an
application’ by “a stockholder to them for relief would be
inefficacious, such application need not be made. In such an
CJ.S.
action, the corporation is a necessary party defendant. (18
1142.) ° | eee : we
Time for declaration of dividends:

oration has a fiscal year to
(1) At the end of the year. — A corp the year — whet her it
determine the results of its operation during
se, such results may also
earned profits or incurred losses. Of cour but a summary .
ually,
be computed monthly, quarterly, or semi-annerm ine the performance
is always made at the end of the year to det
year.
of the company for the whole

E OF THE PHILIPPINES Sec, 42
412 THE REVISED CORPORATION COD
(a) If the company earned profits dur

ing the past year, it
s not, the profits
may declare the same as dividends, but if it doe the company
C versely, if
Con
are carried over to the next fiscal year.
will record such
incurred losses during the past year, its books nings during the
loss and no profits, unl ess it accumulates ear
been distributed as dividends.
previous years which have not
may incur losses
If follows from this that a corporation
eof and still be able
during one fiscal year or any portion ther affect profits
h losses do not
to declare dividends, that is, if suc
that the company has accumulated. On the other hand, a
but because of
corporation may earn profits in one fiscal year
it may not be able to
losses suffered during the previous years,
declare dividends.
is the existence of
(b) From the foregoing, what is material
into account the
earned profits on the date of declaration, taking
e the finan-
results of the entire operations of the company. Sinc
the fiscal
cial statements are generally prepared after the end of
, after the fiscal
year, dividends are declared, as a general rule
.
period has ended, when retained earnings are shown to exist
The determination of the existence of retained earnings may
merely
be made even before the end of the fiscal year, but this is
to enable the management to map out its dividend policy for the
next fiscal year. |
(2), Before the end of the year. — As a rule, a corporation should

not declare dividends out of profits earned during an interim period
or before the end of the fiscal year, considering that profits earned
during say, the first half of the year may be wiped out by losses
incurred during the latter,part of the same year. (SEC Opinion,
July 16, 197 1.) However, a corporation may declare dividends even
before the end of the fiscal year, provided it has sufficiently earned
surplus for the purpose which will not be impaired by losses,
whether expected or not, during the remaining period of the fiscal
year." (SEC Opinion, Oct. 22, 1974.) 3
“Reduction surplus or surplus realized by the reduction of the capital stock effected
under Section 38 by decreasing the par value of authorized shares may be declared only
as stock dividend. (SEC Opinion, Aug. 8, 1991; see Sec. 38;)

© Temaining period of the year as well as the
ee eee mptions used shall be puldicittedlte the SEC. Should
ee pe tuOn sustain losses during the year, cash dividends
distributed to the Stockhold
; er of record must be t corresponding]
refunded to the corporation. (SE gly
C Opinion, July 24, 1991)
To sum
payable frommarthize a cor poration may declare cash dividends
e net earnings realized before the end of the relevant
year, subject to these conditions:
(a) The amount of dividends involved would not be impaired
by losses during the remaining period of the year;
(b) The projected income statement of the company for the
remaining period of the year and the bases and assumptions used
shall be submitted to the SEC; and
(c) Should the company sustain losses during the year,
cash dividends distributed to the stockholders of record must be
correspondingly refunded to the company. (see SEC Opinion, Jan.
15, 1986; SEC Opinion, July 24, 1991.) ©:
Validity of dividend determined

at time of declaration.
(1) Effect of subsequent insolvency
of corporation. —In determining
whether dividends were lawfully. made, the transaction must be .
viewed in the light of the time of its occurrence.
If net or surplus profits existed at that time, the payment of the
dividends is not rendered unlawful by the subsequent insolvency
of the corporation, and if the assets of a corporation are valued
honestly and fairly in view of all the facts known at the time of the
declaration, a\dividend is not rendered unlawful by the fact that
such assets subsequently prove to be worth less than the valuation
placed upon them.
(2) Effects of good faith in making payment out of capital. —
However, mere ignorance of facts showing the true condition of
the assets of a corporation which could have:been ascertained by
reasonable inquiry and examination is not sufficient to validate a
dividend which has been paid out of capital.

Whether the assets ofa corporation were so valued is not a

question to be determined by the board of directors of a corporation,
nor by a majority of its stockholders; hence, a finding but the
directors of a corporations that certain dividends, although in
fact paid out of capital, were declared fairly and in good faith, in
the light of what was known and believed at the time they were
declared, and a subsequent ratification of such finding by a majority
of the stockholders, do not validate the payment of such dividends,
(18 CJ.S. 1102.)
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 the 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. (National Exchange Co. vs. Dexter, 51 Phil. 601 [1928].)
(2) From cash dividends. — Where payment has been made on
stock subscription, the rule depends on whether the stockholder is
delinquent or not. ae :
(a) 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.” (Sec. 42, par. 1.) The cash dividends may be applied
as payment for,the unpaid subscription of all delinquent shares.
(see Sec. 70.)
(b) Cash dividends cannot be withheld from the subscribers
who have not fully paid their subscriptions ‘(unless they are
delinquent on their unpaid subscriptions). Basically, this is
because the balance of the unpaid subscription is ‘not yet due
and semendable, (SEC-OGC Opinion No. 05-16, March 31,
2016, .
(c) The corporation may use the cash dividends to
pay off
stockholders’ subscriptions but which have not been declared
delinquent only if the stockholders concerned give their consent
thereto. (SEC Opinion, March 18, 1991.)

Sec. 42 TITLE IV. POWERS OF CORPORATION ae
(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. (see
Art. 1249, Civil Code.) Under Section 42 (par. 1.), “stock dividends
shall be withheld from the delinquent stockholder until his unpaid
subscription is fully paid.”
In other words, under the provision, it is not allowed to apply
stock dividend to unpaid subscription.”
(a) Astockholder, as such, is not a creditor of the corporation
for his shares although the latter is creditor of the former for the
unpaid balance of his subscriptions." It is the prevailing doctrine
that.the capital stock of a corporation is a trust fund to be used
more particularly for the security of creditors of the corporation
who presumably deal with ition the credit of its capital stock.
(18 CJ.S. 618.) In view of the foregoing, a stockholder’s liability
for unpaid subscriptions (although not yet delinquent) may not
be offset by the issuance and distributed of stock dividends.
_ (Supra.), '
(b) -A stock dividend requires a transfer of surplus to capital —
account and it cannot be made without issuing new shares. Since
the retained earnings of the corporation are already applied
as payment to the new issuance of shares, the same cannot be
reapplied to previous subscriptions still unpaid as this would
be, in effect, reacquiring its own shares, the proceeds of which
will be applied to the unpaid subscription, which case is not
allowed under Section 41. (SEC Opinion, July 4, 1984.)
(c) Section: 6 states that preferred shares may be given
preferential right inthe distribution of dividends among
others, but it does not prohibit holders of preferred shares from
acquiring shares of whatever class by the way of stock dividend.
As long as_.all. the requirements for the declaration of stock
dividend are complied with, the issuance of common shares in
-2Note that stock dividend can be withheld only from a delinquent stockholder.
Stock dividends may be declared out of retained earnings even if there are still unpaid
subscriptions.
3A subscription contract (see Sec. 60.) creates a creditor-debtor relationship between
the corporation and the subscriber.

. (SEC
favor of stockholders holding preferred shares in valid
Opinion No: 28-04, April 27, 2004.)
Instead of stock dividends, the corporation may declare cash
dividends, and use the said dividends to pay off the delinquent
stockholder’s unpaid subscriptions. (SEC Opinion, March 15, 1968.)
Liability of stockholders and directors

for illegally received dividends.
(1) Liability of stockholders to refund them to corporation Or its
creditors. — In case dividends are wrongfully or illegally declared
and paid, there is ample authority for the rule that the stockholders
who received them ican be held liable to refund them to the
corporation or its creditors. It is immaterial that the dividends were
mistakenly paid-out or were received in good faith. Since they do
not act ina corporate capacity in receiving the dividends, they do
not ratify the illegal act of the board as to preclude a’subsequent
recovery. (Lovington Life, F. & M. Ins. Co. v. Page, 66 Am: Dec. 165.)
(2) Where corporation insolvent at time of wrongful payment. — The
rule is especially true if the corporation is insolvent (McDonald v.
- ‘Williams,:174 U.S: 397.), although the authorities are conflicting
where the corporation: was solvent at the ‘time’ of the: wrongful
payment.
(a) It seems to be an unfair and unreasonable burden to
require innocent stockholders to repay dividends, perhaps
years after they have been spent, when they were received in
good faith from a solvent corporation in the regular course of
business, even if it has later become bankrupt. If a wrong was
done to the security of creditors by the directors, ‘they are the
ones to be held responsible. (Ballantine, p- 600.)
3 (b) In view, however of the trust fund theory adopted in
our jurisdiction, the payment of dividends from’ capital may
be considered a wrongful diversion of a'“trust fund” held for
the benefit of creditors, so that the fund May accordingl
y be
followed into the hands of stockholders. (see Phil.
Trust Co.
vs. Rivera, 44 Phil. 469 [1925]; Lumanlan vs. Cura, 59 Phil.
746
[1934].) The innocent stockholders can recover damages from
the guilty directors. | ;

Sec. 42
TITLE Iv. POWERS
OF CORPORATION
417
(3) Liability of g;
and without wee
to creditors for deslane, ae— If the directors acted in good faith,
are not liable to the corpor
not have done SO, and fh
ation or
PAYINg
dividends when they should
if they have been Builty of ey diminishing the capital stock. But
negligence, in paying divid @ fraudulent breach of trust, or of gross
ends when they had
they are Personally liable t i Y Nad nono right
rj h to pay th em,
damaged by the divider | creditors to the extent that creditors are
Liabilit
enforce y of Section
d under directorsan for . easai, :
Peay paid dividen ds may be
Remedies of corporate
creditors.
(1) If dividends are improperly
declared and paid when there
afr no net earnin
gs, they may be reclaimed by the co
or by a receiver or assignee rporate creditors
acting for. the benefit of the
from the creditors
hands of any one who is not an innoce
recipient of the same for a valu
nt purchaser. or
able considera tion:.
(2) Tf sucha wrong is ‘threatened’ a creditor ma
a suit for an’ injunction, since the fund to whic y maintain
h the creditors
loo k: 'for~ security would be ‘impaired: (Clark on Corporations,
pp.:435-436, Steinberg vs. Velasco, 52 Phil. 953 [1929].)
Persons entitled to dividends:. 3

The right ‘of one'to receive dividends from a corporation on
its stock is, manifestly, justified only on the theory that he is a
stockholder. In other words, the right to dividends is an incident to
ownership of stock, and this applies to stock dividends and to cash
dividends. (19 Am. Jur. 2d:370.) ‘~
(1) Unless the dividend is payable to stockholders of record on
a specified date, the real owner'of corporate stock at the time the
dividend is actually declared thereon is the person entitled to the
dividends (Ibid.), without regard to the time when the dividends
where earned or made payable. In other words, it is only the
stockholders of record as of the date of the declaration of dividends or holders
of record on a certain future date, as the case may be, who are entitled
‘to receive dividends unless the parties have agreed otherwise. (SEC

418 THE REVISED CORPORATION CODE OF THE PHILIPPINES Sec. c. 4 42
Opinion, 7 Nov. ° 12, ! 1986; 7 Cojuangco vs. . Sandiganbayan," 5

7 8
790 [2009].) eee mean bie
Naturally, the persons appearing as stockholders in the stock and
transfer book on the date fixed will be the ones entitled to dividends
and the date for payment is only indicated for convenience of the
company. With respect to the payment of dividends, there must
be no discrimination against any stockholders (1 Fletcher, pp. 882-
887.), so that the date for the purpose must ordinarily apply to all
stockholders. :
(2) As between. parties respectively entitled to capital and
to income of stock held in trust, the right to particular dividends
depends generally upon the creator of the trust, actual or presumed.
(19: Am. Jur. 2d 371.)
(3) A transfer of shares not recorded'in the books of the
corporation is valid only as between the parties (Sec. 63.); hence,
the transferor has the right to dividends as against the corporation
without notice of the transfer but he is the trustee of the real owner
of the dividends subject to the contract between the transferor and
transferee as to who is entitled to receive the dividends.
(4) Share subscriptions not‘ yet “recorded in ‘the stock and
transfer book on the date’ of dividend: declaration are not entitled
to dividends. Hence, subscribers to the increase of capital stock are
considered stockholders of record only at the time of the approval of said
increase by the SEC (see Sec. 37, par. 3.) and not.at the time of filing
of the certificate of increase of the capital stock. (see SEC Opinion,
Sept. 15, 1980.) sa :
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 share. (1
Fletcher, pp. 780-789.) : ;
“Citing De Leon, The Corporation Code of the Philippines., Annotated, p. 410, 2002
Ed.

gec. 42 TITLE IV, p OWERS OF CORPORATION
419
to the(a) person
In the a
who of a record date,"* the dividend belongs
of declaration, and € owner of the shares of stock at the time
of payment. The san to the owner of the shares at the time
is made, the S6rpotation L that when a dividend declaration
shareholder to distribon €comes debtor and the right of the
200 [1914],). P . 566; see

see Barretto
Barre
(b) It is the declaration
of the dividends whi
the dividends itself and the right of the
ates ean
and receive it. (SEC Opinion, Oct. 9, 1992.) So,
one who receives
| stock from a corporation immediately before a dividend is
declared has the same right as the other stockh
olders to share
unless he is excl
: uded b y the term of his contract. (SEC Opinion,:
Aug. 6, 1990, citing Fletcher, Sec. 5376.) =
(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.
A record date is the date fixed in the resolution declaring dividends, when the
dividend shall be payable to those who are stockholders of record on a specified future
date or as of the date of the meeting declaring said dividend. (see Ballantine, pp. 566-567.)
The date fixed determines the stockholders who are to receive the dividends: The usual
practice is for the corporation to provide for the closing of its transfer books on a certain
date such that only stockholders as of the given date are entitled to dividends. Usually,
several days elapse between the time a person buys stock and the time the corporation
‘records the sale. Thus, a seller of stock who is still the stockholder of record on a specified
date may receive a dividend after he has sold his stock to another person. Thus, only
those whose ownership of shares are duly registered in the stock and transfer book are
considered stockholders of record and therefore, entitled to all rights of stockholders.
Because payments of stock dividends requiring an increase in the authorized capital
stock are contingent upon SEC’s approval (see Sec. 37.), record and payment dates are
ordinarily indicated as falling within a certain period following SEC’s approval of capital
increase. All cash dividends declared by a corporation shall have a record date which
‘shall not be less than ten or more than 30 days from the said declaration. In case, no record
date is specified, the date shall be deemed fixed at 15 days from declaration. Companies
obliged to pay dividends may have a single declaration for several cash dividends within
a year subject to the condition, that their record and payment dates are also explicitly
provided. (SEC Memo. Circ. No. 2, April 17, 2009; amending Sec. 3 of Amended Rules
Governing Preemptive and Other Subscription Rights and Declaration of Stock and Cash
Divi
ote Be ex dividends is used to indicate that the price of shares of a corporation
excludes the dividend payable on a certain future date to the stockholders of record on a
specified preceding date (E.L. Kohler, op. cit., p. 198.) or a previously declared dividend.
The buyer is entitled to the declared dividend when the stock is sold cum dividends or
dividends-on.

The company should exert real and sincere efforts to contact

and deliver the dividend to him, and only after the lapse of
the prescriptive period for claiming the dividend may the same
be reverted to the surplus account of the corporation. (SEC
Opinion, Jan. 29, 1971.)
It is preposterous to say that a debt can be cancelled by the
action of the debtor without the consent of the creditor. (McLaran v,
Crescent Planning Mill Co., 93 SW 819.)
(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. (Stats v. Biograph
Co., 236 Fed. 454.)
(a) Unlike a cash dividend, a stock dividend requires, as a
general rule, more than mere declaration to make it effective.
The vote to increase stock is not per se an increase; and until the
stock is actually issued, or at least in some manner especially set
Am. Jur.
apart to the stockholder, its effect is not complete. (19
2d 317.)
(b) The stock dividend in shares of the kind already held
gives the shareholder nothing in the way of a distribution
of assets but merely divides his existing shares into smaller
the
units. There is not increase in his proportionate claim upon
corporate assets or income by reason of such a paper dividend.
stock
There is no obligation upon the corporation to declare
dividends, which are not distributions but only a change of the
share and capital structure. (Ballantine, p. 560.)
the declaration of stock dividend gives the
(c) Since
to a valid
stockholder nothing until all the formalities necessary
cation, therefore,
increase of stock are complied with, its revo
have
takes away nothing: But unless rescinded, the shareholders
s so
absolute right to their respective shares in the stock dividend
certificate is
declared and actual delivery of the corresponding
dividend.
not essential to make the shareholder the owner of the
er or his nominee by the

‘Check payments are mailed directly to the stockhold In
cates or those registered
company’s stock transfer agent. For unissued stock cer tifi remits payment to the
street name, checks are sent to the handling broker who, in turn,
beneficial owner of the shares.

Sec. 42
TITLE Iv, POWERS OF CORPORAT
ION 421
Time for payment

of dividends.
(1) Frequency and;
declared, one ata ite, 7] |
gederal ety Metin ase
(a)
Where the condition of the
Carnings are regarded as company is sound and the
constant, the directors may
meeting, declare dividends in adv , at one
ance for succee
ding quarters,
hardly even longer than a year altogether,
the dividend for each
succeeding qu arter being made payable as
of a certain date in
the same manner as the first dividend.
(b) Where the business of the corporation is running
along
in good shape, with abundant revenues with which to pay
dividends, the payment of the regular divi
dends on the various
classes of stock becomes a more or less routine matter,
called
to the attention of the board of directors by the trea
surer at the
directors’ meeting: prior to the expiration of the quarter
or the
half year or the year for which the dividends are to be paya
ble.
(19 Fletcher, pp. 220-221.)
(2) Date of payment. — There is no hard and fast rule describing
the interval of time between the date for the declaration of dividends,
the date of record of stockholders entitled thereto, and the date of
payment, the same being left to the sound and judicious discretion
of directors. (SEC Opinion, April 11, 1962.)
(a) It is customary for the directors to fix the time for
payment of a dividend. The payment date may be the same date
as the record date or it may also be a later date. But a corporation
cannot discriminate among the shareholders as to the time of
payment of dividends.
(b) Ifno time is fixed by the resolution declaring a dividend,
it is payable on demand, and if the resolution declares that it
shall be payable at such time as the board of directors may direct
and the board fixes no time, the law implies that it shall be paid
within a reasonable time. (18 Fletcher, pp. 887-888.)
Equal participation in the distribution

of dividends.
(1) General rule on all the stocks. — As a rule, dividends among
stockholders of the same class must always be pro rata, equal and
without discrimination and regardless of the time when the shares

422 THE REVISED CORPORATION CODE OF THE PHILIPPINE
S Sec, 42
were acquired. The dividends must be general on all the Stocks,

so that each stockholder wil] receive his proportionate share. The
directors have no authority to declare a dividend on any other
principle. They cannot exclude any other portion of the stockholders
from and equal participation in the profits of the company. The rule
against discrimination equally applies to stock dividends. Each
stockholder is entitled to receive new shares in proportion to the
stock held by him and any discrimination is illegal. (11 Fletcher, pp.
1101-1104.)
(2) Fractional shares included in computation. — For the same
reason that a corporation cannot exclude stockholders owning ful]
shares from equal participation in the distribution of dividends,
it cannot deny stockholders to fractional shares (see Sec. 40[a].)
from participation in the dividends to the extent of their respective
holdings. Thus, fractional shares resulting from a previous
distribution of dividend by a corporation shall be included in
sthe computation of stock dividend subsequently declared. (SEC
Opinion, July 12, 1961.)
Total subscription basis of share

in dividends. :
-(1) General rule. — As a general rule, and as applied to any
form of dividend declaration, the participation of each stockholder
in the earning of profits of the corporation is based on his total
subscription and not on the amount paid by him in account thereof.
(Secs. 42 [par. 1], 71.) For example, if a person subscribes for 1,000
shares of the par value of P10.00 per share and has paid P5,000 on
his subscription, he will participate in dividends based on of 1,000
shares, not 500 shares. Sane
The reason is that a stockholder’s entire subscription represents
his holdings in the company for which he pays interest on any unpaid
portion. (see Secs. 63, 65.) Subscribers are considered stockholders
not from the time they are issued stock certificates but from the time
their subscriptions are accepted by the corporation because it is
from this time that they are bound by their subscriptions, subjecting
them to all the liabilities and entitling them ‘to all ‘the rights of
stockholders. (SEC Opinion, Yuri 28, 1966.)
_ (2) Where stockholder delinquent. — Only where a stockholder
is delinquent in the payment of his unpaid subscription that
he loses his privilege in a corporation where he has holdings,
as

Sec. 42
TITLE IV, POWERS OF CORPORATION
Pe en 70, except his right to receive cash dividends,

b ? lowever, shall first be applied to his unpaid balance on the
subscription plus cost and expenses.
(Sec. 42, par. 1.)
Other modes of divisi
on of dividends.
The above rule is not absolute and is subject to the rule of conse
nt.
Thus, it has been opined under the old Code that the distribution of
dividends based on the paid-up shares
or any other mode which
itself is lawful may be adopted by a corporation,
but the unanimous
oat of the stockholders is indispensable. (SEC
Opinion, Dec. 7,
tis believed that the same scheme is still legally feasible under
Section 42 as it is not immoral nor against any public policy.”
Classes of dividends.
Dividends payable to shareholders may be classified:
(1) Cash dividend.— It is dividend payable in cash.
(a). Dividends on par value shares are made, at a stated
i percentage (¢.g., 10%) of the par value although they may also
be paid as fixed amount per share. . 3 o
"The SEC has rendered an opinion that dividends cannot be declared and paid
based on the paid-up stock. (SEC Opinion, Oct. 29, 1987.) ete .
‘. Tt is generally accepted auditing principle that cash means ‘cash on hand or in
bank.’ Standard test in accounting defines ‘cash’ as consisting of those items that serve as
a medium of exchange and provide a basis for accounting measurement..To be reported
as ‘cash,’ an item must be readily available and not restricted for use in the payment of
current obligations. A general guideline is whether an item is acceptable’for deposit at
face value by a bank or other financial institution.
Item classified as cash include coin and currency on hand, and unrestricted funds
available on deposit in a bank, which are often called demand deposits since they can be
withdrawn upon demand. Petty cash funds or change funds and negotiable instruments,
such as personal checks, travelers’ checks, cashiers’ check, bank drafts, and money orders
are also items commonly. reported as cash. The total of these items plus undeposited
coin and currency is sometimes called ‘cash on hand. Interest-bearing ‘accounts: or time
deposits, also are usually classified as cash, even though bank legally can demand prior
notification before a withdrawal can be made. In practice, banks generally do not exercise
this legal right.
Deposits not immediately available due to withdrawal or other restrictions
require separate classification as ‘restricted cash’ or ‘temporary investments,’ They are
not ‘cash’.” (Rueda, Jr. vs. Sandiganbayan, 346 SCRA 341 [2000],. citing Intermediate
Accounting Comprehensive Volume, Ninth Ed., by Smith, Jr. and Skousen, Brigham
Young University, Copyright 1987.)

(b) As to no-par value shares, dividends are payable in

terms of so many pesos or centavos (¢.g., P10.00, P0.01) per share
since there is no basis on which a percentage can be stated. In
other words, a stockholder participates in the dividends based
on the par value in case of par value shares, and the number of
shares in case of no par value shares, and not upon the amount
of the consideration paid by him for his shares.
3 (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. (SEC
Opinion, Oct. 5, 1994.)
Cash and. stock dividends are the more common forms of
dividends.
(2) Property dividend. — It is dividend distributed to the
stockholders in the form of property, real or personal, such as
(see
warehouse receipts or shares of stock of another corporation.
Ballantine, p. 564.) 7
(a) A dividend payable in property is actually a cash
dividend. (see SEC Opinion, March 19, 1999.) The stockholder
the cash. A corporation
- can take the property, sell it, and realize
a
can, therefore, pay declared cash dividend in the form of
“property.””
(6). When a corporation has retained ‘earnings arising out
of its operations, properties which represent investments in the
capital stock of the: corporation may be declared as property
“dividend out of such retained earnings, provided said properties
constitute assets in excess of the other assets which are adequate
to support the issued and. outstanding capital. stock of the
corporation. (SEC Opinion, February 5, 1991.)
(c) Under the SEC’s Rules Regulating the ‘Declaration of
Property Dividends (June 9, 1992), the issuance of the property
dividends must conform with these conditions: (1) the property
to be distributed as dividends shall consist only of property
n
“which are no longer intended to be used in the operatio‘of
liquidating dividend ot
‘| -’The SEC allows the distribution of property dividend as that
s is in
where the distribution of the same is practicable, specifically where the surplu
of the business.
used in the opera tion
form (property) and it is no longer intended to be
(SEC Opinion, Feb. 5, 1991.)

Sec. 42 T ITLE Iv. POWERS OF CORPOR
ATION
the busines
be disteibutad, t the corporation and which are practicable to
dividends shall a lvidends; (2) the issuance of the property
property to the ot result to an inequitable distribution of
market Values Pee igers in terms of the book values and
thewill: distebuce Of thends property
any vide made
distributed;
wh
and (3) when
is ade where some stockholders
s receiv e cash and the others will receive property, the
revailing market value of the property, as agreed upon by th the
stockholders shall be consisidered a3 :
Tee ta
distribution of the total dividends. cee te ee
No actual distribution of ny
by the SEC. prop erty divi dends shall be made
unless app rov ed
5
may be declared as prproopererty ty didiv
(d) Treasury shares 198 4.)
n s.
dend
viide
(SEC Opinion, July 17,
GB) Stock or share dividend. — It is dividend payable in unissued

of in
or increased or additional shares of the corporation instead
of the
cash or in property out of the unrestricted retained earnings
corporation. A stock dividend may be declared only to the extent
of the :maximum number of shares authorized in the articles of
incorporation. 2
(a) Shares of stock are given the special name “stock
buted
dividends” only if they are issued in lieu of undistri
property, then
profits. If they are issued in exchange for cash or
dividends.”
they donot fall under.the category of “stock
(not as
.... »..(b)' A corporation may legally issue shares of stock
to it by a person
stock dividend) in consideration of services of
not a stockholder or in payment of its indebtedness. A share
issue d to pay for servi ces rende red is equivalent to stock
stock
se services is equivalent to
issued in exchange of property, becau
property. fee
of stock issued in payment of
~ (c) Likewise, 'a share
tedne ss is equiv alent to issui ng a stock in exchange: for
. indeb
7 : 3 e
cash.
res of sto ck ma y be iss ued to a non-stockholder ‘or
(d) Sha
wh o is not a sto ckh old er but shares of stock coming
to a person
sto ck di vi de nd s are pay abl e only to stockholders of the
from non-stockholders because
or
corporation and not to strangers to di vi dends. (Nielsen & Co.,
26
ders are en ti tl ed
only sharehol
SCRA 540 [1968].)

(e) Stock dividends are in the nature of shares of stock, the

consideration for which is the amount of unrestricted retained
earning converted into equity in the corporation’s books, [t
is actually two (2) things: 1) a dividend; and 2) the enforceg
use of the dividend money to purchase additional shares of
stocks at par. (Lincoln Phil. Life Insurance Co., Inc. vs. Lepanto
Consolidated Mining Co., 26 SCRA 540 [1968].)
(f), A corporation may increase its authorized capital stock
by way of stock dividends without touching its unissued shares
as long as there are retained earnings to justify the declaration.»
(see SEC Opinion, Oct. 11, 1972.)
(g) A stock dividend has the same effect as cash dividends
distributed to the stockholders who subsequently used said cash
dividends in purchasing shares of the corporation. Since selling
of shares at a premium is not prohibited (Sec. 61, par. 1.) stock
dividends may be declared at a premium for such declaration is
in the nature of a sale of shares at a premium.
(h) As long as the requirements for the declaration of stock
dividends are complied with, the issuance of common shares
in favor of stockholders holding preferred shares is valid (SEC
Opinion No. 28-04, April 27, 2004.);
(4) Optional dividend: — It is dividend which gives the
stockholder an option to receive cash or stock dividend;
(5) Composite dividend. —It is dividend partly in cash and partly
in stocks. Here, there is no option involved;
(6) Preferred or preferential dividend. —It is dividend payable, by
to that to
virtue of contract, to one class of stockholders in priority.
be paid to another class (19 Am. Jur. 2d 286.);
(7) Cumulative dividend. — It is dividend 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 be made
out of subsequent net earnings (Ibid.);
*The procedure prescribed by Sec. 37 to effect an increase of capital stock must be

complied with. The increase will be to the extent of the retained earnings to be distributed
as stock dividends.

427
(8) Scrip dividend ;

certificate issued to a stockh, Ha dend in the form of a Ve
°° . . —lI ivi g oge
money, stock or other benef
(9) Bond dividend. . — It is div;

: ividend distributed in | bonds of the
e e to the stockholders, The bondholder becomes a credi
tor
of the corporation to the extent of the amount
of the bond. Thus
a corporation may Use its retained earnings in improvement off
its plant, or purch asing machinery or other property and issue its
bonds in payment of dividends e oT gs (see 11 Fletcher,
rom such earnin
p. 893.);893.); and
(10) Liquidating dividends. — They are dividends which
are actually distributions of the assets of the corporation upon
dissolution or winding up of the same. (Wise & Co. vs. Meer, 78 Phil.
655 [1947].) They are not paid because of earnings or profits, but as
a return of capital invested. So, the assets of a dissolved corporation
are not distributed as dividends, as dividends are commonly
known. The term has also been used to describe a distribution of
assets made upon a reduction of the capital stock. (19 Am. Jur. 2d
283-284.) A corporation can distribute liquidating dividends only
after it is dissolved and all its creditors have been paid. (see Sec.
139.)
Dividends may also be participating and non-participating. (see
Sec. 6.)
Ordinary and extraordinary dividends.

Dividends may be divided into the ordinary or regular current
dividends payable by the. corporation and extraordinary. or
“extra” dividends, which may consist of cash, property, or stock
distributions.
(1) As usually understood, ordinary div idends are those paid out
some fixed plan
of current earnings of a corporation according to
d to a
or scheme, usually at regular intervals and sometimes limite
, they
substantially fixed rate of return to the shareholder. Generally nary
aire cash dividends, stock dividends being regarded as extraordi

428
dividends,”
dividends and not included within the phrase “regular
unknown.
although a policy of regular stock dividends is not
or stock, usually
(2) Extraordinary dividends, whether cash rn on
mal retu
represent an accumulated excess of earnings over nor
a capitalization of
capital invested and constitute a distribution or
ordinary dividends,
surplus profits remaining after distribution of
(19 Am. Jur. 2d 287.)
property
Effect of declaration of cash or
dividend.
dividends,
(1) When a corporation i ssues cash and property
y the amount or
the assets of the corporation diminish by exactl
value paid out and correspondingly, the prope
rty of the individual
the net worth of the
stockholder increases. The dividend s reduce
corporation.
dividends is
(2) The declaration itself of cash and property
corporation to each of
considered effective to create a debt from the
thereof from the assets,
its stockholders and segregate the amount
is payable of
even though the resolution provides that the dividend
the stockholders in the corporate assets.
Effect of declaration of stock dividend.

(1) A stock dividend converts the surplus or profits of the
permanent account,
corporation covered by such dividend into the
tors to
thereby placing it beyond the power of the board of direc
holders.
withdraw from corporate use and to distribute to the stock
(Eisner v. Macomber, 252 U.S. 189.)
profits have
(2) It shows that the corporation's accumulated
rs or
been capitalized instead of distributed to the stockholde
OF kind,
retained as surplus available for distribution, in money
ts for
should opportunity offer. For from being a realization of profi
the stockholder, it tends rather to postpone said realization. (Nielsen
Co., Inc. vs. Lepanto Consolidated Mining Co., 26 SCRA 540 [1969].)
The declaration of a stock dividend is akin to a forced purchased
of stocks, (PLDT vs. National Telecommunications Commission,
539 SCRA 365 [2007].)
(3) Such a capitalization of surplus or transfer of such surplus
to the capital account of the corporation adds nothing to and takes

Sec 42 TITLE IV. POWERS OF CORPORATION 429
nothing from the corporation. The corporation merely transfers the

surplus to capital account and issues shares of stock to represent the
same. Such shares may be preferred and common stock. So far as
Se stockholder is concerned, the stock dividend does not result in
any increase in value in the holdings of the stockholder because he
ends up with merely a larger number of ownership’s units of shares
representing the same proportionate interest in the corporation
a he possessed before without decreasing the corporation’s
assets.
(4) The declaration likewise adds nothing to the interest
of the stockholders. After a declaration of stock dividends, the
stockholder receives no greater proportional interest in the assets of
the corporation than he heads before. In this respect, it is identical
in substance with a splitting of original shares (Infra.) in which
outstanding shares are exchanged for an increased number of new
shares of proportionally less par value that the old, leaving the
ageregate value of all his stock substantially the same. Such an
increase simply dilutes the shares as they existed before. (19 Am.
Jur. 2d 288-289.)
(5) A stock dividend is, in essence, not a dividend at all in the
ordinary. sense of the term since, as indicated above, no cash or
property leaves the corporation. It does not reduce the real worth of
the corporation or increase the real worth of the stockholder.
(6) When stock. dividends are . distributed among the
stockholders, the amount declared ceases to belong to the
corporation. The unrestricted retained earnings of the corporation
the
are diminished by the amount of the declared dividends, while
|
stockholder’s equity is increased.
forced to
The stockholders, by receiving stock dividends, are
, and
exchange the monetary value of their dividends of capital stock
or
the monetary value they forego is considered the actual payment
s given as stock
consideration for the original issuance of the stock on,
dividends. (PLDT vs. National Telecommunications Commissi
supra.)
to existing
(7) The declaration of stock dividend is advantageous
creditors of the corporation to the extent ‘that corporate earnings
to stockholders. At the
are capitalized, unavailable for distribution with
oration
same time, it improves the cash position of the corp
of borrowing
expansion projects Or programs obviating the necessity
rates.
and paying high interest

Sec. 42
CODE OF THE PHILIPPINES
430 THE REVISED CORPORATION
ILLUSTRATION:
E or ga ni ze d a st oc k co rporation with an
A, B, C, D, an d
cap ita l sto ck of P4 00 ,0 00 divided into 4,000 shares
authorized Each subscribed to and paid
va lu e of P1 00 per sha re.
with a par ation at the
actual asset of the corpor
for 400 shares. Hence, the
ss was P200,000.
beginning of the busine
yea rs of pro fit abl e bus iness, the assets of the
After a few tead of
am ou nt ed to P40 0,0 00, with no debts. Ins
corporation l
cas h di vi de nd s, it wa s agreed to increase the capita
declaring each
an d for tha t pu rp os e, to issue 400 additional shares
stock ck dividends wi ith a total
value
kh ol de r in the fo rm of sto
stoc se of his
P40 ,00 0 wh ic h am ou nt represents the actual increa
of
ss.
share of interest in the busine
the sta rt of the yea r, eac h stockholder held 400
At which is 1/5 of the total
witha total value of P40,000,
At the close of the year, after
shares
cor por ate ca pi taof
l P20 0,0 00.
stockholder still holds 1/5
stock dividends ‘are declared, each 0
h his 800 shares worth P80,00
interest in the corporation wit
porate capital of P400,000. But
in relation to the increased cor
re in the ‘corporate assets is
the proportional int erest of each sha , from
rease in the number of shares
decreased because of the inc
“1/2,000 to 1/4,000.
dividends is not subject to
_ The mere issuance of the stock
ome tax as the y do not con sti tut e income to their recipients.
inc
scrip
Effect of declaration of bond or
dividend. | 7
Absent statutory provisioto n the contrary, a corporation may
its ret ain ed ear nin gs, for exa mpl e, in improvements of its
use
other property which it is
property of in, purchasing machinery or
tion to acquire and hold,
authorized under its articles of incorpora
from such earning. Or
and issue its bonds in payment of dividend -
Fletcher, pp. 1116
the corporation may issue a scrip dividend. (11
1117.)
pay is absolutely
(1) Such a dividend, when the obligation to
ned to a future
due to the stockholders, although payment is postpo
date, (Ibid.)
makes the
(2) The declaration of a bond or scrip dividend
of the bond
stockholder a creditor of the corporation for the amount

431
Distinctions betwee
n Cash dividend
and stock dividend
.
They are:
8S, while stock dividend involves no

disbursement:
(2) Cash dividend dec]
ared
property of the stockholder and cannand paid becomes the absolute
ot be reached by the creditors of
the corporation absent fr aud,
while stoc
of corporate property, may be reached k dividend, being still part
by corporate creditors;
(3) Cash dividend is declared only by
ts discretion, while stock dividend is de the board of directors, at
clared by the board with
e concurrence: of the stockholders representing
outstanding capital stock at a regular or at 2/3 of the
special meeting called for
the purpose (Sec. 42.)
(4) Cash dividend does not i erease the corporate capital, while it
is increased by a stock dividend; !
(5) The declaration of cash dividend creates a debt
corporation to each of its stockholders who then hold from the
whil
such stock,
e no’ debt from the corporation to the stockholders
is created
by the declaration of stock dividend, except in the sense that capit
al.
stock constitutes a liability. (19 Am: Jur. 2d 317.) 8
A dividend payable in ‘stock’is ‘not Synonymous with
, and ‘is
not always or necessarily, a stock dividend: A dividend paya
ble
in stock may, under,some.circumstances, bea cash dividend
(Ibid.,
292.),,as where the dividend consists in treasury stocks or in
stocks
of another corporation (Supra.); and
(6). Cash dividend is taxable as income to the stockholder, while
stock dividend is generally not subject to income tax.” ;
Stock dividend from issue
_ Of additional shares. ,
Whenever an increase is made in'the capital acco
unt of a stock
corporation, the increase is valid only when it represen
ts additional

shares issued for which the equivalent consideration is received by

the corporation.
(1) The increase may result from an issue of additional shares or
the re-investment of retained earning effected by the distribution of
shares as stock dividend. Hence, a corporation with outstanding no-
par value shares originally issued at P5.00 per share cannot increase
its capital account by transferring its surplus to its capital account
without issuing additional shares for the amount transferred. Under
such method, stockholders who have paid in full their no-par value
shares would in effect be made to pay additional amount for the
same shares to increase their value.
(2) Section 6 (par. 6.) provides that “shares of capital
stock issued without par value shall be deemed fully paid and
nonassessable.” Once no-par value shares have been issued at their
issued price, their value can no longer be changed. (see Sec. 61, last
par.) Accordingly, such stock dividend by a transfer of the surplus
to capital with no shares to be issued cannot validly be made. (SEC
Opinion, March 28, 1974.) _
Distribution or reissue of treasury

stocks.
__., The mere acquisition and distribution of previously issued stock
does not constitute a stock dividend. (11 Fletcher, p. OL.
~~ (1) As areissue of existing paid-up shares. — Treasury stocks (see
Sec. 9.), being property of the corporation, may not be distributed
among stockholders as stock dividends, but would: constitute
property ‘dividends. (SEC Opinion, June 13,: 1963; see SEC-OGC
Opinion No. 16016, June 27, 2016.)
No increase of capital is involved, since there is merely a reissue
of existing paid-up shares. Such a ‘distribution of treasury stock
would not be a stock dividend within the ordinary meaning of the
term: (Comm. of Internal Revenue vs. Manning, 66 SCRA 14 [1975],
citing Bass v. Comm. of Internal Revenue, 129 F.2d 300.)
(2) As a distribution of earnings. — If the dividend in stock
consists not of stock created or issued therefor ‘as evidence of the
transfer of surplus or undivided profits to fixed capital, but of
stock in which corporate earnings have been invested or for which
corporate assets have been exchanged or of stock received from the

Sec. 42
TITLE IV. POWERS OF CO
RPORATION
433
stockholders in payment of
In treasury, it is a cash divi debts to the corporation and carried
dend whether such stock is previous
issued and outstandin ly
g of th
€ Same corporation or stock of another
conPoration. (SEC Opinion, June 13, 1963.)
ubstituted property in specie as a divide

nd
portion of its earning us, in a case, where a company utilized a
“
and distributed such s to buy” the majority shares of a stockholder
held that the distriby tihares to the r emaining stockholders, it was
distribution of earnings was not a Stock dividend but in effect a
on
to stockholders and, ther
income tax. (Comm. efore, subject to
of Internal Revenue vs.
Manning, supra.)
(3) As representing a prior di
sbursement of purchase price to
stockholder. — The tei a former
of ti |
|
were acquired and is not increased .upon the

reissue. Such so-called. stock ir
dividend is simply stock wateri
which does not. repres ent net wo ng
rthor surplus, but only a prior
disbursement o f purchase pri
ce to a former stockholder. (SE
Opinion, June 13, 1963, citing Ballantine, p. 484.)
C
Stock splits. ; be |
(1). Distinguished from. stock::\dividen
ds,
— The courts: have
recognized a distinction between
ia. “ stock: split” and! a “stock
dividend.” ti
The essential distinction betwee
n a stock dividend and a ‘stock
Split is that in the former, there
is a capita
Profits, with a distribution of the. added lization of earnings or
sha ares, which evidence
the assets transferred to capital,
while in the latter, there is a mere
increase in the number of shares whi ch evidence ownership
altering the amount of the capital, surplus or segr without
egated earnings,
_ In brief, a stock split is merely a
dividing up of the outstanding
shares of a corporation into a greater number of ‘nits, without
disturbing the stockholder’s original proportio
na I participating
interest inthe corporation. A sto ck split is esse
ntially one of form
and not of substance.
:

(2) Way by which accomplished. — It is said that stock splits are

generally accomplished in two (2) different ways:
(a) If the stock is of the par value type, then the original
certificate is exchanged and a new certificate substituted,
embodying the original shares, plus the new number of shares
authorized by the split.
the stockholder
(b) If itis no-par value stock to be split, then
additional certificates
retains his original certificate and receives
2d 284-285.)
for the additional shares. (19 Am. Jur.
erse stock split.”
The reverse procedure is known as “rev
ILLUSTRATION:
ng shares of stock,
X Corporation has 100,000 outstandi
Because the market price
with a par value of P10,00 per share.
board feels that a lower
of the shares is considered high, the
the shares and attract
price will improve marketability of
the 100,000 shares be
more investors. It may authorize that
lac ed by 500 ,00 0 sha res wit h a par value of 2.00. Thus, each
rep
exchange for each share
‘stockholder will receive five shares in
of outstanding shares is
owned. This increase in the number 3
called stock split. ° ee 3
d, involves the
“Reverse stock split,” on the other hansmaller number of
reduction of the outstanding shares into a
by inc rea sin g the par val ue the reof. For example, there
shares orporation are
is a reverse stock split when'the articles of inc
structure from an authorized
amended by changing the equity n shares
million divided into two (2) millio
capital stock of P20
authorized capital stock of
with a par value of P10.00, to an h a par value of
~ PhP20 mil lion divided into 400,000 shares wit see SEC
n No. 06-17, June 24, 2017;
* P50.00. (SEC-OGC Opinio ; |
5.)"
Opinion No. 01-95, Jan. 4, 200
to additional
uld be charge or credited
‘
————————
—— ;
val ues of capi tal sto ck sho s hould

21Changes in par in capi tal sto ck values exceed APIC, they
the inc rea ses
paid-in-capital (APIC). If The com mon sou rce s of APIC are: (1) excess of par
gs.
be charged to retained earnin resaleor , retirement of treasury share;
(3) distribution
tal stoc k; (2) (5) changes
value paid for capi of det ach abl e stock purchase agreements; stment of
iss uan ce
of stock dividends; (4) ts; and (7) that created by
corporate readju
asse d to
in par val ue; (6) don ate d
tio n und er Sec. 80.) API C, however, shall not be use pt
annota t income exce
quasi-reorganization. (see fut ure yea rs of charges chargeable ag ainsrel
the cur ren t or ieved ofshe su d
relieve income of n a rec ogn i d enterprise may
ize
be
on whe rei
in the case of reorganizati ion that if the existing ent
erprise shall be con
aga ins t inc ome on con dit
charges

435
i . y changes the number of outstandin

serge
s nieaie eee the stockholders’ equity nor the capital
3 _ Shares as a result Of the split does not generate
taxa ome to either the stockholder or the co tporation.
Distinction between distribution in liquidati

and ordinary dividend, In liquidation
The distinction between a dis
tribution in liquidation and
ordinary dividend is factua an
Bethe l, the result in each case dependin
g on
the particular circumstances and the intent of the
parties.
If the distribution is in the n ature
of a recurring return on stock,
it is an ordinary dividend. Ho wever, if
the corporation is winding
up its business :or recapitaliz
ing and narrowing its activities, the
distribution may properly b € treated as in
complete or ‘partial
liquidation and as payment by the corp
oration to the stockholder
for his stock or as return of the capital inve
sted by him. The
corporation is, in the latter instances, wiping out all
or that part of
the stockholders’ interest in the company. (Wise & Co., Inc. vs.
Meer,
78 Phil. 655 [1947]. | > H3 5
Applicability to partnerships.
Section 42 applies only to stock corporations. A partnership has
neither shares of stocks or capital stock, nor does it have a board of
directors that can declare dividends out'of its unrestricted retained
earnings. Dividends are property of the corporation and is payable
only when the board of directors declare them as dividends even if
there are existing profits of the corporation. On’the other hand, in
partnership, profits are already due ‘to the partners during the life
of the partnership/ joint venture in proportion to their interest as set
forth in their agreement, and are deemed to have been actually or
constructively received in the same taxable year, (SEC-OGC Opinion
No. 13-17,2 Nov. 3, 2017.)
the same result may be attained even without reorganization, provided said facts are
fully disclosed and formally approved as in reorganization inwhich event the articles
of
incorporation shall be amended accordingly to refiect the changes in the capital structure
(SEC Opinion No. 01-05, Jan, 4, 2005, citing Statement of Financial Accounting Standard. ,
No. 18 which lays down the generally accepted accounting standards in our jurisdiction.)
S ea De Leon, Comments and Cases on Partnership, Agency and Trust, p. 157. |

[2010].

Sec. 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 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.
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 pertinent laws or regulations.
No management contract shall be entered into for a
period longer than five (5) years for any one (1) term. (N)
Power to enter into management contract.

(1) With another corporation. — Under Section 43, a corporationis
allowed, without the need of amending its articles of incorporation,
to enter into a management contract with another corporation,
which refers “to any contract whereby a corporation undertakes to
manage or operate all or substantially all of the business of another

is 43
TITLE IV. POWERS
op CORPORATION
corporation,
ol
whether
operating agreements Such ¢o ntracts
oy otherwise,” are calle ervice contracts
Briefly stated, ioe
the management it is an agteement which 7
period of time. Of tis affairs to a c Orp oration delegates
Since the ©°rporationanother cor poration for a certain
to manage its can emp loy officers and agents
business, there
another corporation can be no o bje
ction to employing
for
is estopped to deny its by the acts of th © Managing
‘
corporattiion an d
Warehouse Associatio author
ity
n, 49 Phil. , 609(see National Bank vs. Producers’
[1922].)
| 2 convenience to both. Thus

company may, , a holding
affairs of its subsidiari , intervene in the Manage
ilates ment and
(3) With a natural person. — Section 43 refers only

management: contract with
to a
another corporation with another
Corporation, Hence, it does not apply to Mana
entered into by a corporation with nat gement contracts
ural persons.
! Limitations on the power.
The following are the limitations for the

exercise of the Power:
(1) Ratification of the contract. — The mana sement
contract must
beapproved by amajority of the board of direc tors or tr
ustees (before,
Majority of the quorum) and ratified by the Prescribed vote
outstanding capital stock entitled to vate or if the of the
members, as the
“ase may be, of both the managing and the managed co
rporations ,

at a meeting duly called for the purpose. Unless approved by the

required vote of the stockholders, the management contract cannot
take effect. (SEC Opinion, Dec. 1, 1992.)
In either of the two (2) 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 if the managed
corporation is a nonstock corporation, by at least 2/3, not merely
a majority, of the members. Where the contract is between two (2)
corporation having interlocking directors, the contract must comply
with the requirements of Section 32.
(2) Period of the contract. — The period of the management
contract must not be longer than five (5) years for any one term. The
term limitation affords the board of directors and the stockholders
an opportunity to review the situation every five years and decide
whether the contract will be allowed to expire or not. The period
guarantees that management contracts are looked into again by
the stockholders every five years so that if there have been abuses
by the managing corporation, the contract may not be renewed for
another term. (SEC Opinion, March 6, 1986.)
(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. (Ballantine, p. 136.)
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,

ec: 44 TITLE IV. POWERS OF CORPOR
ATION 439
management contract must be a

2/3 vote of the stockholders of Y ppro ved by the prescribed
Corporation. The same vote
the only stockholder in both corporation
than X 1/3 a
of the e tottotal outstandin; g capita
stock ceo entitled to vote of Cor
poration. Only a majority vote is
required if the more than 1/3 ownership of A, B,
A refers to the outstanding capital stock of Y and C, or of
Corporation, the
managed corporation.
(2) Interlocking directors, — If A, B, C, D, and E constitute
_the majority of the members of the board of direc
tors 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’
é of a contract: between two)(2) corporations with inter
locking
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 nonstock corporation.
Sec. 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.
Ultra vires and intra vires acts

explained.
A corporation is not restricted to the exercise of powers expressly
conferred upon it but has the implied or incidental power to do
what is reasonably necessary to carry out its express powers and
to accomplish the purposes for which it was formed. Sections 35(k)
and 44 recognize these implied and incidental powers possessed by
private corporations. |” = cmt era ,
(1) Acts or transactions within the legitimate powers of a
corporation or are related to its purposes are said to be intra vires.
(2) Any business not authorized by law or the articles of
incorporation if pursued by a corporation as part of its regular
Or permanent business would be violative of law or articles of
incorporation, hence, “ultra vires”. (SEC Opinion, Dec. 17, 1990.)

According to the strict construction of the term, an on vires

incidenta ll
act is one not within the express, implied, and
ration 0 le or
of the corporation conferred by the Revised Corpo
the articles of incorporation. It is an act which is not positively
ly or
forbidden, but impliedly forbidden, because it is Na express
impliedly authorized or necessary or incidental in the ce of
the powers so conferred. Since corporations, unlike natural person,
have no inherent powers, third persons dealing with them cannot
assume that corporations and have powers.
The test to be applied is whether the act of the corporation is in
direct and immediate furtherance of its business, fairly incidental to
the express powers and reasonably necessary to their exercise. If so,
the corporation has the power to do it; otherwise, not. (6 Fletcher,
pp. 198-199; Montelibano vs. Bacolod-Murcia Milling Co., Inc., 5
SCRA 36 [1962]; see SEC-OGC Opinion No. 20-09, August 4, 2009.)
ILLUSTRATIONS: »
(1) A corporation was organized to engage 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) Acorporation 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
Aseller, trader, dealer or importer of goods
is not necessarily
or indispensably the manufacturer of. the good
s. Therefore,
manufacturing cannot be treated as reasonably
necessary to the
Oe of the selling. (SEC-OGC Opinion
No. 14-07, July 18,
2007.
Contracts intra vires entered into by the boa

rd of directors
are binding upon the corporation
and courts should not
interfer
e unless such contracts are so unconscio
oppressive as
nable and
to amount to wanton ‘violation to the rights
of

Sec. 44 TITLE IV. POWERS OF CORP
ORATION
441
the minority, as when a Sto

ckholder avers that the board
directors has concluded a transa of
ction that will result in serious
injury to him. (Gamboa vs.
Victoriano, 90 SCRA 40 [1979]
Yong vs. Tiu, 401 SCRA ; Ong
1 [2003].)
Ultra vires acts distinguished

from
other acts.
Although the term ultra vires' act has bee
n used indiscriminately,
it properly differs from acts which are
illegal, in excess or abuse
of pow er, or executed in an unauthorized man
ner, or acts within
corporate powers but outside the authority
of particular officers or
agents . (19 CJ.S, 419.)
(1) From illegal act. — When proper
ly used, an ultra vires ‘act
simply means an act beyond the confer red powers
of a corporation
or the purposes or object for which it is cre
ated as defined by the
law of its organization. (Republic vs.
Acoje Min
SCRA 361 [1963]; Atrium Management Corpor ing Co., Inc., 7
ation vs. Court of
Appeals, 353 SCRA 23 [2001].) The langua
ge of Section 43 appears
to con
fine the term to this meaning. By itself, an ultr
a vires act is
not necessarily illegal. On the contrary,
it may be lawful, moral,
and even praiseworthy. Nevertheless, an
‘ultra vires act ostensibly
includes acts declared illegal by general or spe
cial laws. |
_An illegal corporate act, on the other hand,
isan act contr
to law, morals, good custom, public
order, or public policy (Art.
1306, Civil Code.) and, therefore, per se
illicit. (see Pirovano vs. De
la Rama, 96 Phil. 335 [1954].) 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
esto ppel while the latter is void and cannot be
validated. (Ibid.)
SS
‘Literally, beyond the scope of the purpose (i.e, object

of the corporation) or the
Powers (i.e., the means by which the corporation carrie
s out the object) of the corporation.
"The only ground and policy upon
ave real basis is the interest of the sto which the defense of ultra ires, proper defined, can
of the corporation to the sco ckholders, if any, to confine the bus
pe of the purposes specif iness activities
ie‘in
d its articles of incorporatio
(Ballantine, p. 242.) Creditors cannot attack a n.
contract or transfer merely because it is ultra
vires. The only ground for objection by credi
tors is its effect as a fraudulent diversion of
©orporate assets from the payment of their claim s. (Ibid., p. 258.)

If a foreign-owned corporation authorized under. its articles

of incorporation to sell its products at wholesale only, the sale on
retail would be considered an ultra vires act, or an act beyond the
corporate powers conferred t it by the State. (SEC-OGC Opinion No,
10-18, June 4, 2018.)
(2) From act done without complying with certain conditions and
formalities. — Another class of corporate contracts sometimes said to
be ultra vires, although the phrase as applied to them is inaccurate,
is where the power exists to do what was done, provided the
corporation does it in a certain prescribed way. Thus, informalities
with the consent of stockholders (or members) to'the contract are
often incorrectly called ultra vires, using the term in its strict sense.
The fact that the required consent of stockholders is not obtained
does not make a contract ultra vires. (7 Fletcher, p. 567; also 14-ACJ,,
pp. 312-313)
(3) From act beyond powers of particular officers. — The expression
ultra vires has also been applied to acts by the directors (or trustees)
or other officers of a corporation in excess of the powers conferred
upon them by the stockholders (or members).
Such an act, however, is not necessarily ultra vires act of the
corporation. An act may be within the powers of,a corporation
and not within the powers of the directors, for the powers of
the latter are derived, not from the legislature, like the powers
of the corporation, but from the stockholders in their corporate
capacity.‘ (11 Fletcher, pp. 566-567.) , |
’ 3The general rule is that a corporation must act in the manner and with the formalities,
if any, prescribed by its charter or by the general law. However, a corporate transaction
or contract which is within the powers of the corporation, which is neither wrong in itself
nor against public policy but which is defective from a failure to observe in its execution
a requirement of the law enacted for the benefit or protection of a certain class, is voidable
only and is valid until voided; the parties for whose benefit the requirement was enacted
may ratify it or be estopped to assert its invalidity, and third persons acting in good faith
are not usually affected by an irregularity on the part of the corporation in the exercise of
its granted powers. (19 CJ.S, 432-444.) ; A
‘A result of the above distinction is that the stockholders of a corporation, while they
cannot, by ratification, render valid an act which is beyond the powers of the corporation,
may ratify an act which is within its powers, but beyond the powers of the directors. The
courts often refer to contracts as ultra vires where all that is meant is that a.particular
officer had no power to make the contract. In this class of cases, the question is merely
one of the agencies and, therefore, by old and well-settled rules of law relating to agency:
(Ibid.)

443
‘@) From act involving inexistent contract. — A

be illegal but inexistent
contract may not
. and, ther efor e, void, when it lacks one or
some of the essential elements (i.e., consent, object, and cause) of a
contract, such as those which are absolutely simulated or fictitious;
those whose cause or object is outside the commerce of men; those
which contemplate an impossible service; and those where the
intention of the Parties relative to the principal object of the contract
cannot be ascertained. (Art. 1409, Civil Code.)
Such contracts are not necessarily ultra vires. Neit
her party has
a right of action against the other who can always raise the
defense
of the inexistence of the contract to defeat the claim of the former.
Ratification of ultra vires acts.

@) Where the contract or act is illegal per se, it'is wholly void
or inexistent. It cannot be ratified in Article 1409 of the Civil Code
cannot also be ratified. The doctrine of estoppel cannot operate to
give effect to an act which is null and void.
~— (2) Where the contract or act is not illegal per se but merely beyond
the power of a corporation, the same is merely voidable and may be
enforced by performance, ratification, or estoppel, or on equitable
grounds. (Republic vs. Acoje Mining Co., Inc., supra.) |
(a) Acorporation, like an individual, may ratify and render
binding upon it the originally unauthorized acts of its offices
or other agents (Gokongwei, Jr. vs. Securities and. Exchange
‘Commission, 89 SCRA 336 [1979].) and ultra vires acts which are
not illegal especially so if,no creditors, are prejudiced and no
-rights of the State or the public are involved. (7 Fletcher, p. 585.)
(b) Ratification can never be made on the part-of the
corporation by the same persons who wrongfully assume the
power to make the contract, but the ratification must be by
the officer, or governing body ‘having authority to make the
contract. (Vicente vs. Geraldez,' 22 SCRA 210 [1973]; Arguenza
vs. Metropolitan Bank & Trust Co., 271 SCRA 1 [1997].) .
(c) Ratification by all stockholders could be express or
implied, e.g., receipt of benefits under the contract without
objection. }

Effects of ultra vires acts which

are not illegal.
These rules’ are recognized:
sides, cannot
(1) An ultra vires contract, while executory on both
be enforced by either party thereto. (7 Fletcher, p. 607.) It is in
transcend the powers
the public interest that corporations do not
ranted to them by law and their assets be not subjected to risks
created by forbidden acts;
(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
to assure the
completed or consummated transaction (Ibid., p. 652.)
security of transactions that had been closed. Only the State may
challenge the contract on ultra vires grounds. No public interest is
involved here since both. parties have received to their advantage
the benefits of the contract voluntarily entered into; and
(3) When an ultra vires contract has been performed on one side
and the other has received benefits by reason of such performance,
recovery is permitted in most courts on behalf of the former (Ibid.,
p. 620.) on the ground that it would be unjust to sanction retention
of benefits coupled with refusal to perform. Other courts hold the
contract unenforceable but compel the party who has received the
'The effects of illegal contracts of a corporation are governed by the following

provisions of the Civil Code:
“Art, 1411. When the nullity proceeds from the illegality of the’ cause or object of
the contract, and the act constitutes a criminal offense, both parties being in pari delicto,
they shall have no action against each other, and both shall be prosecuted. Moreover, the
provisions of the Penal Code relative to the disposal of effects or instruments of a crime
shall be applicable to the things or the price of the contract. i
This rule shall be applicable when only one of the parties is guilty; but the innocent
one may claim what he has given, and shall not be bound to comply with his promise.”
not
“Art. 1412. If the act in which'the unlawful or forbidden cause consists does
constitute a criminal offense, the following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover
what he has given by virtue of the contract, or demand the performance of the other’s
undertaking;
what he
(2) | When only one of the contracting parties is at fault, he cannot recover
been promised
has given by reason of the contract, or ask for the fulfillment of what has
him. The other, who is not at fault, or ask for the fulfillment of what has been promis?
what he has given without
him. The other, who is not at fault, may demand the return of
any obligation to comply with his promise.”

gec. 44 TITLE IV. POWERS OF CORPORATION 445
penefits of performance to return what he has received or, failing to

do that, to pay its reasonable value. (Ibid., p. 613.)
Contracts ultra vires in part only.

If the contract is separable, it may be sustained and enforced as
to the part not ultra vires, and held invalid as to the part ultra vires.
By way of illustration:
(1) Securities taken by a corporation, though ultra vires as to
some debts secured, may be enforced as to those debts for which the
corporation was authorized to take them.
(2) Where a corporation issues bonds and executes a mortgage
to secure the same, the bonds are valid if within the powers of the
corporation, though the mortgage may be ultra vires. .
(3) The rule also applies where the corporation executes a
mortgage covering property which it has no power to mortgage,
and property which it may mortgage. The mortgage is valid as to’
the latter. (7 Fletcher, p. 587.) | 4
Acts presumed to be within corporate

powers. bt
(1) Where private rights only are involved. — It is the policy of
the law to look with disfavor upon the defense of ultra vires, where
private rights only. are.involved, especially when interposed by a
corporation to avoid an obligation, otherwise legal and equitable.
(Ibid.; p. 570.) Thus, “when a contractis not on its face necessarily -
beyond the scope of the power. of the corporation by which it-was
made, it will, in the absence of proof to the contrary, be presumed
to be valid. It is not seemly for a corporation, any more for an
individual, to make a contract and then break it, to abide by it so long
as it is advantageous, and repudiate it when it becomes onerous.”
(Coleman vs. Hotel de France Co.,.29 Phil. 323 [1915].)
The defense of tiltra vires rests on violation of trust or duty toward
stockholders (or members), and should not be entertained. where its
allowance will do greater wrong to innocent parties dealing with
the corporation.(19 C.J.S. 433.) 7 |
(2) Where act clearly beneficial to the corporation. — The tendency
of more recent decisions is to hold an act within corporate powers

446 THE REVISED CORPORATION COD
E OF THE PHILIPPINES Sec. 44
where it is clearly beneficial to the compan

y as where the act directly
tends to incr ease its business. Thus, a corporation, a
financial
institution, which owns and maintains a com
puter to service its
data processing needs may sell the computer to othe
r entities after
Servicing its needs. Whatever transactions as are fairly inci
dental or
auxiliary to the main business of a corporation may be und
ertaken
by the same. (SEC Opinion, May 3, 1976.)
Section 35(k) is broad enough to cover a wide range of impli
ed
powers as to make difficult the avoidance of corporate contracts
on
the ground of ultra vires. !
Ultra vires acts as the acts of the corporation.
The doctrine so often laid downby the courts—thata corporation
has such powers only as conferred upon it by its charter — if taken
literally, would be equivalent to saying that an act by the officers
of a
corporation on its behalf and in its name, but in excess of its powers,
even though authorized by the stockholders (or members)
in their
corporate capacity, is not the act of the corporation, as distinguished
from its officers and stockholders. ea
The rule that a corporation has no powers except such
as
conferred by its charter cannot and does not mean that it canno
t
exceed its powers.
(1) A corporation has no right or authority to do acts not withi
n
the powers conferred upon it by the legislature; but, as in the case
of
an individual, it is possible for it do wrong. It may exceed its powers
and do an ultra'vires act, and the act will be, ‘in'contemplati
on of the
law, not merely the act of the officers’or stockholders; but
the act of
the corporation itself, Thus, a conveyance or transfer of property to or
by a corporation may transfer the title; though the corporation has
no power under its charter to hold or transfer the property.
—
(2) When an ultra vires, contract with a corporation is fully
executed by both parties (Supra.), the court will not interfere at the
instance of either party to deprive the other of the rights acquired
under the contract. :
(3) Actions quasi ex contractual may be maintained under some
circumstances, by or against a corporation, for money or property
loaned, paid or delivered under an ultra vires contract.

Sec. 44 TITLE IV. POWERS OF CORPOR
ATION 447
: (4) et an ultra vires contract with a\ corpor

ation has been:
fu . peer by one party, and the other has received the benefits of
such performance (Supra), the latter is estopped to
vires chasacter
set up the ultra
of the transaction to defeat an action on the contract
itself.
(5) Torts and crimes are always ultra vire
may commit a tort and be liable in dam s, and yet a corporation
ages therefor, and it may
be e guigu lty of a misdemeanor,
and be indirectly convicted and
fined therefo
ee r. This. is sufficient to show beyond
a any doubt that a
aha may exceed its powers. (7 Fletcher, pp. 579-580; see Sec.
Invocation of ultra vires,

The doctrine of ultra vires cannot be invoked when
it would
defeat the ends of justice or work a legal wrong. (Coleman vs. Hotel
de France, 29 Phil:323[1915].) io! FASh
It cannot be allowed to prevail whether the pleas interposed for
or against a corporation when it will cause prejudice to a party who
acted in good faith. Thus, loans given to or by a corporation have to
be repaid notwithstanding that the transaction is ultra vires.
Who may invoke ultra vires. .

~ (1) (Generally. — The’ question as to the effect of ultra vires acts
often depends on who is invoking ultra vires. |
(a)' Thus, the State may have the right to invoke it, although
“neither party to the contract may'urge it, as in the case of an
‘» executed contract. 3
‘(b) A party to the contract may, under some circumstances,
urge ultra vires where a total stranger would not have that right.
(c) Likewise, dissenting stockholders sometimes sue to
enjoin the execution or performance of an ultra vires contract
where neither party to the contract could set up the claim.
(2) State. — When the State creates a corporation, the grant of
the charter is on the implied condition that the corporation shall
act within the powers conferred upon it. Ultra vires acts, whether
otherwise wrong or not, breach this condition.
‘See “Effects of ultra vires contracts which are not illegal” (Supra.)

(a) Such an act does not of itself put an end to the existence
of the corporation, but it is, subject to certain qualifications, a
ground for a direct proceeding by the State to obtain a judgment
of forfeiture.
(b) When a corporation is guilty of exercising powers not
authorized by its charter, the State instead of proceeding against
it to obtain a judgment forfeiting its charter may proceed by quo
warranto, to obtain a judgment merely ousting it from further
exercise of the unauthorized power. (7 Fletcher, pp. 604-605; see
Rules of Court, Rule 66, sec. 1[c].)
(c) The SEC may suspend or revoke the certificate of
registration of a corporation for commission of ultra vires acts,
(see P.D. No. 902-A, Sec. 6[1].)
(3) Stockholders. — The stockholders of a corporation have a
right to expect and to insist that its funds shall not be diverted by
giving them away or by employing them in an ultra vires business or
transactions.
(a). Any stockholders, therefore, has such an interest that
he may apply to a court for an injunction’ to. prevent such a
diversion, even though all other stockholders may consent to the
ultra vires act. In like manner, he may sue to enjoin a corporation
from using its funds in the ultra vires purchase of shares of stock
in another corporation.
(b) A’ stockholder, however, may be precluded from
attacking an: act as ultra vires, by his lache
s. If a stockholder
wants protection against the consequences of
an ultra vires act,
he mustask for it with sufficient promptness to enable the
to do justice to him without doing injustice court
to others.
(c) It need hardly be stated that where the sto
himself Par ckholder has
ticipated in the ultra vires act, or consen
he will be estopped from’ maintaini ted thereto,
ng legal proceedings to
secure the annulment of the consequen
ces thereof.
(d) So, also a stockholder may
be barred from asserting the
invalidity of a transaction wher eby a cor
money beyond the limit of its authorizeporation has borrowed
d indebtedness where
the money has been expended for the benefit
of the stockholders
and the corporation. (7 Fletcher
, pp. 600-603.)

sec. 44 TITLE IV. POWERS OF CORPOR
ATION 449
(4) Strangers, — Except where itis otherwise

it is a general rule th at a plea provided by statute,
of ultra vires cannot be interposed by
a stranger not a par ty to the
such act or contract
contract, at least if he is not injured by
(a) For instance, alth

ou gh the act of a corporation in
acquiring a cause of action
j S ultra vires, the want of power to
engage in such business c anno
t be interposed as a defense when
the corporation seeks to enforce
such cause of action. Thus, the
maker of a note cannot d efend upo
n the ground that the contract
whereby the note was tr ansferred
was ultra vires, on the ground
that the payee had'no p ower to indo
rse it for transfer.
(b) So also, if a person is in possession of real property
an action is brought against him by a corporation to
and
~ itor to quiet title or the like, defendant reco ver
cannot set up that the
~ title of plaintiff was acquired ultra vires, whe
re defendant was a
“” Stranger to the original transaction alleged to
be ultra vires. (Ibid.,
pp. 594-596.) - Cee. ee ,
(5) -Compensation in business. — A stranger
whose rights have
not been infringed by an ultra vires:act of-a competit
or corporation
cannot urge ultra vires to prevent the latter. from acti
ng beyond
its powers, unless the right to do so is given by a statute.
In other
words, a competitor cannot attack acts of a corporation as
ultra vires,
merely on the ground of injurious competition, where such acts are
neither public nuisances or trespasses,
~ The only injury of whichhe can be heard in a judicial tribunal
to complain is the invasion of some legal or equitable right: (Ibid.
,
Bap 98ai GA ys ae as 1s :
(6) Creditors. — Judgment creditors may impeach an ultra vires
contract as in fraud of creditors, the same as any other contract.
But creditors of the corporation, whose rights are not infr
inged
by the ultra vires contract, cannot. attack it. They cannot attack
4 corporate transaction as ultra vires unless its intent or effect
is fraudulently to divert the corporate assets from their.
debts.
Ordinarily, a subsequent creditor cannot object: (Ibid., p. 599.) .

Estoppel to deny corporate power

to contract.
(1) General rule. — As provided in Section 21, an association
which assumes to exercise corporate powers and enters into a
contract as a corporation and persons who contract with it as a
corporation are estopped, in an action on the contract, to deny its
corporate existence.
(2) Where power to enter into contract in issue. — The general
principle does not apply where the question is whether a contract
is within the powers conferred upon a corporation by its charter to
make, and hence, since estoppels must be mutual, the other party to
the contract is not estopped to set up that the contract was beyond
the powers of the corporation.. _ :
(3) Where contract wholly executory. — In other words, the mere
act of entering into the contract does not estop either party to show
that the contract is ultra vires. If it did, ultra vires could not be set
up as against a contract wholly executory, whereas.the rule that a
wholly executory contract may be attacked as ultra vires is one of the
few rules as to which there is no contention. All this does not mean
that either party to the contract may not, by his acts, be estopped
from setting up ultra vires. bag.
(4) Where contract apparently ultra vires. — It is held in some
states that a corporation may be estopped to deny its power to enter
into a particular contract, where the contract is apparently within
its-powers, and is rendered ultra vires because of extraneous facts
peculiarly within the knowledge of the corporation, and not known
to the other party. ? . arag
(5) Where contract has been performed on one side. — And in some
States, although notin all, the contention that a contract is ultra
vires, either against the corporation or against the other party, where
the contract has been performed by one party and the other has
received the benefit of such performance, is said 'to be precluded on
the theory of an estoppel. (7 Fletcher, pp. 580-581.)
Corporation liability for torts, crimes,

and other violations. )
(1) General rule. — A corporation, being a juridical entity, can
only act as such through its officers and agents. This being the case,

TITLE Iv, POWERS OF CORPOR
ATION 451
(a) The authority ma

members acting as 'y may come from the stockholders or
:
a bod , Or
od generally
trustees) as the governi ing y, bOr (P , from the directors (or
SCRA 237 [1978].) 8 body. (PNB vs. Court of Appeals, 83
(b) The act of th O

tt he scope © ofof hihis autheoritffyiceorr orcouragent must have been within
se
of employment; but sub- »
‘Ject to this limitation, it may have been without orders, or even
indisregard of the instructions to the officer or agent
have been in excess of instructions, or may have or may
been malicious
or willful. Nor need the corporation have authorized doin
particular act or ratified it after it was done.
g the
(19 C.J.S. 946-949.)
_(c). Acorporation cannot, to escape liability for damages
for
the wrongful acts of its agents or employees, assert that such
acts were beyond the scope of corporate power or that they
occurred with a transaction beyond the scope of such power. It
_is to be kept in mind that all torts are necessarily ultra vires, since
if an act is legally authorized,
it is lawful and nota tort. (Ibid.,
948.)
(d) In labor cases, the Supreme Court has held corporate
directors and officers solidarily liable with the corporation for
the termination of employment of employees done with malice
or in bad faith (Sunio vs. National Labor Relations Commission,
127 SCRA 390 [1984]; General Bank & Trust Co. vs. Court of
Appeals, 135 SCRA 569 [1985]; MAM Realty Development
Corp. vs. National Labor Relations Commission, 244 SCRA
797 [1995]; Uichico vs. National Labor Relations Commission,
273 SCRA 35 [1997]; Manarpus vs. Texan Philippines, Inc., 748
“ SCRA 511 [2015].) on the theory that the legal fiction of separate
corporate personality may be disregarded whenever it is used
as a means of committing an illegal act. (see Acesite Corporation
vs. National Labor Relations Commission, 449 SCRA 360 [2004].)
Any decision against the employer corporation can be
enforced against the officers in their personal capacities for

acting on behalf of the corporation should the corporation be

unable to satisfy the judgment in favor of an employee (as
where it is no longer existing). (A.C. Ransom Labor Union-
CCLU vs. National Labor Relations Commission, 142 SCRA 269
[1986]; Camelcraft Corporation vs. National Labor Relations,
186 SCRA 393 [1990]; Valderrama vs. National Labor Relations
Commission, 256 SCRA 466 [1996].)
(e), Under the Labor Code (Arts. 288, 289 thereof.), when a
corporation violates a provision declared to be penal in nature,
the penalty shall be imposed upon the guilty. officer or officers
of the corporation, disregarding the fiction of corporate entity.
(Reahs Corporation vs. National Labor Relations Commission,
271 SCRA 247 [1997].)
(f) Where an employment relationship exists, a corporation
may be held vicariously liable under Article 2176 (quasi-delict)
in relation to Article 2180 (principle of respondent superior) of the
Civil Code for damages caused by the negligence or fault of
its employees acting within the scope of their assigned tasks.
Absent, evidence of an employment relationship, a corporation
may be held liable under the principle of ostensible agency (see
Arts. 1431 and 1869, Civil Code.) for the negligence and pro hac
vice under the principle of corporate negligence for its failure or
negligence
to follow established standards of conduct to which
it should conform as a corporation. (Professional Services, Inc.
vs. Court of Appeals, 611 SCRA 282 [2010].)
(g) Even though a judgment or order is addressed to the
corporation, the officers as well as the corporation itself may
be punished for contempt for disobedience to its terms, at least
if they knowingly disobey the court’s mandate, since a lawful
judicial commend to a corporation is, in effect, a command to
the officers. (Heirs of T. de Leon’ Vda. de Roxas vs. Court of
Appeals, 422 SCRA 101 [2004].) | |
(h) If the drawer.
of a check is an officer of a corporation,
the notice of dishonor to the said corporation is not notice to the
employee or officer who drew or issued the check for and in its
behalf. Responsibility under Batas Pambansa Blg. 22 (Bouncing
Checks Law) is personal to the accused. The corporation has no
obligation to forward the notice addressed to it to the employee
concerned especially because ‘the corporation itself incurs

TITLE IV. POWERS OF
CORPORATION
453
"vs. People, 459 SC notice of dij

RA 169 Sen
oe eee
(2) Imputation of
criminal intent, —
agent's intention to do wr Although it has no mind, its
ong may be imputed to the corporation.
Accordingl y, corporations may be
. held liable for libel and malicious
prosecution. But since a Corporation as a person is mere legal
fiction,
it cannot be proceeded against criminally because it cannot commit
Sn which Personal violence or malicious intent is required.
Criminal action is limited to the corporate agents guilty of an
act
amounting to a crime and never against the corporation itself. (West
Coast Life Ins. Co. vs. V. Hurd, 27 Phil. 401 [1914]; Times,
Inc. vs.
Reyes, 39 SCRA 303 [1971].) .
(a) The existence of the corporate entity does not shield
from prosecution the corporate agent who knowingly and
intentionally causes the corporation to commit a crime (The
Executive Secretary vs. Court of Appeals, 429 SCRA 81 [2004].)
punishable under the Revised Penal Code. He cannot hide
behind the cloak’ of the separate corporate personality of the
corporation to escape criminal liability. (Republic Glass Corp.
‘vs. Petron Corporation; 698 SCRA 666.[2013]:) orl
- (b) It is the responsible officer or officers acting for the
corporation who must of necessity be the ones to assume the
_ -criminal liability; otherwise, this liability as created by law would
be illusory, and the deterrent effect of the law, negated. The
"corporate officer or employee must have actually participated
in the commission of the criminal offense or violation of law
attributed to the corporation, to be himself individually guilty
of the crime. (see Sia vs. People, 121 SCRA ‘655 [1983].)
(c) The principle applies to those corporate agents who, by__
virtue of their managerial positions or other similar relation to,
the corporation, could be deemed responsible for its commission,
if by virtue of their relationship to the corporation, they had the
power to prevent the act. Whether the officers or employees
are benefited by their delictual acts is not a touchstone of their
' criminal liability. Benefit is not operative act. If through the
or omission of ‘corporate officers or employees,
the default,
act, corporation ‘ commits ‘a ‘crime, they may themselves
be individually ‘held accountable for the crime: (Ching vs.

Secretary of Justice, 481 SCRA 609 [2006]; Espiritu, H. vs. Petron

Corporation, 605 SCRA 245 [2004].)
(d) Mere membership in the board or being president per se,
however does not mean knowledge, approval and participation
in the act alleged as criminal. There must be a showing of
active participation, not simply a constructive one. (ABS-CBN
Corporation vs. Gozon, 753 SCRA 1 [2015].)
(e) The Supreme Court has ruled that corporate officer and /
or agents may be held individually liable for a crime committed
through their act or default under the Intellectual Property
Code. In its current form, the Intellectual Property Code is
malum prohibitum and prescribes a strict liability for copyright
infringement. Good faith, lack of knowledge of the copyright,
or lack of intent to infringe is not a defense by the corporation
against copyright infringement. (Ibid.) :
(3). Penalties imposable. — While a corporation cannot be arrested,
imprisoned, or executed, it may be summoned, fined, or ousted by
quo warranto from the unlawful exercise of its powers. (10 Fletcher,
p. 651; see Rules of Court, Rule 66, sec. 1[c].)
The fine, however, is a mere:consequence of the conviction of
the corporate agent found guilty of violating the law. For violations
of any of the provisions of the Revised Corporation Code or,
on grounds provided by existing laws, rules and regulations, a
corporation is subject to fine and/or dissolution without prejudice
to the institution of appropriate action against the guilty director,
trustee, or officer of the corporation. (see Secs. 137, 161; see also PD.
No. 902-A, Sec. 6[i] thereof; see also R.A. No. 8791 [The General
Banking Law of 2000], Secs. 66, 70,91.) .
Again, the existence of the corporate entity does not shield from
prosecution the agent who knowingly and intentionally commits a
crime at the instance of a corporation, (Ong vs. Court of Appeals,
401 SCRA 648 [2003].)
(4) Liability for moral and exemplary damages. — As a rule, moral
damages are not awarded to a|corporation. unless it enjoyed a
good reputation that the offender debased and; besmirched by
his actuation. Moral damages are also, not recoverable in culpa
contractual unless bad faith has been proved. In breach of contract,
the court may award exemplary damages if the defendant acted in

sec. 44 TITLE IV. POWERS OF CORPORATION ci
a wanton, fraudulent, reckless, oppressive, or malevolent manner.

(Art. 2232, Civil Code.) Fees and expenses of litigation (Art. 2208,
ibid.) are proper only when exemplary damages are award. (San
Fernando Regala Trading, Inc. vs. Cargill Philippines, Inc., 707
SCRA 187 [2013].)
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Title IV

(d) Toamend its articles of incorporation in accordance

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scientific, civic, a or similar Purposes: Provided, That

Meaning of powers of a corporation.

Distinguished from its franchise

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320 THE REVISED CORPORATION CODE OF THe aS

: hip do not owe the;

Classification of corporate powers.

sSesygrey princerns fOr 4 ; in :

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C annot exercise the powers, rights,

Determining whether an act or co

(3) Essentialor necessary powers. Under Section 35, the corporation

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and immediate furtherance of its business, fairly incidental to the

Express powers explained.

Implied powers explained.

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(2) Powers merely

Implied powers classified.

Sometimes it is difficult to determine whether

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(1) In construing charters to determine the powers of

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(3) A corporation engaged in the manufacture of cement could

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under the law has the im lied or inci tablish

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: (2) By board of directors (or trustees).— Similarly, a transaction,

Mode of exercising powers. 3 :

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Power to sue and be sued.

| “(1) Dissolved corporation. — Corporations de facto (Sec.

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(5) Real party-in-interest: — As a rule, the right and power of

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(c) Since the sion;

Verificatio NS and. cert

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a signatory thereto, the corporation is not real party-in-interest

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corporation from possible fraud. being committed ‘adverse to

Power to adopt and use a corporate seal.

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directory rather. than mandat ory. Ac : 3

(3) At common law, the rule prevailed for some

Power to acquire and convey property.

“ "4 the same thing as a signature nor is it equivalent toa

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While a corporation may appoint agents to negotiate for the

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with the requirements prescribed.

Power to acquire shares or securities. ~

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