Powers

Title IV
POWERS OF CORPORATION
Sec. 36. Corporate powers and capacity. — Every cor-

poration incorporated under this Code has the power and
capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period
of time stated in the articles of incorporation and the cer-
tificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance
with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or
public policy, and to amend or repeal the same in accord-
ance with this Code;
1
6. In case 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 non-stock corporation;
7. To purchase, receive, take or grant, hold, convey,
sell, lease, pledge, mortgage and otherwise deal with such
real and personal property, including securities and bonds
of other corporations, as the transaction of the lawful busi-
ness of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and
the Constitution;
8. To enter into with other corporations merger or
consolidation as provided In this Code;
9. To make reasonable donations, including those
for the public welfare or for hospital, charitable, cultural,
'See Section 60.
320
Sec. 36 TITLE IV. POWERS OF CORPORATION 321
scientific, civic, or similar purposes: Provided, That no

corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of
partisan political activity;
10. To establish pension, retirement, and other plans
for the benefit of its directors, trustees, officers and em-
ployees; and
11. To exercise such other powers as may be essential
or necessary to carry out its purpose or purposes as stated
in its articles of incorporation. (13a)
M e a n i n g of p o w e r s of a c o r p o r a t i o n .
The term powers of a corporation has reference to the corpora-
tion's capacity or right under its charter and laws to do certain
things. (6 Fletcher, p. 230.)
Distinguished f r o m its franchise

a n d objects.
(1) The powers of a corporation must be distinguished from
its primary franchise, which is its right to exist as an entity for
the purpose of doing the things embraced within its powers and
from its secondary franchise, which is the right granted to an
existing corporation to use public property for a public use, but
with private profit. (6-A Fletcher, p. 431.)
(2) Neither must its powers be confused with its objects or
business. A corporation exercises its powers for the purpose
of attaining its objects. Thus, for example, the power to issue
promissory notes, being obviously consistent with and reasonably
conducive to the furtherance of the objects of the corporation, is
a mere power and not an object or business of the corporation. (6
Fletcher, p. 231.)
Relative powers of natural persons/partnerships

and corporations.
(1) Any act not prohibited. — An individual has absolute right
to fully use, enjoy and dispose of his properties, to perform all
acts and to make all contracts without any control except when
they are forbidden by the law. The same is true of an ordinary
partnership. Since a natural person and an ordinary partnership
THE CORPORATION CODE OF THE PHILIPPINES Sec. 36
322
do not owe their existence to the State, they can perform any act
not prohibited by law.
(2) Only powers granted. — On the other hand, the civil rights
of a corporation are widely different. Under the doctrine of limited
capacity adopted by our corporation law (Sec. 2.), a corporation
has only such powers as are expressly granted and those that
are necessarily implied from those expressly granted or those
which are incidental to its existence. It is, therefore, not correct to
say that a corporation has the power to do all acts not expressly
or impliedly prohibited. In other words, the enumeration of
corporate powers implies the exclusion of all other powers
except when they are incidental or implied in conformity with the
generally accepted principle of statutory construction "expressio
unius est exclusio 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. A corporation, as an
artificial person, created by or under authority of law, is without
natural rights, (see also Sees. 36[1], 45.)
Classification of corporate p o w e r s .
The three classes of powers of a corporation are:
(1) Those expressly granted or authorized by law (Sec. 2.),
i.e., those conferred by the Corporation Code and its articles of
incorporation (Sec. 45.);
(2) Those that are necessary to the exercise of the express or
incidental powers (Sees. 236[11], 45.); and
(3) Those incidental to its existence. (Sees. 2, 45.)
The powers of a corporation, however, frequently cut across
lines of the above classification.
A corporation exercises its powers through its board of direc-
tors (or trustees) and /or its duly authorized officers and agents.
Physical acts, like the signing of documents, can be performed
only by natural persons duly authorized for the purpose by cor-
porate by-laws or by a specific act of the board of directors. The
certificate of non-forum shopping may be signed for and on behalf
of a corporation by a lawyer who must be "specifically autho-
Sec. 36 TITLE TV. POWERS OF CORPORATION 323
rized" by the board of directors in order to validly sign the cer-

tification. (BA Savings Bank vs. Sia, 336 SCRA 484 [2000]; Ship-
side Incorporated vs. Court of Appeals, 352 SCRA 334 [2001];
BPI Leasing Corp. vs. Court of Appeals, 416 SCRA 4 [2003]; San
Pablo Manufacturing Corp. vs. Comm. of Internal Revenue, 492
SCRA 192 [2006]; Athena Computers, Inc. vs. Reyes, 532 SCRA
343 [2007].) The requirement for signing the certificate applies
even to corporations. The mandatory directions of the Rules of
Court make no distinction between natural and juridical persons.
(Zulueta vs. Asia Brewery, Inc., 354 SCRA 100 [2001].) Note that
Section 36 speaks of "every corporation incorporated under this
Code." Acts or contracts of a corporation outside the scope of its
express, implied, and incidental powers are ultra vires, (see Sec.
45.) An ordinary association cannot exercise the powers, rights,
and privileges granted by the Corporation Code to organizations
registered with the Securities and Exchange Commission.
D e t e r m i n i n g w h e t h e r an act or contract
within s c o p e of corporate p o w e r s .
(1) Sources of powers. — In determining whether a corpora-

tion has power to do an act, it is necessary to:
(a) first, refer to its special charter or its articles of incor-
poration to see whether it is within the express, implied, or
incidental powers conferred;
(b) then, to examine the statutes relating to corporations
to see if the act is prohibited (see Sec. 16.); 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 either expressly or impliedly
conferred thereby, 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 Opinions, 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.
324
Express powers explained.

Express powers are the powers expressly conferred upon the
corporation by law. These powers can be ascertained from the
special law creating the corporation, or in case the corporation
is formed under the general incorporation law, from such law,
the general laws of the land applicable to corporations, and its
articles of incorporation.
Section 36 contains an enumeration of powers expressly given
to corporations created under the general incorporation law. The
express powers may be exercised by the corporation whether or
not any such powers are stated in the articles of incorporation
or by-laws, for they are deemed vested in any corporation
organized under the Code. Unless otherwise provided by the
Code, the general powers conferred by Section 36 are to be
exercised by the board of directors, (see Sec. 23.) Other express
powers of the corporation are specifically provided in Sections
37 to 44, which also lay down the conditions under which they
are to be exercised.
The express powers mentioned in Nos. (2), (4), (5), (6), and (8)
of Section 36 are discussed under Sections 11 and 37, 16, 46-48,
62, and 76-81, respectively.
Implied powers explained.

Implied powers are those powers which are reasonably neces-
sary to execute the express powers and to accomplish or carry
out the purposes for which the corporation was formed. These
implied powers are expressly recognized by Section 36(11).
Powers merely convenient or useful (e.g., giving of interest-
free loans) are not implied if they are not essential, having in
view the purposes or objects of the corporation. The purpose or
purposes for which the corporation was created, as stated in its
articles of incorporation, by defining the scope of corporate busi-
ness or enterprise, in effect, delimit its implied powers.
Implied powers classified.

Sometimes it is difficult to determine whether a certain acti-
vity is an implied power or not. However, the following rough
classification embraces most of the implied powers:
(1) Acts in the usual course of business. — This includes such

acts as borrowing money; making ordinary contracts; executing
promissory notes, checks or bills of exchange; taking notes or
other securities; acquiring personal property for use in connec-
tion with the business; acquiring lands and buildings to be used
as places of business or in connection therewith; and selling, leas-
ing, mortgaging or other transfers of property of the corporation
in connection with the mnning of the business. It is evident that
all of such acts, under ordinary circumstances, are necessary in
order to run a business;
(2) Acts to protect debts owing to a corporation. — If a corpora-
tion is a creditor, it may do such acts as may be necessary to pro-
tect its right as such creditor. Thus, a corporation may purchase
property, act as a guarantor or sometimes even run a business
temporarily to collect a debt, where otherwise it would have no
power to do so;
(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. 42.) This is especially true with respect to those particular
kinds of corporate activities which are governed by special laws,
(see comments under Sec. 14[2].) Thus, a corporation not orga-
nized 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. So, it is generally held
that a corporation may temporarily conduct an outside business
2
to collect a debt out of its profits;
(4) Acts in part or wholly to protect or aid employees. — While
the cases are divided, the better view favors such acts as build-
ing homes, places of amusement, hospitals, etc. for employees, as
within the corporate powers, (see Sec. 36[10].)
2
Under Section 36(11), a corporation, when necessary in the pursuit of its business,
may borrow money. In corporations other than 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.)
326 THE CORPORATION CODE OF THE PHILIPPINES Sec. 36
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 resolution covers a subject
which concerns the benefit, convenience, and welfare of the
corporation's employees and their families (Republic vs. Acoje
Mining Co., Inc., 7 SCRA 361 [1963].); and
(5) Acts to increase business. — Thus, a corporation may con-
duct contests or sponsor radio or television programs, or pro-
mote fairs and other gatherings to advertise and increase its busi-
ness, (see 6 Fletcher, pp. 276-277.)
No fixed rules, however, can be laid down which could be
applied mechanically in determining cases of implied powers.
The question must necessarily depend upon the facts and cir-
cumstances of each case.
For other illustrations of implied powers, see Section 2.
Express powers distinguished

from implied p o w e r s .
(1) The express powers have to do largely with the main
business, objects and purposes of the corporation; the implied
powers, largely with the means and methods of attaining those
objects and purposes.
(2) The former are determined once and for all by the
language of the corporate charter and the applicable law; the
latter may change according to time, place, and surrounding
circumstances.
(3) The test of the former is whether they are found in the
words of the charter or the law; the test of the latter is whether
they are fairly incidental to the former and reasonably necessary
to carry them out (6 Fletcher, p. 234.) in furtherance of the corpo-

ration's business.
Incidental or inherent p o w e r s e x p l a i n e d .
Incidental or inherent powers are powers which a corporation
can exercise by the mere fact of its being a corporation or
powers which are necessary to corporate existence and are,
therefore, impliedly granted. (Sec. 36[11].) As powers inherent
in the corporation as a legal entity, they exist independently of
the express powers, (see Sec. 45.) These incidental powers are
expressly recognized by Sections 2 and 45.
Some of the powers enumerated in Section 36 are incidental
powers which can be exercised by a corporation even in the
absence of an express grant.
Examples of incidental powers are: the power of succession;
to sue and be sued; to have a corporate name; to purchase and
hold real and personal property; to adopt and use a corporate
seal; to contract; to make by-laws; etc. Every corporation has the
implied or incidental power to establish branch offices here or
abroad as the need or exigency of the business of the corporation
may require. (SEC Opinion, May 17, 1990.) 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.)
Construction of powers granted.

(1) In construing charters to determine the powers of corpo-
rations, it is well-settled, as in other cases of legislative grants,
that they are to be construed strictly; any ambiguity in the terms of
the corporate charter must operate against the corporation and
in favor of the public.
(2) In the determination of what powers have been conferred,
the whole instrument is to be taken together, including provisos as
expressing the final intention and purposes of the parties.
(3) On the other hand, since grants of corporate franchises
are intended not only for the purposes of private gain but also
328
to subserve public interest, they should be so construed as not

to defeat the purpose of their creation. The intention of the legisla-
ture should always control, it being the general rule that a thing
which is within the intention of the legislature is as much within
the statute as if it were within the letter.
(4) Charters are also to be construed in view of the circumstanc-
es, usages, and practices existing at the time they were granted and it
is not the province of the court to enlarge the powers of a corpo-
ration 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 he adopted which works the least harm to the
State.
(6) The provisions of 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 spe-
cific provision has been made. (19 Am. Jur. 2d 433-434.)
Ratification of corporate acts.

(1) By stockholders (or members). — They may ratify and ren-
der valid acts done or authorized by the board of directors (or
trustees) but which were beyond the powers of the directors, or
acts done or authorized by the directors at an illegal meeting, or
unauthorized acts of others than the directors, provided the acts
done are such as may 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.)
Donations for political purposes are beyond the power of a
corporation and cannot be ratified, as they are expressly prohi-
bited by the law. (Sec. 36[9]; see Sec. 92[c], National Internal
Revenue Code [R.A. No. 1158, as amended].)
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.)
Thus, assuming that 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 pursu-
ant to Section 42 of the Code, this legal infirmity is cured by the
subsequent ratification of the required vote of the board of direc-
tors and stockholders. (SEC Opinion, Dec. 5,1963.)
M o d e o f exercising p o w e r s .
(1) No particular mode prescribed by charter. — If the charter
of a corporation prescribes no particular mode for the exercise
of 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 to be confined to any one mode of opera-
tion."
(2) Particular mode prescribed by charter. — It 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 will be noticed in treating
of the effect of ultra vires transactions, the fact that a corporation
exercises a power in a mode different from that prescribed by
its charter will not necessarily prevent it from acquiring rights
or incurring liabilities by reason thereof, (see 6 Fletcher, pp. 284-
286.)
(3) Corporation organized under a special law. — Where a cor-

poration is organized under a special law, the rules governing
corporations organized under the general law have no applica-
tion where the special statutes provide methods for the regula-
tion and control of said corporation. (19 Am. Jur. 2d 439.)
Power to sue and be s u e d .

This power (Sec. 36[1].) is an incident to corporate existence.
As a rule, suits are to be brought by or against the corporation in
its own name.
(1) Dissolved corporation. — Corporations de facto (Sec. 20.)
may sue or be sued but a corporation which has been dissolved
after the expiration of the three (3)-year winding-up period (Sec.
122.) ceases to exist de jure or de facto.
(2) Unregistered corporation. — A corporation not duly regis-
tered in accordance with law has no legal capacity to sue as such.
(3) Foreign corporation. — Neither can a foreign corporation
which transacts business in the Philippines without the neces-
sary license from the Securities and Exchange Commission sue
in the Philippine courts. (Sec. 133.)
(4) Right to claim moral damages. — Obviously, an artificial
person like a corporation cannot experience physical suffer-
ing, 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 rep-
utation 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 claim-
ant to present proof to justisfy the award by showing the exis-
tence 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 general rule, the right and
power of a corporation to sue in any court must be brought by
the board of directors or trustees that exercises its corporate
powers (Sec. 23.) on behalf of the corporation or by any of its duly

3
authorized officer or agent. (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];
Munoz vs. People, 548 SCRA 473 [2008].)
(a) Under Section 36(1), read in relation to Section 23,
it is clear that 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 corporations
behalf. (Tana Wing Tak vs. Makasiar, 350 SCRA 475 [2001].)
(b) Under Section 3, Rule 46 of the Rules of Court, a
petitioner is required to submit together with the petition,
a sworn certification of non-forum shopping and failure to
comply with the requirement is sufficient ground for dis-
missal of the petition. The requirement applies even to cor-
porations, 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 subject to dismissal. (Gonzales vs. Climax Mining
Ltd., 452 SCRA 607 [2005]; MC Engineering, Inc. vs. National
Labor Relations Commission, 360 SCRA 183 [2001].)
(c) Since the signing of verifications and certifications
against forum shopping is not integral to the act of filing cases
in behalf of a corporation, the signing may not be deemed as
necessarily included in an authorization merely to file cases.
There must be a specific authorization to sign the verification
and certification in behalf of the corporation. (Metropolitan
Cebu Water District vs. Adala, 562 SCRA 465 [2007].) The
Supreme Court, however, has held that the following officials
3
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].)
332
or employees of the company can sign the verification

and certification without need of a board resolution: 1)
Chairperson of the Board of Directors; 2) President of the
Corporation; 3) General Manager or Acting General Manager;
4) Personnel Officer; and 5) an Employment Specialist in a
labor case. The above cases do not provide a complete listing,
the determination of the sufficiency of the authority being on
a case to case basis. The rationale for justifying the authority
of the above corporate officers or representatives to sign the
verification or certificate against forum shopping is that they
are "in a position to verify the truthfulness and correctness of
the allegations in the petition." (Cagayan Valley Drug Corp.
vs. Comm. of Internal Revenue, 545 SCRA 10 [2008].)
(d) A government-owned or -controlled corporation, can
act only through its duly authorized representatives. In a
case in view of the absence of a board resolution authorizing
petitioner's Officer-in-Charge to represent it in the petition
for review, the Supreme Court ruled the verification of non-
forum shopping executed by said officer failed to satisfy the
requirement of the Rules of Court. (Public Estates Authority
vs. Uy, 372 SCRA 180 [2001].) Where the corporate officer's
power as an agent of the corporation did not derive from
such a resolution, it would nonetheless be necessary to show
a clear source of authority from the charter, the by-laws, or
the implied acts of the governing body. (Premium Marble
Resources vs. Court of Appeals, supra; Social Security System
vs. Commission on Audit, 384 SCRA 548 [2002].)
(e) Applying the rule that every action must be brought
or defended in the name of the real party-in-interest (Rules
of Court, Rule 3, Sec. 2.), where a voting trust agreement was
executed by certain stockholders of a corporation which was
not a signatory thereto, the corporation is not the real party-
in-interest in the suit to enforce the agreement. The action
should be filed by the stockholders. (National Investment &
Development Corporation vs. Aquino, 163 SCRA 153 [1988].)
(f) In a derivative suit, however, the minority stockhold-
er or stockholders may bring an action against erring corpo-
rate officers in the name of the corporation with the corpora-
tion as the real party in interest, (see Comments under Sec.

64.)
(g) While it is true that a criminal case can only be filed
against the officers of a corporation and not against the cor-
poration 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. (Cometa
vs. Court of Appeals, 301 SCRA 459 [1999].)
(h) 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 by-
laws or by a specific act of the board of directors. (Shipside
Incorporated vs. Court of Appeals, supra.; United Paragon
Mining Corp. vs. Court of Appeals, 497 SCRA 638 [2006].)
A resolution of the board of directors may authorize a par-
ticular officer to represent the corporation in all suits brought
for or against it. (Grand Boulevard Hotel vs. Genuine Labor
Organization, 406 SCRA 688 [2003].)
The Supreme Court has ruled that the subsequent sub-
mission of proof of authority to act on behalf a corporation
justifies the relaxation of the Rules for the purpose of allowing
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].)
(i) 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.)
(6) Right of shareholders to intervene. — Shareholders are, in
no legal sense, the owners of corporate property which is owned
by the corporation as a distinct legal person, their interest being
inchoate or beneficial in nature, not direct and immediate in
character (see Rules of Court, Rule 12, Sec. 2.); hence, they have
no right to intervene in an action for or against a corporation.
(Saw vs. Court of Appeals, 195 SCRA 740 [1991].)
In a case, however, a stockholder who was one of the largest
individual stockholders of the corporation and was, until it was
334
placed under receivership, exercising control of the company, and

was the one who asked for the appointment of the receiver and
pledged his own property to the extent of P4,000,000 (in 1927)
to assist in the rehabilitation of the corporation was allowed to
intervene in an action by a creditor to foreclose 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 than [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
Enterprises Corp. vs. Court of Appeals, 310 SCRA 26 [1999].)
The job of a bookkeeper is so integrated with the corporation
that his regular recording of the corporations' "business accounts"
and "essential facts about the transaction of a business or enter-
prise" safeguards the corporation from possible fraud being
committed adverse to its own corporate interest. The rules on
service of process make service on an "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. 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 corporation,
since what is of paramount importance is that the purpose of
the rule on summons has been attained, thereby, the interest of
speedy justice has been sub-served. (Pabon vs. National Labor
Relations Commission, 296 SCRA 7 [1998].)
Similarly, summons was held properly served on a corpora-

tion through a claim employee who does not belong to the mana-
gerial staff, but whose role in the corporation is that of a repre-
sentative in relation to cases involving it, i.e., regularly indorsing
summons and complaints against the corporation, following-up,
and attending cases filed by and against it. (Weena Express, Inc.
vs. Rapacon, 534 SCRA 288 [2007].)
P o w e r to a d o p t a n d u s e a corporate s e a l .
A seal is a device (as an emblem, symbol, or word) used to
4
identify or replace the signature of an individual or organization
and to authenticate (as under common law) written matter pur-
portedly emanating from such individual or organization. It may
refer also to the impression of such a device on documents like
certificates of stocks, (see Webster's 3rd New Int. Diet., p. 2046.)
(1) Any seal adopted and used by the corporation (Sec. 36[4].)
may be altered by it at pleasure. Where a corporation adopts a
seal for a special occasion, different from its corporate seal, the
seal adopted is the corporate seal only for that time and occasion.
(9-A Words and Phrases 407.)
(2) A seal is not required for the validity of any corporate act.
Under Section 63, certificates of stock issued by corporations are
required to be sealed with the seal of the corporation. Neverthe-
less, the use of a corporate seal in certificates of stock must be
deemed merely directory rather than mandatory, (see Sec. 22.) A
corporation may exist even without a seal.
(3) At common law, the rule prevailed for sometime 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 than of an individual,
4
But a "corporate seal" is not the same thing as a signature nor is it equivalent to a
signature, but the seal forms a part of the formality of execution, and where an affidavit
is filed on behalf of a corporation denying its signature on a note, under seal, the execu-
tion of the note is not admitted and the plaintiff is put to formal proof of execution. (9-A
Words and Phrases 407.)
and in all such cases where a natural person will be bound with-
out a seal, a corporation will also be bound.
But although it may not be necessary, the reason it is desir-
able 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 a n d c o n v e y property.

(1) As an incident to every corporation. — This power (Sec.
36[7].) which is also expressly conferred under the law has always
been regarded as an incident to every corporation. A corporation
needs properties or assets to carry on its business.
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].)
It has been held by the Supreme Court: "The owning of a
business lot upon which to construct and maintain its offices is
reasonably necessary to a corporation which has developed to
such an extent that its prospects of the future are such as to justi-
fy its directors in making such acquisition. A different rule would
compel important enterprises to conduct their business exclu-
sively in leased offices — a result which would retard industrial
growth and be inimical to the best interests of society. The cor-
poration acquiring such property is entitled to the full beneficial
use thereof. Thus, a corporation whose business 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 others must necessarily be lawful." (Government vs. El
Hogar Filipino, 50 Phil. 399 [1927].)
(2) As necessary to the transaction of its lawful business. — The
power under Section 36(7) is qualified by the phrase "as the
transaction of the lawful business of the corporation may reason-
ably and necessarily require."
(a) Property obtained by a corporation which is foreign

to the purposes for which it was organized is an unlaw-
ful 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 inci-
dental to the furtherance of its business. (SEC Opinion, Aug.
1,1989.) A corporation may not validly purchase, sell, mort-
gage, 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 if the corporation has no interest whatsoever
in the subject transaction. (SEC Opinion, Sept. 25,1991.)
(b) A corporation can legally enter into or form a joint
5
venture corporation to be owned by it and others as stock-
holders. An act is held within corporate powers, if possible,
where it is clearly beneficial to the company, as where the act
leads to increase its business. (SEC Opinion, Nov. 11,1987.)
(c) The transfer or sale of shares owned by a corpora-
tion in another corporation requires approval by the board
of directors of the seller corporation (Sec. 25.) and while a
corporation is expressly empowered by Section 36(7) to dis-
pose corporate assets, such power is subject to the provisions
of Section 40. (SEC Opinion, Aug. 21, 1995.) In the 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 or more corporate
officers to sign loan documents or deeds of assignment for
the corporation. (Great Asian Sales Center Corporation vs.
Court of Appeals, 381 SCRA 557 [2002].)
(d) To enable a corporation to engage in any of its sec-
ondary purposes, Section 42 must be complied with. Similar-
ly, if the act has the effect of incurring, creating, or increasing
bonded indebtedness under Section 38, or involves the sell-
ing or disposition of all or substantially all the property and
5
See note 8 under Section 2.
338
assets of the corporation under Section 40, the corporation

must comply with the requirements prescribed.
(3) As subject to limitations or restrictions. — The right or
power of private corporations to deal in real as well as personal
property is also subject to limitations or restrictions prescribed
by special laws and the Constitution. 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 dis-
posed 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 cer-
tain assets, (see Sees. 51, 52, R.A. No. 8791.)
Power to acquire shares

or securities.
(1) Shares of other corporations. — Section 36(7) authorizes a
private corporation to acquire shares or securities of other corpo-
rations.
(a) Such an act does not need the approval of the stock-
holders if done in pursuance of the purpose or purposes of
the corporation as stated in its articles of incorporation but
when the purpose is done solely for investment, the approv-
al of the stockholders as required by Section 42 is necessary.
(De la Rama vs. Ma-ao Sugar Central Co., Inc., 27 SCRA 247
[1969].) The prevailing view is that a corporation has no pow-
er to purchase or hold stock in another corporation unless it
is one of the activities permitted by its articles of incorpo-

ration. (7 R.C.L. Corp., par. 535; see SEC Opinion, Nov. 20,
1961.)
(b) In any case, the power to acquire shares in other cor-
porations is subject to specific limitations established by the
Code, special laws, and the Constitution. The shares must be
limited to shares of existing corporations because only natu-
ral persons can be incorporators. (Sec. 10.) The exercise of the
power is also subject to the provisions of Section 140. Under
the new Civil Code (Art. 2112.), the pledgee may appropriate
the thing pledged only if, after the second auction, the thing
pledged is not sold.
(c) When a corporation subscribes to the capital stock of
another corporation, it is required, as a rule, to pay its sub-
scription in full. This is based upon the fact that while a cor-
poration has an unlimited capacity to contract obligations,
it has only a limited capacity to pay. (SEC Opinion, July 13,
1961.)
(2) Shares of the acquiring corporation. — The Corporation
Code expressly authorizes a corporation subject to limitations
stated therein to acquire its own stocks, (see Sees. 40, 41, 42, 68,
last par., 77, 81,105.) A corporation may purchase its own stock,
however, only when it has "unrestricted retained earnings" to
cover the shares to be purchased or acquired, (see Sec. 41.)
Corporation as stockholder or member.

The Corporation Code contains no express provision prohi-
biting the organization of a corporation composed of other cor-
porations. Our statutes are silent on this point and our courts
have not as yet passed upon the matter. However, the decided
weight of authority in the United States supports the view that a
corporation may become a member of another corporation. (SEC
Opinion, Oct. 12,1970.)
(1) A private corporation may, either by original subscription
or by purchase, become a stockholder and member of another
corporation with all the rights and liabilities attaching to such
relation, either when it is expressly authorized by statute or its
charter to do so, or when such subscription or purchase is within
340
its implied powers as a necessary or proper means of exercising

the other powers conferred on it. (Ibid., citing 18 C.J.S., Sec. 35.)
(2) Under the older statutes, corporations were composed
entirely of persons, but it is true now in most States that a
corporation need not be composed entirely of natural persons,
but other corporations may be either incorporators (in practical
effect) or stockholders. The most notable examples are the great
universities of Oxford and Cambridge which are themselves
distinct and separate corporations. (Ibid., citing Oleck, Modern
Corporation Law, Sec. 226.)
Thus, it is legally feasible to organize an incorporated national
federation of distinct corporations or associations. (SEC Opinion,
Oct. 23,1970.)
Power to contribute to charity.

(1) Existence of power formerly unsettled. — Section 36(9)
expressly vests in business corporations the authority to
contribute for purely charitable purposes. Before, the existence
6
of such authority was not settled. 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
'The uncertainty resulted from the absence of any provision in the former Corpora-
tion 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 Section 30(h),
thereof which provision is also found in the National Internal Revenue Code of 1986.
(Pres. Decree No. 1158, as amended.) Said Section 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 exclusively public purposes, or to domestic corporations or associations or-
ganized and operated exclusively for religious, charitable, scientific, athletic, cultural, or
educational purposes or for the rehabilitation of veterans, or to societies for the preven-
tion of cruelty to children or animals, no part of the net income of which inures 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 of a corporation, of
the taxpayer's taxable income as computed without the benefit of this paragraph, x x x."
Still, it was not clear whether purely charitable gifts, unconnected with the corpora-
tion's business, could be considered valid as constituting a proper use of corporate funds
if made without stockholders' authorization. Section 30(h) is now Section 34(H) of the
National Internal Revenue Code of 1997. (Pres. Decree No. 1158, as amended by R.A.
No. 8424.)
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
vs. 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].)
(2) Basis of power now expressly granted. — Section 36(9) gives
recognition to the growing tendency to regard charitable gifts as
within the scope of corporate authority. It is based on the modern
view that business corporations are not organized solely as profit-
making enterprises but also as economic and social institutions
with corresponding public responsibility to aid in the betterment
of economic and social conditions in the community in which
such corporations are doing business. As has been better stated:
"Many business have advocated social responsibility
of business corporations. This is important if business cor-
porations and capitalistic society are to survive, x x x. The
inability of business corporations to contribute to purely
charitable purposes may not only impair their public patron-
age, but may create an unfavorable reaction against private
enterprise. In the last analysis, corporate donations, unless
amounting to piracy of the corporate treasury, redound to the
benefit of the corporation, the shareholder, the creditors, and
the public." (E.R. Navarro, op. cit, supra, pp. 191-192.)
"As business is chiefly conducted through the medium of
corporations, it is the corporation, its shareholders, directors,
and officers, who are being made to realize their social
obligations to employees and customers. Consistent with
this development is the changing attitude toward corporate
contributions to charities In times when so much wealth
is concentrated in the hands of incorporated associations, it
is clearly in the public interest to permit such associations to
make contributions to charity." (Ibid., p. 191, citing Stevens
on Corporations [1949], p. 252.)
342
(3) Limitations on power. — Under the Code, the only

limitations imposed on the authority of a corporation to make
donations are: (a) the amount thereof must be reasonable; and
(b) the donations must not be in aid of any political party or
candidate or for purposes of partisan political activity, (see Sec.
95, B.P. Big. 881 [Omnibus Election Code].) It is not required by
law that the donation should inure to the direct financial benefit
of the corporation, nor that the donation be taken from corporate
earnings as long as it is "reasonable" under the circumstances,
taking into account the corporation's financial condition; hence,
it may be paid out of capital, although stockholders and creditors
who may feel aggrieved are not denied the right to question the
exercise of the power, and if found excessive, to seek adequate
relief therefrom.
The limitation that the donations must be "reasonable" pro-
vides a check against scheming directors and officers who may
use the authority as a screen to appropriate corporate funds for
personal ends.
Power to establish p e n s i o n , retirement

and other plans.
(1) Such plans promote corporate purpose or purposes. — The

authority granted to every corporation by Section 36(10) to
establish pension, retirement, and other plans for the benefit
of its officers and employees is a statutory recognition that
disbursement of corporate funds in pursuance of such plans
likewise promotes the purpose or purposes for which the
corporation was formed. Courts have been liberal in finding as a
responsibility of business the comfort, health, and well-being of
its employees. Thus, it has been repeatedly held that the granting
of bonus, gratuity, and incentive compensation to employees as
a reward for work is within the implied powers of a corporation.
Indeed, it is a well-established practice of corporations. The
implied power to build houses, schools, churches, and libraries
for the use of employees has also been sustained, (see Wyatt &
Wyatt, Business Law: Principles and Cases [1963], p. 708; Lopez
Realty, Inc. vs. Fontecha, 247 SCRA 183 [1995].)
(2) Such plans promote better relations with corporate employees.

— For a corporation, like an individual employer, is not limited
to payment of wages to its employees but may extend to them
other benefits, such as paid vacations, sick benefits and medi-
cal treatment, and pensions, which are not necessarily 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 Security Act (R.A. No.
1161, as amended.) are expressly permitted by the Code on the
theory that such activities promote better relations between the
corporation and its employees. (19 Am. Jur. 2d 508-509.)
Under the National Internal Revenue Code (Pres. Decree
No. 1158, as amended.), such contributions to pension trusts are
deductible from gross income (Sec. 34Q] thereof.) and all income
of the funds of such trusts are exempt from income tax, including
the retirement benefits granted thereunder. (Sec. 60[B] thereof.)
Power to act as guarantor.

(1) Power generally withheld. — The general rule is that no
corporation has the power, by any form of contract or endor-
sement, to become a guarantor or surety or otherwise lend its
credit to another person or corporation. A corporation is without
implied power to guarantee for accommodation the contract
of its customers with third persons on the ground that it may
thus stimulate its own business. Such use of its credit is clearly
beyond the power of an ordinary business corporation. (Brinson
vs. Mill Supply Co., Inc., 14 S.E. 2d 505.)
(2) Where corporate business will be advanced. — However,
the general rule will not apply and the court will allow an
accommodation indorsement under an implied authorization
where the guarantee "tends directly to promote the business
authorized by its articles" or "is an appropriate means by which
it may reasonably be expected that the business in which the
corporation is engaged will be advanced." (Woods Lumber Co.
vs. Moore, 191 P. 905.) Thus, a corporation which acquired the
bonds of another corporation in the legitimate transaction of its
business (i.e., payment of debt due it) may sell them, and to make
them more readily marketable, guarantee their payment. (Carlos
vs. Mindoro Sugar Co., 57 Phil. 343 [1932].)
344
(3) Where risk considerable and benefit remote or disproportionate.

Xhe issue is whether the legitimate business activities of the
corporation guarantor were so enhanced as to create an implied
7
power under the charter. But even where there is a possible
benefit to the corporation (e.g., a guarantee to third persons of
the raw material commitments of the corporate guarantor's
supplier), the risk can be considerable and the benefit can be
remote, intangible, and difficult to evaluate. Where they have
been sufficiently remote and incidental or disproportionate to
the risks, courts have held the guarantee unenforceable. (W.L.
Cary, Cases and Materials on Corporations, pp. 59-60 [1969 ed.].)
Sec. 37. Power to extend or shorten corporate term. —

A private corporation may extend or shorten its term as
stated in the articles of incorporation when approved by
a majority vote of the board of directors or trustees and
ratified at a meeting by the stockholders 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 of nonstock
corporations. Written notice of the proposed action and of
the time and place of the meeting shall be addressed to
each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to
the addressee in the post office with postage prepaid, or
served personally: Provided, That in case of extension of
corporate term, any dissenting stockholder may exercise
his appraisal right under the conditions provided in this
Code, (n)
'The SEC has allowed mortgage of corporate assets to secure obligations of another
corporation (a) when the mortgage is in furtherance of the interest of the corporation,
and in the usual and regular course of business, or (b) when it is made to secure the
debt of a subsidiary. (SEC Opinion, April 15, 1987.) Even if the third party mortgage
does not fall under either of the two instances, the mortgage may be allowed, subject
to the strict observance of certain conditions, to wit: (a) there is no express restriction in
the articles of incorporation or by-laws; (b) the purpose of the mortgage is not illegal;
(c) the consent of all corporate creditors and stockholders has been secured; (d) the
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.)
P o w e r to e x t e n d or s h o r t e n corporate
term.
The corporate term of a private corporation may be extended

or shortened by an amendment of the articles of incorporation
approved by the majority vote of the board of directors or trust-
ees and ratified at a meeting of the stockholders representing at
least 2 / 3 of the outstanding capital stock or by at least 2 / 3 of the
members in case of non-stock corporations.
(1) Unlike in Section 16 which governs the amendment in
general of articles of incorporation, the amendment under Section
37 must be taken at a meeting of the stockholders or members
and upon a vote. "Mere written assent" would not be sufficient.
However, the formal requirements in the second paragraph of
Section 16 must be complied with.
(2) The provision on the taking effect of the amendment in
the third paragraph of Section 16 upon its approval by the Secu-
rities and Exchange Commission is not applicable because the
date of approval by the Commission may be before the effectiv-
ity date of the extension or reduction of the corporate term. The
effectivity of the amendment relates back to the date of its filing
with the Commission in case the latter fails to act within six (6)
months from such date for a cause not attributable to the corpo-
ration.
(3) A voluntary dissolution of a corporation may be effected
by amending the articles of incorporation to shorten the corpo-
rate term. (Sec. 120.)
(4) The extension of the corporate term as originally stated in
the articles of incorporation is subject to the limitations or condi-
tions provided in Section 11.
Appraisal right of dissenting stockholders.

Section 37 grants appraisal right to a dissenting stockholder
(right of stockholder in the cases provided by law to demand
payment of the fair value of his shares) "in case of extension of
corporate term." Such right should also be available to a dissent-
ing stockholder if the corporate term is shortened as it is express-
ly recognized in Section 81(1).
346
Note that the appraisal right applies only to a stockholder of

a stock corporation.
Sec. 38. Power to increase or decrease capital stock; incur,

create or increase bonded indebtedness. — No corporation
shall increase or decrease its capital stock or incur,
create or increase any bonded indebtedness unless
approved by a majority vote of the board of directors and,
at a stockholders' meeting duly called for the purpose,
two-thirds (2/3) of the outstanding capital stock shall
favor the increase or diminution of the capital stock,
or the incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed increase or
diminution of the capital stock or of the incurring, creating,
or increasing of any bonded indebtedness and of the
time and place of the stockholders' meeting at which the
proposed increase or diminution of the capital stock or the
incurring or increasing of any bonded indebtedness is to
be considered, must be addressed to each stockholder
at his place of residences as shown on the books of the
corporation and deposited to the addressee in the post
office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority

of the directors of the corporation and countersigned by
the chairman and the secretary of the stockholders' meet-
ing, setting forth:
(1) That the requirements of this section have been
complied with;
(2) The amount of the increase or diminution of the
capital stock;
(3) If 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 resi-
dences of the persons subscribing, the amount of capital
stock or number of shares of no-par stock subscribed by
each, and the amount paid by each on his subscription in
cash or property, or the amount of capital stock or number
of shares of no-par stock allotted to each stockholder if
such increase is for the purpose of making effective stock
dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created

or increased;
(5) The actual indebtedness of the corporation on the
day of the meeting;
(6) The amount of stock represented at the meeting;
and
(7) The vote authorizing the increase or diminution of
the capital stock, or the incurring, creating or increasing of
any bonded indebtedness.
Any increase or decrease in the capital stock or the
incurring, creating or increasing of any bonded indebted-
ness shall require prior approval of the Securities and
Exchange Commission.
One of the duplicate certificates shall be kept on file
in the office of the corporation and the other shall be
filed with the Securities and Exchange Commission and
attached to the original articles of incorporation. From and
after approval by the Securities and Exchange Commission
and the issuance by the Commission of its certificate of
filing, the capital stock shall stand increased or decreased
and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may
declare: Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of
increase of capital stock unless accompanied by the 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 such
increased capital stock has been subscribed and that at
least twenty-five percent (25%) of the amount subscribed
has been paid either in actual cash to the corporation or
that there has been transferred to the corporation property
the valuation of which is equal to twenty-five percent (25%)
of the subscription: Provided, further, That no decrease of
the capital stock shall be approved by the Commission, if
its effect shall prejudice the rights of corporate creditors.
Nonstock corporations may incur or create bonded
indebtedness, or increase the same, with the approval by
a majority vote of the board of trustees and of at least two-
thirds (2/3) of the members in a meeting duly called for the
purpose.
Bonds issued by a corporation shall be registered

with the Securities and Exchange Commission which shall
have the authority to determine the sufficiency of the terms
thereof. (17a)
Power to increase or decrease

capital stock.
An increase or reduction in the capital stock of the corpora-
tion is a fundamental change in the corporation. The authority of
the corporation to take such action is not to be implied but exists
only when expressly conferred. (Peck vs. Elliot, 79 F. 10; 38 L.R. A.
616; 44 A.L.R. 1315.) The power is expressly granted by Section
38.
Section 38 prescribes the procedure to be complied with to
effect a legal increase or decrease of the capital stock (not capital)
which is now subject to prior approval of the Securities and
6
Exchange Commission. (par. 4.) Even holders of non-voting
shares are entitled to vote on the matter, (see Sec. 6, par. 6[5].)
The notice requirement (par. 1.) is mandatory and is obviously
designed to protect the interests of minority stockholders.
The Corporation Code contains no prohibition for a corpora-
tion to increase its authorized capital stock even if the same has
not yet been fully subscribed.
Limitations on the power.

(1) As a general rale, a corporation cannot lawfully decrease
its capital stock if such decrease will have the effect of relieving
existing subscribers from the obligation of paying for their
unpaid subscriptions without a valuable consideration for such
release, as such an act of the corporation constitutes an attempted
withdrawal of so much capital upon which corporate creditors
are entitled to rely. (Phil. Trust Co. vs. Rivera, 44 Phil. 649 [1923].)
"An amended articles of incorporation is not required to be filed with the SEC to
reflect an increase in the contributed capital of a non-stock/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
V V
2,1998.)
The corporation must submit proof to the SEC that such decrease
will not prejudice the rights of creditors. (SEC Opinion No. 05-10
July 12, 2005.)
(2) A corporation cannot issue stock in excess of the amount
limited by its articles of incorporation; such issue is ultra vires
and the stock so issued is void even in the hands of a bona fide
purchaser for value; and
(3) A reduction or increase of the capital stock can take place
only in the manner and under the conditions prescribed by law.
(see Sec. 38.)
The Corporation Code contains no prohibition for a corpora-
tion to increase its authorized capital stocks even if the same has
not yet been fully subscribed.
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
9
assets by the issuance of stock dividends. (18 Am. Jur. 2d 753-
755.)
I t is considered as a cardinal rule in accounting that any business entity has to

reflect at all times the actual business transactions and/or events in its books as they
happen. For this reason, the corporation can already enter the increase in its authorized
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 issu-
ance of the certificate of filing of the increase by the Securities and Exchange Commission,
and it retroacts to the day of the approval of such increase by the Commission thereby
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 Commission. (SEC Opinion,
July 28,1972.)
350
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 except when such
increase is for the purpose of effecting a stock dividend (Sec. 38, par.
2[3]; see Sec. 43.) previously authorized.
If the actual capital is increased by accumulated profits and
such profits are distributed to the stockholders in the form of
stock dividends, the capital stock is increased, for the profits are
reinvested in the corporation by transferring the same from sur-
plus account to a capital account. The amount corresponding to
the stock dividends declared may be used to cover the required
25% subscription to increase the authorized capital stock and, if
sufficient, will obviate the necessity of taking in new subscrip-
tion.
(2) If the increase of the authorized capital stock is not 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(3). It is, therefore, clear that stock dividends once
declared and issued are fully paid, and this rule admits of no
exception. (SEC Opinion, Sept. 9,1977.)
Effectivity of increase or d e c r e a s e .
(1) From and after approval by SEC. — Under Section 38
(par. 4.), the capital stock of a corporation stands increased or
decreased only from and after approval and the issuance by the
Securities and Exchange Commission 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.
(2) Use of amount of increase during pendency of application.
— Where the corporation, however, is already a going concern,
"in need of steady supply of funds for its business operations,"
it is the policy of the Securities and Exchange Commission to
allow the use of the amount representing the paid-up capital
received on account of the proposed increase of capital stock so
as not to disrupt its operations even during the pendency of the
application for increase of the capital stock with the Commission.
(SEC Opinion, Jan. 30, 1975.) 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 extended to any of the subscribers to the proposed
increase in the capital stock. (SEC Opinion, Dec. 9,1981.)
O v e r - i s s u e of s h a r e s .
(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.) An over-issued stock is
also known as spurious stock.
(2) An over-issue of stock does not avoid the original issue.
Moreover, 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 surren-
dered and new shares issued in their stead. The new issue in
such case merely takes the place of 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 stock is issued to replace certificates which
have been lost. (Ibid.)
Unauthorized increase of capital

stock.
An attempted unauthorized increase of capital stock amounts
to an over-issue and such stock is, therefore, absolutely void and
cannot be validated by application of the doctrine of estoppel.
The same is true, as a rule, of an increase which is, in effect,
wholly unauthorized because attempted under such conditions
or in such a manner that is not within statutory authority to make
the increase.
It necessarily follows that:
(1) Subscriptions for such stock are likewise void both on the
ground of illegality and for want of consideration;
352
(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;
(3) Subscribers for or purchasers of such shares do not
become liable to creditors of the corporation or on a winding up
as stockholders for unpaid subscriptions, and are not subject to a
statutory liability to creditors imposed upon stockholders; and
(4) Subscribers for or purchasers of such shares from the
corporation may recover from it money paid to it under their
subscription or purchase as upon a failure of consideration, or
breach of warranty of the existence of the thing sold, unless they
are 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 C.J.S. 750.)
Subscription r e q u i r e m e n t in case
of increase of capital stock.
(1) Subscriptions and payments based on capital stock as increased.
— A recognized authority gave the opinion that the proviso in
Section 17 (par. 4.) in the old law (now Sec. 38 [par. 4].) "requires
subscriptions and payments on account of subscriptions to the
increased capital of the corporation in the same proportion to the
new authorized capital or new non-par shares as such subscrip-
tions and payments must bear to the original authorized capital
or shares. So, before the Securities and Exchange Commission
files [accepts] any amendment increasing the capital stock, the
treasurer of the corporation must file an affidavit showing that at
least 20% [now 25%] of the increase in capital stock is subscribed
10
and 25% of the subscription is paid.
'"Where the stockholders authorized the increase of the capital stock of a corpora-
tion but the minimum legal requirement of 25% subscription and 25% payment could
not be met so that no certificate of increase in capital stock was filed with the Securities
and Exchange Commission, 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.)
(a) New subscriptions necessary. — Thus, if the corporation
has an authorized capital stock of P20,000.00 and it is pro-
posed to increase it to P50,000.00, an increase of P30,000.00,
subscriptions must be obtained for not less than P6,000.00
[now P7,500.00] and payments in cash or in property amount-
ing to not less than Pl,500.00 [now Pl,875.00] must be made
on account of such subscriptions. (Fisher, op. cit, p. 61.) This
assumes that the total subscriptions and payments to the
original capital stock are in the same proportion.
(b) No new subscriptions necessary. — Without the proviso,
it is quite clear that the pre-incorporation subscription
requirements under Section 13 can easily be circumvented.
But where at the time of the increase, in the same example,
at least P12,500.00 worth of shares, which represent 25% of
P50,000.00, the amount of the capital stock as increased, had
already been subscribed and P3,125.00 (now minimum of
P5,000.00) or 25% thereof paid, it would seem that no new
subscriptions are necessary. In such case, the reason for
requiring new subscriptions no longer exists. It is to be noted
that Section 38 (par. 4.) requires "at least twenty-five percent
(25%) of such increased capital stock has been subscribed x x x,"
or, in other words, "such capital stock as increased," and not
"such increase in capital stock."
(2) Subscriptions and payments based on additional amount
by which capital stock is increased. — The SEC has construed the
phrase to mean the additional amount by which the capital stock
is increased. A contrary rule may defeat the intention to infuse
capital. Furthermore, the proceedings of the Batasang Pambansa
[now Congress] show that the intention is to require at least 25%
11
of the proposed increase. (SEC Opinion, July 29, 1993.) Sub-
sequently, it opined that the phrase "of such increased capital
stock" refers to the total subscription (not to individual subscrip-
tions) and regardless of class. Thus, when the corporation has
several classes of shares, the 25% subscription requirement may
"Where the increase in capital stock consists of two (2) or more classes of shares, the
SEC allows either of the following ways of applying the 25%-25% rule: to be applied on
each of the classes of shares representing the increase in capital stock; or to be applied on
the total amount representing the increase in capital stock. (SEC Opinion, Aug. 4,1992.)
354
be applied only to one class of shares or it may distribute it to all

classes of shares, equally or unevenly. (SEC Opinion, April 11,
1995.)
No treasurer's affidavit is required to be attached in case of
decrease of capital stock.
Ways of increasing (decreasing)

authorized capital stock.
There are at least three (3) ways by which the authorized
capital stock may be increased (decreased):
(1) By increasing (decreasing) the number of shares autho-
rized to be issued without increasing (decreasing) the par value
thereof;
(2) By increasing (decreasing) the par value of each share
without increasing (decreasing) the number thereof; and
(3) By increasing (decreasing) both the number of shares
authorized to be issued and the par value thereof.
ILLUSTRATION:
Assume that the authorized capital stock of X Corporation
is fixed at P1,000,000.00 divided into 100,000 shares with a par
value of P10.00 per share. The capital stock may be increased
(or decreased) as follows:
The number of shares is increased (decreased) to 150,000
(75,000) shares with the same par value of P10.00 each share; or
the par value per share is increased (decreased) to P15.00 (P5.00)
without increasing (decreasing) the number of authorized
shares; or the number of shares is increased (decreased) to
150,000 (75,000) and at the same time increasing (decreasing)
the par value of each share to P15.00 (P5.00).
Increase by w a y of stock d i v i d e n d s .
Stock dividends (see Sec. 43.) are ordinarily declared out of
the authorized but unissued shares of the corporation.
A corporation, however, may also increase its capital stock
by way of stock dividends without touching its unissued
shares as long as there are sufficient retained earnings to cover
the increase, (see Sec. 62[5].) If the proposed stock dividend

would result in the issuance of shares of stock in excess of the
corporation's authorized capital stock, the over-issue is null and
void. Such dividend declaration may be validly done provided
that the corporation simultaneously 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 v a l u e or no par v a l u e s h a r e s
for t h e authorized increase.
Under the authority granted under Section 38 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 classes of shares
or to both.
The issue of no par value shares for 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 thereby reduced and the true money value of the
issued shares may be below their par value. Under the prohibi-
tion contained in Section 62 (par. 1.), the unissued shares cannot
be sold for less than their par value. Buyers, however, will be
reluctant to pay par value because the outstanding shares have a
book value or actual value which is below par. All the while the
corporation is in need of more capital. So in this particular case,
it may decide to issue no-par value shares, the selling price of
which may be fixed in the manner provided for in Section 62 (last
par.) of the Code. (C.G. Alvendia, op. ext., p. 199.)
Reduction of capital stock.

(1) By decrease of number of authorized shares. — When a corpo-
ration is authorized to reduce its capital stock, it may do so also
by redeeming redeemable shares (see Sec. 8.) or purchasing its
snares (see Sec. 41.) and cancelling or retiring the same, includ-
ing treasury shares, (see Sec. 9.) Or it may accept a surrender of
shares and give the holders in exchange therefor a proportionate
amount of its assets, provided no rights of creditors are involved,
or issue bonds for that purpose or exchange another class of stock

for that retired, or exchange its outstanding shares for a smaller
number of shares. Or it may do so by cancelling shares which
have not yet been issued.
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 stockholders, each stockholder should be
allowed to surrender such proportion of his stock as the amount
of the proposed reduction bears to the whole amount of the capi-
tal stock. (6-A Fletcher, p. 385.)
(2) By decrease of par value of authorized shares. — When a
corporation lawfully reduces its capital stock pursuant to Section
38, the shares which are retired or reduced no longer exist for any
purpose. If the shares acquired 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 indicated 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 for the purpose of
eliminating its deficit.
The reduction or decrease surplus or surplus arising from the
reduction of capital stock pursuant to Section 38 in excess of the
deficit may only be declared as stock dividends since it partakes
of the nature of paid-in capital in excess of par value, (see SEC
Opinion, Aug. 8,1991; see Sec. 122.)
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.) Under Section 38 (par. 4.), it is expressly provided

"that no decrease of the capital stock shall be approved by the
Commission, if its effect shall prejudice the rights of corporate
creditors."
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 C.J.S.
747.), subject to the rights of corporate creditors.
Distribution of surplus on reduction.

(1) Where there is no impairment of capital. — Upon a reduction
of capital stock, if capital has not been impaired by losses, there
necessarily occurs a surplus of assets to the extent of the reduc-
tion. 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 carry-
ing 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 general rule, where
capital stock is impaired and a reduction is made merely to meet
358
that impairment, there will be no distribution of assets among

the shareholders. (18 Am. Jur. 2d 764-765.)
(3) Distribution not mandatory. — The distribution to stock-
holders of surplus remaining after a reduction of capital stock is
authorized by the Code (Sec. 122, last par.) but cannot be com-
pelled. It must be borne in mind that the funds resulting from
such reduction represent capital and not profits.
ILLUSTRATIONS:
(1) X Corporation has an authorized capital stock of
P1,000,000.00 divided into 100,000 shares with a par value of
P10.00 each. Only 60,000 shares with a par value of P600,000.00
were subscribed and fully paid for. X Corporation can reduce
its authorized capital stock only after complying with the
formalities prescribed by Section 38.
If X Corporation reduces its authorized capital stock to
P600,000.00, the unissued 40,000 shares are considered retired
and no longer exist for any purpose. Here, there is no reduction
12
of the legal capital of P600,000.00.
(2) If, in the same example, there is an unpaid subscription
of P100,000.00 representing 10,000 shares, X Corporation can
reduce its authorized capital stock provided that it does not
work to prejudice the right of corporate creditors, (par. 4.)
The reduction of capital stock to, say, P500,000.00 will, in
effect, release the subscribers from liability on their unpaid
subscriptions. It will also reduce the legal capital by P100,000.00.
If the net assets of X Corporation are less than P500,000.00, the
corporation cannot reduce its capital stock to said amount if it
will adversely affect corporate creditors.
(3) Suppose all the 100,000 shares were subscribed and
fully paid for. If the authorized capital stock is reduced to
P600,000.00, the surplus of P400,000.00 may be distributed
unless the rights of corporate creditors are affected. Thus, if at
the time of reduction, the net assets of the corporation amount
only to P700,000.00, then only the reduction surplus of P100,000.00
may be distributed. It is in the nature of a liquidating dividend.
(4) Suppose, in the preceding example, the authorized
capital stock was reduced to P700,000.00 or to 70,000 shares
,2
See definition under Section 6.
merely to meet the impairment of the corporation's capital.

In this case, no distribution of assets can be made among the
stockholders.
P e r s o n s entitled to q u e s t i o n increase
or d e c r e a s e 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 in the absence of an estoppel;
or by creditors of the corporation, or by a receiver or assignee
representing them, insofar as the transaction affects their rights.
(2) And, as we have seen, 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 recover-
ing 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].)
P o w e r to incur, create, or increase

bonded indebtedness.
A corporate bond is an obligation to pay a definite sum of mon-
ey at a future time at fixed rate of interest.
The power of a corporation to incur, create, or increase bond-
ed indebtedness or indebtedness secured by its notes or bonds is
likewise expressly conferred by Section 38. But it is also a power
implied from the express powers.
(1) Stock and non-stock corporation. — A business corporation,
in the absence of restriction, may borrow money whenever the
necessity of its business so requires and issue security or custom-
ary evidence of debt such as notes, bonds or mortgages. (19 Am.
Jur. 2d 496.) Under Section 38 (par. 5.), non-stock corporations
are now expressly authorized to incur, create, or increase bonded
indebtedness.
(2) Procedure and formalities. — The procedure prescribed in
Section 38 for incurring bonded indebtedness is the same as the
procedure for increasing or decreasing the capital stock except
that the certificate need not state the matters set forth in Nos. (2)
and (3) and is not required to be accompanied by the sworn state-
ment of the treasurer of the corporation concerning the amount

of the increased capital stock subscribed and paid. The prescrip-
tion of the formalities with respect to "bonded indebtedness"
only, implies 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. 6[4].)
(4) Prior approval of, and registration of bonds with, SEC. — Any
incurring, creating, or increasing by the corporation of any bond-
ed indebtedness is subject to prior approval of the Securities and
Exchange Commission. (Sec. 38, par. 4.) The bonds issued by the
corporation have to be registered with the Commission 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. 62, par. 3.)
W h e n obligations constitute b o n d e d
indebtedness.
(1) Notes and bonds. — When a corporation borrows money,
its indebtedness may be evidenced by notes or bonds as its pri-
mary 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.
(b) Also, payment of bonds is usually, though not in-
variably, secured as to both principal and interest by certain
specified property held for the purpose under a formal deed

or trust.
(c) A bond issue consists of a number of bonds which,
while they may vary as to denomination, some may be regis-
tered and some unregistered, are all of like general tenor and,
if secured, are all secured.
(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.
(c) The bonds usually, but not necessarily, run to bearer
and are transferable by delivery.
(d) The effect of the creation and issuance of such obliga-
tions is a borrowing from the general public.
Whenever a corporation resorts to this method of borrowing
funds, the resulting obligations constitute a "bonded indebted-
ness," subject to the requirements of Section 38 of the Corpora-
tion Code as to creation or increase. (H.C. Bentley, Corporation
Finance and Accounting, cited in Fisher, pp. 315-316.) Other
bonds issued by a corporation against its general credit are not
covered by the provisions of Section 38, but the SEC Rules re-
quire their submission to the Commission for approval before
they can be issued to the public. (SEC Opinion, April 6,1990.)
ILLUSTRATIONS:
(1) A Mortgage Trust Indenture was executed by X Cor-
poration under the following facts: X Corporation will obtain
credit/loan accommodations from three of four creditors, each
evidenced by a promissory note. As security for the payment of
the promissory note, X Corporation constituted a mortgage on

its fixed assets. Instead of constituting individual mortgage in
favor of each creditor, Z, a bank, was appointed by X Corpora-
tion with the consent of the creditors as common Trustee-Mort-
gagee. The mortgage is covered by an agreement denominated
as Mortgage Trust Indenture executed by X Corporation to Z.
In addition to the mortgage contract, Mortgage 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 corresponding
MPC covering the same is cancelled. This process enables 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.
Is the issuance of the MPC subject to the requirements of
bonded indebtedness under Section 38?
No. When a 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
undivided interests of the creditors in the mortgaged property
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, for the purpose of financing its subdivision/
housing development projects. The credit transaction will be for
a 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?
The features of the transaction characterize a term loan, as

distinguished from a bond issue. (SEC Opinion, Nov. 18,1977.)
T h e corporate b o n d contract.
(1) Parties. — There are three (3) parties to a corporation
bond contract: the borrowing corporation, the bondholders, and
the trustee. The trustee is a bank or trust company, which is cho-
sen and paid by the corporation but serves mainly to protect the
bondholders.
(2) Trustee's functions. — They usually include:
(a) countersigning the bonds to assure authenticity;
(b) collecting interest and principal payments from the
debtor-corporation and distributing them to those entitled;
(c) acting as mortgagee or collateral holder if the bonds
are secured;
(d) verifying the performance of the debtor corporation's
promises on behalf of the bondholders; and
(e) taking legal action on behalf of the bondholders if
necessary.
Obviously, the bondholders cannot usually be parties to the
framing of the bond contract, but they adopt its provisions when
they choose to acquire bonds.
(3) Bond indenture. — The contract itself, known as the "bond
indenture," is a complete, lengthy legal document which consti-
tutes the agreement between the parties. The bonds themselves
are certificates of participation in their contract. In the indenture,
the corporation promises to pay principal and interest, promises
to pay the trustee, promises to pay its taxes and other debts, and
promises to maintain its property and conduct its business pru-
dently.
(4) Usual provisions. — The bond indenture will contain
many 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 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
provisions, and conversion options. (G.A. Christy & J.C.
Clendenin, "Introduction to Investments," 7th ed. [1978], pp.
138-139.)
Bond terminology.
Corporate bond issues are commonly given titles which un-
dertake to describe the terms of the contract. Thus:
(1) Promissory instruments running five (5) years or longer
13
are "bonds" or "debentures"; shorter maturities are "notes."
(2) An equipment obligation (Philadelphia plan) may be a
"trust certificate."
(3) To identify the type of lien, the word "mortgage," "lease-
hold mortgage," "collateral trust," and "secured" are used.
(4) For further clarification, adjectives such as "first," "sec-
13
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. 128.)
Debentures are serial obligations or notes issued on the basis of the general credit of the
corporation and since they are not secured by corporate property, they are not bonded
indebtedness as contemplated in Section 38.
ond," "refunding," "consolidated," "general," "divisional," "pri-

or," and "adjustment" may be used singly or in combination.
(5) To describe the pledged property, such words as "bridge,"
"terminal," or "equipment" may be included.
(6) Additionally, such descriptive terms as "income sinking
fund," "purchase money," "extended," "series," "serial," "par-
ticipating," and "convertible," are used. (Ibid., op. cit., p. 154.)
Types of b o n d s .
(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 by a
pledge of either stocks or bonds, or both which are deposited
with a trustee; and
(c) Equipment obligations or debt instruments to secure
financing loans on locomotives, railway cars, buses, large
trucks, and similar equipment. The most outstanding charac-
teristics of an equipment obligation is the railroad equipment
trust certificate secured by title to rolling stock, such as cars
and locomotives.
Under the Philadelphia (or equipment lease) plan, a manufactur-
er 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 pay-
ments over a period of 15 years or less are at rates calculated to
be well within the economic life of the equipment, and there is
a substantial downpayment as further protection. (Soldofsky &
Olive, "Financial Management," 1974 ed., pp. 62-65.)
Under the New York (conditional sale) plan, the trustee receives
the equipment from the manufacturer and sells it to the purchas-
ing corporation in return for a series of equipment trust notes.
These notes are interest-bearing and of serial maturities; when

sold to investors, they provide the money to pay the manufac-
turer. When the notes are paid off by the purchasing corpora-
tion, the conditional sale becomes final and complete. (Christy &
Clendenin, op. cit., p. 144.)
Examples of unsecured bonds are:
(a) Straight debenture bonds or general credit bonds not
secured by any specific property. The earning of the issuing
corporation provides the protection to the debenture bond-
holders;
(b) Guaranteed bonds or that type for which one or more
individuals or corporations other than the issuer guarantees
the payment 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 of
liquidation or reorganization to any existing and future debt
defined in the indenture as senior debt. (Soldofsky & Olive,
op. cit., pp. 64-65.)
(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
are:
(a) Convertible debentures or 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 referred to as adjustment
bonds, or debt instruments with a fixed rate of interest pay-
able only if earned and declared by the board of directors.
They are hybrid securities combining some of the character-
istics of preferred and straight bonds; and
(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. {Ibid., op. cit., 65-69.)
Sec. 39. Power to deny pre-emptive right. — All stock-

holders of a stock corporation shall enjoy pre-emptive
right to subscribe to all issues or disposition of shares of
any class, in proportion to their respective shareholdings,
unless such right is denied by the articles of incorporation
or an amendment thereto: Provided, That such pre-emptive
right shall not extend to shares to be issued in compliance
with laws requiring stock offerings or minimum stock own-
ership 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 p r e - e m p t i o n 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
14
was made in proportion to their existing shareholdings and on
equal terms with other holders of the original stocks before sub-
scriptions are received from the general public. For example, if a
stockholder with pre-emptive right owns 20% of the outstanding
shares of the corporation, he may subscribe 20% of any shares of
stock issued by the corporation. This principle is known as the
right of pre-emption or pre-emptive right of stockholders. 15
14
The mere fact that the subscriber is entitled by right of pre-emption to only a por-
tion 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. 14,1964.)
The corporation may still allow its stockholders who failed to exercise their pre-
emptive 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 stockhold-
ers are given the opportunity again. (SEC Opinion, Oct. 9,1990.)
""Pre-emptive rights" to subscribe to shares are considered "securities" within the
contemplation of Section 2(a) of the Revised Securities Act. (SEC Opinion, April 19,1994.)
(1) Availability of right to new issues of shares and unissued

shares. — The right extends only to new issues of shares arising
from any increase of capital stock effected under Section 38, but
may also be available with respect to "issues or disposition" of
unissued shares belonging to the original stock of the corpora-
tion, (infra.) Hence, it extends to the unsubscribed portion of the
capital stock and even to treasury shares.
(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 vs.
Eckhardt, 175 N.E. 382.) This principle, however, does not apply
to transfers where the assignors have previously exercised their
pre-emptive rights to subscribe to new issues. To rule otherwise
would allow the pre-emptive 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 pre-emption in a stock corporation depends on a consider-
ation of all the surrounding circumstances of each case. In other
words, the right 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 pre-
serve unaltered and unimpaired his proportionate influence and
interest in the corporation and the relative value of his holdings.
In other words, the purpose of the right is to protect from
impairment and dilution the basic rights of the existing stock-
holders 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.) A stockholder cannot be
forced to waive the right even if majority of the other stockhold-
ers opt to waive it. (SEC Opinion No. 08-08, Mar. 31, 2008.)
ILLUSTRATION:
X Corporation has an original capital stock of P100,000.00
divided into 1,000 shares with a par value of P100.00 per share.
A owns 500 shares. Subsequently, the capital stock is increased
to P200,000.00 (to 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) to
only 30% (600/2,000).
(2) Right to net earnings as dividends. — Suppose the
corporation made a net earnings of P50,000.00. Had this entire
amount been distributed as cash dividends before the increase,
each stockholder, including A, would have received P50.00
(P50,000.00/1,000) per share. After the increase, the dividend
would be reduced to P25.00 (P50,000.00/2,000) per share.
(3) Right to net corporate assets after liquidation. — Assume
now that the total assets of the corporation amount to PI70,000.00,
with liabilities of P20,000.00 and surplus of P50,000.00. Thus,
its net assets or net worth is P150,000.00. Therefore, the actual
value per share is P150.00 (P150,000.00/1,000). If the new
shares were to be issued at their par value of P100.00, the
actual value of the original shares would be reduced to P125.00
(P250,000.00/2,000).
If the rule of pre-emption will not be observed, it is evident
that existing stockholders who are allowed to subscribe to more
than 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 pre-emptive 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.
Power to deny pre-emptive right.

The pre-emptive right of stockholders of a stock corporation
"to subscribe to all issues or disposition of shares of any class
in proportion to their respective shareholdings" may be "denied
by the articles of incorporation or an amendment thereto"
370
or may fall under any of the exceptions." (Sec. 39.) 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 subscribe to Common " B " shares in proportion to their
interest, but they cannot be required to subscribe to the Common
" B " shares, especially since the latter are of a class different from
17
the class they are holding.
A stockholder whose pre-emptive right is violated may main-
tain 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 81(1).
Shares to w h i c h right not available.

Under Section 39, the pre-emptive right of stockholders to
subscribe to all issues or disposition of shares in proportion to
their respective shareholdings extends "to all issues or disposition
of shares of any class" (such as treasury shares) unless denied by
18
the articles of incorporation or an amendment thereto (in which
case they are deemed to have waived the right), and except to the
following:
(1) Shares to be issued in compliance with laws requiring
stock offerings or minimum stock ownership by the public;
(2) Shares to be issued in good faith with the approval of
stockholders representing 2 / 3 of the outstanding capital stock in
exchange for property needed for corporate purposes; and
(3) Shares to be issued in good faith with the approval of the
stockholders representing 2 / 3 of the outstanding capital stock in
payment of previously contracted debt.
The pre-emptive right does not extend to the issue of shares
in No. (1) in view of the need to comply with a legal requirement
16
The SEC requires an explicit written waiver of the right of pre-emption from the
non-subscribing stockholders every time it processes an application for increase in capital
stock.
17
It is not clear whether common stockholders have a pre-emptive right to acquire
preferred shares and preferred stockholders to acquire common shares. But if the pre-
ferred stock is convertible to common, holders of common shares must be given the right.
18
As commonly the practice in an initial public offering of new issues in the stock
exchange.
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.
Offering of r e m a i n i n g u n s u b s c r i b e d
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
pre-emptive right, he is deemed to have impliedly waived his
right to subscribe to the same or to the balance if he subscribes
only to a portion. It does not follow that said shares should again
be offered on a pro rata basis to stockholders who took advantage
of their right of pre-emption. This is because as long as they
exercise their pre-emptive 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.) 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 pre-emptive rights of such stockholders.
(2) To stockholders of record. — As a matter of policy, the Secu-
rities and Exchange Commission considers it a sound corporate
practice to offer always the remaining shares to the stockholders
of record whenever practical and feasible before offering them
to the public (Ibid.; May 14, 1990, Dec. 6, 1994, March 23, 1998.),
although this "right of first refusal" is not provided for in the
ILLUSTRATION:
A owns 20% of the capital stock of Corporation X. He
exercised his pre-emptive 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.
372
In this case, A still maintains his 20% interest in the

corporation although C's proportionate holdings increased. A
has no cause for complaint as long as his 20% interest is not
reduced.
Time within which the right may

be exercised.
The time within which a stockholder must exercise his pre-
emptive right is generally fixed in the resolution authorizing the
increase of capital stock.
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 vs. Great American
Ins. Co., 200 Pa. 516, 50 A. 154.) Parenthetically, such resolution
may also require the stockholders desiring to exercise his pre-
emptive right to pay a deposit on the new stock at the time of
subscribing. (SEC Opinion, Dec. 29,1976.)
Pre-emptive right as to treasury s h a r e s .

(1) In close corporations, the pre-emptive 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, unless the
articles of incorporation provide otherwise. (Sec. 102.)
(2) In widely held corporations, it would seem that existing
stockholders have also a pre-emptive right as to treasury shares
(Sec. 9.) in view of the use of the phrase "disposition of shares of
any class" in Section 39. Note, however, that sale or disposition
of the treasury stock is not considered a new issue.
Furthermore, since the funds used in reacquiring the treasury
shares come from the surplus profits of the corporation, which
could have been declared instead as dividends, it is a desirable
policy to recognize the pre-emptive rights of stockholders over
treasury shares.
Price of new stock offerings.

(1) Interests of the corporation and all stockholders to be consid-
ered. — The concept of pre-emptive rights is given by law to safe-
guard two distinct interests of stockholders — protection against
dilution of their equity in the corporation and protection against
dilution of their proportionate voting control. The law, however,
gives no indication regarding the price that a corporation must
receive for new shares. Obviously, the power to determine the
price 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 issued at prices far below their fair value in a corporation
with only a limited market for its shares, existing stockholders
who do not want to invest or do not have the capacity to invest
additional funds can have their equity interest in the corporation
diluted to the vanishing 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 corpo-
ration 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 inter-
est 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 for a legally
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 accord-
ance with legal requirements. (Katzowitz vs. Sidler, 249 N.E. 2d
359 [Ct. Apps. N.Y. 1969].)
Availability of right to additional issue

of originally authorized shares.
A shareholder's pre-emptive 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.
The shareholders' pre-emptive 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.
(1) All originally authorized shares initially offered for subs-
cription. — When one subscribes for shares in a corporation, he
realizes that his position is fixed on the basis of 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].) The
subscriber cannot claim dilution of interest in case additional
issues of originally authorized shares are purchased by others.
(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 sub-
scribing for more, the corporation must first offer the additional
issue of shares from the unsubscribed portion of the authorized
capital stock pre-emptively 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 alloted for subscription rather than to the
total number of authorized shares at the time of his subscrip-
tion. The subscriber cannot claim a dilution of interest in case
additional issues of originally authorized shares are purchased
by others.
"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 resolu-
tion without need of stockholders' approval. (SEC Opinion No. 05-03, April 27, 2005.)
ILLUSTRATION:
X, Inc. has an original capital stock of P1,000,000.00
divided into 100,000 shares with a par value of P10.00 each.
At its inception, Corporation X offered for subscription all the
100,000 shares but only 40,000 shares were subscribed and fully
paid. Z's subscription covers 4,000 shares.
In this case, Z is not entitled to pre-emption with respect to
the remaining unissued 60,000 shares if they are later reoffered.
He cannot claim a dilution of interest.
Where the number of shares initially offered for subscription
was only 40,000, then Z may exercise his pre-emptive right in
case the remaining 60,000 shares are subsequently offered for
subscription to the extent of 1 /10, or 6,000 snares.
Sec. 40. Sale or other disposition of assets. — Subject

to the provisions of existing laws on illegal combinations
and monopolies, a corporation may, by a majority
vote of its board of directors or trustees, sell, lease,
exchange, mortgage, pledge or otherwise dispose of all
or substantially all of its property and assets, including
its goodwill, 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, when authorized by the
vote of the stockholders or representing at least two-thirds
(2/3) of the outstanding capital stock, or in case of non-
stock corporation, by the vote of at least two-thirds (2/3)
of the members, in a stockholders' or members' meeting
duly called for the purpose. Written notice of the proposed
action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place
of residence as shown on the books of the corporation
and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That any
dissenting stockholder may exercise his appraisal right
under the conditions provided in this Code.
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.
376
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 said corporation or if the
proceeds of the sale or other disposition of such property
and assets be appropriated for the conduct of its remaining
business.
In non-stock corporations, where there are no mem-
bers with voting rights, the vote of at least a majority of
the trustees in office will be sufficient authorization for the
corporation to enter into any transaction authorized by
this section. (28 1/2a)
Power to sell, lease, etc. all or substantially

all corporate assets.
(1) Requisites. — A corporation by the action of its board of
directors or trustees supported by the vote of shareholders or
members may sell, lease, exchange, mortgage, pledge, or other-
wise dispose of all or substantially all of its property, and assets
including its goodwill, (see Title IX [Merger and Consolidation].)
The requisites for the validity of such sale, etc. are as follows:
(a) The sale, etc., must be approved by the board of direc-
tors or trustees;
(b) The action of the board of directors or trustees must
be authorized by the vote of stockholders representing 2 / 3
of the outstanding capital stock including holders of non-
voting shares (see Sec. 6, par. 6[3].) or 2 / 3 of the members, as
the case may be; and
(c) The authorization must be done at a stockholders' or
members' meeting duly called for that purpose after written
notice.
(2) Other legal limitations. — As a safeguard against abuse

of power, Section 40 provides that the sale, etc., shall be subject
to the provisions of existing laws on illegal combinations and
monopolies, (see Sec. 140.) Furthermore, under the Bulk Sales Law
(Act No. 3952, Sees. 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 in a state of suspended
animation (Ballantine, p. 666.), subject to the effect of non-use
of corporate powers and continued inoperation of a corporation
provided in Section 22. (SEC Opinion, July 8,191387.) 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.) The only way the transfer can
proceed without prejudice to the creditor is to make the assignee
assume the liabilities of the assignor, unless the creditors who
did not consent to the transfer choose to rescind the transfer on
the ground of fraud. (Caltex [Phils.], Inc. vs. PNOC Shipping
Transport Corp., 498 SCRA 400 [2006].)
(4) Liability of purchasing corporation. — Generally, where one
corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of
the transferor, provided the latter acted in good faith and paid
adequate consideration for such assets, except where any of the
following circumstances is present:
(a) Where the purchaser expressly or impliedly agrees to
assume such debts;
(b) Where the transaction amounts to a consolidation or
merger of the corporations;
(c) Where the purchasing corporation is merely a con-
tinuation of the selling corporation (see Caliguia vs. National
Labor Relations Commission, 264 SCRA 110 [1996].); and
378
(d) Where the transaction is entered into fraudulently in

order to escape liability for such debts. (Edward J. Nell Co.
. vs. Pacific Farms, Inc., 15 SCRA 415 [1965], citing 15 Fletcher
160-161; McLeod vs. National Labor Relations Commission,
512 SCRA 222 [2007].)
Where the requirements of the Bulk Sales Law (supra.) have
not been complied with, both the selling and buying corpora-
tions may be held solidarily liable to the creditor of the selling
corporation.
Authority of the board.

(1) Stock corporations. — Section 40 covers not only sale but
also lease, exchange, mortgage, pledge or other disposition of its
properties.
(a) The board is given the right to decide upon the terms
and conditions of the transaction including the consideration
for the property disposed of, for, at any rate, the transaction
is still subject to approval by the stockholders or members.
(b) After such approval, the board may nevertheless, in
its discretion, abandon the transaction, without further action
or approval by the stockholders or members but subject to
the rights of third parties under any contract relating thereto,
(par. 3.)
(c) If the property to be sold constitutes merely a part
of the assets of the corporation, even if substantial, and the
sale thereof will not render the corporation incapable of con-
tinuing its business (par. 4.), the board of directors or trustees
may dispose of the same as it may deem convenient without
need of approval of the stockholders or members of the cor-
poration. (SEC Opinion, Dec. 4, 1990.) Under paragraph 4,
the authorization by the stockholders or members is not re-
quired. It is understood, however, that the transaction is not
tainted with fraud or bad faith or prejudicial to the interest of
the corporation.
(2) Non-stock corporations. — Under the last 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 40 in the case of non-stock corporations
where there are no members with voting rights.
Appraisal right of dissenting stockholder.

It is to be noted that the exercise of the appraisal right of any
dissenting stockholder (par. 1; see Sec. 81 [2].) is predicated on
the "sale or other disposition of all or substantially all" of the
corporate assets, the phrase being defined as such which would
render the corporation "incapable of continuing the business or
accomplishing the purpose for which it was incorporated." (Sec.
40, par. 2.)
Conversely, any disposition which does not involve all or
substantially all of the corporate assets as defined above, made
in the ordinary course of business, does not require the approval
of the stockholders or members as set forth in Section 40 and
would not entitle any dissenting stockholder to exercise his
appraisal right. (Ibid., par. 4.) To determine if the sale is made
in the ordinary course of business, the test is not the amount
involved but the nature of the transaction.
Liability of p u r c h a s i n g corporation for debts

of selling corporation.
As a rule, a corporation that purchases the assets of another
will not be liable for the debts of the selling corporation, provided
the former acted in good faith and paid adequate consideration
for such assets, except when any of the following circumstances
is present:
(1) where the purchaser expressly or impliedly agrees to
assume the debts,
(2) where the transaction amounts to a consolidation or
merger of the corporations,
(3) where the purchasing corporation is merely a continua-
tion of the selling corporation, and
(4) where the transaction is fraudulently entered into in
order to escape liability for those debts. (Philippine National
Bank vs. Andrada Electric & Engineering Company, 381 SCRA
244 [2002].)
Sec. 41. Power to acquire own shares. — A stock corpo-

ration shall have the power to purchase or acquire its own
shares for a legitimate corporate purpose or purposes,
380
including but not limited to the following cases: Provided,

That the corporation has unrestricted retained earnings in
its books to cover the shares to be purchased or acquired:
(1) To eliminate fractional shares arising out of stock
dividends;
(2) To collect or compromise an indebtedness to
the corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold
during said sale; and
(3) To pay dissenting or withdrawing stockholders en-
titled to payment for their shares under the provisions of
this Code, (n)
Power to acquire o w n s h a r e s .
Section 41 expressly authorizes a stock corporation to pur-
20
chase or acquire its own shares subject to the limitation that
the acquisition is for a legitimate corporate purpose or purposes
and that there be unrestricted retained earnings (see Sec. 43.) in its
books to cover the shares acquired.
(1) Elimination of fractional shares. — A fractional share is
a share which is less than one (1) corporation share. Thus, if a
stockholder owns 250 shares and the corporation declares 25%
stock dividend, his total shares will be 312 and 1/2 shares.
Inasmuch as fractional shares cannot be represented at corporate
21
meetings (No. 1.), the corporation may purchase the same from
the stockholder concerned or issue fractional scrip certificates
20
Although shares thus purchased are, unless formally "retired," treated as "treasury
shares," and, under a discredited method of accounting, are carried on the corporation's
books as an asset or are applied to reduce "capital," "stated capital," or "capital stock"
issued, it is obvious that, although the selling shareholder has given up an asset, the cor-
poration has not acquired one. Its own shares are of no value to it unless and until they
are resold. What has actually happened is that the corporation's assets have been reduced
by the amount paid for the shares, while the proportionate interest of each of the other
shareholders in the diminished assets have been decreased by diminishing the number of
outstanding shares. Legal capital is not reduced by the transaction. Reduction of capital
(see Sec. 38.) may be made only by the methods prescribed in the statutes. Only a few
statutes include reacquisition of shares as such a method and then only in exceptional
circumstances. (W.L. Cary, Cases and Materials on Corporation Law, 1969 ed., p. 1592.)
21
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. (Bal-
lantine, p. 401.)
to such stockholder who may negotiate for the sale thereof with
other stockholders also owning fractional shares so as to convert
them into full shares.
(2) Satisfaction of indebtedness to corporations. — No. 2 of Sec-
tion 41 does not authorize a corporation to arbitrarily purchase
the shares it issued to any of its stockholders indebted to it,
whether at the prevailing market price or at par value for the
purpose of applying the proceeds thereof to the satisfaction of its
claim against them, and this is particularly true where the con-
sent of such stockholders has not been secured. And even where
their consent has been secured, the corporation can buy their
shares only if the conditions for the purchase (infra.) are present,
(see SEC Opinion, Aug. 11,1961.)
A stockholder may avail of Section 63 which allows transfer
of shares to a third party.
(3) Payment of shares of dissenting or withdrawing stockholders.
— No. 3 of Section 41 refers to instances when a dissenting stock-
holder is given appraisal right (see Sec. 81.) and the right to with-
draw from the corporation as provided in Section 16 (Amend-
ment of articles of incorporation), Section 37 (Power to extend
or shorten corporate term), Section 40 (Sale or other disposition
of corporate assets), Section 42 (Power to invest corporate funds
in another corporation or business or for any other purpose),
Section 68 (Delinquency sale), Section 77 (Stockholders' or mem-
bers' approval [of plan of merger or consolidation]), and Section
105 (Withdrawal of stockholder or dissolution of [close] corpora-
tion).
Under the Civil Code (Art. 2112.), the pledgee (corporation)
may appropriate thing (stock certificates) pledged, if after the
second auction the thing pledged is not sold.
(4) Other cases. — This power of the corporation to acquire its
own shares is not limited to the cases enumerated in Section 41.
(a) It may also be exercised under Section 9 (treasury
shares).
(b) With respect to redeemable shares, they may be pur-
chased by the corporation regardless of the existence of
unrestricted retained earnings in the books of the corporation,
(see Sec. 8.)
382
(c) Shares may also be reacquired to effect a decrease

in the capital stock of a corporation, (see Sec. 38.) Where a
corporation reacquires its own shares, it does not thereby
become a subscriber thereof.
(d) In close corporation, where there is a deadlock
respecting the management of its business, the Securities
and Exchange Commission may order the purchase at their
fair value of shares of any stockholder by the corporation
regardless of the availability of unrestricted retained earnings
in its books. (Sec. 104, par. 1[4].)
Conditions for the exercise

of the power.
The right and power of a corporation to acquire or purchase
its own shares is not absolute, but depends upon the contingency
of the condition of its affairs and its relation to creditors at the
time of the purchase. (Fisher, op. cit., p. 287.)
Briefly, a corporation's right to purchase its shares according
to the weight of authority is subject to the following limitations:
(1) That its capital is not thereby impaired;
(2) That it be for a legitimate and proper corporate purpose;
(3) That there shall be unrestricted retained earnings (see Sec.
22
43.) to purchase the same and its capital is not thereby impaired;
(4) That the corporation acts in good faith and without preju-
dice to the rights of creditors and stockholders; and
(5) That the conditions of corporate affairs warrant it. (SEC
Opinions, Sept. 11, 1985, Oct. 12,1992, and April 11,1994.)
"No 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
cost of the said shares, except:
a. When the shares are 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
and certificates of stock representing said snares;
b. When the shares are reacquired to effect a decrease in the capital stock of the
corporation as approved by the Securities and Exchange Commission;
c. When the shares are reacquired by a close corporation pursuant to the order of
the Securities and Exchange Commission acting to arbitrate a deadlock as provided for
under Section 104 of the Corporation Code of the Philippines. (Sec. 111, CCP No. 1-Rules
Governing Redeemable and Treasury Shares, 1982; see Sec. 8.)
The SEC has exclusive supervision, control, and regulatory

jurisdiction to investigate 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 Sections 41 and 122. (Boman Environmental
Dev. Corp. vs. Court of Appeals, 167 SCRA 540 [1988].) Thus,
if the aforementioned conditions are present, a corporation
may acquire the shares of alien stockholders to comply with
constitutional or legal requirements prescribing the minimum
percentage of capital stock ownership of Filipino citizens in
certain corporations. (Ibid.; see Sec. 12.)
Although the existence of legitimate corporate purposes may
justify a corporation's acquisition of its shares under Section 41,
such purpose cannot excuse the stockholder from the effects of
taxation arising from the redemption of stocks by the corpora-
tion. If the issuance of stock dividends is part of a tax evasion
plan and thus, without legitimate business reasons, the pro-
23
ceeds of the redemption may be deemed as taxable dividends.
(Comm. of Internal Revenue vs. Court of Appeals, 301 SCRA 152
[1999].)
Trust f u n d 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 pro-
vision being first made for the payment of corporate debts and
that any such disposition of it is a fraud on the creditors of the
corporation who extend credit to the corporation on the faith of
its outstanding capital stock and, therefore, void.
(1) Corporation generally without power to purchase its own
shares. — It could be inferred from our law that a corporation
has generally no power to purchase its own shares of stock
except otherwise provided in the Code. This rule is dictated by
the necessity of protecting the interests of existing creditors who
23
See "Tax treatment of stock dividends," under Section 43.
384
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 38. 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.)
(2) 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. 122, last par.) A corporation have unrestricted
retained 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. 43.)
Note that under the doctrine, the corporation is not prohi-
bited to use its assets for purposes of its business.
Effects of purchase on corporate

creditors.
If at the time the purchase is made, the corporation does not
have a unrestricted retained earnings or has negative earnings,
or if the amount paid for the shares exceeds the surplus, the pur-
chase necessarily operates as a distribution to the selling share-
holders of a part of the capital, and to that extent impairs capital.
(1) The impairment may be intentionally permanent, as
where the corporation thereafter treats the purchased shares as
retired but does not formally reduce capital, or merely refrains
from reselling the shares.
(2) The impairment may be unintentionally permanent to
the full amount paid, as where the corporation finds itself unable
Sec. 41 "TITLE IV. POWERS OF CORPORATION 385
to resell the shares at all, or to the extent of part of the amount

paid, as where it is unable to resell except at a lower price.
These consequences affect creditors. But there may be a
difference between current 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 W.L. 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 corpora-
tion is objectionable also in that it injures remaining sharehold-
ers' rights, although it may be advantageous also to those who
do not sell.
(1) In general. — The impact of this purchase on the rights of
remaining shareholders was fully discussed as follows:
"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 unrepresented by any available assets, or where the
liability of unpaid capital is to be reduced or extinguished,
the same percentage should 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 with-
draws part of the original capital from the venture and re-
distributes 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 prose-
cution 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 per-
manently 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 shareholders 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 was very well explained as follows:
"If 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 pockets 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 unauthor-
ized reduction in capital, or else the possibility of dividends
is postponed until such time as the 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 price, the distribution of
the surplus as dividends has still been postponed." (Ibid.,
quoting Levy, "Purchase by a Corporation of its Own Stock"
[1930], 15 Minn. L. Rev. 1.)
(3) Share in possible losses. — The diminution of the number
of shareholders may entail still other dangers. As treasury stock
does not share in the profits, it may be contended that the remain-
ing shareholders would as a result get a bigger individual share
therein by way of increased dividends per share. On the other
hand, their share of possible losses is increased, inasmuch as part

of the working capital disappears. With this decrease in working
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. — 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 them to be detrimental to the enterprise or inconvenient
to the management. (W.L. Cary, op. cit., p. 1592.)
Sec. 42. Power to invest corporate funds in another

corporation or business or for any other purpose. — Subject
to the provisions of this Code, a private corporation may
invest its funds in any other corporation or business or for
any purpose other than the primary purpose for which it
was organized when approved by a majority of the board
of directors or trustees and ratified by the stockholders
representing at least two-thirds (2/3) of the outstanding
capital stock, or by at least two-thirds (2/3) of the members
in the case of non-stock corporations, at a stockholders'
or members' meeting duly called for the purpose. Written
notice of the proposed investment and the time and place
of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of
the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided,
That any dissenting stockholder shall have appraisal right
as provided in this Code: Provided, however, That where the
388
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. (171 1/2a)
Power to invest funds in other corporations

or for other purposes.
(1) In order that a corporation may invest its funds in any
other corporation or business or for any purpose other than
the primary purpose, compliance with the requirements of
24
Section 42 is necessary (see De la Rosa vs. Mao Sugar Central
Co., Inc., 27 SCRA corporation [1969].) and, of course, subject to
the prohibition against certain corporations (e.g., insurance and
banking corporations) from having more than one purpose.
(2) Where the purpose clause of the articles of incorporation
of a company embodies different and related purposes, the
corporation may intend to carry them out simultaneously or to
prosecute first the primary business in which it is most interested
and then embark later in any one of the other purposes, as the
need for expansion of the enterprise may warrant or the necessity
of a change of business may demand. (SEC Opinion, Jan. 2,1973.)
By virtue of the provisions of Section 42, a corporation may be
organized with multiple lawful purposes so long as the primary
purpose is indicated in the articles of incorporation. However,
the investment of its funds is limited to the primary purpose.
(3) The term "funds" in Section 42 includes any corporate
property to be used in furtherance of the business. Thus, idle cor-
porate property may be temporarily leased to make it productive
in the absence of express restrictions in the articles of incorpora-
tion or by-laws and the leasing is not used as a scheme to preju-
24
In accounting, investments refer to assets not directly identified with the primary
activities of a company, as distinguished from inventories, receivables, plant and equip-
ment, and assets used in the sale of goods or services. Investments occupy a supple-
mentary relationship to a corporation's primary revenue-producing activities. They are
expected to contribute to the objectives of the company either through direct returns (div-
idends or interest) or value appreciation, or through enhancing the long-run operations
of the company by providing some business advantage, or, as in the case of special funds,
by enabling the company to meet certain business requirements, (see PICPA Bulletin No.
12[1], Nov., 1977.)
dice corporate creditors, subject to the requirements of Section

42. (SEC Opinion No. 54, Nov. 3, 2003.)
(4) A non-stock, non-profit foundation may invest its funds in
or subscribe to shares of another domestic corporation. The term
"funds," as used in Section 42, include "donations" received by
the corporation from other entities. However, its power to invest
is limited by its articles of incorporation. (Ibid.)
Purpose other than the primary purpose.

(1) A secondary purpose. — 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 42.
(2) Not among the secondary purposes. — A corporation is not
allowed to engage in a business distinct from those enumerated
in the articles of incorporation without amending the purpose
25
clause of said articles (see Sees. 14[2], 16.) to include the desired
business activity among its secondary purposes.
Pawnshops organized as corporations and partnerships may
be allowed the ancillary activity of directly purchasing or sell-
ing goods and articles. Presidential Decree No. 114, otherwise
"Under General Order No. 47, which was issued during the period of martial law,
private and public firms with 500 or more employees were required to provide for their
own and their immediate families rice consumption needs either through importation
of or by directly engaging in rice production. Since General Order No. 47 is not merely
advisory but imperative, being a rule having the force of law (until revoked or repealed),
firms affected can engaged in rice production without the need of amending their articles
of incorporation. (SEC Opinion, Sept. 12, 1975.) Accordingly, shareholders' consent to a
corporation's investment of funds in another corporation to comply with the requirement
of General Order No. 47 is not required, considering that the investment is made pursu-
ant to a statutory obligation. (SEC Opinion, Jan. 19, 1976.) General Order No. 47 was
repealed by Executive Order No. 176 (May 28,1987).
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 by-laws; (4) There must be a collateral
or assurance that the borrower is capable of paying them at maturity date; (5) The lending
is not used as a scheme to prejudice corporate creditors or result in the infringement of
the Trust Fund Doctrine; and (6) Section 42 is complied with. (SEC Opinion, Jan. 11,1991.)
known as the Pawnshop Regulation Act, contains no provision

limiting the business of pawnshops to such activity. By implica-
tion, their scope may be extended to other unrelated business
unless clearly prohibited by the language of the Act. The only
26
requirement is that the person or entity engaged at the same
time in other businesses not directly related or not incidental to
the business of pawnshop, shall keep such business distinct and
separate from his pawnshop operations. (SEC Opinion, March
28,1985.)
(3) Incident to primary purpose. — A corporation may invest
its funds in another business which is incident or auxiliary to
its primary purpose as stated in its articles of incorporation
without the approval of the stockholders or members as
required under Section 42. Even holders of non-voting shares
or non-voting members, as the case may be, are entitled to vote
on the matter, (see Sec. 6, par. 6[7].) In such case, a dissenting
stockholder shall have no appraisal right. 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].)
Ratification of defective investment.

A corporate transaction or contract which is within the cor-
porate powers, but which is defective from a purported failure
to observe in its execution the requirement of Section 42 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.)
Mere ultra vires acts (see Sec. 45.) or those which are not illegal
and void ab initio, but are not merely within the scope of the
^Under Section 4175(P), Book IV, of the Central Bank Manual of Regulations for
Banks and other Financial Intermediaries.
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].)
Sec. 43. Power to declare dividends. — The board of

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

surplus profits in excess of one hundred percent (100%)
of their paid-in capital stock, except: (1) when justified
by definite corporate expansion projects or programs
approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with
any financial institution or creditor, whether local or foreign
from declaring dividends without its/his consent, and such
consent has not yet been secured; or (3) when it can be
clearly shown that such retention is necessary under
special circumstances obtaining in the corporation, such
as when there is a need for special reserve for probable
contingencies, (n)
Concept of dividends.
A stock corporation exists to make a profit and to distribute a
portion of the profits to its stockholders.
(1) A dividend is that part or portion of the profits of a corpo-
ration set aside, declared and ordered by the directors to be paid
ratably to the stockholders on demand or 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 to
the stockholders of a corporation as a return upon their invest-
ment. (Cojuangco vs. Sandiganbayan, 586 SCRA 790 [2009].)* 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.)
(2) A dividend is a sum which can be divided among stock-
holders without touching the capital stock. (Lockhart vs. 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 liq-
uidation of the corporation, and to a distribution of assets upon a
reduction of the capital stock. (19 Am. Jur. 2d 283.)
Dividends, regardless of the form these are declared, that
is, cash, property, or stocks, are valued at the amount of the de-
clared dividend taken from the unrestricted retained earnings of
the corporation. (PLDT vs. National Telecommunications Com-
mission, 539 SCRA 365 [2007].)
Concept of profits.
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 As-
sociation [USEAEA] vs. U.S. Employees Association [USEA], 107
SCRA 87 [1981], citing Ballantine's Law Diet., 3rd ed.) It has also
been defined as "the excess of return over expenditure in a trans-
action or series of transactions," or the "excess of an amount re-
ceived over the amount paid for goods and services" (Nicolas vs.
Court of Appeals, 288 SCRA 307 [1998].), citing Webster's Third
New Int. Diet., p. 1986 and Barron's Law Dictionary, p. 1991.)
As applied to a corporation, the term has a larger meaning
than dividends and covers benefits of any kind, the excess
of value over cost, acquisition beyond expenditures, gain or
advance. {Ibid., citing Booth vs. Gross, Kelly & Co., 238 P. 289,
831, 41 A.L.R. 868.) It is the excess of receipts over expenditures,
that is, net earnings. (Ibid., citing American cases.)
"Citing DE LEON, The Corporation Code of the Philippines Annotated, p. 384, 2002
Dividends distinguished f r o m profits

or e a r n i n g s .
(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. 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. 2d 284.) They may be in cash as well as
in kind.
Dividends received by a company which is a stockholder in
another corporation are corporate earnings arising from corpo-
rate 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 divi-
dends 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].)
P o w e r t o declare d i v i d e n d s .
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
28
them."
(1) Sfodt dividends. — In the case of stock dividend, it shall
not be issued without the approval of stockholders represent-
ing 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. 43, par. 1.)
If the requisite vote for the declaration of stock dividends has
been secured, the stockholders who are opposed cannot legally
"Dividends cannot be 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.)
refuse to receive their participation in the stock dividends. How-

ever, 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 Code or juris-
prudence, 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. 43, par. 1.)
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. They are stated either at a given percent or a fixed
amount for each share. The record date determines the time
when the stockholders of record shall be ascertained.
Dividends payable out of unrestricted

retained e a r n i n g s .
Under the law, dividends other than liquidating dividends
(which are not really dividends as they are from capital) may
be declared and paid out of "the unrestricted retained earnings"
of the corporation. (Ibid.) A corporation cannot make a valid
29
29
The Code, in Section 43, adopting the change made in accounting terminology,
substituted the phrase "unrestricted retained earnings," 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 under-
stood. Indeed, the Code still speaks of "surplus profits" in the second paragraph of Sec-
tion's in fixing the maximum earnings which may be retained by a corporation and in
Section 3 in defining stock corporations. The Code deleted the phrase "arising from its
business."
It may be argued that the term "unrestricted retained earnings," as used in the Code,
refers to all the excess of assets of the corporation over its liabilities including the amount
of the legal or stated capital. Hence, it is not limited to accumulated net profits of the cor-
poration "arising from its business" but may now comprehend also other gains such as
those derived from the sale of fixed assets. But the term does not include the unrealized
increase in value of fixed assets, (infra.)
contract to pay dividends other than from retained earnings or

profits and an agreement to pay such dividends out of capital
is unlawful and void. The power of a corporation to acquire
its own shares is likewise subject to the condition that there be
unrestricted retained earnings in its books to cover the shares to
be purchased. (Sec. 41.)
For purposes of the general rule, the capital or capital stock
which may not be impaired or depleted by dividends is not the
30
entire net assets of the corporation; rather, it is the legal capital
of the corporation in the strict sense, referring to that portion of
the net assets directly or indirectly contributed by the stockhold-
ers as consideration for the stocks issued to them upon the basis
of their par or issued value.
R e a s o n s for t h e rule.
(1) The main reason for the rule is that the outstanding capi-
tal stock of a corporation, including unpaid subscriptions, is a
trust fund (supra.) for the security of creditors and cannot be dis-
tributed to their prejudice to the stockholders as dividends, the
creditors being precluded from holding the stockholders person-
ally liable of their claims.
(2) Moreover, each stockholder is entitled as a matter of right
to have the capital of the corporation unimpaired in order to carry
out the purpose for which the corporation has been created. The
rationale is that stockholders should only receive dividends from
their investment, and not from the investment itself.
(3) The reason has also been stated to be that the capital stock
of a corporation cannot be diverted or withdrawn to the preju-
dice of its creditors and stockholders. This latter statement of the
reason for the rule, however, has been criticized, for although a
court will treat the assets of an insolvent corporation as a trust
fund for its creditors and stockholders, a corporation cannot be
said to hold any of its property subject to a trust while it is a sol-
vent and going concern. (18 C.J.S. 1097.)
"For definition of "legal capital/' see comments under Section 6.

396
Rule as to no par value stock.

The Code makes it clear that with respect to no par value
shares, the entire consideration (including paid-in surplus, infra.)
received from the same shall be treated as capital and shall not be
available for distribution as dividends. (Sec. 6, par. 3.)
The theory is that the stockholders intended that all such
consideration shall constitute the basic business fund of the cor-
poration to be permanently devoted in the prosecution of the
corporate business.
Dividends f r o m property in w h i c h
capital is invested.
(1) To engage in "wasting business." — In the case of corpo-
rations engaged in "wasting business," such as mining or
timber-cutting, sometimes capital consumed in the regular
course of operation, is treated as earnings. According to the so-
called "wasting assets" doctrine, which is based on an English
case, such a "wasting assets" corporation, the capital of which is
necessarily exhausted in the carrying on of its operations, may
rightfully declare and pay dividends out of net income without
making up for the loss of its capital which is thus being constantly
diminished. (19 Am. Jur. 2d 298.)
In 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, is not formed for the purpose of
permanently using the property in which its capital 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, no
deduction is to be made for depreciation in the value of its mine
by reason of its use 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 and debts
and a reasonable fund for contingencies.
Each dividend payment represents a liquidation of capital

assets.
(2) To utilize a lease or patent. — The same is true of a corpo-
ration 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 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.)
Unrestricted retained earnings explained.

31
(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 the stated or
nominal (authorized) capital stock, (see Sees. 12,13,14[8].)
Stated otherwise, the ordinary way of determining whether
a corporation has retained earnings or not is to compute the
value of all its assets and deduct therefrom all of its debts and
liabilities, including legal capital, and thus ascertain whether the
balance exceeds the amount of its outstanding shares of capital
stock. This may be expressed in the following equation:
Retained earnings - Assets - liabilities and legal capital
31
In accounting, the term has been denned as "the accumulated net income of a cor-
poration from the date of incorporation (or from the latest when a deficit was eliminated
in a quasi-reorganization), after deducting therefrom distributions to stockholders and
transfer to capital stock or other accounts." (PICPA Bulletin No. 10[4, b], Nov., 1975.) The
captions "retained income" and "accumulated earnings retained for use in the business
are also used in preference to the term "earned surplus." (Ibid., No. 28.)
The difference between the total assets and liabilities of a cor-

poration represents its net worth or net assets or the stockholders'
32
equity consisting of the capital invested and the retained earn-
ings. 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 undis-
tributed earnings or profits realized by a corporation arising
from the transaction of its business and the management of its
33
affairs, out of current and prior years.
Section 43 does not categorically state that the retained earn-
ings 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 actual earn-
ings or profits realized from the business of the corporation.
(2) Such retained earnings or portion thereof are said to
be unrestricted and, therefore, free for dividend distribution
to stockholders, if they have not been reserved or set aside
by the board of directors for some corporate purpose or for
some other purpose in accordance with managerial, legal, or
contractual requirements, (see Sec. 43, par. 2.) For instance,
under the Insurance Code (Pres. Decree No. 1460, Sees. 210-214.),
insurance companies are required to maintain reserves to assure
the payment of losses covered by their policies and the return
of unearned premiums. The restrictions may be imposed by the
Securities and Exchange Commission in pursuance of authority
given by law. In any event, no legal obligation exists on the part
of the board to distribute all the unrestricted retained earnings as
dividends, (infra.)
Section 3 provides that stock corporations may distribute

dividends out of "surplus profits." For purposes of dividend dec-
laration, the term "surplus profits" may be used synonymously
with unrestricted retained earnings.
32
In accounting, the term has been denned as "the residual interest of owners in the
assets of a corporate business entity, measured by the excess of assets over liabilities."
(PICPA Bulletin No. 10[1], Nov. 1975.)
"Dividends from 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.
I t e m s affecting unrestricted retained e a r n i n g s .

SEC Memorandum Circular No. 11 (Dec. 5, 2008) prescribes
the guidelines in determining availability of retained earnings
for cash, property and stock dividend declarations of stock cor-
porations. It enumerates the items affecting the unrestricted
retained earnings account from an accounting purview, as
follows:
(1) Nominal or temporary or income statement accounts
closed to income and expense summary at the end of the period
to determine actual results of operations during the period and
further closed to retained earnings account;
(2) Effects of changes in accounting policy;
(3) Foreign exchange gains and losses;
(4) Actuarial gains or losses;
(5) Share in the net income of associates /joint ventures ac-
counted for under equity method of accounting;
(6) Dividend declarations during the period;
(7) Appropriations of retained earnings during the period;
(8) Reversals of appropriations;
(9) Effects of prior period adjustments; and
(10) Treasury shares.
Existence of actual profits or e a r n i n g s .

To justify the declaration of dividends, there must be an ac-
tual bona fide surplus profits or earned surplus over and above all
34
debts and liabilities of the corporation. (Steinberg vs. Velasco, 52
34
The SEC has explicitly reiterated its original policy that dividends (cash or stock),
shall be declared only out of unrestricted retained earnings of the corporation. A corpo-
ration cannot declare dividends when it has zero or negative retained earnings (defi-
cit). The surplus profits or income must be (1) bona fide income founded upon actual
earnings or profits. The existence of surplus profits arising from business operations is
a condition precedent to the declaration of dividends;. (2) Actual earnings or profits shall
mean net income for the year based on the audited financial statements, adjusted for
unrealized items enumerated below, which are not available for dividend declaration:
(a) Share /equity in net income of the associate or joint venture accounted for under the
equity method, as the same is not yet actually earned or realized; (b) Unrealized for-
eign exchange gains, except those attributable to cash and cash equivalents; (c) Unreal-
ized actuarial gains which result when the company opts to recognize actuarial gains or
400
Phil. 953 [1929].) Hence:

(1) Earnings of the corporation which have not yet been re-
ceived even though they consist in money which is due cannot
35
be included in the profits out of which dividends may be paid.
(11 Fletcher, p. 1064.)
(2) As a rule, dividends cannot be declared out of borrowed
money, for borrowed money is not profit; but money may be
borrowed temporarily for the purpose of paying dividends, if the
corporation has used its surplus assets to make improvements
for which it might have borrowed money. (18 C.J.S. 1102.)
(3) A corporation may properly pay dividends from accumu-
lated surplus out of previous years although realizing no profit
from current earnings.
(4) On the other hand, it cannot pay dividends although it
has realized actual profits for the year in which dividends are
declared until it has ehminated a deficit resulting from its opera-
losses directly to profit or loss statement; (d) Fair value adjustment or gains arising from
market-to-market valuation, which are not yet realized; (e) The amount of recognized
deferred tax asset that reduced the amount of income tax expense and increased the net
income and retained earnings, until realized; (f) Adjustment due to deviation from Phil-
ippine Financial Reporting Standards/generally accepted accounting principles (PFRS/
GAAP), which results to gain; (g) Other unrealized gains or adjustments to the retained
earnings brought about by certain transactions accounted for under the PFRS such as
accretion income under International Accounting Standards 39, Day 1 gains on initial rec-
ognition of financial instruments, reversal of revaluation increment to retained earnings,
and negative goodwill on investments in associate; and (h) Other adjustments that the
SEC may prescribe. (3) Additional paid-in capital shall neither be declared as dividends
nor reclassified to absorb deficiency except through an organizational restructuring duly
approved by the Commission. (SEC Memo. Circ. No. 11, Dec. 5, 2008.)
A "reconciliation of retained earnings" is required by the Circular to be submit-
ted by listed companies, corporations with securities reconstructed under the Securities
Regulation Code (SRC) and by public companies. For other corporations, the reconcilia-
tion shall be required only in two (2) instances.
35
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
received in cash? No. Retained earnings or surplus profits referred to under Section 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 accounting, Corporation X can recognize as income its equity in the net
earnings in Corporation Y, the same cannot be declared as dividends since it is not yet
actually realized as income inasmuch as Corporation Y has not yet declared the same as
dividends. (SEC Opinion, Oct. 6,1995.)
Sec. 43 T I T L E rv. P O W E R S O F C O R P O R A T I O N
401
tions of preceding years. (William vs. Western Union Tel. Co., 93

N.Y. 162.) In other words, dividends may not be declared so long
as a 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 said 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 speaking, net earnings are what remains of
gross receipts 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."
(2) Depreciation in the value of the corporation's plant is a
proper expense charge and the same is true of expenditures for
maintenance and upkeep. And a reserve fund may be accumu-
lated 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 founded 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 c a s h dividends.
Under the pertinent provision of Section 16 (now Sec. 43.) of
the former Corporation Law, which reads as follows: "No corpo-
ration shall make or declare dividends except from the surplus
profits arising from its business, or divide or distribute its capi-
402
tal stock or property other than actual profits x x x," dividends,

whether cash or stocks, must be declared only out of surplus
profits arising from corporate business.
The Securities and Exchange Commission has expressed
the view that paid-in or premium surplus (difference between the
par value and the higher price for which stock is sold by the
corporation) cannot be declared as cash dividends under Section
16 above (SEC Opinion, May 7,1968.), or even as stock dividends
because Section 43 of the Corporation Code provides that
dividends can be declared only from the unrestricted retained
36
earnings. (SEC Opinion, April 16,1988.) The reason given is that
"the entire proceeds of sales of a corporation of its own stock,
even when sold for more than par value, are part of its capital
stock (i.e., to be regarded as paid-in capital, rather than as retained
earnings) and, therefore, cannot be profits earned through the
conduct of its business out of which dividends may be paid."
(Merchants and Insurance Reporting Co. vs. Youtz, 178 R 540.) It
also said that to permit this capital surplus to be distributed as
cash dividend is a "fraud upon creditors who extend credit on
the faith of its capital stock." (14 C.J. Sec. 1210, p. 801.)
Whether dividends can now be declared out of premium sur-
plus under Section 43 of the new Corporation Code is a legal
question and, consequently, is not to be resolved by whatever
may be the present accounting practice on the matter. The fol-
lowing support the proposition that the distribution of paid-in
37
surplus as cash dividends may be legally permitted under the
present law:
36
The SEC has allowed the declaration of dividends from paid-in surplus subject to
the following conditions: (1) They shall be declared only as stock dividends; (2) No credi-
tors shall be prejudiced therefrom; and (3) There shall be no resulting impairment of capi-
tal. (SEC Opinion, Oct. 19,1989.) The reason is that when a corporation converts the pre-
mium or contributed surplus into capital by issuing to its stockholders stock dividends, it
actually parts with nothing but merely transfers the surplus to capital account and issues
shares of stock to represent the same. (SEC Opinions, Aug. 16,1993 and March 27,1955.)
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.)
37
"The preferred terminology is 'capital in excess of par (or stated) value,' 'addi-
tional paid-in capital,' 'additional contributed capital,' or similar descriptive phrases. Use
of the captions 'surplus,' 'capital surplus,' or 'paid-in surplus' should be discontinued."
(PICPA Bulletin No. 10[28], Nov. 1975.)
(1) Dividends from other gains not arising from business.

Unlike Section 16 of the old law, Section 43 does not require that
dividends distributable by a corporation be "from the surplus
profits arising from its business," the quoted phrase having been
deleted, indicating a legislative intent to do away with the idea
of profits earned in the business as the only source of dividends.
38
Hence, "unrestricted retained earnings" from which divi-
dends may be declared are not limited to the accumulated earned
surplus of the corporation but may also include other gains not
"arising from its business."
(2) Absence of provision on treatment of paid-in surplus from issue
of par value shares. — There is no provision in the Code which
specifically treats paid-in surplus from the issue of par value
shares as part of the capital stock.
On the contrary, while Section 6 (par. 3.) explicitly requires
"that the entire consideration received by a corporation for its no
par value shares shall be treated as capital and shall not be avail-
able for distribution as dividends," there is no similar provision
with respect to par value shares. It is true that there was also
no similar provision even under the old corporation law but the
same would be a surplusage since Section 16 of said law already
restricted the distribution by a corporation of dividends only to
"surplus profits arising from its business."
(3) Credit of paid-in surplus to profit and loss. — At the start of
the operation of a corporation, the actual value of its shares is
the same as their par value. The premium on stock issued after
the corporation has accumulated profits is justified by the need
to equalize as between the new and the old stockholders their
respective rights in such profits which are distributable in cash
38
According to the SEC, the term "retained earnings" as defined under the generally
accepted accounting principles is understood to mean "the accumulated profits realized
out of normal and continuous operations of the business after deducting therefrom distri-
butions to stockholders and transfers to capital stock or other accounts." Profits realized
from the sale of treasury shares are treated as part of "capital" or "paid-in surplus" and
cannot, therefore, be declared as stock or cash dividend. They are not ordinary profits
which would form part of retained earnings. (SEC Opinion, April 14, 1988.)
Corporations usually get additional funding from existing shareholders via loans
or advances which are later converted into additional paid-in capital (APIC) in the nature
of additional capital investment or debt-to-equity conversion. Per SEC Memorandum
Circular No. 11, APIC shall not be declared as dividend.
404
dividends. While such premium may be considered as part of the

capital contributed or invested by a stockholder for accounting
purposes, it is really, from the legal standpoint, in the nature of
profit or surplus realized by the corporation resulting from the
profitable operation of the corporate business.
Hence, such premium should be credited to profit and loss
and not to capital.
(4) Treatment of paid-in surplus as premium for privilege of
subscribing. — The authorized capital stock limits the amount or
number of shares that may be issued by a corporation at a speci-
fied par value. In other words, the amount which the corporation
is authorized to raise by the issue of shares should not exceed
the authorized capital stock which can only be increased by
complying with the formalities prescribed by Section 38.
It follows that when shares are issued above par, the excess
is not to be treated as capital, i.e., not as part of the consideration
for the shares but merely as a premium given for the privilege of
subscribing to such shares, and hence, not as a part of the trust
fund for the benefit of creditors who have no cause for complaint,
provided the corporation is solvent and sufficient assets remain
to pay their claims.
It is significant to note that holders of par value shares par-
ticipate in dividends, and in case of liquidation of the corpora-
tion, in the corporate assets, on the basis of the par value of their
shares, irrespective of the amount of the consideration paid for
by them, indicating that any excess is not to be considered part
of their invested capital for purposes of dividend declarations.
(5) Treatment of capital stock as referring to legal capital. — Except
by decrease of capital stock (Sec. 38.) and as otherwise allowed,
the Code prohibits the distribution of corporate assets or property
prior to dissolution (see Sec. 122, last par.) conformably to the
general rule that the capital stock of a corporation constitutes a
trust fund for the benefit of corporate creditors. For purposes of
this rule, the capital stock contemplated by law should refer to
the aggregate par value (or issued value in case of no par value
shares) of the outstanding shares of stock, for creditors extend
credit to a corporation on the faith of its capital stock represented
by its outstanding shares and not necessarily on the basis of the
actual consideration paid for each of the shares which may be

unknown to them.
Under the trust fund doctrine, it is only the assets of the corpo-
ration, as represented by the subscribed or outstanding capital
stock, that constitute a fund to which creditors have a right to
look for the satisfaction of their claims and which the corporation
is not allowed to impair to their prejudice. (Phil. Trust Co. vs.
Rivera, 44 Phil. 469 [1925]; Lumanlan vs. Cura, 59 Phil. 746 [1934].)
In other words, the capital stock which must not be reduced by
the payment of the dividends means the legal capital, i.e., the
portion of the corporate assets equivalent to the total par value
of all the outstanding par value shares (or the total consideration
39
received for no par value shares) of the corporation.
(6) Increase of capital account without issuance of additional
shares. — Furthermore, it is the law, not the corporation, that
must necessarily determine what assets shall form part of the
capital stock which the corporation is not allowed to impair for
the protection of its creditors. However, following the opinion of
the Commission, it now depends entirely on the board of direc-
tors whether or not to create premium surplus and, therefore,
whether or not the increase in the value of the stock is to be treat-
ed as part of the corporation's capital stock. The rule will make
possible an increase in the capital account without issuing addi-
tional shares for the amount capitalized.
The corporation, of course, may declare stock dividends from
premium surplus, but as a stock dividend involves a transfer of
surplus to capital account, it is valid only when corresponding
shares are issued to the stockholders for the amount transferred.
If a corporation can declare cash dividends out of actual earnings
even to the extent of reducing the market value of stocks to their
par value, why not out of premium surplus?
(7) Issuance of stock at par value but less than market value. —
Lastly, Section 62 prohibits a corporation from issuing stock for a
39
Accordingly, the term "legal capital" has been defined as follows: "That part of
the paid-in capital of a corporation which by law, agreement, or resolution of directors
become the par or stated value of the capital stock; the portion of the assets restricted as to
withdrawal under corporation law." (E.L. Kohler, A Dictionary for Accountants, 1975 ed., p.
289.) It does not include paid-in surplus.
406
consideration less than the par value but it is not required by law
to issue stock which has increased in value, at a price above par.
If the difference or premium must be treated as part of the capital
stock for the benefit of the creditors, then a corporation should
not be permitted to issue stock for a consideration less than its
market value, although it may be above the par value. However,
such issuance is not prohibited by Section 62.
Thus, shares with a par value of P10.00 but with a market
value of P15.00 may be legally issued for a price less than P15.00
provided it is not less than P10.00. It will depend, therefore, sole-
ly on the board of directors of the corporation whether the excess
value should become part of the capital stock by issuing the stock
at market price or be given free to stockholders by issuing stocks
at par value. If the difference can be distributed gratuitously to
the stockholders without diminishing the capital stock, why not
as cash dividends?
Distribution of revaluation surplus

as dividends.
A corporation can have its fixed assets like real estate revalu-
ated for the purpose of determining its current market value. The
excess 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
property, (see SEC Opinion, May 14,1970.)
(1) General rule. — An increase in the value of 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 purposes of 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. vs. 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 the business. (SEC Opinion, Dec. 7, 1971, citing Ballantine, p.
541.)
(2) Exceptions. — The above ruling is not absolute as the Se-
curities and Exchange Commission allows certain exceptions
making revaluation increment 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 earn-
ing from operations in that period are 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 of fixed assets
as a result of revaluation thereof may be declared as dividends,
provided the following conditions exist:
(a) The corporation has sufficient income from opera-
tions from which the depreciation on the appraisal increase
was charged;
(b) It has no deficit at the time the depreciation on the ap-
praisal 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 not impaired
by subsequent losses is available for dividend. (SEC Opin-
ions, Oct. 2,1981 and March 19,1992.)
Declaration of dividends.
(1) Conditions. — A dividend declaration ordinarily requires
the concurrence of two things, namely:
(a) The existence of "unrestricted retained earnings" out
of which the dividends may be declared and paid; and
408
(b) A corporate resolution of the board of directors

declaring the payment of a portion or all of such earnings to
the stockholders.
(2) Additional requirements for stock dividends. — Cash divi-
dends require only approval of the board of directors. Stock
dividends are issued by resolution of the board of directors and
approval of the resolution by the stockholders. For the declara-
tion of stock dividends, a corporation must have also a sufficient
number of authorized unissued shares for distribution to stock-
holders; otherwise, it must increase its capital stock to the extent
of the corporate earnings to be declared and distributed as stock
dividends, (see Sec. 38.)
The distribution of dividends will, of course, reduce the
retained earnings of the corporation by exactly the amount paid
out to stockholders in the case of cash dividend, or transferred to
capital account in the case of stock dividend, (infra.)
Discretion of the board of directors

to declare dividends.
The board of directors has the responsibility to declare divi-
dends and determine the timing as well as their amount.
(1) The fact that profits or earnings have accrued in the
prosecution of the corporate business does not necessarily
impose upon the directors the duty to declare them as dividends.
(Wabask R. Co. vs. Barclay, 280 U.S. 197.)
(2) If in their honest judgment the directors reasonably
determine that the profits should be kept in the business, no
court has the power to compel them to make the distribution
40
in the absence of bad faith or clear abuse of discretion, or such
^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.
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
arbitrary or unreasonable conduct as amounts to a breach of

trust. The apportionment of the net earnings to the payment
of dividends is largely a question of policy entrusted to the
discretion of the board of directors. If there is any doubt about
the propriety of declaring dividends, the directors are justified in
resolving the doubt against 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 or not to distribute at all any dividend
41
subject to the prohibition in the second paragraph of Section 43.
(infra.)
(4) The stockholders may sue the directors to compel them
to declare and pay a dividend if they unreasonably accumulate
profits of the corporation but they have the burden of proving
the justification of declaring dividends.
Limit on retained e a r n i n g s .
(1) Under the Corporation Code. — Stock corporations are
prohibited from retaining surplus profits in excess of 100% of
their paid-in capital stock except when justified by any of the
42
reasons mentioned. (Sec. 43, par. 2.) If the requirement which is

mandatory is violated, the corporation may be compelled by the
Securities and Exchange Commission to declare dividends to its
43
stockholders. The prohibition on retention of profits provided in
fiduciaries. Their cestui que trusts are the corporation and the stockholders as a body. Cir-
cumstances such as those above 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 vs. Gottfried, 73 N.Y.S. 2d 696.)
41
In view of the restrictions imposed by Section 43, the "business judgment" rule
which upholds judicial non-interference in corporate management (see Sec. 23.) has lim-
ited application with regard to dividend declarations.
42
The SEC has resolved as a matter of policy to construe paid-in capital stock as used
in the second paragraph of Section 43, to include payment on subscription in excess of
par. (SEC Opinion No. 47, Sept. 30, 2003.)
4J
The SEC has issued the following rules governing the excess profits of corpora-
tions:
(1) All corporations which have surplus profits in excess of necessary require-
ments for capital expansion and reserves shall declare and distribute the excess profits as
dividends to stockholders.
(2) Where the financial statements of the corporation show surplus profits in ex-
cess of 100% paid-up capital, it shall explain by footnotes why the same has not been
declared as dividends. If the explanation is not satisfactory, the Commission shall direct
the corporation to distribute the excess as dividends.
410
Section 43 is applicable to all stock corporations, including wholly

owned subsidiaries. Section 43 does not make any qualification
in using the words "stock corporations." (SEC Opinion, July 22,
1993.)
There may be some question as to whether or not the reten-
tion of profits is justified by the "reasonable needs of the busi-
ness." Suffice it to say that the policy of the law to encourage
and force the distribution of dividends curtails the discretionary
power of directors to retain corporate earnings."
The Commission will consider as sufficient justification for non-distribution of divi-

dends the following: A. The corporation has definite expansion plans approved by the
board of directors and stockholders, and whenever necessary, by the proper government
authority. The amounts appropriated for such purpose shall be segregated from the free
surplus. Upon completion of the expansion program, reserves established shall be de-
clared as stock dividends. B. The corporation is prohibited under any loan agreement
with any financial institution or creditor, whether local or foreign, from declaring divi-
dends without its/his consent, and such consent has not been secured. C. The non-distri-
bution of dividends is consistent with the policy or requirement of a government office.
Should an examination of the affairs of the corporation be necessary to determine
the validity of the explanation given, an examination fee of not exceeding five hundred
pesos (P500) shall be charged to and collected from the company.
(3) It shall be the policy of all corporations whose securities are listed in any op-
erating stock exchanges or registered and licensed under the Securities Act to maintain
and distribute equitable balance of cash and stock dividends, consistent with the needs
of stockholders and the demands for growth or expansion of the business.
Any declaration of dividend, whether cash or stock, shall be reported to the Com-
mission within fifteen (15) days from the declaration: Provided, That in the case of cor-
porations whose securities are listed in any operating stock exchange or registered and
licensed under the Securities Act, the report shall be filed with the Commission before or
simultaneously with the release or publication of the notice of declaration of dividends
to stockholders.
Any and all appropriations out of surplus profits for reserves shall have prior ap-
proval of the board of directors and stockholders. The specific purpose arid justification
for each reservation shall be clearly stated in the financial statements by footnotes.
44
Section 43 supersedes Presidential Decree No. 270 which also requires all corpora-
tions which have surplus profits in excess of necessary requirements for capital expan-
sion and reserves to declare and distribute the excess profits as dividends to stockhold-
ers, pursuant to such rules and regulations which under the Decree the Securities and
Exchange Commission is authorized to promulgate. According to the Decree, "a more
favorable and healthier climate for investments would be promoted if stockholders are
able to share in the profits of corporations whenever possible, the same not being subject
to the absolute or arbitrary action of management on the matter." The Decree applies
only to publicly held corporations or those having stockholders in excess of twenty. (SEC
Opinion, Sept. 14, 1973.) It does not apply to wholly owned subsidiaries of foreign cor-
porations. (SEC Opinion, Jan. 8,1974.) The term "surplus profits," as used in the Decree,
is synonymous to "retained earnings," as used in accounting. (SEC Opinion, Nov. 14,
1973.) Unlike Section 43, the Decree does not fix the limit of the surplus profits that may
be retained.
Sec. 43 TITLE rV. POWERS OF CORPORATION 411
(2) Under the National Internal Revenue Code. — Section 29 of

the Tax Code imposes a 10% surtax on corporations improperly
accumulating profits or surplus, in addition to other income taxes
imposed on corporations. The purpose is to prevent individual
taxpayers from avoiding the progressive rates of income tax by
employing the corporate form for the accumulation of taxable
45
income. (De Leon & De Leon, Jr., The National Internal Revenue
The Commission has opined that the scheme adopted by a corporation with sub-
stantial surplus profits whereby the stated value of each share of its outstanding no-par
value shares was revalued by increasing the same from, say, P1,000 per share to P7,000,
the payment to which would come from its retained earnings, instead of declaring stock
dividends because the existing unissued shares of the corporation were not sufficient for
distribution to its stockholders, was violative of Pres. Decree No. 270, as it deprived them
of their right to participate in the surplus profits according to their respective interests.
(SEC Opinion, July 31,1979.)
45
"Sec. 29. Imposition of Improperly Accumulated Earnings Tax. —
(A) In General. — In addition to other taxes imposed by this Tide, there is hereby
imposed for each taxable year on the improperly accumulated taxable income of each
corporation described in Subsection B hereof, an improperly accumulated earnings tax
equal to ten percent (10%) of the improperly accumulated taxable income.
(B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. —
(1) In General. — The improperly accumulated earnings tax imposed in the pre-
ceding Section 1 shall apply to every corporation formed or availed for the purpose of
avoiding the income tax with respect to its shareholders or the shareholders of any other
corporation by penriitting earnings and profits to accumulate instead of being divided or
distributed.
(2) Exceptions. — The improperly accumulated earnings tax as provided for under
this Section shall not apply to:
(a) Publicly-held corporations;
(b) Banks and other non-bank financial intermediaries; and
(c) Insurance companies.
(C) Evidence of Purpose to Avoid Income Tax. —
(1) Prima Facie Evidence. — The fact that any corporation is a mere holding com-
pany or investment company shall be prima facie evidence of a purpose to avoid the tax
upon its shareholders or members.
(2) Evidence Determinative of Purpose. — The fact that the earnings or profits of a
corporation are permitted to accumulate beyond the reasonable needs of the business
shall be determinative of the purpose to avoid the tax upon its shareholders or members
unless the corporation, by the clear preponderance of evidence, shall prove to the con-
trary.
(D) Improperly Accumulated Taxable Income. — For purposes of this Section, the term
"improperly accumulated taxable income" means taxable income adjusted by:
(1) Income exempt from tax;
(2) Income excluded from gross income;
(3) Income subject to final tax; and
(4) The amount of net operating loss carry-over deducted;
And reduced by the sum of:
(1) Dividends actually or constructively paid; and
(2) Income tax paid for the taxable year.
412
Code Annotated, 2003 ed., Vol. 1, pp. 230-231.)
Action to enforce declaration

of dividends.
Since a stockholder has no individual interest in the profits
of a corporation until a dividend has been declared, the general
rule is that, prior to the declaration of a dividend, a stockholder
cannot maintain an action at law to recover his share of the accu-
mulated profits. Mandamus is not a proper remedy in such a case.
However, an action at law may be maintained where it is al-
leged that sufficient net profits have been earned to obligate the
corporation to pay the amount agreed. Before an action to compel
the declaration and payment of a dividend can be maintained, it
must appear that the complaining stockholder has made appli-
cation to the directors of the corporation for the relief sought.
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 ap-
plication need not be made. In such an action, the corporation is
a necessary party defendant. (18 C.J.S. 1142.)
Time for declaration of d i v i d e n d s .

(1) At the end of the year. — A corporation has a fiscal year in
order to determine the results of its operation during the year
— whether it earned profits or incurred losses. Of course, such
results may also be computed monthly, quarterly, or semi-annu-
ally, but a summary is always made at the end of the year to
determine the performance of the company for the whole year.
(a) If the company earned profits during the past year,
it may declare the same as dividends, but if it does not, the
Provided, however, That for corporations using the calendar year basis, the accumu-
lated earnings tax shall not apply on improperly accumulated income as of December 31,
1997. In the case of corporations adopting the fiscal year accounting period, the improp-
erly accumulated income not subject to this tax shall be reckoned, as of the end of the
month comprising the twelve (12)-month period of fiscal year 1997-1998.
(E) Reasonable Needs of the Business. — For purposes of this Section, the term "rea-
sonable needs of the business" includes the reasonably anticipated needs of the business.
(NIRC.)
profits are carried over to the next fiscal year. Conversely, if

the company incurred losses during the past year, its books
will record such loss and no profits, unless it accumulated
earnings during the previous years which have not been dis-
tributed as dividends. It follows from this that a corporation
may incur losses during one fiscal year or any portion thereof
and still be able to declare dividends, that is, if such losses do
not affect profits that the company has accumulated. On the
other hand, a corporation may earn profits in one fiscal year
but because of losses suffered during the previous years, it
may not be able to declare dividends.
(b) From the foregoing, it is clear that what is material
is the existence of earned profits on the date of declaration,
taking into account the results of the entire operations of the
company. Since the financial statements are generally pre-
pared after the end of the fiscal year, dividends are declared,
as a general rule, after the fiscal period has ended, when re-
tained earnings are shown to exist. Of course, the determina-
tion of the existence of retained earnings may be made even
before the end of the fiscal year, but this is merely to enable
the management to map out its dividend policy for the next
fiscal year.
(2) Before the end of the year. — Therefore, a corporation should
not declare dividends out of profits earned during an interim pe-
riod 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, 1971.) 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 im-
paired by losses, whether expected or not, during the remaining
period of the fiscal year." (SEC Opinion, Oct. 22,1974.)
"The SEC requires the submission of the projected income statement of the corpora-
tion for the remaining period of the year as well as the basis and assumption used therein
for the valuation of the Commission showing that the corporation will not sustain losses
that would impair the existing earnings to be declared as dividends. Should the corpora-
tion sustain losses during the year, cash distributed to the stockholders of record must be
refunded to the corporation. (SEC Opinion, Nov. 12,1990.)
414
The Securities and Exchange Commission requires that the

projected income statement of the corporation for the remain-
ing period of the year as well as the basis and assumptions used
therein shall be submitted to the Commission. Should the corpo-
ration sustain losses during the year, cash dividends distributed
to the stockholder of record must be correspondingly refunded
to the corporation. (SEC Opinion, July 24,1991.)
Validity of dividend determined

at time of declaration.
(1) Effect of subsequent insolvency of corporation. — In deter-
mining whether dividends were lawfully made, the transaction
must be viewed in the light of the time of its occurrence, and if
net or surplus profits existed at that time, the payment of the
dividend 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 worthless than the val-
uation placed upon them.
(2) Effect of good faith in making payment out of capital. — How-
ever, 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. And whether the
assets of a 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 by the directors of
a corporation 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
C.J.S. 1102.)
Payment of subscription f r o m d i v i d e n d s .
(1) From dividends to be declared. — It has been held that a
stipulation to the effect that the subscription is "payable from
the first dividends declared on any and all shares of said com-
party owned by me at the time dividends are declared until the

full amount of the subscription has been paid" is illegal for it
"obligates the subscriber to pay nothing for the shares except as
dividends may accrue upon the stock." In the contingency that
dividends are not paid, there is no liability at all. (National Ex-
change 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.
(a) The stockholder is still entitled to receive cash divi-
dends due on delinquent stock but the dividends "shall first
be applied to the unpaid balance on the subscription, plus
costs and expenses." (Sec. 43, par. 1.) The cash dividends may
be applied as payment for the unpaid subscription of all de-
linquent shares. (See Sec. 71.)
(b) Cash dividends cannot be withheld from the sub-
scribers who have not fully paid their subscriptions unless
they are delinquent on their unpaid subscriptions. The cor-
poration 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.)
(3) From stock dividends. — A stockholder's indebtedness to
a corporation under a subscription agreement cannot be com-
pensated with the amount of his shares in the same corpora-
tion, there being no relation of creditor and debtor with regard
to such shares, (see Art. 1249, Civil Code.) Under Section 43
(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 divi-
47
dend to unpaid subscription.
(a) A stockholder, as such, is not a creditor of the cor-
poration for his shares although the latter is creditor of the
48
former for the unpaid balance of his subscription. It is the
47
Note 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.
"A subscription contract (see Sec. 60.) creates a creditor-debtor relationship between
the corporation and the subscriber.
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 it on
the credit of its capital stock. (18 C.J.S. 618.) In view of the
foregoing, a stockholder's liability for unpaid subscriptions
(although not yet delinquent) may not be offset by the issu-
ance and distribution 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 al-
ready applied as payment to the new issuance of shares, the
same cannot be reapplied to previous subscriptions which
are 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.
(c) Section 6 states that preferred shares may be given
preferential right in the distribution of dividends among oth-
ers, but it does not prohibit holders of preferred shares from
acquiring shares of whatever class by 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 favor of stockholders holding preferred shares is valid.
(SEC Opinion No. 04-28, April 27,2004.)
Instead of stock dividends, the corporation may declare cash
dividends, and use the said dividends to pay off the stockhold-
er'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 stockhold-
ers who received them can 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 in a corporate capacity in receiving the dividends,
they do not thereby ratify the illegal act of the board as to pre-
elude a subsequent recovery. (Levington Life, F. & M. Ins. Co. vs.

Page, 66 Am. Dec. 165.)
(2) Where corporation insolvent at time of wrongful payment.
— The rule is especially true if the corporation is insolvent (Mc-
Donald vs. 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.)
(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 accordingly 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.
(3) Liability of directors. — If the directors acted in good faith,
and without negligence, they are not liable to the corporation
or to creditors for declaring and paying dividends when they
should not have done so, and thereby diminishing the capital
stock. But if they have been guilty of a fraudulent breach of trust,
or of gross negligence, in paying dividends when they had no
right to pay them/they are personally liable to creditors.
Liability of directors for unlawfully paid dividends may be
enforced under Section 31.
Remedies of corporate creditors.

If dividends are improperly declared and paid when there
are no net earnings, they may be reclaimed by the corporate
creditors or by a receiver or assignee acting for the benefit of the
creditors.
418
(1) If the capital stock of a corporation is wrongfully paid

away by the directors, it may be pursued by creditors into the
hands of any one who is not an innocent purchaser or recipient
of the same for a valuable consideration.
(2) If such a wrong is threatened, a creditor may maintain a
suit for an injunction, since the fund to which the creditor looks
for security would thereby be impaired. (Clark on Corporations,
pp. 435-436; see Steinberg vs. Velasco, 52 Phil. 953 [1929].)
Persons entitled to dividends.

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 as well
as to cash dividends. (19 Am. Jur. 2d 370.)
(1) Except where 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 dividend (Ibid.), without regard to the time when
the dividends were 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 Opinion, Nov. 12, 1986; Cojuangco vs.
Sandiganbayan, 586 SCRA 790 [ 2 0 0 9 ] >
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 con-
venience of the company. The rule with respect to the payment
of dividends is that 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 is
generally dependent upon the creator of the trust, actual or pre-
sumed. (19 Am. Jur. 2d 371.)
^'Citing DE LEON, The Corporation Code of the Phils., Annotated, p. 410, 2002 Ed.
(3) A transfer of shares which is 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 cor-
poration 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) If an unregistered pledge earns dividends, the pledgor is
entitled to the same as against the corporation, in the absence of
notice of the pledge; but if the pledge is recorded in the books of
the corporation, the pledgee has the right to receive the dividends,
with the obligation to compensate what he receives with the debt
of the pledgor, (see Art. 2102, Civil Code.)
(5) Share subscriptions not yet recorded in the stock and
transfer book on the date of dividend declaration, are not en-
titled to said dividend. Hence, subscribers to the increase of capi-
tal stock are considered stockholders of record only at the time of the
approval of said increase by the Securities and Exchange Commis-
sion (see Sec. 38, par. 3.) and not at the time of filing of the certifi-
cate of increase of the capital stock, (see SEC Opinion, Sept. 15,
1980.)
Right of s t o c k h o l d e r s after declaration

of d i v i d e n d s .
(1) Cash dividends. — As soon as cash dividends are publicly
declared, the stockholders have the right to their pro rata shares.
(1 Fletcher, pp. 780-789.)
50
(a) In the absence of a record date, the dividend belongs
50
A record date is the date fixed in the resolution declaring dividends, when the divi-
dend 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.
Because payments of stock dividends requiring an increase in the authorized capi-
tal stock are contingent upon SEC's approval (see Sec. 38.), 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
to the person who is the owner of the shares of stock at the

time of declaration, and not to the owner of the shares at the
time of payment. The reason is that when a dividend declara-
tion is made, the corporation becomes debtor and the right of
the shareholder to distribution, unless a record date is speci-
fied, becomes fixed by the declaration. (Ballantine, p. 566; see
Barretto vs. Sta. Maria, 26 Phil. 200 [1914].)
(b) It is the declaration of the dividends which creates
both the dividends itself and the right of the stockholders to
demand and receive it. (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 stock-
holders to share therein, unless he is excluded by 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.
The company should exert real and sincere efforts to contact
51
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 vs. Crescent Planning Mill
Co., 93 SW 819.)
which shall not be less than 10 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 that are 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. Ore. No. 2, April 17,2009; amending Amended
Rules governing Pre-Emptive and Other Subscription Rights and Declaration of Stock
and Cash Dividends.
The term 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.
51
Check payments are mailed directly to the stockholder or his nominee by the com-
pany's stock transfer agent. For unissued stock certificates or those registered in street
name, checks are sent to the handling broker who, in rum, remits payment to the benefi-
cial owner of the shares.
(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. (Staats vs. Bio-
graph Co., 236 Fed. 454.)
(a) Unlike a cash dividend, a stock dividend requires, as
a general rule, more than mere declaration to make it effec-
tive. 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 apart to the stockholder, its effect is not com-
plete. (19 Am. Jur. 2d 317.)
(b) The so-called 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 units. There is no increase in his proportionate
claim upon the corporate assets or income by reason of such
a paper dividend. There is no obligation upon the corpora-
tion to declare stock dividends, which are not distributions
but only a change of the share and capital structure. (Ballan-
tine, p. 560.)
(c) Since the declaration of stock dividend gives the stock-
holder nothing until all the formalities necessary to a valid
increase of stock are complied with, its revocation, therefore,
takes away nothing. But unless rescinded, the shareholders
have absolute right to their respective shares in the stock div-
idends so declared and actual delivery of the corresponding
certificate is not essential to make the shareholder the owner
of the dividend.
Time for p a y m e n t of dividends.

(1) Frequency and intervals of declaration. — Dividends are
usually declared, one at a time, generally quarterly.
(a) Where the condition of the company is sound and the
earnings are regarded as constant, the directors may, at one
meeting, declare dividends in advance for succeeding quar-
ters, hardly even longer than a year altogether, the dividend
for each succeeding quarter being made payable as of a cer-
tain 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 dividends on the
various classes of stock becomes a more or less routine mat-
ter, called to the attention of the board of directors by the
treasurer at the directors' meeting prior to the expiration of
the quarter or the half year or the year for which the divi-
dends are to be payable. (19 Fletcher, pp. 220-221.)
(2) Date of payment. — There is no hard and fast rule describ-
ing 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 ju-
dicious discretion of the directors. (SEC Opinion, April 11,1962.)
(a) It is customary for the directors to fix the time for pay-
ment of a dividend. But a corporation cannot discriminate
among the shareholders as to the time of payment of divi-
dends.
(b) If no time is fixed by the resolution declaring a divi-
dend, 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. (19 Fletcher, pp. 887-
888.)
Equal participation in the distribution

of dividends.
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 were acquired.
(1) General on all the stocks. — The dividends must be general
on all the stocks, so that each stockholder will 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 an equal participation in the
profits of the company. The rule against discrimination is equally
applicable 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
full shares from equal participation in the distribution of divi-
dends, it cannot deny stockholders to fractional shares (see Sec.
41[1].) from participation in the dividends to the extent of their
respective holdings. Thus, fractional shares resulting from a pre-
vious distribution of dividend by a corporation shall be included
in the computation of stock dividend subsequently declared.
Total subscription basis of s h a r e

in d i v i d e n d s .
As a general rule, and as applied to any form of dividend
declaration, the participation of each stockholder in the earnings
or profits of the corporation is based on his total subscription
and not on the amount paid by him in account thereof. (Sees. 43
[par. 1], 72.) For example, if a person subscribes for 1,000 shares
of the par value of P10.00 per share and has paid P5,000.00 on
his subscription, he will participate in dividends on the basis of
1,000 shares, not 500 shares.
The reason is that a stockholder's entire subscription repre-
sents his holdings in the company for which he pays interest on
any unpaid portion, (see Sees. 64, 66.) Subscribers are considered
stockholders not from the time they are issued stock certificates
but from the time their subscriptions are accepted by the corpo-
ration 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, June 28,
1966.)
Only in cases where a stockholder is delinquent in the pay-
ment of his unpaid subscription that he loses his privilege in a
corporation where he has holdings, as provided in Section 71,
except his right to receive cash dividends, which, however, shall
first be applied to his unpaid balance on the subscription plus
cost and expenses. (Sec. 43, par. 1.)
Other m o d e s of division of dividends.

The above rule is not absolute and is subject to the rule of
consent. Thus, it has been opined under the old Code that the
424
distribution of dividends on the basis of the paid-up shares or

any other mode which itself is lawful may be adopted by a cor-
poration, but the unanimous consent of the stockholders is indis-
pensable. (SEC Opinion, Dec. 7,1973.)
It is believed that the same scheme is still legally feasible
under Section 43 as it is not immoral nor against any public
policy. The Securities and Exchange Commission has rendered
an opinion to the contrary, (see note 1.)
Classes of dividends.
Dividends payable to shareholders may be classified as fol-
lows:
(1) Cash dividend. — It is dividend payable in cash. 52
(a) Dividends on par value shares are made at a stated

percentage (e.g., 10%) of the par value although they may
also be paid as a fixed amount per share.
(b) As to no par value shares, dividends are payable in
terms of so many pesos or centavos (e.g., P10.00, P0.01) per
share since there is no basis on which a percentage can be
stated. In other words, a stockholder participates in the divi-
dends on the basis of the par value in case of par value shares,
and the number of shares in case of no par value shares, and
52
"It is a 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.
Items that are 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 in-
struments, 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 ac-
counts, or time deposits, also are usually classified as cash, even though a bank legally
can demand prior notification before a withdrawal can be made. In practice, banks gener-
ally do not exercise this legal right.
Deposits that are 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 Ac-
counting Comprehensive Volume, Ninth Ed., by Smith, Jr. and Skousen, Brigham Young
University, Copyright 1987.)
not upon the amount of the consideration paid by him for his
shares.
(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 43. (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
warehouse receipts, or shares of stock of another corporation, (see
Ballantine, p. 564.)
(a) A dividend payable in property is actually a cash
dividend. The stockholder can take the property, sell it, and
realize the cash. A corporation may, therefore, pay declared
cash dividend in the form of a "property." The Securities and
Exchange Commission allows the distribution of property
dividend as liquidating dividend or where the distribution
of the same is practicable, specifically where the surplus is in
that form (property) and it is no longer intended to be used
in the operation of the business. (SEC Opinion, Feb. 5,1991.)
(b) If the property does not form part of the surplus or
retained earnings of the corporation, the same cannot be de-
clared as property dividends.
(c) SEC rules (June 9, 1992.) require, among others, that
the property to be distributed as dividends shall consist only
of property which are no longer intended to be used in the
operation of the business of the corporation and which are
practicable to be distributed as dividends. No actual distri-
bution of property dividends shall be made unless approved
by the Commission;
(3) Stock dividend. — It is dividend payable in unissued or
increased or additional shares of the corporation instead of in
cash or in property out of the unrestricted retained earnings of
the corporation. A stock dividend may be declared only to the
extent of the maximum number of shares authorized in the
(a) Shares of stock are given the special name "stock

dividends" only if they are issued in lieu of undistributed
profits. If they are issued in exchange for cash or property,
then they do not fall under the category of "stock dividends."
A corporation may legally issue shares of stock (not as stock
dividend) in consideration of services to it by a person not
a stockholder or in payment of its indebtedness. A share of
stock issued to pay for services rendered is equivalent to stock
issued in exchange of property, because services is equivalent
to property. Likewise, a share of stock issued in payment of
indebtedness is equivalent to issuing a stock in exchange for
cash.
(b) Shares of stock may be issued to a non-stockholder or
to a person who is not a stockholder but shares of stock com-
ing from stock dividends are payable only to stockholders
of the corporation and not to strangers or non-stockholders
because only shareholders are entitled to dividends. (Nielsen
& Co., Inc. vs. Lepanto Consolidated Mining Co., 26 SCRA
540 [1968].)
(c) Stock dividends are in the nature of shares of stock,
the consideration for which is the amount of unrestricted
retained earnings converted into equity in the corporation's
books. It is actually two things: 1) a dividend; and 2) the
enforced use of the dividend money to purchase additional
shares of stock at par. (Lincoln Phil. Life Insurance Co., Inc.
vs. Court of Appeals, 293 SCRA 92 [1998], citing Nelson &
Co., Inc. vs. Lepanto Consolidated Mining Co., 26 SCRA 540
[1968].)
(d) A corporation may increase its authorized capital
stock by way of stock dividends without touching its un-
issued shares as long as there are retained earnings to justify
the declaration." (see SEC Opinion, Oct. 11,1972.)
(e) A stock dividend has the same effect as cash dividends
distributed to the stockholders who subsequently used said
"The procedure prescribed by Section 38 to effect an increase of capital stock must

be complied with. The increase will be to the extent of the retained earnings to be distrib-
uted as stock dividends.
cash dividends in purchasing shares of the corporation. Since

selling of shares at a premium is not prohibited (Sec. 62, 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;
(f) 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. 04-28, April 27, 2004.);
(4) Optional dividend. — It is dividend which gives the stock-
holder an option to receive cash or stock dividend;
(5) Composite dividend. — It is dividend which is partly in
cash and partly in stocks. Here, there is no option involved;
(6) Preferred or preferential dividend. — It is dividend which
is payable, by virtue of contract, to one class of stockholders in
priority to that to be paid to another class (19 Am. Jur. 2d 286.);
(7) Cumulative dividend. — It is dividend which is contracted
to be paid at a certain rate at stated times and, if net earnings
at any dividend period are insufficient to pay the contract divi-
dend, it is to be made out of subsequent net earnings (Ibid.);
(8) Scrip dividend. — It is dividend in the form of a writing or
certificate issued to a stockholder entitling him to the payment
of money, stock or other benefit at some future time inasmuch
as the corporation at the time such dividends are declared has
profits not in cash or has no sufficient cash, or has the cash but
wishes to reserve it for some corporate purposes. It is in the form
of a promissory note or a promise to pay and may be issued to
bear interest;
(9) Bond dividend. — It is dividend distributed in bonds of
the corporation to the stockholders. The bondholder becomes
a creditor of the corporation to the extent of the amount of the
bond. Thus, a corporation may use its retained earnings in
improvement of its plant, or purchasing machinery or other
property and issue its bonds in payment of dividends from such
earnings (see 11 Fletcher, p. 893.); and
(10) Liquidating dividends. — They are dividends which are
actually distributions of the assets of the corporation upon disso-
lution or winding up of the same. (Wise & Co. vs. Meer, 78 Phil.
655 [1947]) They are not paid on account 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 dis-
tribution of assets made upon a reduction of the capital stock. (19
Am. Jur. 2d 283-284.)
Dividends may also be participating and non-participating.
(see Sec. 6.)
Ordinary and extraordinary dividends.

Dividends may be divided into the ordinary or regular cur-
rent dividends payable by the corporation and extraordinary or
"extra" dividends, which may consist of cash, property, or stock
distributions.
(1) As usually understood, ordinary dividends are those paid
out of current earnings of a corporation according to some fixed
plan or scheme, usually at regular intervals and sometimes
limited to a substantially fixed rate of return to the shareholder.
Generally, they are cash dividends, stock dividends being
regarded as extraordinary dividends and not included within
the phrase "regular dividends," although a policy of regular
stock dividends is not unknown.
(2) Extraordinary dividends, whether cash or stock, usually
represent an accumulated excess of earnings over normal return
on capital invested and constitute a distribution or a capitaliza-
tion of surplus profits remaining after distribution of ordinary
dividends. (19 Am. Jur. 2d 287.)
Effect of declaration of c a s h d i v i d e n d .
(1) When a corporation issues cash dividends, the assets of
the corporation diminish by exactly the amount paid out and
correspondingly, the property of the individual stockholder
increases. (11 Fletcher, p. 1110.)
(2) The declaration itself of cash dividends is considered
effective to create a debt from the corporation to each of its
stockholders and segregate the amount thereof from the assets,
even though the resolution provides that the dividend is payable

of the stockholders in the corporate assets.
Effect of declaration of stock dividend.

(1) A stock dividend converts the surplus or profits of the
corporation covered by such dividend into the permanent
account, thereby placing it beyond the power of the board of
directors to withdraw from corporate use and to distribute to the
stockholders. (Eisner vs. Macomber, 252 U.S. 189.)
(2) It shows that the corporation's accumulated profits have
been capitalized instead of distributed to the stockholders or
retained as surplus available for distribution, in money or kind,
should opportunity offer. For from being a realization of profits
for 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
purchase of stocks. (PLDT vs. National Telecommunications
(3) Such a capitalization of surplus or transfer of such
surplus to the capital account of the corporation adds nothing to
and takes 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 as well as
common stock.
(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 had 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 than the old, leaving
the aggregate 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.) A stock dividend, therefore, is, in essence,
not a dividend at all in the ordinary sense of the term.
(5) When stocks dividends are distributed among the stock-
holders, the amount declared ceases to belong to the corpora-
tion. The unrestricted retained earnings of the corporation are
430
diminished by the amount of the declared dividends, while the

stockholder's equity is increased. The stockholders, by receiving
stock dividends, are forced to exchange the monetary value of
their dividends for capital stock, and the monetary value they
forego is considered the actual payment or consideration for the
original issuance of the stocks given as stock dividends. (PLDT
vs. National Telecommunications Commission, supra.)
(6) The declaration of stock dividend is advantageous to
existing creditors of the corporation to the extent that corporate
earnings are capitalized, unavailable for distribution to stock-
holders. At the same time, it improves the cash position of the
corporation with expansion projects or programs obviating the
necessity of borrowing and paying high interest rates.
Tax treatment of stock d i v i d e n d s .

Stock dividends are not taxable as income because they
represent merely an unrealized gain to the stockholder who
receives nothing from the corporation that answers the definition
54
of income under the National Internal Revenue Code.
Income, in tax law, is an amount of money or its equivalent
coming to a person within a specified time, whether as payment
for services, interest, or profit from investment. It is gain derived
and severed from capital, from labor or from both combined, so
that to tax a stock dividend would be to tax a capital increase
rather than the income. Capital is wealth or fund; whereas,
"Sec. 73. x x x (B) Stock dividends. — A stock dividend representing the transfer of
surplus to capital account shall not be subject to tax. However, if a corporation cancels
or redeems stock issued as a dividend at such time and in such manner as to make the
distribution and cancellation or redemption, in whole or in part, essentially equivalent to
the distribution of a taxable dividend, the amount so distributed in redemption or cancel-
lation of the stock shall be considered as taxable income to the extent that it represents a
distribution of earnings or profits. (Pres. Decree No. 1158, as amended.)
The exception is designed to prevent the issuance and cancellation or redemption
of stock dividends, which is fundamentally not taxable, from being made use of as a
devise for the actual distribution of cash dividends, which are taxable. Thus, "the provi-
sion had the obvious purpose of preventing a corporation from avoiding dividend tax
treatment by distributing earnings to its shareholders in two transactions — a pro rata
stock dividend followed by a pro rata redemption — that would have the same economic
consequences of a simple dividend." (Comm. of Internal Revenue vs. Court of Appeals,
301 SCRA 152 [1999].)
income is gain or profit or the flow of wealth. (Comm. of Internal

Revenue vs. Court of Appeals, 301 SCRA 152 [1999].)
ILLUSTRATION:
A, B, C, D, and E organized a stock corporation with an
authorized capital stock of P400,000.00 divided into 4,000 shares
with a par value of P100.00 per share. Each subscribed to and
paid for 400 shares. Hence, the actual asset of the corporation
at the beginning of the business was P200,000.00.
After a few years of profitable business, the assets of the
corporation amounted to P400,000.00, with no debts. Instead of
declaring cash dividends, it was agreed to increase the capital
stock and for that purpose, to issue 400 additional shares each
stockholder in the form of stock dividends with a total value of
P40,000.00 which amount represents the actual increase of his
share or interest in the business.
At the start of the year, each stockholder held 400 shares
with a total value of P40,000.00, which is 1/5 of the total
corporate capital of P200,000.00. At the close of the year, after
stock dividends are declared, each stockholder still holds 1/5
interest in the corporation with his 800 shares worth P80,000.00
in relation to the increased corporate capital of P400,000.00. But
the proportional interest of each share in the corporate assets is
decreased because of the increase in the number of shares, from
1/2,000 to 1/4,000.
The mere issuance of the stock dividends is not subject to
income tax as they do not constitute income to their recipients.
Effect of declaration of b o n d
or scrip dividend.
In the absence of statutory provision to the contrary, a cor-
poration may use its retained earnings, for example, in improve-
ments of its property or in purchasing machinery or other prop-
erty which it is authorized under its articles of incorporation to
acquire and hold, and issue its bonds in payment of dividend
from such earnings. Or, the corporation may issue a scrip divi-
dend. Such a dividend, when the obligation to pay is absolute, is
a debt absolutely due to the stockholders, although payment is
postponed to a future date. (11 Fletcher, pp. 1116-1117.)
432
(1) The declaration of a bond or scrip dividend makes the

stockholder a creditor of the corporation for the amount of the
bond or scrip issued as dividends, but the assets of the corpora-
tion remain the same as nothing passes out of the corporation to
the stockholder.
(2) It has the effect of deferring the payment of cash divi-
dends.
Distinctions between cash dividend

and stock dividend.
They are as follows:
(1) A cash dividend involves a disbursement to the stock-
55
holder of accumulated earnings, while stock dividend does not
involve any disbursement;
(2) Cash dividend declared and paid becomes the absolute
property of the stockholder and cannot be reached by the
creditors of the corporation in the absence of fraud, while stock
dividend, being still part of corporate property, may be reached
by corporate creditors;
(3) Cash dividend is declared only by the board of directors, at
its discretion, while stock dividend is declared by the board with
the concurrence of the stockholders representing at least 2 / 3
of the outstanding capital stock at a regular or special meeting
called for the purpose (Sec. 43.);
(4) Cash dividend does not increase the corporate capital,
while it is increased by a stock dividend; and
(5) The declaration of cash dividend creates a debt from the
corporation to each of its stockholders who then hold such stock,
while no debt from the corporation to the stockholders is created
by the declaration of stock dividend, except in the sense that
capital stock constitutes a liability. (19 Am. Jur. 2d 317.)
55
Cash dividends and property dividends received from a domestic corporation and
the share of an individual partner in the distributable net income of a (business) part-
nership are subject to income tax at 6%/8%/10%, effective January 1, 1998/1999/2000,
respectively. The tax is 25% if the stockholder is a non-resident aliens individuals not
engaged in business. (Sees. 24[B, 2], 25[A, 2, B], National Internal Revenue Code.)
It is important to note that a dividend payable in stock is

not synonymous with, and is not always or necessarily, a stock
dividend. A dividend payable in stock may, under some circum-
stances, be a cash dividend (Ibid., 292.), as where the dividend
consists in treasury stocks or in stocks of another corporation.
(supra.)
(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 account of a
stock corporation, the increase is valid only when it represents
additional shares issued for which the equivalent consideration
is received by the corporation. The increase may be the result
of an issue of additional shares or the re-investment of retained
earnings 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 already paid in full their no-par
value shares would in effect be made to pay additional amounts
for the same shares to increase their value. Section 6 (par. 3.)
provides that "shares of capital stock issued without par value
shall be deemed fully paid and non-assessable." Once no-par
value shares have been issued at their issued price, their value
can no longer be changed, (see Sec. 62, 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 re-issue
of treasury stocks.
The mere acquisition and distribution of previously issued
stock does not constitute a stock dividend. (11 Fletcher, p. 891.)
(1) As a re-issue of existing paid-up shares. — Treasury stocks
(see Sec. 9.), being property of the corporation, may not be dis-
tributed among stockholders as stock dividends, but would con-

stitute property or cash dividends. (SEC Opinion, June 13,1963.)
No increase of capital is involved, since there is merely a re-issue
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 vs. 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 stockholders in payment of debts to the corporation and
carried in treasury, it is a cash dividend whether such stock is
previously issued and outstanding of the same corporation or
stock of another corporation. (SEC Opinion, June 13,1963.)
It is the same as if the corporation had used accumulated
earnings to buy any other property — say, the stock of another
corporation — and had distributed such substituted property
in specie as a dividend to its shareholders. Thus, in a case,
where a company utilized a portion of its earnings "to buy" the
majority shares of a stockholder and distributed such shares to
the remaining stockholders, it was held that the distribution was
not a stock dividend but in effect a distribution of earnings to
stockholders and, therefore, subject to income tax. (Comm. of
Internal Revenue vs. Manning, supra.) Note: Dividends are no
longer subject to income tax.
(3) As representing a prior disbursement of purchase price to
a former stockholder. — The re-issue of treasury shares by a
corporation as a purported stock dividend cannot be approved,
since there is no capitalization of surplus. The stated capital was
not reduced when the treasury shares were acquired and is not
increased upon their re-issue. Such so-called stock dividend
is simply stock watering which does not represent net worth
or surplus, but only a prior disbursement of purchase price
to a former stockholder. (SEC Opinion, June 13, 1963, citing
Ballantine, p. 484.)
Stock splits.
(1) Distinguished from stock dividends. — The courts have
recognized a distinction between a "stock split" and a "stock
dividend." The essential distinction between a stock dividend
and a stock split is that in the former, there is a capitalization
of earnings or profits, together with a distribution of the added
shares which evidence the assets transferred to capital, while in
the latter, there is a mere increase in the number of shares which
evidence ownership without altering the amount of the capital,
surplus, or segregated earnings.
In brief, a stock split is merely a dividing up of the outstanding
shares of a corporation into a greater number of units, without
disturbing the stockholder's original proportional participating
interest in the corporation. A stock split is essentially one of form
and not of substance.
(2) Ways by which accomplished. — It is said that stock splits
are generally accomplished in two 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.
(b) If it is no-par value stock to be split, then the stock-
holder retains his original certificate and receives additional
certificates for the additional shares. (19 Am. Jur. 2d 284-285.)
The reverse procedure is known as "reverse stock split."
ILLUSTRATION:
X Corporation has 100,000 outstanding shares of stock, with
a par value of P10.00 per share. Because the market price of the
shares is considered high, the board feels that a lower price will
improve marketability of the shares and attract more investors.
It may authorize that the 100,000 shares be replaced by 500,000
shares with a par value of P2.00. Thus, each stockholder will
receive 5 shares in exchange for each share owned. This increase
in the number of outstanding shares is referred to as stock split.
"Reverse stock split," on the other hand, involves the
reduction of the outstanding shares into a smaller number of
436
shares and this is done when it is felt that a higher price for the
shares will be advantageous to the corporation. Thus, in the
same example, the 100,000 outstanding shares may be called
in and replaced by 50,000 shares with a par value of P20.00
per share. There is an increase in the par value (also market
value per share) of outstanding shares of a specified class with
a corresponding reduction in the number of shares issued.*
In either case, the split merely changes the number of
outstanding shares without affecting the stockholders' equity
nor the capital stock. The receipt of shares as a result of the split
does not generate taxable income to either the stockholder or
the corporation.
Distinction between distribution in liquidation

and ordinary d i v i d e n d .
The distinction between a distribution in liquidation and an
ordinary dividend is factual, the result in each case depending
on the particular circumstances of the case and the intent of the
parties. If the distribution is in the nature of a recurring return on
stock, it is an ordinary dividend.
However, if the corporation is really winding up its business
or recapitalizing and narrowing its activities, the distribution
may properly be treated as in complete or partial liquidation and
as payment by the corporation to the stockholder for his stock or
as return of the capital invested by him. The corporation is, in the
latter instances, wiping out all or that part of the stockholders'
C h a n g e s in par values of capital stock should be charged or credited to additional

paid-in-capital (APIC). If the increases in capital stock values exceed APIC, they should be
charged to retained earnings. The common sources of APIC are as follows: (1) excess of
par value paid for capital stock; (2) resale or retirement of treasury shares; (3) distribution
of stock dividends; (4) issuance of detachable stock purchase agreements; (5) changes in
par value; (6) donated assets; and (7) that created by corporate readjustment of quasi-
reorganization. (see annotation under Sec. 80.) APIC, however, shall not be used to
relieve income of the current or future years of charges chargeable against income except
in the case of reorganization wherein a recognized enterprise may be relieved of such
charges against income on condition that if the existing enterprise shall be continued
the same result may be attained even without reorganization, provided said facts are
fully disclosed and formally approved as in reorganization in which event the articles of
incorporation shall be amended accordingly to reflect the changes in the capital structure.
(SEC Opinion No. 05-01, Jan. 4, 2005, citing Statement of Financial Accounting Standard
No. 18 which lays down the generally accepted accounting standards in our jurisdiction.)
Sec. 44 TITLE IV. POWERS OF CORPORATION
437
interest in the company. (Wise & Co., Inc. vs. Meer, 78 Phil 655
[1947].)
For tax purposes, gains and losses from liquidating divi-
dends are considered as capital gains or losses, (see Sees. 33 [b],
66[a], 21[f], National Internal Revenue Code.)
Sec. 44. Power to enter into management contract. — No

corporation shall conclude a management contract with
another corporation unless such contract shall have been
57
approved by the board of directors and by stockholders
owning at least the majority of the outstanding capital
stock, or by at least the majority of the outstanding capital
stock, or by at least a majority of the members in the
case of a non-stock corporation, of both the managing
and managed corporation, at a meeting duly called for
the purpose: Provided, That (1) where a stockholder or
stockholders representing the same interest of both the
managing and the managed corporations own or control
more than one-third (1/3) of the total outstanding capital
stock entitled to vote of the managing corporation; or (2)
where a majority of the members of the board of directors
of the managing corporation also constitute a majority
of the members of the board of directors of the managed
corporation, then the management contract must be
approved by the stockholders of the managed corporation
owning at least two-thirds (2/3) of the total outstanding
capital stock entitled to vote, or by at least two-thirds (2/3)
of the members in the case of a non-stock corporation.
No management contract shall be entered into for a period
longer than five years for any one term.
The provisions of the next preceding paragraph shall

apply to any contract whereby a corporation undertakes to
manage or operate all or substantially all of the business
of another corporation, whether such contracts are called
service contracts, operating agreements or otherwise:
Provided, however, That such service contracts or operating
agreements which relate to the exploration, development,
exploitation or utilization of natural resources may be
entered into for such periods as may be provided by the
pertinent laws or regulations, (n)
'or trustees.
438
Power to enter into m a n a g e m e n t

contract.
(1) With another corporation. — Under Section 44, a corporation
is expressly 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 corporation, whether such contracts are
called service contracts, operating agreements or otherwise."
Briefly stated, it is an agreement under which a corporation
delegates the management of its affairs to another corporation
for a certain period of time. Since the corporation can employ
officers and agents to manage its business, there can be no
objection to employing another corporation for the purpose.
A corporation under management is bound by the acts of the
managing corporation and is estopped to deny its authority, (see
National Bank vs. Producers' Warehouse Association, 42 Phil.
609 [1922].)
(2) With parent corporation. — Absent a finding of fraud or
bad faith, contracts entered into by a parent corporation with a
subsidiary or affiliate may be held legal where the purpose is
to provide more efficient operation and greater convenience to
both. Thus, a holding company may, in some cases, intervene in
the management and affairs of its subsidiaries or affiliates such
as the centralization of accounting and personnel functions, pro-
vided the management in those affairs will not affect the separate
and continuing existence of the managed corporation. However,
since this situation may, in effect, place the subsidiary or affiliate
to a certain extent within the control of the present company and
the latter, in turn, assumes responsibility for such management,
the same shall be subject to the provisions of Section 44 relative
to execution of management contracts. (SEC Opinion, Nov. 28,
1990.)
(3) With a natural person. — Section 44 refers only to a mana-
gement contract with another corporation. Hence, it does not
apply to management contracts entered into by a corporation
with natural persons.
Limitations on t h e power.
The following are the limitations for the exercise of the pow-
er:
(1) Ratification of the contract. — The contract must be
approved by a majority of the quorum of the board of directors
or trustees and ratified by the prescribed vote of the outstanding
capital stock entitled to vote (see Sec. 6, last par.) or of the
members, as the case may be, of both the managing and the
managed corporations, at a meeting duly called for the purpose.
In either of the two cases mentioned in Section 44 (par. 1.),
the management contract must be approved by the stockholders
of the managed corporation owning at least 2 / 3 , not merely a
majority, of the total outstanding capital stock entitled to vote, or
in case the managed corporation is a non-stock corporation, by at
least 2 / 3 , not merely a majority, of the members. Where the con-
tract is between two corporations having interlocking directors,
the contract must comply with the requirements of Section 33;
(2) Period of the contract. — The period must not be longer
than five (5) years for any one term except those contracts which
relate to the exploration, development, exploitation or utilization
of natural resources that may be entered into for such periods as
may be provided by pertinent laws or regulations; and
(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 con-
travene Section 23, 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 sub-
ject 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 instru-
mentality 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
440
managed corporation.
outstanding capital stock entitled to vote of X Corporation, the
management contract must be approved by the prescribed 2 / 3
vote of the stockholders of Y Corporation. The same vote shall
apply where A is the only stockholder in both corporations
and he owns more than 1/3 of the total outstanding capital
stock entitled to vote of X Corporation. Only a majority vote is
required if the more than 1 / 3 ownership of A, B, and C, or of
A refers to the outstanding capital stock of Y Corporation, the
managed corporation.
(2) Interlocking directors. — If A, B, C, D, and E constitute
the majority of the members of the board of directors of X
Corporation and also of Y Corporation, the bigger 2 / 3 vote
by the stockholders of Y Corporation is necessary. This is a
case of a contract between two corporations with interlocking
directorates, (see Sec. 33.) The extent of the shareholdings of A,
B, C, D, and E in X Corporation is immaterial.
In both illustrations, the management contract need only
be approved by the majority of the outstanding capital stock of
X Corporation, or in illustration No. 2, of the members, in case
X Corporation is a non-stock corporation.
managing corporation
Sec. 45. Ultra vires acts of corporations. — No corporation
under this Code shall possess or exercise any corporate
powers except those conferred by this Code or by its
articles of incorporation and except such as are necessary
or incidental to the exercise of the powers so conferred.
(14a)
Ultra vires and intra vires acts

explained.
It is well-settled that a corporation is not restricted to the
exercise of powers expressly conferred u p o n it but has the
implied or incidental powers to do what is reasonably necessary
to carry out its express powers and to accomplish the purposes
for which it was formed. Sections 36(11) and 4 5 give express
recognition to these implied and incidental powers possessed by
private corporations.
According to the strict construction of the term, an ultra

vires act is one not within the express, implied, and incidental
powers of the corporation conferred by the Corporation Code
Sec. 45 TITLE rV. POWERS OF CORPORATION 441
or articles of incorporation. It is an act which is not positively

forbidden, but impliedly forbidden because not expressly or
impliedly authorized or necessary or incidental in the exercise of
the powers so conferred.
Acts or transactions within the legitimate powers of a corpo-
ration or are related to its purposes are said to be intra vires.
ILLUSTRATIONS:
(1) A corporation was organized for the purpose of
engaging in the buying and selling of home appliances. The
act of buying and selling motor vehicles would be ultra vires
although it is itself lawful because it is outside the object for
which the corporation is created and, therefore, beyond its
powers.
The buying and selling of refrigerators would be intra vires.
(2) A corporation was organized to engage in the business
of manufacturing a particular product. Marketing and selling
the product may be logically necessary to the business of
manufacturing, considering that there must be an end-user for
the goods manufactured or produced.
A seller, trader, dealer or importer of goods is not necessarily
or indispensably the manufacturer of the goods. Therefore,
manufacturing cannot be treated as reasonably necessary to the
business of the selling. (SEC Opinion No. 07-14, July 2007.)
Contracts intra vires entered into by the board of directors
are binding upon the corporation and courts should not
interfere unless such contracts are so unconscionable and
oppressive as to amount to wanton violation to the rights of
the minority, as when a stockholder avers that the board of
directors has concluded a transaction that will result in serious
injury to him. (Gamboa vs. Victoriano, 90 SCRA 40 [1979]; Ong
Yong vs. Tiu, 401 SCRA 1 [2003].)
Ultra vires acts distinguished

f r o m other acts.
Although the term ultravires acthas been used mdiscriminately,
it is properly distinguishable from acts which are illegal, in excess
or abuse of power, or executed in an unauthorized manner, or acts
442
within corporate powers but outside the authority of particular

officers or agents. (19 C.J.S. 419.)
(1) From illegal act. — When properly used, an ultra vires act
means simply an act which is beyond the conferred powers of
a corporation or the purposes or objects for which it is created
58
as defined by the law of its organization. (Republic vs. Acoje
Mining Co., Inc., 7 SCRA 361 [1963]; Atrium Management Cor-
poration vs. Court of Appeals, 353 SCRA 23 [2001].) By itself, an
ultra vires act is not necessarily illegal. On the contrary, it may be
lawful, moral, and even praiseworthy. An illegal corporate act,
on other hand, is an act which is contrary to law, morals, good
customs, public order, or public policy (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 perfor-
mance, ratification or estoppel while the latter is void and cannot
be validated. (Ibid.)
(2) From act done without complying with certain conditions and
formalities. — Another class of corporate contracts which are
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 in connection with the consent of
stockholders (or members) to the contract are often incorrectly
referred to as 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-A C.J., pp.
312-313.)
The general rule is that a corporation must act in the man-
ner and with the formalities, if any, prescribed by its charter or
by the general law. However, a corporate transaction or contract
5
*The only ground and policy upon which the defense of ultra vires, properly
defined, can have real basis is the interest of the stockholders, if any, to confine the
business activities of the corporation to the scope of the purposes specified in its articles
of incorporation. (Ballantine, p. 242.) Creditors cannot attack a contract or transfer
merely because it is ultra vires. The only ground for objection by creditors is its effect as a
fraudulent diversion of corporate assets from the payment of their claims. (Ibid., p. 258.)
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 C.J.S. 432-444.)
(3) From act beyond powers of particular officers. — The expres-
sion ultra vires has also been applied to acts done 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 cor-
poration. 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 cor-
poration, but from the stockholders in their corporate capacity.
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
agency and, therefore, governed by old and well-settled rules of
law relating to agency. (11 Fletcher, pp. 566-567.)
(4) From act involving inexistent contract. — A contract may not
be illegal but inexistent and, therefore, 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 ficti-
tious; those whose cause or object did not exist at the time of the
transaction; those whose 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. Neither party
has a right of action against the other who can always raise the
444
defense of the inexistence of the contract to defeat the claim of

the former.
Ratification of ultra vires acts.

(1) Where the contract or act is illegal per se, it is wholly void
or inexistent. It cannot be ratified or validated. {Ibid., par. 2.) Inex-
istent contracts (supra.) defined 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) A corporation, like an individual, may ratify and
thereby render binding upon it the originally unauthorized
acts of its officers 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 thereby 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 cor-
poration 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].)
Effects of ultra vires acts w h i c h

are not illegal.
59
The following rules are recognized:
'The effects of illegal contracts of a corporation are governed by the following pro-
visions 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.
(1) An ultra vires contract, while executory on both sides, can-

not be enforced by either party thereto. (7 Fletcher, p. 607.) It is in
the public interest that corporations do not transcend the powers
granted 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 completed or consummated transaction.
(Ibid., p. 652.) Only the State may challenge the contract on ultra
vires grounds. No public interest is involved here since both par-
ties have already 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 perfor-
mance, recovery is permitted in most courts on behalf of the for-
mer (Ibid., p. 620.) on the ground that it would be unjust to sanc-
tion retention of benefits coupled with refusal to perform. Other
courts hold the contract unenforceable but compel the party who
has received the benefits of performance to return what he has
received or, failing to do that, to pay its reasonable value. (Ibid.,
p. 613.)
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].) It cannot be allowed to pre-
vail whether the plea is interposed for or against a corporation
when it will cause prejudice to a party who acted in good faith.
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."
"Art. 1412. If the act in which the unlawful or forbidden cause consists does not
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;
(2) When only one of the contracting parties is at fault, he cannot recover what he
has given by reason of the contract, or ask for the fulfillment of what has been promised
him. The other, who is not at fault, may demand the return of what he has given without
any obligation to comply with his promise."
Thus, loans given to or by a corporation have to be repaid not-

withstanding that the transaction is ultra vires.
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 of the 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 mort-
gage 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 a corporation executes a
mortgage covering property which it has no power to mortgage,
as well as property which it may mortgage. The mortgage is val-
id as to the latter. (7 Fletcher, p. 587.)
Acts p r e s u m e d to be within corporate

powers.
(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 which is otherwise legal and
equitable. (Ibid., p. 570.) Thus, "when a contract is 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 ultra vires rests on violation of trust or duty to-
ward 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.)
(2) Where act clearly beneficial to the corporation. — The ten-

dency of more recent decisions is to hold an act within corporate
powers, if possible, where it is clearly beneficial to the company
as where the act directly tends to increase its business. Thus, a
corporation, a financial institution, which owns and maintains a
computer to service its data processing needs may sell the com-
puter to other entities after servicing its needs. Whatever transac-
tions as are fairly incidental or auxiliary to the main business of a
corporation may be undertaken by the same. (SEC Opinion, May
3,1976.)
In any case, Section 36(11) is broad enough to cover a very
wide range of implied 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 down by the courts — that a cor-
poration has such powers only as are conferred upon it by its
charter — if taken literally, would be equivalent to saying that
an act done 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.
The rule that a corporation has no powers except such as are
conferred by its charter cannot and does not mean that it cannot
exceed its powers.
(1) A corporation has no right or authority to do acts which
are not within the powers conferred upon it by the legislature,
but, as in the case of an individual, it is possible for it to do wrong.
It may exceed its powers and do an ultra vires act, and the act will
be, in contemplation of the law, not merely the act of the officers
or stockholders, but the act of the corporation itself. Thus, a con-
veyance 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
448
instance of either party to deprive the other of the rights acquired

under the contract.
(3) Actions quasi ex contractu may be maintained under some
circumstances, by or against a corporation, for money or prop-
erty loaned, paid or delivered under an ultra vires contract.
(4) When an ultra vires contract with a corporation has been
fully performed by one of the parties, and the other has received the
benefit of such performance (supra.), the latter is estopped to set
up the ultra vires character of the transaction to defeat an action
60
on the contract itself.
(5) Torts and crimes are always ultra vires, and yet it is well-
settled that a corporation may commit a tort and be liable in
damages therefor, and it may be guilty of a misdemeanor, and be
indirectly convicted and fined therefor. This is sufficient to show
beyond any doubt that a corporation may exceed its powers. (7
Fletcher, pp. 579-580; see Sec. 44.)
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. Thus, the State may
have the right to invoke it, although neither of the parties to the
contract may urge it, as in the case of an executed contract. So, a
party to the contract may, under some circumstances, urge ultra
vires in a case where a total stranger would not have that right.
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, are a breach of this condition. 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. But
when a corporation is guilty of exercising powers not authorized
"See "Effects of ultra vires contracts which are not illegal," supra.
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 Sec. 121.)
The Securities and Exchange Commission may suspend or
revoke the certificate of registration of a corporation for commis-
sion of ultra vires acts, (see Pres. Decree 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 nofbe diverted by
giving them away or by employing them in an ultra vires business
or transaction, and any stockholder, 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.
However, a stockholder may be precluded from attacking an
act as ultra vires, by his laches. In other words, if a stockholder
wants protection against the consequences of an ultra vires act, he
must ask for it with sufficient promptness to enable the court to
do justice to him without doing injustice to others. Furthermore,
it need hardly be stated that where the stockholder has himself
participated in the ultra vires act, or consented thereto, he will
be estopped from maintaining legal proceedings to secure the
annulment of the consequences thereof. So, also a stockholder
may be barred from asserting the invalidity of a transaction
whereby a corporation has borrowed money beyond the limit
of its authorized indebtedness where the money has been
expended for the benefit of the stockholders and the corporation.
(7 Fletcher, pp. 600-603.)
(4) Strangers. — Except where it is otherwise provided by
statute, it is a general rule that a plea of ultra vires cannot be
interposed by a stranger not a party to the contract, at least if he
is not injured by such act or contract.
For instance, although the act of a corporation in acquiring
a cause of action is ultra vires, yet the want of power to engage
in such business cannot be interposed as a defense when the
450
corporation seeks to enforce such cause of action. Thus, the

maker of a note cannot defend upon the ground that the contract
whereby the note was transferred was ultra vires, on the ground
that the payee had no power to indorse it for transfer. So, if a
person is in possession of real property and an action is brought
against him by a corporation to recover it or to quiet title or
the like, defendant cannot set up that the title of plaintiff was
acquired ultra vires, where defendant was a stranger to the
original transaction alleged to be ultra vires. (Ibid., pp. 594-596.)
(5) Competitors in business. — A stranger whose rights have
not been infringed by an ultra vires act of a competitor corporation
cannot urge ultra vires to prevent the latter from acting 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 which he can be heard in a judicial tribunal to complain is the
invasion of some legal or equitable right. (Ibid., p. 598.)
(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
infringed by the ultra vires contract, cannot attack it. They cannot
attack a corporate transaction as ultra vires unless its intent or
effect is fraudulently to divert the corporate assets from their
debts. It follows that ordinarily, a subsequent creditor cannot
object. (Ibid., p. 599.)
Estoppel to deny corporate p o w e r

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 con-
tract 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 con-
tract 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 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.
(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 extra-
neous facts peculiarly within the knowledge of the corporation,
and not known to the other party.
(5) Where contract has been performed on one side. — And in
some States, although not in 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 of the par-
ties 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.)
Corporate liability for torts, crimes,

a n d 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, it is responsible for the tortious acts of the latter done with-
in the scope of their authority or in the course of employment to
the same extent that an unincorporated individual or association
would be. (see 1 Fletcher, pp. 27-28; Stevens on Corporations,
p. 355; see Art. 2180, Civil Code.)
(a) The authority may come from the stockholders or
members acting as a body, or generally, from the directors (or
trustees) as the governing body. (P.N.B. vs. Court of Appeals,
83 SCRA 237 [1978].)
(b) The act of the officer or agent must have been within
the scope of his authority or course of employment; but sub-
ject to this limitation, it may have been without orders, or
even in disregard of the instructions to the officer or agent or
may have been in excess of instructions, or may have been
malicious or willful. Nor, need the corporation have autho-
rized the doing of the particular act or ratified it after it was
done. (19 C.J.S. 946-949.)
(c) A corporation cannot, in order to escape liability for
damages for the wrongful acts of its agents or employees,
assert that such acts were beyond the scope of its corporate
power or that they occurred in connection 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 au-
thorized, it is for that reason lawful and not a 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].) on the theory
that the legal fiction of separate corporate personality may
be disregarded whenever it is used as a means of conrrrtitting
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 Commission, 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 na-
ture, the penalty shall be imposed upon the guilty officer or

officers of the corporation, disregarding the fiction of corpo-
rate entity. (Reahs Corporation vs. National Labor Relations
(f) 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 command to a corporation is, in effect, a com-
mand to the officers. (Heirs of T. De Leon Vda. De Roxas vs.
Court of Appeals, 422 SCRA 101 [2004].)
(g) If the drawer 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 B.P. Big. 22 (Bouncing Checks
Law) is personal to the accused. The corporation has no obli-
gation to forward the notice addressed to it to the employee
concerned especially because the corporation itself incurs no
criminal liability under B.P. Big. 22. Personal knowledge of
the notice of dishonor is necessary. (Mangomen vs. People,
459 SCRA 169 [2005].)
(2) Imputation of criminal intent. — Although it has no mind,
an intention on the part of its agent to do wrong may be imputed
to the corporation. Accordingly, corporations may be held liable
for libel and malicious prosecution. But since a corporation as
a person is a mere legal fiction, it cannot be proceeded against
criminally because it cannot commit a crime in 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].) 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].)
The above is true with respect to crimes punishable under
the Revised Penal Code. 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].)
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 an operative act. (Ching vs.
Secretary of Justice, 481 SCRA 609 [2006].)
(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.) The fine, however, is a mere consequence of
the conviction of the corporate agent found guilty of the violation
of law. For violations of any of the provisions of the 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 Sees.
121, 144; see also Pres. Decree No. 902-A, Sec. 6[i] thereof; see
also R.A. No. 8791 [The General Banking Law of 2000], Sees. 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].)
— oOo —

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Title IV

Sec. 36. Corporate powers and capacity. — Every cor-

'See Section 60.

scientific, civic, or similar purposes: Provided, That no

Distinguished f r o m its franchise

Relative powers of natural persons/partnerships

The reason for the doctrine is that a corporation owes its

rized" by the board of directors in order to validly sign the cer-

(1) Sources of powers. — In determining whether a corpora-

Express powers explained.

Implied powers explained.

Implied powers classified.

(1) Acts in the usual course of business. — This includes such

In a case where the opening of a post office branch of

Express powers distinguished

to carry them out (6 Fletcher, p. 234.) in furtherance of the corpo-

Construction of powers granted.

to subserve public interest, they should be so construed as not

Ratification of corporate acts.

Effect of ratification retroactive.

(3) Corporation organized under a special law. — Where a cor-

Power to sue and be s u e d .

powers (Sec. 23.) on behalf of the corporation or by any of its duly

or employees of the company can sign the verification

tion as the real party in interest, (see Comments under Sec.

placed under receivership, exercising control of the company, and

Similarly, summons was held properly served on a corpora-

Power to acquire a n d c o n v e y property.

(a) Property obtained by a corporation which is foreign

assets of the corporation under Section 40, the corporation

Power to acquire shares

is one of the activities permitted by its articles of incorpo-

Corporation as stockholder or member.

its implied powers as a necessary or proper means of exercising

Power to contribute to charity.

expressed in a case as follows: "A business corporation is

(3) Limitations on power. — Under the Code, the only

Power to establish p e n s i o n , retirement

(1) Such plans promote corporate purpose or purposes. — The

(2) Such plans promote better relations with corporate employees.

Power to act as guarantor.

(3) Where risk considerable and benefit remote or disproportionate.

Sec. 37. Power to extend or shorten corporate term. —

The corporate term of a private corporation may be extended

Appraisal right of dissenting stockholders.

Note that the appraisal right applies only to a stockholder of

Sec. 38. Power to increase or decrease capital stock; incur,

A certificate in duplicate must be signed by a majority

(4) Any bonded indebtedness to be incurred, created

Bonds issued by a corporation shall be registered

Power to increase or decrease

Limitations on the power.

Necessity for increasing capital stock.

I t is considered as a cardinal rule in accounting that any business entity has to

Necessity of new subscription

Unauthorized increase of capital

(2) Subscribers for or purchasers of such stock acquire none

be applied only to one class of shares or it may distribute it to all

Ways of increasing (decreasing)