CHAPTER VIII

POWERS OF CORPORATIONS

NOTES

DOCTRINE OF LIMITED CAPACITY

This doctrine adopted by our corporation code says that a corporation has only such
powers as are expressly granted on it by law, and those that are necessarily implied
from those expressly granted, or those which are incidental to its existence.

The reason 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.

RULE ON CONSTRUCTION OF POWERS GRANTED

In case of ambiguity they are to be strictly construed against the corporation and in favor
Of the public, since grants of corporate franchises are intended not only for private gain
but also to subserve public interest, they should be so construed as not to defeat the
purpose of their creation.

Construction is to be adopted which works least harm to the State.

RATIFICATION OF CORPORATE ACTS.

First, note that the SHs are NOT THE AGENTS OF THE CORPORATION. They only
Have INDIRECT CONTROL through their votes.

WITH THE EXCEPTION ONLY OF SOME POWERS RESERVED BY LAW TO

SHS/MEMBERS, IT IS the DIRECTORS/TRUSTEes, who HAVE SOLE AUTHORITY TO
DETERMINE POLICY, ENTER INTO CONTRACTS, AND CONDUCT THE ORDINARY
BUSINESS OF THE CORPORATION, IN ALL MATTERS WHICH DO NOT REQUIRE THE
APPROVAL OR CONSENT OF THE SHS, WITHIN THE SCOPR OF ITS CHARTER,
THE AOI, BY LAWS, and RELEVANT PROVISIONS OF LAW.

So what are the powers requiring SHS rati cation?

EXPRESS POWERS REQUIRING SHAREHOLDERS’ RATIFICATION

a. Extend or Shorten Corporate Term (Secs.11, 36 and 80[a])

b. Increase or Decrease Capital Stock(Sec. 37)

c. Incur, Create or Increase Bonded Indebtedness (Sec. 37)

d. Sell, Dispose, Mortgage or Encumber All or Substantially AllAssets (Sec.39;SEC Memo

Circular No. 12-2020)

Corporate property is not property of the shareholders or members,

and as such, may not be sold without express authority from the Board of Directors.Litonjua v.
Eternit Corp.,490 SCRA 204 (2006).

Sale by Board of the only corporate property without compliance with Sec. 40 requiring
rati cation of members representing at least two-thirds of the membership, would make the

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 sale null and void. Islamic Directorate v.CA,272 SCRA 454 (1997);Peña v. Court of Appeals,193
SCRA 717 (1991).

TheCorporation Code de nes a sale or disposition of substantially all assets and property of a
corporation as one by which the corporation “would be rendered incapable of continuing the
business or accomplishing the purpose for which it was incorporated”–any sale or disposition
short of this wil not need shareholder rati cationand may be pursued by the majority vote of
the Board of Directors.
Strategic Alliance Dev. Corp. v. Radstock Securities Ltd.,607 SCRA 413 (2009).

e. Invest Corporate Funds for Non-Primary Purpose Endeavor (Sec. 41)

Investment by a sugarcentralin the equity of a jute-bag manufacturing company used in
packing sugar falls within the implied powers of the sugar central as part of its primary
purpose; itdoes not needshareholders’ rati cation.üDe la Rama v. Ma-ao Sugar Central
Co.,27SCRA 247 (1969).

f. Enter intoManagement Contracts (Sec. 43)

A management contract is not an agency contract, and therefore is not revocable at
will.üNielson & Co.v. Lepanto Consolidated Mining,26 SCRA 540 (1968);Ricafort v. Moya,195
SCRA 247(1991).

Note: In extreme cases, dissenting shareholders may exercise their appraisal right by
surrendering and demanding for payment the fair value of their shares. (APPRAISAL RIGHT
provided by Section 80 and for CLOSE CORPORATIONS this right is provided in Section 104)

WHAT DO YOU MEAN BY "POWERS OF A CORPORATION"?

As a person with separate juridical personality and the capacity to enter

into a contract, a corporation may sue and be sued in its corporate name, adopt
and use a corporate seal, deal with real and personal properties, whether tangible
or intangible, enter into any commercial agreement with natural and juridical
persons, make reasonable donations, including campaign or political contributions,
provide pension, retirement, health, and other plans for the bene t of its Directors,
Trustees, O cers, and employees.

What are the kinds of powers of a corporation?

a. Express powers – The are the powers granted by the Revised
Corporation Code, (General powers in Sec35; and the Speci c Powers I mentioned) the
corporation’s articles of incorporation, its corporation charter, and other relevant administrative
regulations and issuances.

What is the legal basis in saying that the AOI of a corporation is a source of
express power of a corporation? = ANS> First is Section 44 which states:

Section 44. Ultra Vires Acts of the Corporations. - No corporation shall

possess or exercise corporate powers other than those conferred by this
Code or by its articles of incorporation and except as necessary or
incidental to the exercise of the powers conferred.

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 And Section 35 (k) which states: “(k) To exercise such other powers as may be
essential or necessary to carry out its purpose or purposes as stated in the articles of
incorporation.”

b. Inherent or Incidental powers – These are the powers that, although

not expressly stated, are deemed to be within the capacity of corporate
entities by virtue of its nature as a corporation. (SEE SEC 2)

NOTES ON INHERENT OR INCIDENTAL POWERS:

Powers necessary to its corporate existence such as power to sue and be sued
in Sec 35(a) And power to own, acquire and convey properties as corporation
needs assets to carry on its business

c. Implied or Necessary powers – These are the powers that exists as a

necessary consequence either of the exercise of the express powers of
the corporation; or the pursuit of its purposes as provided for in the
corporate Charter(AOI)

NOTES ON IMPLIED POWERS:

1. These are powers that are Necessary to execute the EXPRESS powers
2. These are powers to CARRY OUT THE PURPOSES in the AOI for which the
corporation was formed.
3. These is recognized by Sec35(k), also in last paragraph of Sec44 (“…except as
necessary or incidental to the exercise of the powers conferred.”)
4. Powers which are merely convenient or useful (like giving free-interest loans) are NOT
IMPLIED if they are NOT essential, having in view the purposes or objects of the
corporation.
5. The purpose clause in the AOI de nes the scope of corporate business and in
e ect DELIMIT its implied powers.
6. A CORPORATION MAY NOT ENGAGE IN A BUSINESS DIFFERENT FROM THAT
FOR WHICH IT WAS CREATED AS A REGULAR AND PERMANENT PART OF ITS
BUSINESS. It may however do so indirectly as provided for in SEC 41. But then section 41
refer only purpose OTHER THAN THE PRIMARY PURPOSE. Section 41 which provides:

Section 41. Power to Invest Corporate Funds in Another Corporation or Business

or for Any Other Purpose. - Subject to the provisions of this Code, a private
corporation may invest its funds in any other corporation, business, or for any purpose
other than the primary purpose for which it was organized, when approved by a majority
of the board of directors or trustees and rati ed 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
outstanding capital stock, or by at least two-thirds (2/3) of the members in the case of
nonstock corporations at a meeting duly called for the purpose. Notice of the proposed
investment and the time place of residence as shown in the books of the corporation and
deposited to the addressee in the post o ce with the postage prepaid. Served
personally, or sent electronically in accordance with the rules and regulations of the
Commission on the use of electronic data message, when allowed by the bylaws or done
with the consent of the stockholders: Provided, That any dissenting stockholder shall
have appraisal right as provided in this Code: Provided, however, That where the
investment by the corporation is reasonably necessary to accomplish its primary purpose
as stated in the articles of incorporation, the approval of the stockholders or members
shall not be necessary.

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 7. ASSIGNMENT: make a case digest on the matter of implied
corporate power, of University of Mindanao, Inc. v. Bangkok
Central ng Pilipinas, 778 SCRA 458 (2016)

A corporation is granted su cient powers to pursue its purposes. The

approval by the SEC of any of the corporation’s purpose or purposes carries with
it the grant by the State of essential or necessary powers, although not speci cally
mentioned in law.

What are Ultra Vires acts?

Section 44. Ultra Vires Acts of the Corporations. - No corporation shall

possess or exercise corporate powers other than those conferred by this
Code or by its articles of incorporation and except as necessary or
incidental to the exercise of the powers conferred.

Any transaction, activity, or contract inconsistent with the powers of a corporation or

otherwise not conferred by law or its articles of incorporation, or not necessary or incidental
to the exercise of the powers thus conferred, is considered in Latin as ultra vires or
"beyond the powers" of a corporation. Thus, any transaction, activity, or contract
consistent with the powers of a corporation or otherwise conferred by law or its articles of
incorporation, including those necessary or incidental to the exercise of the powers thus
conferred, is considered in Latin as intra vires or "within the powers" of a corporation.

What are the General Powers of a Corporation?

SEC. 35. Corporate Powers and Capacity. – Every corporation incorporated under this
Code has the power and capacity:

(a) To sue and be sued in its corporate name;

(b) To have perpetual existence unless the certi cate of incorporation provides
otherwise; (READ WITH SEC 11, and SEC36)
(c) To adopt and use a corporate seal;
(d) To amend its articles of incorporation in accordance with the provisions of
this Code; (READ WITH SEC15)
(e) To adopt bylaws, not contrary to law, morals or public policy, and to amend
or repeal the same in accordance with this Code;(READ WITH SEC45-47)
(f) 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 nonstock corporation;(READ WITH SEC61;
SEC62-63)
(g) To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage, and otherwise deal with such real and personal property,

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 including securities and bonds of other corporations, as the transaction of
the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution;
(h) To enter into a partnership, joint venture, merger, consolidation, or any
other commercial agreement with natural and juridical persons;(READ WITH SEC75-79,
ON CORPORATE COMBINATIONS)
(i) To make reasonable donations, including those for the public welfare or
for hospital, charitable, cultural, scienti c, civic, or similar purposes:
Provided, That no foreign corporation shall give donations in aid of any
political party or candidate or for purposes of partisan political activity;
(j) To establish pension, retirement, and other plans for the bene t of its
directors, trustees, o cers, and employees; and
(k) To exercise such other powers as may be essential or necessary to carry out
its purpose or purposes as stated in the articles of incorporation. (Note: this is the
IMPLIED POWERS OF THE CORPORATION)

POWER TO SUE AND BE SUED

NOTES:
• The power to sue and be sued commences upon the SEC’s issuance of the corporation’s
Certi cate of Incorporation.
• For FOREIGN CORPORATIONS read SEC150 for this matter.

Section 150. Doing Business Without a License. - No foreign corporation transacting

business in the Philippines without a license, or its successor or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such corporation may be sued or
proceeded against before the Philippin courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.

• This is incidental to corporate existence

• THIS IS EXERCISED BY THE BOD/BOT based on SEC 22:
SEC 22. “……Unless otherwise provided in this Code, the board of directors or
trustees shall exercise the corporate powers, conduct all business, and control all
properties of the corporation.”

POWER OF SUCCESSION

POWER TO ADOPT A CORPORATE SEAL

What is a Corporate Seal?

A Corporate Seal is a sign, emblem, device adopted by the corporation to

distinguish it from other corporations.

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Used to identify and authenticate (as under the common law) written matter purportedly
emanating from such organization (or an individual assigned with a seal or known to that seal)

A SEAL IS NOT REQUIRED FOR THE VALIDITY OF CORPORATE ACTS.

Note however the use of SEAL OF THE CORPORATION in CERTIFICATES OF STOCKS under
SECTION 62.

Section 62. Certi cate of Stock and Transfer of Shares. - “………, countersigned
by the secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the bylaws.”

This requirement must be deemed DIRECTORY rather than mandatory.

SEAL IS NOT NECESSARY, it is desirable because the use of the seal establishes prima
facie, that the instrument to which it is a xed is the act of the corporation.

POWER TO ADOPT ARTICLES OF INCORPORATION AND BY-LAWS

POWER TO ENTER INTO A PARTNERSHIP OR JOINT VENTURE

WITH ANOTHER CORPORATION

POWER TO ISSUE OR SELL STOCKS, ADMIT MEMBERS

Please see discussion under §§59-71, infra.

POWER TO PURCHASE, RECEIVE, TAKE, OR GRANT, HOLD, CONVEY, SELL, LEASE,

PLEDGE, MORTGAGE, AND DEAL WITH REAL AND PERSONAL PROPERTY, INCLUDING
INTANGIBLES SUCH AS SECURITIES AND BONDS

This power has always been regarded as an incidental power to every corporation. Again
because a corporation needs assets to carry on with its business.

The phrase “as the transaction of the lawful business of the corporation may reasonably and
necessarily require” QUALIFIES THIS POWER. For example, a property obtained which is
foreign to the purpose for which it is organized is an UNLAWFUL ACQUISITION. e.g. buying
bus units by a shipping corporation.

The only exception to this is the one provided in Section 41, but complying with the
requirements prescribed thereto.

Section 41. Power to Invest Corporate Funds in Another Corporation or Business

or for Any Other Purpose. - Subject to the provisions of this Code, a private
corporation may invest its funds in any other corporation, business, or for any purpose
other than the primary purpose for which it was organized, when approved by a majority

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 of the board of directors or trustees and rati ed 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
outstanding capital stock, or by at least two-thirds (2/3) of the members in the case of
nonstock corporations at a meeting duly called for the purpose. Notice of the proposed
investment and the time place of residence as shown in the books of the corporation and
deposited to the addressee in the post o ce with the postage prepaid. Served
personally, or sent electronically in accordance with the rules and regulations of the
Commission on the use of electronic data message, when allowed by the bylaws or done
with the consent of the stockholders: Provided, That any dissenting stockholder shall
have appraisal right as provided in this Code: Provided, however, That where the
investment by the corporation is reasonably necessary to accomplish its primary purpose
as stated in the articles of incorporation, the approval of the stockholders or members
shall not be necessary.

LIMITATIONS OR RESTRICTIONS

If acquisition results to increasing, creating, or incurring bonded indebtedness under Section

37, which provides:

“Section 37. Power to increase or Decrease Capital Stock; Incur,

Create or Increase Bonded Indebtedness. - No corporation shall
increase or decrease its capital stock or incur, create or increase any
bonded indebtedness unless approved by a majority vote of the
board of directors and by two-thirds (2/3) of the outstanding capital
stock at a stockholders' meeting duly called for the purpose.

…………”

In the sale of its assets, there is a limitation provided in Section 39. That is when the assets to
be sold or conveyed is ALL or SUBSTANTIALLY ALL ASSETS. Thus section 39 provides:

Section 39. Sale or Other Disposition of Assets. - Subject to the

provisions of Republic Act No. 10667, otherwise known as the "Philippine
Competition Act", and other related laws a corporation may, by a majority
vote of its board of directors or trustees, sell, lease, exchange, mortgage,
pledge, or otherwise dispose of its property and assets, upon such terms
and conditions and for such consideration, which may be money, stock,
bonds, or other instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem expedient.

A sale of all or substantially all of the corporation's properties and assets,

including its goodwill, must be authorized by the vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or at
least two-thirds (2/3) of the members, meeting duly called for the purpose.
In nonstock corporations where there are no members with voting rights,
the vote of at least a majority of the trustees in o ce will be su cient

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 authorization for the corporation to enter into any transaction authorized
by this section.

The determination of whether or not the sale involves all or substantially all
of the corporation's properties and assets must be computed based on its
net asset value, as shown in its latest nancial statements. A sale or other
disposition shall be deemed to cover substantially all the corporate
property and assets if thereby the corporation would be rendered
incapable of continuing the business or accomplishing the purpose of
which it was incorporated.

Written notice of the proposed action and of the time and place for the
meeting shall be addressed to stockholders or members at their places of
residence as shown in the books of the corporation and deposited to the
addressee in the post o ce with postage prepaid, served personally, or
when allowed by the bylaws or done with the consent of the stockholder,
sent electronically: Provided, That any dissenting stockholder may
exercise the right of appraisal under the conditions provided in this Code.
After such authorization or approval by the stockholders or members, the
board of directors or trustees may, nevertheless, in its discretion, abandon
such sale, lease, exchange, mortgage, pledge, or other disposition of
property and assets, subject to the rights of third parties under any
contract relating thereto, without further action or approval by the
stockholders or members.

Nothing in this section is intended to restrict the power of any

corporation, without the authorization by the stockholders or members, to
sell, lease, exchange, mortgage, pledge, or otherwise dispose of any of its
property and assets if the same is necessary in the usual and regular
course of business of the corporation or if the proceeds of the sale or
other disposition of such property and assets shall be appropriated for the
conduct of its remaining business.

Acquisition of SHARES OR SECURITIES. [Sec 35(g)]

S
hares of other corporations - Again this act does not need the approval of the SHs if
done in pursuance of the purpose or purposes of the corporation AS STATED IN ITS AOI.
The corporation has no power to purchase or hold stock in another corporation unless it
is one activity permitted by its articles of incorporation.

O
wn shares or stocks acquisition. - Authorized by the RCC in Sections 40, 67 last
paragraph; Sections 76, and 104. A corporation acquiring its own stocks must have
“unrestricted retained earnings” says Section 40.

In our Constitution, there is also a limitation:

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- No private corporation or association may hold alienable lands of 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 (Sec 3, Art II)

And in some Special laws:

Subject to the provisions of the Bulk Sales Law;
the Philippine Competition Act;
Article 186 of the Revised Penal Code

In Sections 51, 52 of RA 8791 or the General Banking Law, any real property acquired by a
bank by way of satisfaction of claims under the circumstances enumerated in the law shall be
disposed of by within a period of ve (5) years or as may be prescribed by the Monetary Board.
The bank may, after said period, continue to hold the property for its own use, subject to
limitations with respect to ceiling on investments in certain assets.

NOTE OF THE POWER TO PLEDGE AND MORTGAGE INCLUDED IN THIS POWER. DOES THIS
MEAN THAT A CORPORATION HAS THE POWER TO GUARANTY OR SECURE OBLIGATION OF
ANOTHER ENTITY?

The law does not expressly confer on a corporation the power to guaranty or secure the
obligation of another entity. The SEC acknowledges that a corporation may validly provide for
the same in its articles of incorporation, and in furtherance of its business purpose. This
actually complements its power and capacity "to…pledge, mortgage, and otherwise deal with
such real and personal property…as the transaction of the lawful business of the corporation
may reasonably and necessarily require."

[If there is nothing in its AOI which confers a corporation the power to enter into a
contract of guarantee or suretyship, it is deemed that the corporation is not authorized to
do so especially since such act could prove to be disadvantageous to the corporation.
Entering into such contracts would be ultra vires which, according to the strict
construction of the term, is an act not within the express, implied and incidental powers
of the corporation conferred by the Revised Corporation Code, or the AOI. It is an act
NOT POSITIVELY FORBIDDEN, BUT IMPLIEDLY FORBIDDEN FOR LACK OF
EXPRESS OR IMPLIED AUTHORITY.] - SEC-OGC Opinion No. 08-11 April 16, 2008,
SEC-OGC Opinion No. 16-14, July 7, 2014

The grant of a security interest that is in furtherance of a corporation’s

business is embraced within the scope of a corporation’s implied powers.
However, the di culty arises in its application to speci c institutions.

For example, if a corporation guarantees an application of its President for

a loan, and if the loan is incurred for the bene t of the corporation, the guaranty
is in the exercise of a corporation’s implied powers. Also, when one corporation
owns and controls another, the former may guarantee the debts of the latter.

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 HW, The mere fact that the shareholders of two (2) corporations are practically the same
does not authorize one (1) corporation to guarantee the contracts of the other.

The common denominator among these cases is that the guarantee or mortgage is
entered into to obtain some bene t for the corporation.

There is no hard and fast rule in determining if a corporate guarantor or mortgage falls within a
corporation’s implied powers. Each case must be measured against its own peculiar facts and
circumstances.

Corporation mortgage its properties to secure its own

loan and/or other
obligations

Yes, because
the act of mortgaging
to secure the its properties to pay
obligation of another o its creditors is in
(concept of a third-party furtherance of the
corporate purposes

No, because the same will not be in furtherance of the

purposes for which the corporation was organized. Properties of
the corporation must be used for its use or business, not for the
business of some other person.

Exception: If the debtor-corporation in whose favor the

corporation will execute a mortgage is the latter’s subsidiary, and
only if no third party or creditor of the corporation shall be
prejudiced.

ASSIGNMENT/QUIZ: May a corporation mortgage its properties to secure

its own loan and/or other obligations?
Answer: Yes, because the act of mortgaging its properties to pay
o its creditors is in furtherance of the corporate purposes for
which it was organized.

HOW ABOUT IF mortgage OF its properties IS to secure the

obligation of another? Is the concept of a third-party mortgage
applicable to a corporation?

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Answer: No, because the same will not be in furtherance of the
purposes for which the corporation was organized. Properties of
the corporation must be used for its use or business, not for the
business of some other person.

Exception: If the debtor-corporation in whose favor the

corporation will execute a mortgage is the latter’s subsidiary, and
only if no third party or creditor of the corporation shall be
prejudiced.

Q: Is the concept of an accommodation party, wherein the

accommodation party secures the obligation of the accommodated
party, whether it be a guaranty or a surety, and without a mortgage,
applicable to a corporation?

Answer: The Supreme Court has held that a corporation cannot

secure the obligation of another. The issue or indorsement of
negotiable paper by a corporation without consideration and for
the accommodation of another is ultra vires. (Ernestina Crisologo-Jose vs. Court of Appeals, et
al., G.R. No. 80599, 15 September 1989.)
IMPORTANT NOTE ON THIS DOCTRINE: Unless the corporation is engaged in the business of
suretyship such as a bonding company which is, by its very nature,
engaged in the business of securing the obligation of another.

FINAL NOTE ON THIS: The Board must secure shareholders’ or members’ approval if the
grant of guaranty or surety amounts to an indirect sale or disposition of all or
substantially all properties of the corporation. E.g. Kun isanla halos lahat ng assets.

POWER TO ENTER INTO MERGER OR CONSOLIDATION

POWER TO MAKE REASONABLE DONATION FOR CHARITABLE,

CIVIC, CIVIL PURPOSES

What are the requisites for a valid corporate donation?

a. Donation must be reasonable. -

This is a check against scheming directors and o cers who may use the authority as a screen
to appropriate corporate funds for personal ends.

b. Must be for valid purposes such as public welfare, hospital, charitable,

cultural, scienti c, civic, or similar purposes.
c. May be made by a domestic corporation in aid of any political party,
candidate, and/or partisan political activity. Note that foreign corporations are still prohibited
from making donations in favor of any political party, candidate, and/or partisan political
activity.
d. Must bear a reasonable relation to the corporation’s interest and not be
remote and fanciful.

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 POLITICAL CONTRIBUTIONS NOW ALLOWED under the Revised Corporation Code.
Under the old Corporation Code, corporations, whether domestic or
foreign, were prohibited from making campaign or political contributions.
The Revised Corporation Code lifted the prohibition directed to domestic corporations,
save those mentioned in the Omnibus Election Code145 on account of their bene ts
and privileges derived from the government. Political contributions are not subject to
donor’s tax, provided they are duly reported to the Commission of Elections.

Foreign corporations remain forbidden from making political contributions. Such prohibition is
consistent with the State policy against foreign interference in the country’s domestic a airs.

SPECIFIC/SPECIAL EXPRESS POWERS

What are the speci c powers of a corporation?

a. To extend or shorten corporate term.

b. To increase or decrease corporate stock.
c. To incur, create, or increase bonded indebtedness.
d. To deny pre-emptive right.
e. To sell, dispose, lease, encumber all or substantially all of corporate
assets.
f. Purchase or acquire shares.
g. Invest corporate funds in another corporation or business for purposes
other than the primary purpose.
h. Declare dividends out of unrestricted retained earnings.
i. Enter into management contract with another corporation (not with an
individual or a partnership – within general powers) whereby one
corporation undertakes to manage all or substantially all of the business
of the other corporation for a period not longer than ve (5) years for
any one (1) term.
j. Amend the Articles of Incorporation.

POWER TO EXTEND OR SHORTEN CORPORATE TERM

Relevant Provision:
Section 36. Power to Extend or Shorten Corporate Term. - A private
corporation may extend or shorten its term as stated in the articles of
incorporation when approved by a majority vote of the board of directors or
trustees, and ratified at a meeting by the stockholders or members
representing at least two-thirds (2/3) of the outstanding capital stock or of
its members. Written notice of the proposed action and the time and place

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 of the meeting shall be sent to the stockholders or members at their
respective place of residence as shown in the books of the corporation, and
must be deposited to the addressee in the post office with postage prepaid,
served personally, or when allowed in the bylaws or done with the consent
of the stockholder, sent electronically in accordance with the rules and
regulations of the Commission on the use of electronic data messages. In
case of extension of corporate term, a dissenting stockholder may exercise
the right of appraisal under the conditions provided in this Code.
Note:
- REMEMBER SECTION 11 ABOUT CORPORATE TERM.
SEC. 11. Corporate Term. A corporation shall have perpetual existence
unless its articles of incorporation provides otherwise. Corporations with
certi cates of incorporation issued prior to the e ectivity of this Code,
and which continue to exist, shall have perpetual existence, unless the
corporation, upon a vote of its stockholders representing a majority of its
outstanding capital stock, noti es the Commission that it elects to retain
its speci c corporate term pursuant to its articles of incorporation:
Provided, That any change in the corporate term under this section is
without prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code.

A corporate term for a speci c period may be extended or shortened by

amending the articles of incorporation: Provided, That no extension may be
made earlier than three (3) years prior to the original or subsequent expiry
date(s) unless there are justi able reasons for an earlier extension as may
be determined by the Commission: Provided, further, That such extension
of the corporate term shall take e ect only on the day following the original
or subsequent expiry date(s).

A corporation whose term has expired may apply for a revival of its
corporate existence, together with all the rights and privileges under its
certi cate of incorporation and subject to all of its duties, debts and
liabilities existing prior to its revival. Upon approval by the Commission, the
corporation shall be deemed revived and a certi cate of revival of
corporate existence shall be issued, giving it perpetual existence, unless its
application for revival provides otherwise.

No application for revival of certi cate of incorporation of banks, banking

and quasi-banking institutions, preneed, insurance and trust companies,
non-stock savings and loan associations (NSSLAs), pawnshops,
corporations engaged in money service business, and other nancial
intermediaries shall be approved by the Commission unless accompanied
by a favorable recommendation of the appropriate government agency.

- TAKE NOTE THAT SHORTENING THE TERM IS A MANNER OF VOLUNTARY

DISSOLUTION. SECTION 136 PROVIDES:

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 Section 136. Dissolution by Shortening Corporation Term. - A
voluntary dissolution may be effected by amending the articles of
incorporation to shorten the corporate term pursuant to the
provisions of this Code. A copy of the amended articles of
incorporation shall be submitted to the Commission in accordance
with this Code.

Upon the expiration of the shortened term, as stated in the

approved amended articles of incorporation, the corporation shall
be deemed dissolve without any further proceedings, subject to
the provisions of this Code on liquidation.

In the case of expiration of corporate term, dissolution shall

automatically take effect on the day of the following the last day of the
corporate term stated in the articles of incorporation without the need
for the issuance by the Commission of a certificate of dissolution.
HENCE, A CORPORATION CANNOT ANYMORE EXTEND ITS CORPORATE TERM ONCE IT IS
ALREADY IN THE WINDING-UP STAGE, BECAUSE FOR A DISSOLVED CORPORATION
WHICH IS ALREADY IN THE LIQUIDATION OR WINDING-UP STAGE, THERE IS NOTHING
MORE TO EXTEND. THE REMEDY THEN IS TO FILE A PETITION FOR REVIVAL OF
CORPORATE EXISTENCE.

ASSIGNMENT/QUIZ: Can the extension be done during the liquidation period or winding-
up period?

Section 15 Section 36

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Section 15. Amendment of Articles of Incorporation. -
Unless otherwise prescribed by this Code or by special
law, and for legitimate purposes, any provision or matter
stated in the articles of incorporation may be amended
by a majority vote of the board of directors or trustees
and the vote or written assent of the stockholders
representing at least two-thirds (2/3) of the outstanding
capital stock, without prejudice to the appraisal right of
dissenting stockholders in accordance with the
provisions of this Code. The articles of incorporation of a
nonstock corporation may be amended by the vote or
written assent of majority of the trustees and at least
two-thirds (2/3) of the members.
The original and amended articles together shall contain
all provisions required by law to be set out in the articles
of incorporation. Amendments to the articles shall be
indicated by underscoring the change or changes made,
and a copy thereof duly certified under oath by the
corporate secretary and a majority of the directors or
trustees, with a statement that the amendments have
been duly approved by the required vote of the
stockholders or members, shall be submitted to the
Commission.
The amendments shall take effect upon their approval
by the Commission or from the date of filing with the
said Commission if not acted upon within six (6) months
from the date of filing for a cause not attributable to the
corporation.
Section 36. Power to Extend or Shorten
Corporate Term. - A private corporation may
extend or shorten its term as stated in the
articles of incorporation when approved by a
majority vote of the board of directors or
trustees, and ratified at a meeting by the
stockholders or members representing at
least two-thirds (2/3) of the outstanding capital
stock or of its members. Written notice of the
proposed action and the time and place of the
meeting shall be sent to the stockholders or
members at their respective place of
residence as shown in the books of the
corporation, and must be deposited to the
addressee in the post office with postage
prepaid, served personally, or when allowed in
the bylaws or done with the consent of the
stockholder, sent electronically in accordance
with the rules and regulations of the
Commission on the use of electronic data
messages. In case of extension of corporate
term, a dissenting stockholder may exercise
the right of appraisal under the conditions
provided in this Code.

Amendment of AOI. No meeting. Also amendment of AOI as it will change

corporate term. Here hw, amendment is taken at a
MEETING of the SHS/members and upon a VOTE

- NEXT, TAKE NOTE THAT IN SECTION 36, APPRAISAL RIGHT IS AVAILABLE ONLY TO
“EXTENSION OF CORPORATE TERM”, WHILE IN SECTION 80, WHICH IS SPECIFIC TO
APPRAISAL RIGHT, THE RIGHT IS APPLICABLE TO BOTH, EXTENSION AND
SHORTENING. Thus, it is settled now, that appraisal right is applicable TO BOTH. In fact,
Section 11 (Corporate Term) also made mention of Appraisal Right, and states:“….Provided,
That any change in the corporate term under this section is without prejudice to the
appraisal right of dissenting stockholders in accordance with the provisions of this
Code.” NOW DONT FORGET THAT APPRAISAL RIGHT is AVAILABLE ONLY TO
STOCKHOLDERS IN A STOCK CORPORATION. (NOT AVAILABLE TO NON-STOCK CORP)
-

PROBLEM: HARRY D., the Corporate Secretary of the

SPX Holdings, Inc., forgot that the term of SPX Holdings expired the day before. He readily
convened the Board, issued notices of meeting to the Board and to the stockholders,
both of which readily approved the amendment to the articles of incorporation extending
the corporate life of San Gabriel
Holdings, Inc. Can the term be extended?

Answer: No. The term cannot be extended since the same has

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 already expired, even if due to a day of delay in inadvertence. The
remedy is to le a Petition for Revival of Corporate term with the
SEC.

POWER TO INCREASE OR DECREASE CAPITAL STOCK

Section 37. Power to increase or Decrease Capital Stock; Incur,
Create or Increase Bonded Indebtedness. - No corporation shall
increase or decrease its capital stock or incur, create or increase any
bonded indebtedness unless approved by a majority vote of the
board of directors and by two-thirds (2/3) of the outstanding capital
stock at a stockholders' meeting duly called for the purpose. Written
notice of the time and place of the stockholders' meeting and the
purpose for said meeting must be sent to the stockholders at their
places of residence as shown in the books of the corporation served
on the stockholders personally, or through electronic means
recognized in the corporation's bylaws and/or the Commission's rules
as a valid mode for service of notices.

A certificate must be signed by a majority of the directors of the

corporation and countersigned by the chairperson and secretary of
the stockholders' meeting, setting forth:

(a) That the requirements of this section have been complied with;

(b) The amount of the increase or decrease of the capital stock;

(c) In case of an increase of the capital stock, the amount of capital

stock or number of shares of no-par stock thereof actually
subscribed, the names nationalities and addresses of the persons
subscribing, the amount of capital stock or number of no-par stock
subscribed, the names, nationalities and addresses of the persons
subscribing, the amount of capital stock or number of no-par stock
subscribed by each, and the amount paid by each on the subscription
in cash or property, or the amount of capital stock or number of
shares of no-par stock allotted to each stockholder if such increase is
for the purpose of making effective stock dividend therefor
authorized;

(d) Any bonded indebtedness to be incurred, created ot increased;

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(e) The amount of stock represented at the meeting; and

(f) The vote authorizing the increase or decrease of capital stock, or

incurring, creating or increasing of bonded indebtedness.

Any increase or decrease in the capital stock or the incurring,

creating or increasing of any bonded indebtedness shall require prior
approval of the Commission and where appropriate, of the
Philippine Competition Commission. The application with the
Commission shall be made within six (6) months from the date of
approval of the board of directors and stockholders, which period may
be extended for justifiable reasons.

Copies of the certificate shall be kept on file in the office of the

corporation and filed with the Commission and attached to the
original articles of incorporation. After approval by the Commission
and the issuance by the Commission of its certificate of filing may
declare: Provided, That the Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by a sworn
statement of the treasurer of the corporation accompanied by a sworn
statement of the treasurer of the corporation lawfully holding office at
the time of the filing of the certificate, showing that at least twenty-five
percent (25%) of the increase in capital stock has been subscribed
and that at least twenty-five percent (25%) of the amount subscribed
has been paid in actual cash to the corporation or that property, the
valuation of which is equal to twenty-five percent (25%) of the
subscription, has been transferred to the corporation: Provided,
further, That no decrease in capital stock shall be approved by the
Commission if its effect shall prejudice the rights of corporate
creditors.

Nonstock corporations may incur, create or increase bonded

indebtedness when approved by a majority of the board of trustees
and of at least two-thirds (2/3) of the members in a meeting duly
called for the purpose.

Bonds issued by a corporation shall be registered with the

Commission, which shall have the authority to determine the
sufficiency of the terms thereof.

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 NOTES:

Despite the Board resolution approving increase in capital stock and the receipt of payment on
the future issues of the shares from the increased capital stock, such funds do not constitute
part of the capital stock of until approval of the increase by SEC.
Central Textile Millsv. NWPC,260 SCRA 368 (1996).

An increase or decrease in the CAPITAL STOCK of the corporation is a fundamental change

in the corporation. (e.g. requiring amendment of its AOI)

That is why the above generally requires the SEC’s approval as they involve amendment
of the articles of incorporation. Where shares or debt will be o ered to the public, the law
additionally requires prior registration with the SEC in accordance with the section 8 of the
Securities Regulation Code.

Note also that what is being increased or decreased is CAPITAL STOCK, and NOT CAPITAL.
Recall the di erence between the two.

C
APITAL is the actual entire assets of the corporation less its liabilities. Its the NET
ASSETS. That means it includes NOT ONLY THE AMOUNT INVESTED BY THE
STOCKHOLDERS (Capital Stock) BUT ALSO THE UNDISTRIBUTED EARNINGS
(Retained Earnings, a.k.a. the NET Pro t/Net Income), and PREMIUMS ON SUBSCRIPTION
(a.k.a. Additional Paid-in Capital)

C
APITAL STOCK on the other hand is an amount xed in the AOI to be subscribed by
the stockholders. It is the contribution, the amount invested by the stockholders. It is
made DIRECTLY through subscription, or INDIRECTLY if given as STOCK DIVIDENDs.
If it has Par value = the amount of capital stock is known as AUTHORIZED CAPITAL STOCK
If it has NO Par value = the amount of capital stock is known simply as the Stated Capital or
simply Capital Stock. Recall the format of AOI in Section 14 (seventh part). There is no
Authorized Capital Stock in no par value shares.

Further the term AUTHORIZED CAPITAL STOCK is the total stocks (number of shares with the
price of its share known as par value) that a corporation states in its AOI. Its telling the govt,
thru SEC that this is the amount of capital that we want to raise. Thus it is composed of the
ISSUED SHARES (shares which were subscribed), and the UNISSUED SHARES (or the shares
which are still available for “issue” or subscription).

Thus, the statement of ACS in the AOI actually serves as a limitation of the CS. So, a
corporation cannot issue stocks in excess of the amount stated in its AOI, such issue is ULTRA
VIRES, the stock issue IS VOID EVEN IN THE HANDS OF BONA FIDE PURCHASER FOR
VALUE.

Now lets go back.

In increasing or decreasing capital stock, the prior approval not only of the SEC, but also
of the Phil. Competition Commission may be required.
When is this approval required?

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 In the Philippines, our anti-trust law is the
Philippine Competition Act (PCA) or RA 10667.

This law seeks to prohibit two (2) general anti-competition practices. One is anti-competitive
agreements (contracts which restrict competition) and the other one which is abuse of market
dominance.

This law also created the Philippine Competition Commission(PCC) which is the body
tasked to determine whether or not there is anti-competition agreement. So the law gives the
PCC the right to be noti ed of certain transactions which could be anti-competition practices.
One notable transaction involving corporations that could be anti-competition is when there is
merger or consolidation or corporate combinations. Sometimes it may be that the increase or
decrease in capital stock may amount to abuse of dominant position one of the prohibited
practices by the law, as it restricts, or prohibit competition. This is the reason of Section 37
requiring such prior approval of the PCC.

Recalling your knowledge about authorized capital stock….

Note that the term "capital stock" as used in this section (sec37) refers to "authorized capital
stock", meaning it applies only to shares with PAR VALUE.

ACS = no. of shares x par value

So if your ACS is P1,000,000 divided into 10,000 shares x Php100 per share, you could
increase or decrease your CS (your ACS) by changing either the number of shares, the Par
value, or both!

That is why the ways by which the corporation may increase or decrease its capital
stock are as follows:
a. By increasing the number of shares but maintaining the par value.
b. By increasing the par value but maintaining the number of shares.
c. By increasing the par value and likewise increasing the number of shares.

FURTHER, In case of increase in capital stock, the Revised Corporation Code requires that
twenty- ve percent (25%) of the increase must be subscribed, and that twenty- ve percent
(25%) of such subscription must be paid. With these it is very important to remember that IT IS
NOT REQUIRED THAT EVERY SUBSCRIBER SHALL PAY 25% OF HIS OR HER
SUBSCRIPTION. THE REQUIREMENT IS MET IS 25% OF THE AMOUNT SUBSCRIBED.
Meaning some may have paid less than 25% and others more than 25% of their subscription
but the total payment is at least 25% of the total subscription which also must be at least 25%
of the increase.

Next is that you must consider that AN INCREASE IN ACS CANNOT BE LAWFULLY
ACCOMPLISHED WITHOUT AN ACTUAL INCREASE IN THE ASSETS OF THE
CORPORATION, UNLESS SUCH INCREASE IS TO EFFECT A STOCK DIVIDEND.

INCREASE BY WAY OF STOCK DIVIDENDS.

Read Section 42:

Section 42. Power to Declare Dividends. - The board of directors of a

stock corporation may declare dividends out of the unrestricted
retained earnings which shall be payable in cash, property, or in stock

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 to all stockholders on the basis of outstanding stock held by
them: Provided, That any cash dividends due on delinquent stock
shall be first be applied to the unpaid balance on th subscription plus
costs and expenses, while stock holders until their unpaid
subscription is fully paid: Provided, further, That no stock dividend
shall be issued without the approval of stockholders
representing at least two-thirds (2/3)of the outstanding capital
stock at a regular or special meeting duly called for the purpose.

Stock corporations are prohibited from restraining surplus profits in

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

AS TO decrease in capital stock, the rule is that a corporation cannot

lawfully decrease its capital stock. TRUST FUND DOCTRINE remember?
Decrease in capital stock generally results in the return of capital. This is why
under last paragraph of Section 139 states:

Section 139. Corporate Liquidation. - Except for …..

Except by decrease of capital stock and as otherwise allowed by this Code,

no corporation shall distribute any of its assets or property except upon
lawful dissolution and after payment of all its debts and liabilities.
This is why it is required by this section that the corporation must submit proof to the SEC that
the DECREASE IN CS, will not prejudice the rights of corporate creditors, otherwise the SEC
will not approve such decrease.

HOW IS REDUCTION DONE?

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The same in increasing it, opposite nag lang. that is by reducing the number of authorized
shares, par value, or both.

NOTE: These schemes are not STOCK SPLIT or REVERSE STOCK SPLIT which are also
RESTRUCTURING OF CAPITAL STOCK.
A corporation may restructure its capital through a stock split or a reverse
Split.

a. Stock Split

There is a stock split when the corporation increases the number of its issued shares, without
the corresponding increase in the amount of its capital stock. Consequently, there is a
decrease in the par value of each share. This facilitates the sale by a shareholder of a fraction
of his shareholdings. It makes the price of each share more a ordable to the public.

From the perspective of the corporation, it may x a lower issue price and expedite additional
share issuances. Existing shareholders may exercise their pre-emptive right to prevent dilution
of their equity interest.

b. Reverse Split

In contrast to Stock Split, a Reverse Split decreases the number of a corporation’s issued
shares, with the corresponding increase in the par value of each share to maintain the amount
of the corporation’s capital stock. This limits the sale by a shareholder of a fraction of his
shareholdings.

Reducing the authorized shares may include those already issued (subscribed). One good
example is the case of REDEEMABLE SHARES in Section 8, and TREASURY SHARES in
Section 9 in relation to Section 40. However Capital Stock is NOT yet reduced or
decreased after redeeming or acquiring own shares previously issued. Its because once
these shares are Redeemed or Acquired by the corporation, they continue to exist, as
Treasury Shares, nasa Capital Stock pa rin sila. Why? Because they represent actual
assets invested by shareholders. So to reduce Capital Stock, these shares redeemed or
acquired, MUST BE RETIRED OR CANCELLED.

Note, in case redeemable shares and treasury shares, there is no prejudice to creditors if
they are retired or cancelled because it is deemed that creditors have been informed of such
possible or planned return of capital at the time they extended credit to the
corporation such as when a corporation issues redeemable shares.They are
charged with knowledge that they cannot treat the same as "trust fund" and hence
there is also no prejudice if the creditors give consent to the proposed return of
capital.

A corporation may not decrease its capital stock if it purposes to relieve an

existing subscriber of his obligation to pay for his subscription. This is the case of Philippine
Trust Company vs. Marciano Rivera, 44 Phil 470 (1925). THIS IS BECAUSE ISSUED SHARES
(SUBSCRIBED which includes not fully paid shares) already have actual equivalent assets
(ACCTS RECEIVABLE) kaya sabi ng SC in this case:

"It is established doctrine that subscription to the capital of

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 a corporation constitute a nd to which creditors have a right to
look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its debts.
(Velasco vs. Poizat, 37 Phil., 802.) 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 an under the conditions prescribed
by the statute or the charter or the articles of incorporation.
Moreover, strict compliance with the statutory regulations is
necessary (14 C. J., 498, 620).”

In short if there is decrease in capital stock, unpaid subscription must still be paid before
retired or cancelled.

WHAT WILL YOU DO WITH THE SURPLUS OR ADDITIONAL PAID IN CAPITAL [APIC]
(subscription price in excess of par value) IF ANY, UPON CANCELLATION OF THESE
SHARES?
Ans: They can only be declared as STOCK DIVIDEND.

To explain further about the APIC. Additional Paid-in Capital (APIC) already forms part of equity
emanating from the original subscription agreement. APIC, as a premium, forms part of the
capital of the corporation and therefore, falls within the purview of the trust fund doctrine. Thus,
APIC is also governed by the TRUST FUND DOCTRINE.

Finally, on this matter, remember that Capital maintenance does not require a complete ban on
decrease of capital stock. A corporation may do so to return unwanted assets to its
shareholders, or to implement a scheme to replace equity with debt.

POWER TO INCUR, CREATE, OR INCREASE BONDED

INDEBTEDNESS
The rst thing you need to know is What constitutes Bonded Indebtedness referred to in
Section 37 requiring tedious process and approval of SHS/members?

First and foremost, the power to incur bonded indebtedness is not just a special power as in
Section 37, IT IS ALSO A POWER IMPLIED FROM THE EXPRESS POWERS. A business
corporation, absent restrictions may borrow money whenever the necessity of its business so
requires and issue security or customary evidence of debt such as notes, bonds, or mortgages.
Even a Non-stock corporation is a authorized.

So, according to the SEC, the term “bonded indebtedness” refers to negotiable corporate
bonds which are secured by mortgage on corporate property. Accordingly, if the notes are not
secured by mortgage on corporate property, the same need not comply with the requirements
of section 37.

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 Kumbaga bonded indebtedness is a fundamental matter a ecting the inchoate right or interest
of shareholders. Thus, to add, even NON-VOTING SHAREHOLDERS CAN VOTE ON THIS
MATTER. Remember your Section 6, its in paragraph 3(d).

Section 6. Classi cationof shares. Xxxxxxx

xxxxx

Holders of nonvoting shares shall nevertheless be entitled to vote on the following

matters;
(a) Amendment of the articles of incorporation;
(b) Adoption and amendment of bylaws;
(c) Sale, lease, echange, mortgage, pledge, or other disposition of all or substantially all
of the corporate property;
(d) Incurring, creating, or increasing bonded indebtedness;
(e) Increase or decrease of authorized capital stock;
(f) Merger or consolidation of the corporation with another corporation or other
corporations;
(g) Investment of corporate funds in another corporation or business in accordance with
this Code; and
(h) Dissolution of the corporation.

POWER TO DENY PREEMPTIVE RIGHT

Section 38. Power to Deny Preemptive Right. - All stockholders of a stock corporation shall
enjoy preemptive right to subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto: Provided, That such preemptive right shall not
extend to shares issued in compliance with laws requiring stock o erings or minimum stock
ownership by the public; or to shares issued in good faith with the approval of the stockholders
representing two-thirds (2/3) of the outstanding capital stock in exchange for property needed
for corporate purposes or in payment of previously contracted debt.

NOTES

A pre-emptive right is the preferential right of shareholders to subscribe to

all issues or disposition of shares of any class in proportion to their present
shareholdings.

Stated otherwise, before shares or new shares are to be issued by a corporation,

these must rst be o ered to the existing stockholders in proportion to their
respective shareholdings in the corporation.

Only if the shareholder waives his preemptive right can these shares be o ered to third parties
and other non-stockholders.

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 What is the purpose of a preemptive right?
A share subscription gives the subscriber certain proportionate economic
and political rights. An economic right refers to the right to receive dividends and
capital in case of liquidation. Political rights refer to the right to be nominated to
the Board and to approve certain corporation actions. Thus, the purpose is to
prevent the stockholder’s interests from being diluted without the stockholder’s
consent.

EXAMPLE:

FB corporation has original stock of Php100,000

That is 1,000 shares x Php100 par value/share

Assume the capital stock is increased to Php200,000

That is 1,000 shares increase. Thus, the CS would be:
2,000 shares x Php100 par value/share

Assume you are a SH and owns 500 shares. You have a preemptive right to buy 50% of the
new 1,000 shares (the increase/new shares) which is proportionate to your current holdings.
That is 500/1,000 shares = 50%.

E ects on:
A ected Rights How can your shares be diluted?

RIGHT TO VOTE If you will not be allowed to subscribe, your holdings will not anymore be
50% after the increase. New SHs will hold portion of your old 50% holdings.
RIGHT TO DIVIDENDS Your holdings after increase will just be 25% (500/2000 shares). The other
25% now belongs to new SHs.
RIGHT TO ASSETS
AFTER LIQUIDATION

Is there preemptive right on the re-issuance of treasury shares?

Yes. Kari section 38 refers to ANY CLASS OF SHARES, and use of the term “DISPOSITION”.
Plus, treasury shares are not among the exceptions provided where the right is not available.

In an Opinion, the SEC has opined that the "pre-emptive right extends not only to issuance of
new shares resulting from an increase in capital stock, but also to issuance of previously
unsubscribed shares which formed part of the existing
capital stock.”

This is because the law does not distinguish between newly issued shares and previously
subscribed shares.

REMEDIES IF RIGHT IS DENIED.

SH may le an action to compel the corporation to give him the right. HW if the right is
VALIDLY DENIED, as when the AOI is AMENDED. The SH may just exercise his APPRAISAL
RIGHT under section 80.

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 FOR EXAM: ”Petitioner bewails the fact that in view of the lack of notice
to him of such subsequent issuance, he was not able to exercise his
right of pre-emption over the unissued shares. However, the
general rule is that pre-emptive right is recognized only with respect
to new issue of shares, and not with respect to additional issues of
originally authorized shares. This is on the theory that when a
corporation at its inception o ers its rst shares, it is presumed to
have o ered all of those which it is authorized to issue. An original
subscriber is deemed to have taken his shares knowing that they
form a de nite proportionate part of the whole number of
authorized shares. When the shares left unsubscribed are later re-
o ered, he cannot therefore claim a dilution of interest. (Campos
and Lopez-Campos Selected Notes and Cases on Corporation
Law, p. 855, citing Yasik V. Wachtel 25 Del. Ch. 247,17A. 2d 308
(1941)."

At present, the equitable approach is to o er unissued shares to those shareholders who have
not been previously o ered the same batch of shares that are about to be issued. The
corporation may rightfully deny such right to those who previously refused to take them. In
fact, the SEC has made it clear that under the Revised Corporation Code, preemptive right
applies and extends to all issuance of shares whether taken from the original authorized capital
stock or in the increase in capital stock.

FOR EXAM: IS PRE-EMPTIVE RIGHT ABSOLUTE?

Ans. No, because it may be waived. See Section 38.

What are the instances where such right is not available?

Ans. Read and cite Section 38.

USUAL PRACTICE: For practicality purposes, when new shares of stock are to be issued by a
corporation whose shares are listed in the stock exchange, the rst order of business is usually
to amend the articles of incorporation to deny stockholders pre-emptive right. Otherwise, a
corporation who has thousands of stockholders upon its issuances of new shares will have to
“knock" at the doors of each. HASSLE DIBA?!

FINAL NOTE. Do not confuse PRE-EMPTIVE RIGHT under this law, with the RIGHT OF FIRST
REFUSAL (ROFR). The latter (ROFR) is CONTRACTUAL in nature, while the former (PER) is
LEGAL (provided by law).
The latter is enforceable therefore against co-shareholder based on contractual stipulations;
while the former is enforceable against the corporation which is bound under the law.

POWER TO SELL, LEASE, EXCHANGE, PLEDGE, OR OTHER

DISPOSITION OF ALL OR SUBSTANTIALLY ALL OF
CORPORATE ASSETS

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Section 39. Sale or Other Disposition of Assets. - Subject to the
provisions of Republic Act No. 10667, otherwise known as the "Philippine
Competition Act", and other related laws (New provision) a corporation
may, by a majority vote of its board of directors or trustees, sell, lease,
exchange, mortgage, pledge, or otherwise dispose of its property and
assets, upon such terms and conditions and for such consideration, which
may be money, stock, bonds, or other instruments for the payment of
money or other property or consideration, as its board of directors or
trustees may deem expedient.

A sale of all or substantially all of the corporation's properties and assets,

including its goodwill, must be authorized by the vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or at
least two-thirds (2/3) of the members, meeting duly called for the purpose.

In nonstock corporations where there are no members with voting rights,

the vote of at least a majority of the trustees in office will be sufficient
authorization for the corporation to enter into any transaction authorized by
this section.

The determination of whether or not the sale involves all or substantially all
of the corporation's properties and assets must be computed based on its
net asset value, as shown in its latest financial statements. (New provision)
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 of which
it was incorporated.

Written notice of the proposed action and of the time and place for the
meeting shall be addressed to stockholders or members at their places of
residence as shown in the books of the corporation and deposited to the
addressee in the post office with postage prepaid, served personally, or
when allowed by the bylaws or done with the consent of the stockholder,
sent electronically: Provided, That any dissenting stockholder may exercise
the right of appraisal under the conditions provided in this Code.

After such authorization or approval by the stockholders or members, the

board of directors or trustees may, nevertheless, in its discretion, abandon
such sale, lease, exchange, mortgage, pledge, or other disposition of
property and assets, subject to the rights of third parties under any contract

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 relating thereto, without further action or approval by the stockholders or
members.

Nothing in this section is intended to restrict the power of any corporation,

without the authorization by the stockholders or members, to sell, lease,
exchange, mortgage, pledge, or otherwise dispose of any of its property
and assets if the same is necessary in the usual and regular course of
business of the corporation or if the proceeds of the sale or other
disposition of such property and assets shall be appropriated for the
conduct of its remaining business.

Section 39 covers NOT ONLY SALES, but also lease, exchange, mortgage, pledge or
other disposition of its properties.

HOW TO DETERMINE IF THE SALE IS “SUBSTANTIALLY ALL ASSETS”?

SEC Memorandum Circular No. 12, Series of 2020 provides the guidelines to publicly-listed
companies (PLC) on what constitutes a sale of all or substantially all of its property and assets
and the required stockholders’ approval of such sale. So we follow this.

It provides that a sale or disposal of corporate property and assets amounting to at least 51%
of the corporation’s total assets shall (NET ASSET VALUE) be considered a sale of all or
substantially all of the corporate property and assets, whether such sale accrued in a single
transaction or in several transactions taking place within one (1) year from the date of the rst
transaction. We refer it as the Aggregate Sale Transactions.

The determination whether a sale amounts to at least 51% of the corporation’s assets must be
computed based on its total assets as shown in its latest audited nancial statement (AFS).
The computation may also be based on the latest quarterly nancial statement or a special
purpose nancial statement prepared in connection with the sale transaction.
The vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital
stock (OCS) in a stockholders’ meeting duly called for the purpose of approving such sale shall
be required prior to the execution of the sale transaction. In cases of Aggregate Sale
Transactions, shareholder approval shall be required for the sale transaction that breaches the
51% corporate asset threshold.

A PLC found, after due notice and hearing, to have violated SEC MC No. 12 may be held liable
for penalties/sanctions under Section 158 of the Revised Corporation Code.

NOTE HW, THAT THIS IS NOT ONLY THE GAUGE, (THE 51% ABOVE), Section 39 take note,
that a sale or 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 of which it was incorporated”.

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 Section 158. Administrative Sanctions. - If, after due notice and
hearing, the Commission finds that any provision of this Code, rules
or regulations, or any of the Commission's orders has been violated,
the Commission may impose any or all of the following sanctions,
taking into consideration the extent of participation, nature, effects,
frequency and seriousness of the violation:

(a) Imposition of a fine ranging from Five thousand pesos

(₱5,000.00) to Two million pesos (₱2,000,000.00), and not
more that One thousand pesos (₱1,000.00) for each day of
continuing violation but in no case to exceed Two million
pesos (₱2,000,000.00);

(b) Issuance of the permanent cease and desist order;

(c) Suspension or revocation of the certificate of

incorporation; and

(d) Dissolution of the corporation and forfeiture of its assets

under the conditions in Title XIV of this Code.

Addt’l Notes:

Note that section 39 makes reference to Philippine Competition Act and other related laws.

Other related law aside from Philippine Competition Act, is the Bulk Sales Law.

AGAIN,

Philippine Competition Act (PCA) or RA 10667.

This law seeks to prohibit two (2) general anti-competition practices. One is
anti-competitive agreements (contracts which restrict competition) and the
other one which is abuse of market dominance.

This law also created the Philippine Competition Commission(PCC) which is

the body tasked to determine whether or not there is anti-competition
agreement.

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 ACT 3952: BULK SALES LAW
Purpose of the Law
meant to protect creditors of businessmen against preferential or
fraudulent transfers
Coverage of the Law
The law covers all transactions, whether done in good faith or not,
or whether or not the seller is in a state of insolvency, that fall within the
description of what is a “bulk sale.”

Types of transactions which are treated as “bulk sales”:

1. Sale, transfer, mortgage or assignments of a stock of goods,
wares, merchandise, provisions, or materials otherwise than
in the ordinary course of trade;- ---extra ordinary sales of
good
2. Sale transfer, mortgage or assignments of all, or substantially all, of
the business or trade of the vendor, mortgagor, transferor, or assignor;-
ordinary sale of business
3. Sale, transfer, mortgage, or assignment of all, or
substantially all, of the xtures and equipment used in the
business of the vendor, mortgagor, transferor, or assignor.-
extra ordinary sales of equipment.

Note: Only creditors at the time of the sale in violation of the law are
within the protection of the laws and creditors subsequent to the sale are
not covered.

Even if the transaction falls within the de nition of “bulk sale”, the
following are not deemed covered by the law:
1. If the vendor, mortgagor, transferor or assignor produces
and delivers a written waiver of the provisions of the law
from his creditors as shown by veri ed statements;
2. The law does not apply to executors, administrators,
receivers, assignees in insolvency, or public o cers, acting
under process.
Obligations when transaction is a bulk sale:
1. The vendor must deliver to such vendee a written statement
of:
a. names and addresses of all creditors to whom said vendor or
mortgagor may be indebted;
b. amount of indebtedness due or owing to each of said creditors

2. The vendor must apply the purchase money to the pro-rata payment
of bona de claims of the creditors as shown in the veri ed statement.
3. The seller, at least 10 days before the sale, shall:
a. make a full detailed inventory of the goods, merchandise, etc., cost
price of each article to be included in the sale
b. notify every creditor at least 10 days before transferring possession
of the goods, of the price, terms and conditions of the sale
Consequences of Violation of Requirements under #6 above stated:
1. When 6(a) above is not complied with, the sale itself is void;
the seller will be criminally liable.
2. When 6(b) above is not complied with, the sale itself is also
void; seller is also criminally liable.
3. When 6(c) is not complied with, the sale is not void; no
criminal liability on the seller.

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 YOU MIGHT WONDER, IF THE CORPORATION IS ALLOWED UNDER SECTION 39 TO SELL
ALL OR SUBSTANTIALLY ALL OF ITS ASSETS, IS THIS NOT A VIOLATION OF THE TRUST
FUND DOCTRINE?

CAN IT REALL SELL ALL ASSETS WITHOUT DISSOLUTION? HOW?

YES. IF MADE TO ANOTHER CORPORATION, THE SELLING CORPORATION MAY CONTINUE

IN A STATE OF SUSPENDED ANIMATION subject to the e ect of NON-USE of corporate
powers and continued inspiration of a corporation provided under SECTION 21, eventually
leading to dissolution under Section 138.

Section 138. Involuntary Dissolution. - A corporation may be dissolve by the

Commission motu propio or upon ling of a veri ed complaint by any interested
party. The following may be grounds for dissolution of the corporation:

(a) None-use of corporate charter as provided under Section 21 of his Code;

(b) Continuous inoperation of a corporation as provided under Section 21 of this
Code;
(c) Upon receipt of a lawful court order dissolving the corporation;
(d) Upon nding by the nal judgment that the corporation procured its incorporation
through fraud;
(e) Upon nding by nal judgment that the corporation:
(1) Was created for the purpose of committing, concealing or aiding the
commission of securities violation, smuggling, tax evasion, money laundering,
or graft and corrupt practices;
(2) Committed or aided in the commission of securities violations, smuggling,
tax evasion, money laundering, or graft and corrupt practices, and its
stockholders knew of the same; and
(3) Repeatedly and knowingly tolerated the commission of graft and corrupt
practices or other fraudulent or illegal acts by its directors, trustees, o cers,
or employees.

If the corporation is ordered dissolved by nal judgment pursuant to the grounds set
forth in subparagraph (e) hereof, its assets, after payment of its liabilities, shall upon
petition of the Commission with the appropriate court, be forfeited in favor of the
national government. Such forfeiture shall be without prejudice to the rights of
innocent stockholders and employees for services rendered, and to the application
for other penalty or sanction under this Code or other laws.

The Commission shall give reasonable notice to, and coordinate with, the
appropriate regulatory agency prior to the involuntary dissolution of companies
under their special regulatory jurisdiction.

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 In Caltex Inc. v. PNOC Shipping Transport Corp., 498 SCRA 400, The SC said that the only way
the that transfer can proceed without prejudice to the Creditors 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.

REMEMBER YOUR OBLICON, YUNG ISANG KLASE NG NOVATION BY SUBSTITUTING

PARTIES IN THE PERSON OF DEBTORS. Its DELEGACION in Article 1293 of civil code.

Delegacion – one which takes place when the creditor accepts a third person to
take the place of the debtor at the instance of the later.
Art. 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the latter,
but not without the consent of the creditor. Payment by the new debtor gives him rights
mentioned in articles 1236 and 1237.

NELL DOCTRINE

So, let us summarize. The rules is known as the Nell Doctrine which states that:

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 circumstances is
present:

a. The purchaser expressly or impliedly agrees to assume the debts;

b. The transaction amounts to a consolidation or merger of the corporations;

c. The purchasing corporation is merely a continuation of the selling corporation; and

d. The transaction is fraudulently entered into on order to escape liability for those
debts.

(Nell v. Paci c Farms, Inc. 15 SCRA 415, 1965) reiterated in Bank of Commerce v.
Radio Philippines Network, Inc. 722 SCRA 520 (2014).

If any of the cited exceptions is present, the transferee corporation shall assume the
liabilities of the transferor.

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 BUSINESS-ENTERPRISE TRANSFER.

In Cesar Villanueva, PHILIPPINE CORPORATE LAW

679-680, 682, 686, 692-693 (2010), cited in J.
Leonen, Dissenting Opinion in Bank of Commerce v.
Radio Philippines Network, Inc., G.R. No. 195615,
April 21, 2014, 722 SCRA 520, 617 [Per J. Abad,
Third Division], for its discussion on the three
levels of Corporate Acquisitions and
Transfers, namely : (1) pure assets-only
transfer; (2) transfer of the business enterprise;
and (3) equity transfer. It discussed that in a pure
assets-only transfer, "the purchaser is only
interested in the 'raw' assets and properties of the
business, perhaps to be used to establish its own
business enterprise or to be used for its on-going
business enterprise." In a transfer of business
enterprise, "[t]he purchaser's primary interest, is to
obtain the 'earning capability' of the venture." An
equity transfer is when "[t]he purchaser takes
control and ownership of the business by
purchasing the controlling shareholdings of the
corporate owner." In this case, "[t]he control of the
business enterprise is therefore indirect [as] the
corporate owner remains the direct owner of the
business, and what the purchaser has actually
purchased is the ability to elect the members of the
Board of Directors of the corporation which runs the
business."

For the first and third type, the transferee shall not be
liable for the debts and liabilities of the transferor
except where the transferee expressly or impliedly
agrees to assume such debts. The second type, the
transfer of business enterprise, makes the
transferee iiable for the transferor's liabilities.
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 In the case of Y-1 Leisure Philippines, Inc. v. Yu. 770 SCRA 56 (2015) the Court said
that Section 40( NOW SECTION 39 UNDER THE REVISED CORP CODE) re ects the
so called BUSINESS-ENTERPRISE TRANSFER

The SC said:

“Section 40 suitably re ects the business-enterprise transfer under the exception of the
Nell Doctrine because the purchasing or transferee corporation necessarily continued
the business of the selling or transferor corporation. Given that the transferee
corporation acquired not only the assets but also the business of the transferor
corporation, then the liabilities of the latter are inevitably assigned to the former.”

……..

“The Caltex case, thus, af rmed that the transfer of all or substantially all the proper
from one corporation to another under Section 40 necessarily entails the assumption of
the assignor's liabilities, notwithstanding the absence of any agreement on the
assumption of obligations. The transfer of all its business, properties and assets without
the consent of its creditors must certainly include the liabilities; or else, the assignment
will place the assignor's assets beyond the reach of its creditors. In order to protect the
creditors against unscrupulous conveyance of the entire corporate assets, Caltex
justi ably concluded that the transfer of assets of a corporation under Section 40 must
likewise carry with it the transfer of its liabilities.”

“Notably, an evaluation of the relevant jurisprudence reveals that fraud is

not an essential element for the application of the business-enterprise
transfer. (kasi in this case, The petitioners in this case, assert and insist that
under the Caltex case, there was an assumption of liabilities because fraud
existed on the part of PSTC, as the transferee corporation)

“The exception of the Nell doctrine,52 which finds its legal basis under
Section 40, provides that the transferee corporation assumes the debts and
liabilities of the transferor corporation because it is merely a continuation of
the latter's business. A cursory reading of the exception shows that it does
not require the existence of fraud against the creditors before it takes full
force and effect. Indeed, under the Nell Doctrine, the transferee corporation
may inherit the liabilities of the transferor despite the lack of fraud due to
the continuity of the latter's business.”
(Kaya lahit walang fraud, meron automatic assumption of liability kapag
meron Business-Enterprise Transfer)

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POWER TO ACQUIRE OWN SHARES

Section 40. Power to Acquire Own Shares. - Provided, That the

corporation has unrestricted retained earnings in its books to cover the
shares to be purchased or acquired, a stock corporation shall have the
power to purchased or acquired, a stock corporation shall have the power
to purchase or acquire its own shares for a legitimate corporate purpose or
purposes, including the following cases:

(a) To eliminate fractional shares arising out of stock dividends;

(b) To collect or compromise an indebtedness to the corporation,

arising out of unpaid subscription, in a delinquency sale, and to
purchase delinquent shares sold during said sale; and

(c) To pay dissenting or withdrawing stockholders entitled to

payment for their shares under the provisions of this Code.

(This refers to the exercise of the APPRAISAL RIGHT)

Section 40(c) refers to instances when a dissenting stockholder is given appraisal right.
IT IS IMPORTANT TO NOTE THEREFORE THAT This power of the corporation to
acquire its own shares is not limited to the cases enumerated in Section 40.

HERE IS THE SUMMARY:

FIRST IN SECTION 40;
SECOND, THE INSTANCES ENUMERATED IN SEC. 80;

Section 80. When the Right of Appraisal May Be Exercised. - Any stockholder of a
corporation shall have the right to dissent and demand payment of the fair value of the shares
in the following instances:

(a) In case an amendment to the articles of incorporation has the e ect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing preferences in any
respect superior to those of outstanding shares of any class, or of extending or shortening the
term of corporate existence;
(b) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in this Code;
(c) In case of merger or consolidation; and
(d) In case of investment of corporate funds for any purpose other than the primary purpose of
the corporation.

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 THEN provided in Section 15 (Amendment of articles of incorporation);
ALSO IN Section 36 (Power to extend or shorten corporate term;
In Section 39 (Sale or other disposition of corporate assets);
In Section 41 (Power to invest corporate funds in another corporation or business or for
any other purpose);
In Section 67 (Delinquency sale);
In Section 76 (Stockholders' or members' approval [of plan of merger or consolidation]);
and in Section 104 (Withdrawal of stockholder or dissolution of [close] corporation)

NOTE also in Other cases.

• It may also be exercised under Section 9 (treasury shares);

• With respect to redeemable shares, they may be purchased by the corporation

regardless of the existence of unrestricted retained earnings in the books of the
corporation. (see Sec. 8.);

• 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
become a subscriber thereof;

• In close corporation, where there is a deadlock respecting the management of its

business, the SEC 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. 103, par. 1[d]; SEC-OGC Opinion No. 11-09,4 May 8,
2009.).

Brie y, a corporation's right to purchase its shares according to the weight of authority is
subject to these limitations:
1. its capital is not thereby impaired;
2. it is for a legitimate and proper corporate purpose;
3. there shall be unrestricted retained earnings (see Sec. 42.) to purchase the same;$
4. the corporation acts in good faith and without prejudice to the rights of creditors and
stockholders; and
5. That the conditions of corporate affairs warrant it. (SEC-OGC Opinion No. 11-09,
May 8, 2009; SEC Opinions, Sept. 11, 1985, Oct. 12, 1992, and April 11, 1994.)

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—
POWER TO INVEST CORPORATE FUNDS IN ANOTHER
CORPORATION OR BUSINESS OR FOR ANY OTHER
PURPOSE.

Section 41. Power to Invest Corporate Funds in Another Corporation or

Business or for Any Other Purpose. - Subject to the provisions of this Code,
a private corporation may invest its funds in any other corporation,
business, or for any purpose other than the primary purpose for which it
was organized, when approved by a majority of the board of directors or
trustees and ratified by the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or by at least two-thirds (2/3) of the
outstanding capital stock, or by at least two-thirds (2/3) of the members in
the case of nonstock corporations at a meeting duly called for the purpose.
Notice of the proposed investment and the time place of residence as
shown in the books of the corporation and deposited to the addressee in
the post office with the postage prepaid. Served personally, or sent
electronically in accordance with the rules and regulations of the
Commission on the use of electronic data message, when allowed by the
bylaws or done with the consent of the stockholders: Provided, That any
dissenting stockholder shall have appraisal right as provided in this
Code: Provided, however, That where the investment by the corporation is
reasonably necessary to accomplish its primary purpose as stated in the
articles of incorporation, the approval of the stockholders or members shall
not be necessary.

NOTES:
The power to acquire and convey property is an incident to every corporation as
declared under Section 35(g). Meaning, it may be exercised by the corporation whether
or not such power is stated in its articles of incorporation or by-laws.

Thus, if the investment is made in any other corporation or business, or for any purpose
other than the primary purpose for which the investing corporation was organized, the
approval by the majority of the board of directors or trustees, etc. (see section 41 reqs)
is required.

This means that section 41 applies to secondary purpose or purposes. Because section
41 does not require AMENDMENT OF THE AOI.

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Recall that a corporation is not allowed to engage in a business distinct from those
enumerated in the AOI without amending the purpose clause of the articles to include
the desired business activity among its SECONDARY PURPOSES.
Basis = Section 15, in relation to Section 13 (b):
Section 13. Contents of the Articles of Incorporation. - All corporations shall
file with the Commission articles of incorporation in any of the official
languages, duly signed and acknowledged or authenticated, in such form
and manner as may be allowed by the Commission, containing
substantially the following matters, except as otherwise prescribed by this
Code or by special law:

(a) The name of corporation;

(b) The specific purpose or purposes for which the corporation is

being formed. Where a corporation has more than one stated
purpose, the articles of incorporation hsall indicate the primary
purpose and the secondary purpose or purposes: Provided, That a
nonstock corporation may not include a purpose which would
change or contradict its nature as such;

WHAT IS THE EFFECT IF SECTION 41 IS NOT COMPLIED WITH?

The act is ULTRA VIRES. SEE SECTION 44.

Mere Ultra Vires acts (section 44) or those which are NOT ILLEGAL AND VOID AB
INITIO, and are without effect simply because they are not within the scope of AOI, are
merely VOIDABLE, thus, may become binding when rati ed by SHS (Pirovano v. De La
Rama Steamship Co., 96 Phil 335 (1954).

POWER TO DECLARE DIVIDENDS

Section 42. Power to Declare Dividends. - The board of directors of a stock

corporation may declare dividends out of the unrestricted retained earnings
which shall be payable in cash, property, or in stock to all stockholders on
the basis of outstanding stock held by them: Provided, That any cash
dividends due on delinquent stock shall be first be applied to the unpaid
balance on the subscription plus costs and expenses, while stock dividends
shall be withheld from the delinquent stockholders until their unpaid
subscription is fully paid: Provided, further, That no stock dividend shall be
issued without the approval of stockholders representing at least two-thirds

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(2/3)of the outstanding capital stock at a regular or special meeting duly
called for the purpose.

Stock corporations are prohibited from restraining surplus profits in excess

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

POWER TO ENTER INTO MANAGEMENT CONTRACT

Section 43. Power to Enter into Management Contract. - No corporation

shall conclude a management contract with another corporation unless
such contract is approved by the board of directors and by the stockholders
owning at least the majority of the outstanding capital stock, or by at least a
majority of the members in the case of a nonstock corporation, or both the
managing and the managed corporation, at a meeting duly called for the
purpose: Provided, That (a) where a stockholder or stockholders
representing the same interest of both the managing and the managed
corporations own or control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of the managing corporation; or (b)
where a majority if the members of the board of directors of the managing
corporation also constitute a majority of the members of the board of
directors of the managed corporation, then the management contract must
be approved by the stockholders of the managed corporation owning at
least two-thirds (2/3) of the total outstanding capital stock entitled to vote,
or by at least two-thirds (2/3) of the members in the case of a nonstock
corporation.

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These shall apply to any contract whereby a corporation undertakes to
manage or operate all or substantially all of the called services 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 entered
into such periods as may be provided by the pertinent laws or regulations.

No management contracts shall be entered into for period longer that five
(5) years for any one term.

Section 44. Ultra Vires Acts of the Corporations. - No corporation shall

possess or exercise corporate powers other than those conferred by this
Code or by its articles of incorporation and except as necessary or
incidental to the exercise of the powers conferred.

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