LAW ON corporation

SECTION

36

CORPORATE POWERS
AND CAPACITY

Classification of Corporate Powers

Expressly granted or authorized by law
Necessary to the exercise of the existence or
incidental powers
Incidental to its existence

SECTION

36

CORPORATE POWERS
AND CAPACITY
POWER TO SUE AND BE SUED

POWER TO ADOPT AND USE CORPORATE SEAL

POWER TO ACQUIRE AND CONVEY PROPERTY

Inherent in every corporation; Subject to constitutional
and statutory requirements

POWER TO ACQUIRE SHARES OR SECURITIES

Shares of other corporations;
Shares of the acquiring corporation

SECTION

36

CORPORATE POWERS
AND CAPACITY
POWER TO CONTRIBUTE TO CHARITY
Public responsibility of corporations;
Limitations on power

POWER TO ESTABLISH PENSION, RETIREMENT

AND OTHER PLANS

SECTION

37

POWER TO SHORTEN OR EXTEND

CORPORATE TERM

Must be taken at a meeting of stockholders or

members and upon a vote.

A voluntary dissolution

Extensions of the corporate term as stated in the articles of

incorporation is subject to limitations provided in Section 11

SECTION

38

POWER TO INCREASE OR DECREASE

CAPITAL STOCK

LIMITATIONS ON THE POWER

(1) As a general rule, 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
(2) A corporation cannot issue stock in excess of the
amount limited by its articles of incorporation
(3) A reduction or increase of the capital stock can take
place only in the manner under the conditions
prescribed by law.

SECTION

38

POWER TO INCREASE OR DECREASE

CAPITAL STOCK

NECESSITY FOR INCREASING CAPITAL STOCK

INCREASE OF CORPORATE ASSET

ISSUANCE OF STOCK DIVIDENDS

The capital stock may also be increased without any corresponding

increase in the corporate asset by the issuance of stock dividends.

SECTION

38

POWER TO INCREASE OR DECREASE

CAPITAL STOCK

Sec. 38 requires at least 25% of such increased

capital stock has been subscribed
(1) When new subscriptions necessary. at least 25% of the increased
capital stock has been subscribed and that at least 25% of the amount
subscribed has been in actual cash or property.
Illustration:
A corporation has an authorized capital stock of P80,000 and it is proposed
to increase it to P100,000, an increase of P20,000.
Subscription must be obtained for not less than P5,000(20,000 x 25%)
And payment in cash or in property amounting to not less than
P1,250(5,000 x 25%)

SECTION

38

POWER TO INCREASE OR DECREASE

CAPITAL STOCK

(2) When new subscriptions not necessary. Without the provision, it is

quite clear that the pre-incorporation subscription requirements under
Section 13 can easily be circumvented.
Illustration:
A corporation has an authorized capital stock of P80,000 and it is proposed
to increase it to P100,000.
P25,000(100,000 x 25%) had already been subscribed
P6,250(25,000 x 25%) thereof paid

SECTION

38

POWER TO INCREASE OR DECREASE

CAPITAL STOCK

Ways of increasing (decreasing) authorized capital stock

By increasing (decreasing) the number of shares authorized
to be issued without increasing (decreasing) the par value
By increasing (decreasing) the par value of share without
increasing (decreasing) the number
By increasing (decreasing) both the number of shares
authorized to be issued and the par value.

SECTION

38

POWER TO INCREASE OR DECREASE

CAPITAL STOCK

Power to incur bond indebtedness

Corporate bond an obligation to pay a definite sum of money at a future date
at fixed rate of interest.
(1) Stock and non-stock corporation.- A business corporation, in the absence of
restriction, may borrow money whenever the necessity of its business so
requires and issue security or customary evidence of debt such as notes,
bonds, or mortgages. Under Section 38, non-stock corporations are now
expressly authorized to incur, create, or increase bonded indebtedness.
(2) Procedure- the same as the procedure for increasing or decreasing the
capital stock
(3) Prior approval of, and registration of bonds with SEC.

SECTION

39

POWER TO DENY PRE-EMPTIVE RIGHT

CONCEPTS AND PURPOSE

This refers to the right of existing stockholders to
subscribe to all issuances or disposition of shares of
any class, in proportion to their respective
stockholdings, before such shares are offered to the
public.
Its purpose is to enable the stockholders to maintain
their proportionate control of the corporation

SECTION

39

POWER TO DENY PRE-EMPTIVE RIGHT

SHARES COVERED BY THE EXERCISE OF PRE-EMPTIVE RIGHT

Issued as a result of increase in capital stock
Issued out of the unsubscribed portion of the authorized
capital stock

Other shares that may disposed by the corporation

SECTION

39

POWER TO DENY PRE-EMPTIVE RIGHT

WHEN IS RIGHT NOT AVAILABLE?

Denied by the Articles of Incorporation or an

amendment thereto.

Shares are to be issued in compliance with laws

requiring stock offerings or minimum stock
ownership by the public

SECTION

39

POWER TO DENY PRE-EMPTIVE RIGHT

Shares are to be issued in good faith with the

approval of the stockholders representing 2/3 of the
outstanding capital stock;
in exchange for property needed for corporate
purposes and;
in payment of a previously contracted debt.

SECTION

40

SALE OR OTHER DISPOSITION OF

ASSETS

POWER TO SELL, LEASE, ETC. ALL OR SUBSTANTIALLY ALL CORPORATE ASSETS

Requisites for the validity of such sale
Must be approved by the board of directors or trustees;
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 or 2/3 of the members, as the
case may be; and
The authorization must be done at a stockholders or
members meeting duly called for that purpose after written
notice.

SECTION

40

SALE OR OTHER DISPOSITION OF

ASSETS

What is meant by substantially all of corporate assets?

If the corporation would be:
Rendered incapable of continuing the
business, or
Accomplishing the purpose for which it was
incorporated

SECTION

40

SALE OR OTHER DISPOSITION OF

ASSETS

AUTHORITY OF THE BOARD

STOCK
CORPORATIONS

NON-STOCK
CORPORATIONS

SECTION

41

POWER TO ACQUIRE OWN SHARES

Instances where corporation may acquire its own shares

To eliminate fractional shares out of stock dividends;
To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale and to purchase delinquent shared sold during said
sale;

To pay dissenting or withdrawing stockholders (in the exercise of the stockholders

appraisal right);
To acquire treasury shares
Redeemable shares regardless of existence of retained earnings
To effect a decrease of capital stock
In close corporations, when there is a deadlock in the management of the business

SECTION

41

POWER TO ACQUIRE OWN SHARES

CONDITIONS FOR THE EXERCISE OF THE POWER

The capital of the corporation must not be impaired

Legitimate and proper corporate objective is advanced

Condition of the corporate affairs warrants it

Transaction is designed and carried out in good faith

Interest of creditors not impaired, that is, not violative of
the trust fund doctrine

SECTION

42

POWER TO INVEST CORPORATE FUNDS IN

ANOTHER CORPORATION OR BUSINESS
OR FOR ANY OTHER PURPOSE

REQUIREMENTS
Approval by the majority vote of the BOD or BOT.
Ratification by 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 corporation
Ratification must be made at a meeting duly called for the
purposes
Prior written notice of the proposed investment.

SECTION

43

POWER TO DECLARE DIVIDENDS

CONCEPT OF DIVIDENDS
It is a part or portion of the profits of a corporation set aside,
declared, and ordered by the directors to be paid ratably to the
stockholders on demand or at a fixed time.

It is considered as a return on the investment of stockholders in

their interest in the corporation.

SECTION

43

POWER TO DECLARE DIVIDENDS

DIVIDENDS VS. PROFITS/EARNINGS

DIVIDENDS

PROFITS/EARNINGS

Portion of the profit or net

earnings set aside for ratable
distribution among the
stockholders.

Part of the assets of the

corporation and do not
belong to stockholders
individually.

Dividends come from profits, while profits are source of dividends.

SECTION

43

POWER TO DECLARE DIVIDENDS

DIVIDENDS PAYABLE OUT OF UNRESTRICTED RETAINED EARNINGS

STOCK
DIVIDENDS

It shall not be issued without the approval of

stockholders representing at least 2/3 of the
capital stock then outstanding at a
regular/special meeting of the corporation.

OTHER
DIVIDENDS

A mere majority of the quorum of the board of

directors is sufficient to declare other dividends;
hence, without a need off stockholders
approval.

SECTION

43

POWER TO DECLARE DIVIDENDS

DIVIDENDS PAYABLE OUT OF UNRESTRICTED RETAINED EARNINGS

Payment of dividends other than from retained
earnings is prohibited; likewise, payment out of capital
is unlawful and void.
There should be sufficient unrestricted retained
earnings to cover the shares to be reacquired.
BOD is at liberty to distribute or not to distribute at all
any dividends. No legal obligation exists. However,
subject to prohibition of this Section. (DISCRETION)

SECTION

43

POWER TO DECLARE DIVIDENDS

RULES AS TO NO-PAR VALUE STOCK

The entire consideration received from payment of no-par value
shares shall be treated as capital and shall not be available for
distribution as dividends.
Consideration received shall constitute the basic business fund
of the corporation.

SECTION

43

POWER TO DECLARE DIVIDENDS

UNRESTRICTED RETAINED EARNINGS

Such earnings or portions thereof available for
dividend distribution, if not have been reserved or set
aside by the BOD for some corporate purpose nor are
required by law to be earmarked for some other
purpose specified by such law.

SECTION

43

POWER TO DECLARE DIVIDENDS

EXISTENCE OF ACTUAL PROFITS OR EARNINGS

THERE MUST BE AN ACTUAL BONA FIDE SURPLUS PROFITS OR EARNINGS OVER
AND ABOVE ALL DEBTS AND LIABILITIES.

Earnings which have not yet been received cannot be

included in the profits out of which dividends may be paid.
Dividends cannot be declared out of borrowed money it is
not a profit. However, borrowed money may be temporarily
used to pay dividends.

SECTION

43

POWER TO DECLARE DIVIDENDS

EXISTENCE OF ACTUAL PROFITS OR EARNINGS

THERE MUST BE AN ACTUAL BONA FIDE SURPLUS PROFITS OR EARNINGS OVER
AND ABOVE ALL DEBTS AND LIABILITIES.

Payment of accumulated surplus out of previous years is

allowed although realizing no profit from current earnings.
Dividends may not be declared so long as deficit exists.

SECTION

43

POWER TO declare dividends

DECLARATION OF DIVIDENDS
CONDITIONS

ADDL REQUIREMENT FOR

STOCK DIVIDENDS

Existence of UNRESTRICTED
RETAINED EARNINGS

Approval of BOD resolution by

the stockholders.

Corporate resolution of BOD

declaring payment of
dividends

Sufficient number of
unauthorized unissued shares

SECTION

43

POWER TO DECLARE DIVIDENDS

CLASSSES OF DIVIDENDS
Cash Dividend

Property
Dividend

Stock Dividend

Optional
Dividend

Composite
Dividend

Bond/Scrip
Dividend

Preferred
Dividend

Cumulative
Dividend

Liquidating
Dividends

SECTION

43

POWER TO DECLARE DIVIDENDS

CASH DIVIDEND VS. STOCK DIVIDEND

CASH DIVIDEND

STOCK DIVIDEND

Cannot be revoked after

declaration

Can be revoked after

declaration but before issuance

Applied to unpaid balance of

delinquent shares

Can be withheld until payment of

unpaid balance of delinquent shares

Corporation becomes debtor of

the shareholders

No debt is created by its

declaration

Does not increase the capital

Increases the capital

SECTION

44

Power to enter into

management contract

WITH ANOTHER CORPORATION

Under Section 44, a corporation is expressly allowed

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.

SECTION

44

POWER TO ENTER INTO

MANAGEMENT CONTRACT

WITH PARENT CORPORATION

In the absence 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.

SECTION

44

POWER TO ENTER INTO

MANAGEMENT CONTRACT

WITH A NATURAL PERSON

Section 44 refers only to a management
contract with another corporation. Hence, it
does not apply to management contracts
entered into by a corporation with natural
persons.

SECTION

44

POWER TO ENTER INTO

MANAGEMENT CONTRACT

LIMITATIONS ON THE POWER

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 stockholders or
members, as the case may be, of both the managing
and the managed corporations, at a meeting duly
called for the purpose;

SECTION

44

POWER TO ENTER INTO

MANAGEMENT CONTRACT

LIMITATIONS ON THE POWER

The period of the contract must not be longer than
five (5) years for any one term except that contracts
which relate to the exploration, development,
exploitation or utilization of natural resources may be
entered into for such periods as may be provided be
pertinent laws or regulations.

SECTION

45

ULTRA VIRES ACTS OF CORPORATION

ULTRA VIRES AND INTRA VIRES ACTS EXPLAINED

It is well-settled that a corporation is not restricted
to the exercise of powers expressly conferred upon
it but has the implied or incidental powers to do
what is reasonably necessary to carry out its
express powers and to accomplish the purposes
for which it was formed.

SECTION

45

ULTRA VIRES ACTS OF CORPORATION

Ultra vires act distinguished from an 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 for
which it is created.

SECTION

45

ULTRA VIRES ACTS OF CORPORATION

RATIFICATION OF ULTRA VIRES ACTS

Where the contract is illegal per se, it is wholly void or
inexistent. It cannot be ratified or validated.
Where the contract 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 ground.

SECTION

45

ULTRA VIRES ACTS OF CORPORATION

EFFECTS OF ULTRA VIRES ACTS WHICH ARE NOT ILLEGAL

An ultra vires contract, as long as it is executory on both sides,
cannot be enforced by either party thereto.
When an ultra vires contract has been fully performed on both
sides , neither party thereto can lawfully set aside the same or to
recover what has been given.

LAW ON corporation