Study Guide 5 Questions and Answers

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CORPORATION LAW Study Guide 5

ARTS. 36-45, BP 68

1. EXPLAIN THE DOCTRINE OF LIMITED CAPACITY.

A corp. Can only exercise powers expressly granted by law, incident to its existence or can be implied from its authorized powers.

2. WHAT ARE THE THREE (3) GENERAL CLASSES OF CORPORATE POWERS? EXPLAIN EACH.

Powers of a corp. Provided by Secs. 36-44.

(p. 311, de Leon)

Classes of Powers:

(1) those expressly granted or authorized by law (Sec. 2), i.e. those conferred by BP 68 and its AOI (Sec. 45);

(2) Those that are necessary to the exercise of the express or incidental powers (Secs. 236 [11], 45) and;

(3) Those incidental to its existence. (Sec. 2, 45)

Sec. 36 lists 11 powers of a corp. Sec. 43 needs concurrence of stockholders.

EXPRESSIMPLIEDINCIDENTAL

1. Those powers given to a corp. either:

a. By clear and express provision of law:

* some of the other powers enumerated in Sec. 36 are considered inherent or incidental, which even if not given by express grant are given so deemed to be within the capacity of the foreign entities (such as the power to adopt by-laws)

b. by the charter or articles of incorporation:

* express grant of authority from the board of directors needed to validly bind the corp.* unless there is a board resolution authorizing an officer to exercise express powers given to a corp. such as filing a suit on its behalf, such an action is absent* the power of a corp. to sue and be sued in any court is lodged with the BOD that exercise its corp. powers.* by-laws are not sources of any powerThose powers that exist as a necessary consequence of:

a. the exercise of express powers of the corp. or

b. the pursuit of its purpose as provided for in the AOI:

*the management of the corp. in the absence of express restrictions, has discretionary authority to enter into contracts or transactions which may be deemed reasonably necessary or incidental to the business purpose

* sub-par. 11 of Sec. 36 provide that a corp. has the power and capacity to exercise such powers as may be essential or necessary to carry out its purpose or purposes as stated in the AOI.Those powers that:

* attach to a corp. at the moment of its creation

* w/o regard to its express powers or particularly primary purposes

* is said to be inherent in it as a legal entity or a legal organization

* powers that go into the very nature and extent of a corps. juridical entity cannot be presumed to be incidental or inherent powers. This juridical entity is State-grant and cannot be altered or amended without State authority.

2. Art. 46 of the CC expressly provides for the powers of the corp. as a juridical personality possesses

* Sec. 36 of the CC expressly enumerates the 10 powers which the corp. may exercise

* Sec. 45 of the same Code recognizes other powers provided for in the AOISec. 2 of the CC provides the corp. as having the powers, attributes and properties expressly authorizes by law or incident to its existence

3. Generally exercised by the BOD with exception to certain instances where the stockholders' assent are neededGenerally, purely members of the BOD exercise thisGenerally, purely members of the BOD exercise this

3. WHAT IS AN ULTRA VIRES ACT? DISTINGUISH IT FROM AN ILLEGAL ACT.

Ultra Vires are acts which is not within the express, implied, and incidental powers of the corporation conferred by the Corporation Code or AOI. It is an act which is not positively forbidden, but impliedly forbidden because not expressly or impliedly authorized or necessary or incidental in the exercise of the powers so conferred.

Intra vires are acts or transactions within the legitimate powers of a corporation or are related to its purposes.

ULTRA VIRESILLEGAL ACTS

1. may not be illegalPer se illicit for being contrary to law, ALWAYS ULTRA VIRES

2. may be lawful, moral, praiseworthyContrary to law, morals, good customs, public order, public policy

3. voidable and may be enforced by performance, ratification or estoppelVoid and cannot be validated

ILLEGAL ACTS

Art. 5, NCC - acts executed against provisions of mandatory or prohibitory laws are void and nullArt. 1409, NCC - enumerates the inexistent contracts, which are void ab initio, i.d. cause, object, purpose are contrary to law, morals, customs, public order, public policy.Art. 1306, NCC - contracting parties may establish such stipulations, clauses, terms & conditions they deem proper as long as not contrary to law, morals, good customs, public order, public policy.

4. ENUMERATE THE SPECIFIC POWERS EXPRESSLY GRANTED TO CORPORATIONS UNDER SEC. 36, BP 68.

"Corporate Powers and Capacity - Every corporation incorporatedunder this Code has the power and capacity:

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

(2) Of succession by its corporate name for the period of time statedin the AOI and the certificate of incorporation;

(3) To adopt and use a corporate seal;

(4) To amend its AOI in accordance with the provisions of this Code;

(5) To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code;

(6) In case of stock corporations, to issue or sell stocks to subscribersand to sell treasury stocks in accordance with the provisions of thisCode; and to admit members to the corporation if it be a non-stockcorporation;

(7) To purchase, receive, take or grant, hold, convey, sell, lease, pledge,mortgage and otherwise deal with such real and personal property,including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution;

(8) To enter into merger or consolidation with other corporations as provided in this Code (Sec. 76);

(9) To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similarpurposes: Provided, That no corporation, domestic or foreign,shall give donations in aid of any political party or candidate orfor purposes of partisan political activity;

(10) To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees, and;

(11) To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in itsAOI.

5. WHAT ARE THE LIMITATIONS ON THE POWER OF THE CORPORATION TO EXTEND ITS TERM OF EXISTENCE?

Sec. 37, BP 68 (p. 322, de Leon)

"A private corporation may extend or shorten its term as statedin the AOI when approved by a majority vote of the BOD/BOT'sand ratified at a meeting by the stockholders representing at least2/3 of the OCS or by at least 2/3 of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on thebooks of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided,THAT in case of extension of corporate term, any dissentingstockholder may exercise his appraisal right under the conditionsprovided in this Code."

Relate with Sec. 11. Extension of a corps. Life needs an amendment of its AOI and not to exceed 50 years. Sec. 37 however, does not mention amendment of the AOI. SEC. 37 does not mention written assent of stockholders as opposed to Sec. 16.Relate to Sec. 81 (appraisal right)

6. HOW MAY INCREASE (OR DECREASE) IN THE CAPITAL STOCK OF A CORPORATION BE DONE?

(p. 342, de Leon)There are three ways by which the authorized capital stock may be increased (decreased):

(1) By increasing (decreasing) the number of shares authorized to be issued without increasing (decreasing) the par value thereof;

(2) By increasing (decreasing) the par value of each share without increasing (decreasing) the number thereof; and

(3) By increasing (decreasing) both the number of shares authorized to be issued and the par value thereof.

(p. 336, de Leon)An increase or reduction in the capital stock of the corporation is a fundamental change in the corporation. The authority of the corporation to take such action is not be implied but exists only when expressly conferred. The power is expressly granted by Sec. 38.

(1) The increase or decrease is now subject to prior approval of theSEC;

(2) Even holders of non-voting shares are entitled to vote on the matter (Sec. 6, par. 6[5])

(3) The notice requirement is mandatory and is obviously designed to protect the interests of minority stockholders.

N.B. BP 68 contains no prohibition for a corporation to increase or decrease its authorized capital stock even if the same has not yet been fully subscribed.

7. WHAT ARE THE LIMITATIONS ON THE POWER OF A CORPORATION TO DECREASE OR INCREASE ITS CAPITAL STOCK?

(p. 337, de Leon)

(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 as such an act of the corporation constitutes an attempted withdrawal of so much capital upon which corporate creditors are entitled to rely (Phil. Trust Co. vs. Rivera, 44 Phil. 649 [1923])

(2) The corporation must submit proof to the SEC that such decrease will not prejudice the rights of creditors. (SEC Opinion No. 05-10, 7/12/2005)

(3) A corporation cannot issue stock in excess of the amount limited by its AOI; such issue is ultra vires and the stock so issued is void even in the hands of a bona fide purchaser for value; and

(4) A reduction or increase of the capital stock can take place only in the manner and under the conditions prescribed by law.

8. EXPLAIN THE STOCKHOLDERS RIGHT OF PRE-EMPTION.

Sec. 39, BP 68 (DE LEON, p. 354)

RIGHT OF PRE-EMPTION is the right of stockholders to be offered first new stock issuances of a corp. in proportion to their existing shareholdings when such offer is given and on equal terms with other holders of the original stocks before subscriptions are received from the general public. Priority in subscribing to new stock issuances. Up to 50% of newly issued shares.

The right of pre-emption is based on the principle that a stockholder in subscribing to shares of stock, does so under the understanding that his equity is fixed by the relation which the number of shares he subscribes bears to the total authorized capital stock, issued or unissued, subscribed or unsubscribed, at the time of his subscription as shown in the AOI and should, therefore, not be diluted by the issuance of additional shares without giving him the opportunity to subscribe to such shares in proportion to his shareholdings.

Rationale is to maintain the stockholders proportionate share in the total value of the corp. Applies only to new issue of shares, which occurs when the capital stock of the corp. Is increased.

Power of pre-emption does not extend to shares issued to pay debts previously incurred by the corp. (Sec. 39, BP 68).

9. WHAT IS MEANT BY BOND/BONDED INDEBTEDNESS?

Sec. 38, (de Leon, p. 347)

Bonded indebtedness is when a corporation borrows money and hence is under an obligation to pay a definite sum of money at a future time at fixed rate of interest. The corporation's powers to create bonded indebtedness is both express and implied. A corp's. indebtedness may be evidenced by notes or bonds as its primary security.

BONDSNOTES

1. amount of money borrowed is large, obtained from a no. of people and extends over a period of yearsAmount of money borrowed is small, borrowed in a single sum, from a few persons or for a short time only

2. phrasing is more formalPhrasing is informal

3. payment is usually, though not always, secured as to both principal and interest by certain specified property held for the purpose under a formal deed or trustNot secured

3. consists of a number of bonds, may vary as to denomination, some may be registered others unregistered, but all are of like tenor and if secured, all are secured

4. usually but not always run to bearer and transferable by delivery

5. issuance of which is borrowing from the public

10. GIVE THE REQUISITES IN ORDER THAT A CORPORATION MAY VALIDLY SELL, LEASE, EXCHANGE OR OTHERWISE DISPOSE OF ALL OR SUBSTANTIALLY ALL ITS ASSETS.

Sec. 40, BP 68 (DE LEON, p. 364)

The requisites for the validity of such sale, etc. are as follows:

(1) the sale, etc., must be approved by the BOD or BOT;

(2) the action of the BOD or BOT must be authorized by the vote of stockholders representing 2/3 of the OCS including holders of non-voting shares (see Sec. 6, par. 6[3] or 2/3 of the members, as the case may be; and;

(3) the authorization must be done at a stockholders' or members' meeting duly called for that purpose after written notice

Sec. 40 applies in case of substantial sale or disposition of corporate assets (Sec. 39, BP 68, par. 2).

11. IN WHAT INSTANCES MAY A CORPORATION ACQUIRE ITS OWN SHARES?

Sec. 41, BP 68 (DE LEON, p. 367)

"Power to acquire own shares. - A stock corp. shall have the powerto purchase or acquire its own shares for a legitimate corp. purposeor purposes, including but not limited to the ff. cases: Provided, that thecorp. has unrestricted retained earnings in its books to cover the sharesto be purchased or acquired:

(1) to eliminate fractional shares arising out of stock dividends;(2) to collect or compromise an indebtedness to the corp., arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and (3) to pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code."

No. 2, date of payment may or may not be stated in subscription contract, date may be fixed by BOD in a resolution called (Sec. 67, BP 68 - payment of unpaid subscription). CALL is a resolution by BOD demanding payment or part thereof, if no payment w/in 30 days entire subscription becomes delinquent and sold in a delinquency sale, and sold to lowest and best bidder.

Sec. 68, BP 68 (last par.) - no bidder in delinquency sale (corp. Is the only bidder), such delinquent sale will be credited as paid in full in the books of corp. Title to all such shares will be vested in corp. As Treasury shares (Sec. 9).

No. 3 refers to the right of appraisal (Sec. 81, BP 68).

"OWN SHARES" refers to issued shares covered by a valid subscription contract (hence not necessarily paid - Sec. 60,BP 68).

Committee of Appraisers determines the fair market value of shares of dissenting stockholders, decision of which is final and to be paid within 30 days (Sec. 82, BP 68).

Sec. 82 (last par....

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