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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.

EXPRESS IMPLIED INCIDENTAL1. 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 power

Those 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 AOI

Sec. 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 needed

Generally, purely members of the BOD exercise this

Generally, 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 VIRES ILLEGAL ACTS1. may not be illegal Per se illicit for being contrary to law,

ALWAYS ULTRA VIRES2. may be lawful, moral, praiseworthy Contrary to law, morals, good

customs, public order, public policy3. voidable and may be enforced by performance, ratification or estoppel

Void 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.

BONDS NOTES1. amount of money borrowed is large, obtained from a no. of people and extends over a period of years

Amount of money borrowed is small, borrowed in a single sum, from a few persons or for a short time only

2. phrasing is more formal Phrasing is informal3. 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 trust

Not 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 secured4. usually but not always run to bearer and transferable by delivery5. 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.) p. 656 - see book

FRACTIONAL SHARES

- a fractional share is a share which is less than one (1) corp. share. Thus, if a stockholder owns 250 shares and the corp. declares 25% stock


dividend, his total shares will be 312 and 1/2 shares. Inasmuch as fractional shares cannot be represented at corporate meetings, the corp. may purchase the same from the stockholder concerned or issue fractional scrip certificates to such stockholder who may negotiate for the sale thereof with other stockholders also owning fractional shares so as to convert them into full shares.

OTHER CASES:

(4) under Sec. 9 (Treasury shares);

(5) with respect to redeemable shares, they may be purchased by the corp. regardless of the existence of unrestricted retained earnings in the books of the corp. (Sec. 8);

(6) shares may also be reaqcuired to effect a decrease in the capital stock of a corp. (Sec. 38). where a corp. reacquires its own shares, it does not thereby become a subscriber thereof;

(7) in closed corps., 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 corp. regardless of the availability of unrestricted retained earnings in its books (Sec. 104, par. 1 [4]).

12. WHAT IS MEANT BY THE "TRUST FUND DOCTRINE"? EXPLAIN.

Sec. 41, BP 68 (DE LEON, p. 371)

TRUST FUND DOCTRINE was first enunciated by the SC in Philippine Trust Co. vs. Rivera (144 Phil. 469, 1923), which holds that the assets of the corp. as represented by its capital stock are "trust funds" to be maintained unimpaired and to be used to pay corporate creditors in the sense that there can be no distribution of such assets among the stockholders without provision being first made for the payment of corporate debts and that any such disposition of its assets to the prejudice of the creditors of the corporation who extended credit to the corp. on the faith of its OCS is null and void.

Purpose of said doctrine is to encourage corps. To lend money knowing that their investments will be repaid. Without said doctrine banks will not for example lend money and corps. Will have difficulty accessing credit.

When a corp. Acquires its own shares it disposes its own funds. To do that a corp. Must have unrestricted retained earnings. Same applies in distribution of dividends, esp. Cash dividends. Otherwise, such acts may be detrimental to the corps. Creditors.

13. WHAT ARE DIVIDENDS? HOW ARE DIVIDENDS DISTINGUISHED FROM PROFITS?

Sec. 43, BP 68 (DE LEON, p. 379)

DIVIDEND is that part or portion of the profits of a corp. set aside, declared and ordered by the directors to be paid ratably to the stockholders on demand or at a fixed time. It is payment to the stockholders of a corp. as a return upon their investment.

It is also a sum which can be divided among stockholders without touching the capital stock. The term has been regarded as indicating that there must be a surplus or profits to be divided. However, the word has also been used with no reference to surplus or net profits, e.g., to describe distributions made to stockholders on liquidation of the corp., and to a distribution of assets upon a reduction of the capital stock.


DIVIDENDS PROFITS1. as applied to corporate stock, is that portion of the profits or net earnings which the corporation has set aside for ratable distribution among the stockholders - thus dividends come from profits.

Source of dividends

2. must be declared or set aside by the corp.

Part of the assets of the corp. and do not belong to the stockholders individually.

3. in cash or in kind In cash or in kind

4. Income of stockholders 4. Income of corporation

If its a stock divident, need for ratification of stockholder is required.

14. WHAT CONSTITUTE THE RETAINED EARNINGS OF A CORPORATION?

Sec. 43, BP 68 (DE LEON, p. 385)

RETAINED EARNINGS of a corp. is the "difference between the total present value of its assets after deducting losses and liabilities and the amount of its capital stock." Capital stock in this instance should be understood to refer to outstanding stock (Sec. 137), and not the stated or nominal (authorized) capital stock (Secs. 12, 13, 14 [8]).

In another manner, the ordinary way of determining whether a corp. has retained earnings or not is to compute the value of all its assets and deduct therefrom all of its debts and liabilities, including legal capital, and thus ascertain whether the balance exceeds the amount of its outstanding shares of capital stock. This may be expressed in the ff. equation:

retained earnings = assets - liabilities, legal (outstanding) capital & losses

15. WHEN ARE RETAINED EARNINGS CONSIDERED UNRESTRICTED?

Sec. 43, BP 68 (DE LEON, p. 386)

Unrestricted retained earnings (surplus profits) are dividends declared out of actual earnings or profits realized from the business of the corp., such retained earnings or portion thereof are said to be unrestricted, and therefore, free for dividend distribution to stockholders, if they have not been reserved or set aside by the board of directors for some corporate purpose or for some other purpose in accordance with managerial, legal, or contractual requirements.

Three provisions in CC which require unrestricted retained earnings:Art. 41Art, 43Art. 8216. WHAT ARE THE KINDS OF DIVIDENDS THAT MAY BE DECLARED BY A CORPORATION?

Sec. 43, BP 68 (DE LEON, p. 415)

ORDINARY/REGULAR DIVIDENDS EXTRAORDINARY/EXTRA DIVIDENDS

1. payable by corp. May consist of cash, property, stock distributions


2. paid out of current earnings of a corp. according to some fixed plan or scheme, usually at regular intervals and sometimes limited to a substantially fixed rate of return to the shareholder.

Usually represent an accumulated excess of earnings over normal return on capital invested and constitute a distribution or a capitalization of surplus profits remaining after distribution of ordinary dividends.

3. generally cash dividends Generally stock dividends

Dividends are given based on subscribed shares, paid or unpaid. For cash dividends, it will be applied to unpaid subscription. Stock dividends are withheld until full payment of subscription.

CLASSES OF DIVIDENDS [Sec. 43, BP 68 (DE LEON, p. 411)]

(1) CASH DIVIDEND. Payable in cash.

(2) PROPERTY DIVIDEND. It is dividend distributed to the stockholders in the form of property, real or personal (or any disposable property of corp.), such as warehouse receipts, or shares of stock of another corporation. Actually this is a cash dividend, the stockholder can take the property, sell it, and realize the cash. A corp. may, therefore, pay declared cash dividends in the form of a "property."

(3) STOCK DIVIDEND. It is dividend payable in unissued or increased or additional shares of the corp. instead of in cash or in property out of the unrestricted retained earnings of the corp. A stock dividend may be declared only to the extent of the minimum number of shares authorized in the AOI.

(4) OPTIONAL DIVIDEND. It is dividend which gives the stockholder an option to receive cash or stock dividend.

(5) COMPOSITE DIVIDEND. It is dividend which is partly in cash and partly in stocks. Here, there is no option involved.

(6) PREFERRED OR PREFERENTIAL DIVIDEND. It is dividend which is payable, by virtue of contract, to one class of stockholders in priority to that to be paid to another class.

(7) CUMULATIVE DIVIDEND. It is dividend which is contracted to be paid at a certain rate at stated times and, if net earnings at any dividend period are insufficient to pay the contract dividend, it is to be made out of subsequent net earnings.

(8) SCRIP DIVIDEND. It is dividend which is contracted to be paid at a certain rate at stated times and, if net earnings at any dividend period are insufficient to pay the contract dividend, it is to be made out of subsequent net earnings.

(9) BOND DIVIDEND. It is dividend distributed in bonds of the corp. to the stockholders. The bondholder becomes a creditor of the corp. to the extent of the amount of the bond. Thus, a corp. may use its retained earnings in improvement of its plant, or purchasing machinery or other property and issue its bonds in payment of dividends from such earnings.

(10) LIQUIDATING DIVIDENDS. They are dividends which are actually distributions of the assets of the corp. upon dissolution or winding up of the same. They are not paid on account of earnings or profits, but as a return of capital invested.

Sec. 42, BP 68 - relate to Sec. 36 (7), BP 68. = investing in another corp. As long as in line with its primary purpose.