Power to Sell or Dispose of Assets

Section 40 [Read]
Q: When is a sale considered substantial in order to require the approval for its
validity?
A: When the corporation will be rendered incapable of continuing the business.
Otherwise, approval is not required. A mere Board Resolution will be sufficient.
[2nd Para, Section 40]

Conditions for the valid exercise of this power:

1. RESOLUTION by the majority vote of the board of directors/trustees;
2. AUTHORIZATION from the stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of the members;
3. RATIFICATION of the stockholders or members must be made at a meeting duly
called for that purpose;
4. PRIOR WRITTEN NOTICE of the proposed action and of the time and place of
meeting must be made addressed to all stockholders of record, either by mail or
personal service;
5. SALE OF ASSETS SHALL BE SUBJECT TO EXISTING LAWS on illegal
combinations and monopolies; and
6. DISSENTING STOCKHOLDER shall have the option to exercise his appraisal
right

N.B.
The procedure and requirements above set forth will not apply if the sale or
disposition does not involve all or substantially all of the assets of the
corporation as to render it incapable of continuing the business or accomplishing
the purpose for which it was incorporated. Thus, if the same is necessary in the
usual and regular course of the business, Section 40 will not apply.
Example: In realty company, where the normal business would be acquisition
and sale of real properties, the board of directors may validly sell the only asset
of the corporation, which is in the form of realty without the consent of its
stockholders since this is the very purpose of its existence.
For Section 40 to apply therefore, the sale or disposition of assets must be such
as to render the corporation incapable to carry out the purpose of its
organization, or that the proceeds thereof will not be used for the conduct of the
remaining business.

Q: Will the acquiring corporation be liable for the liabilities of the selling corporation?
A: General Rule: Where one corporation sells or otherwise transfers all of its assets
to another corporation, the latter is not liable for the debts and liabilities of the
transferor.
Exception:
1) Where the purchaser expressly or impliedly agrees to assume such debts;
2) Where the transaction amounts to a consolidation or merger of the
corporations;
3) Where the purchasing corporation is merely a continuation of the selling
corporation; and
4) Where the transaction is entered into fraudulently in order to escape liability for
such debts. [Read Section 80, BP 68]

Power To Acquire Own Shares

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N.B.
A corporation may acquire its own shares provided that (1) it is for a legitimate
purpose and (2) that the corporation has unrestricted retained earnings.

Instances when a corporation may acquire its own shares:

1) To eliminate fractional shares arising out of stock dividends;
2) To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale, and to purchase delinquent shares
sold during said sale; and
3) To pay dissenting or withdrawing stockholders entitled to payment for their
shares (in the exercise of their appraisal rights or under Section 105) under the
provisions of this Code, and
4) To redeem redeemable shares under Section 8 of the Code.

General Rule:
The law requires that the corporation must at all times have unrestricted retained
earnings is a condition for the exercise of the power to acquire own shares. The
corporation cannot use its capital stock to purchase its own shares, that is,
corporate assets below the legal or stated capital but only from surplus profits.
Exceptions:
In the redemption of redeemable shares where the corporation may so acquire
its shares regardless of the existence of unrestricted retained earnings as
provided for in Section 8 of the Code;
In the exercise of stockholders right to compel a close corporation to purchase
his shares, for any reason, under Section 105, when the corporation has
sufficient assets in its book to cover its debts and liabilities exclusive of capital
stock; and
In cases of deadlocks in a close corporation under Section 104.

Trust Fund Doctrine

Subscription to the capital stock of a corporation, including any unpaid portion
thereof, constitutes a fund which the creditors have the right to look up to for the
satisfaction of their claims.

N.B.
If reacquired, they become Treasury Shares of the corporation.
If reissued, they will regain its status as common shares/outstanding stocks.

Power to Invest Funds

Section 42 [Read]

May Invest its Funds means an investment in the form of money, stock, bonds and
other liquid assets and does not include real properties or other fixed assets.

For any purpose other than the primary purpose means that even if the business or
undertaking is allowed or authorized in the secondary purpose or purposes of the
corporation, the provision of Section 42 must be complied with before the corporation
may pursue the same.

Requirements and Steps to be followed for a Valid Investment of Corporate Funds:

1. RESOLUTION by the majority of the Board of Directors or Trustees;

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 2. RATIFICATION by the stockholders representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case of non-stock corporations;
3. Ratification must be made AT A MEETING duly called for that purpose;
4. PRIOR WRITTEN NOTICE of the proposed investment and the time and place of
the meeting shall be made, addressed to each stockholder or member by mail or
by personal service; and
5. Any DISSENTING STOCKHOLDER shall have the option to exercise his
appraisal right.

N.B.
The requirement relative to ratification or approval of the stockholders or
members is not absolute and applies only to investments that are beyond the
corporations primary purpose, or outside the express or implied powers of the
investing corporation. Thus, where the investment is reasonably necessary to
accomplish its primary purpose, the approval of the stockholders or members is
not required.

Power to Declare Dividends

Section 43 [Read]

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