CORPORATE POWERS AND AUTHORITY
To make reasonable donations, including those for the public
Corporate Power and Capacity
Related Provisions :
Art. 46, Civil Code - Juridical persons may acquire and possess property of
all kinds, as well as incur obligations and bring civil or criminal actions, in
conformity with the laws and regulations of their organization.
Section 36. Corporate powers and capacity. – Every corporation
incorporated under 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 stated
in the articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation 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 subscribers
and to 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 non-stock corporation;
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;
9.
welfare or for hospital, charitable, cultural, scientific, civic, or similar
purposes: Provided, That no corporation, domestic or foreign, shall
give donations in aid of any political party or candidate or for
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 the articles of
incorporation. (13a)
Section 45. Ultra vires acts of corporations. – No corporation under this
Code shall possess or exercise any corporate powers except those conferred
by this Code or by its articles of incorporation and except such as are
necessary or incidental to the exercise of the powers so conferred. (n)
___________
1. LBP v. COA
Facts:
The records indicate that on 22 July 1980, the Board of Directors of
the LBP issued Resolution No. 80-222 fixing the new rates for penalty
charges on past due loans/amortization and other credit accommodations.
The Resolution also provided that "in cases of defaults in loan payment and
other credit accommodations due to unforeseen, highly justifiable
reasons/circumstances beyond the control of the borrower such as damages
due to natural calamities, sickness, adverse government rulings or court
judgments, duly processed and verified by the lending units, penalty charges
may be condoned / reduced by the Loan Executive Committee upon
recommendation of the appropriate lending units"
On 23 September 1986, LBP requested its Corporate Auditor to pass
in audit its waiver of the penalty charges. Said official questioned the waiver
and opined that the power to condone interests or penalties is vested
exclusively in the COA but, in the absence of a categorical ruling on the
matter applicable to a government banking institution, referred the LBP
request to the COA in a letter dated 20 January 1987.
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COA maintains that it has the sole prerogative to compromise liabilities to the
Government pursuant to Section 36 of Pres. Decree No. 1445, the
Government Auditing Code. On the other hand, LBP claims that it, too, has
the power to condone penalties being a commercial bank clothed with
authority to exercise all the general powers mentioned in the Corporation
Law and the General Banking Act.
Issue:
Whether or not LBP is authorized to compromise or release claims or
liabilities in whole or in part.
Ruling:
LBP is authorized.
LBP was created as a body corporate and government
instrumentality to provide timely and adequate financial support in all phases
involved in the execution of needed agrarian reform (Rep. Act No. 3844, as
amended, Sec. 74). Section 75 of its Charter vests in LBP specific powers
normally exercised by banking institutions, such as the authority to grant
short, medium and long-term loans and advances against security of real
estate and/or other acceptable assets; to guarantee acceptance(s), credits,
loans, transactions or obligations; and to borrow from, or rediscount notes,
bills of exchange and other commercial papers with the Central Bank. In
addition to the enumeration of specific powers granted to LBP, Section 75 of
its Charter also authorizes it:
12. To exercise the general powers mentioned in the
Corporation Law and the General Banking Act, as amended,
insofar as they are not inconsistent or incompatible with this
Decree.
But while we rule that LBP is empowered by its corporate charter to
waive penalty charges, thereby overruling COA's avowed exclusive
prerogative to settle and compromise liabilities to the Government,
nevertheless, pursuant to Pres. Decree No. 1445, LBP is still subject to
COA's general audit jurisdiction to see to it that the fiscal responsibility that
rests directly with the head of the government agency has been properly and
effectively discharged (Section 25[1]), and as provided for in its Section 26,
reading:
Sec. 26. General jurisdiction. — The authority and powers of
the Commission shall extend to and comprehend all matters
relating to auditing procedures, systems and controls, the
keeping of the general accounts of the Government, the
preservation of vouchers pertaining thereto for a period of
ten years, the examination and inspection of the books,
records, and papers relating to those accounts, and the audit
and settlement of the accounts of all persons respecting
funds or property received or held by them in an accountable
capacity, as well as the examination, audit, and settlement of
all debts and claims of any sort due from or owing to the
Government or any of its subdivisions, agencies and
instrumentalities. The said jurisdiction extends to all
government-owned or controlled corporations . . .
2. Pilipinas Loan Co. v. SEC
Facts:
Private respondent Filipinas Pawnshop, Inc. is a duly organized
corporation registered with the Securities and Exchange Commission (SEC)
on February 9, 1959 with its principal place of business located along Pedro
Gil St Paco, Metro Manila. The articles of incorporation of private respondent
states that its primary purpose is to extend loans at legal interest on the
security of either personal properties or on the security of real properties, and
to finance installment sales of motor vehicles, home appliances and other
chattels.
On September 11, 1990, private respondent filed a complaint against
petitioner with the Prosecution and Enforcement Department (PED) of the
SEC docketed as PED CASE No. 90-0737. The complaint alleged that: (1)
petitioner, contrary to the restriction set by the Commission, has been
operating and doing business as a pawnbroker, pawnshop or "sanglaan" in
the same neighborhood where private respondent has had its own pawnshop
for 30 years in violation of its primary purpose and without the imprimatur of
the Central Bank to engage in the pawnshop business thereby causing
unjust and unfair competition with private respondent; and (2) the business
name of petitioner, "PILIPINAS" Loan, bears similarity in spelling and
phonetics with the corporate name of private respondent, "FILIPINAS"
Pawnshop, creating constant confusion in the minds of the public and the
customers of private respondent. In the same complaint, private respondent
urged the SEC to: (1) order petitioner to change its business name, Pilipinas
Loan, and cease from using it in the near future; (2) order Pilipinas Loan to
cease and desist from engaging in the business of pawnbroking as defined
under PD No. 114; and (3) impose upon the director, officers, employees or
persons responsible such penalties as may be proper under the law.
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 On August 13, 1991, the SEC en banc rendered a Decision affirming
with modification the aforementioned Order. The Decision ordered petitioner
to (1) amend its articles of incorporation by deleting the word "pledge" in its
primary purpose and the word "Pilipinas" as part of its corporate name and
substituting another word in lieu thereof within fifteen (15) days from receipt
of the decision; and (2) to cease and desist from further engaging in business
as a "pawnshop" or "pawnbroker" or "sanglaan" as defined in Presidential
Decree No. 114, otherwise known as the Pawnshop Regulation Act, until the
proper license shall have been secured from the Central Bank of the
Philippines.
Petitioner thus insists that the jurisdiction of the SEC is limited to
matters intrinsically connected with the regulation of corporations,
partnerships and associations and those dealing with the internal affairs of
such entities. The SEC allegedly cannot arrogate unto itself the power to look
into violations of PD 114 when such power rests solely with the Central Bank.
Issue:
Whether or not it is correct to prohibit the corporation to engage in
pawnbroking, which is against its articles of incorporation.
Ruling:
Yes. It must be recalled that the complaint of private respondent
alleged that the articles of incorporation of petitioner contained this
prohibition: "without, however, engaging in pawnbroking as defined in PD
114" and despite this restriction, petitioner allegedly continued to actually
operate and do business as a pawnshop. The complaint thus treats of a
violation of petitioner’s primary franchise.
A corporation, under the Corporation Code, has only such powers as
are expressly granted to it by law and by its articles of incorporation, those
which may be incidental to such conferred powers, those reasonably
necessary to accomplish its purposes and those which may be incident to its
existence. In the case at bar, the limit of the powers of petitioner as a
corporation is very clear, it is categorically prohibited from "engaging in
pawnbroking as defined under PD 114". Hence, in determining what
constitutes pawnbrokerage, the relevant law to consider is PD 114. This
reference to PD 114 is also in line with Article 2123 of the Civil Code that
states that:
"Art. 2123. With regard to pawnshops and other establishments,
which are engaged in making loans secured by pledges, the special
laws and regulations concerning them shall be observed, and
subsidiarily, the provisions of this Title."
Ultra-Vires Doctrine
Sec. 45 (see previous)
3. Manila Metal Container Corp. v. PNB
Facts:
Petitioner was the owner of 8,015 square meters of parcel of land
located in Mandaluyong City, Metro Manila. To secure a P900,000.00 loan it
had obtained from respondent Philippine National Bank, petitioner executed
a real estate mortgage over the lot. Respondent PNB later granted petitioner
a new credit accommodation. On August 5, 1982, respondent PNB filed a
petition for extrajudicial foreclosure of the real estate mortgage and sought to
have the property sold at public auction. After due notice and publication, the
property was sold at public action where respondent PNB was declared the
winning bidder. Petitioner sent a letter to PNB, requesting it to be granted an
extension of time to redeem/repurchase the property. Some PNB personnel
informed that as a matter of policy, the bank does not accept “partial
redemption”. Since petitioner failed to redeem the property, the Register of
Deeds cancelled TCT No. 32098 and issued a new title in favor of PNB.
Meanwhile, the Special Asset Management Department (SAMD) had
prepared a statement of account of petitioner’s obligation. It also
recommended the management of PNB to allow petitioner to repurchase the
property for P1,574,560.oo. PNB rejected the offer and recommendation of
SAMD. It instead suggested to petitioner to purchase the property
for P2,660,000.00, in its minimum market value. Petitioner declared that it
had already agreed to SAMD’s offer to purchase for P1,574,560.47 and
deposited a P725,000.00.
3
Issue:
Whether or not SAMD is authorized to agree and accept offers even
without the approval of the Board of Directors.
Ruling:
No. There is no evidence that the SAMD was authorized by
respondent's Board of Directors to accept petitioner's offer and sell the
property for P1,574,560.47. Any acceptance by the SAMD of petitioner's
offer would not bind respondent.
Section 23 of the Corporation Code expressly provides that the
corporate powers of all corporations shall be exercised by the board of
directors. Just as a natural person may authorize another to do certain acts
in his behalf, so may the board of directors of a corporation validly delegate
some of its functions to individual officers or agents appointed by it. Thus,
contracts or acts of a corporation must be made either by the board of
directors or by a corporate agent duly authorized by the board. Absent such
valid delegation/authorization, the rule is that the declarations of an individual
director relating to the affairs of the corporation, but not in the course of, or
connected with the performance of authorized duties of such director, are
held not binding on the corporation.
Thus, a corporation can only execute its powers and transact its business
through its Board of Directors and through its officers and agents when
authorized by a board resolution or its by-laws.
4. Atrium Management Corp. v. CA
Facts:
On January 3, 1983, Atrium Management Corporation filed with the
Regional Trial Court, Manila an action for collection of the proceeds of four
postdated checks in the total amount of P2 million. Hi-Cement Corporation
through its corporate signatories, petitioner Lourdes M. de Leon, treasurer,
and the late Antonio de las Alas, Chairman, issued checks in favor of E.T.
Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed the
four checks to petitioner Atrium Management Corporation for valuable
consideration. Upon presentment for payment, the drawee bank dishonored
all four checks for the common reason "payment stopped". Atrium, thus,
instituted this action after its demand for payment of the value of the checks
was denied.
After due proceedings, on July 20, 1989, the trial court rendered a
decision ordering Lourdes M. de Leon, her husband Rafael de Leon, E.T.
Henry and Co., Inc. and Hi-Cement Corporation to pay petitioner Atrium,
jointly and severally, the amount of P2 million corresponding to the value of
the four checks, plus interest and attorney's fees.
On appeal to the Court of Appeals, on March 17, 1993, the Court of
Appeals promulgated its decision modifying the decision of the trial court,
absolving Hi-Cement Corporation from liability and dismissing the complaint
as against it. The appellate court ruled that: (1) Lourdes M. de Leon was not
authorized to issue the subject checks in favor of E.T. Henry, Inc.; (2) The
issuance of the subject checks by Lourdes M. de Leon and the late Antonio
de las Alas constituted ultra vires acts; and (3) The subject checks were not
issued for valuable consideration.
Issue:
Whether or not the act of issuance of the checks was an ultra vires
act.
Ruling:
No. The act of issuing the checks was well within the ambit of a valid
corporate act, for it was for securing a loan to finance the activities of the
corporation, hence, not an ultra vires act.
"An ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and therefore
beyond the power conferred upon it by law" The term "ultra vires" is
"distinguished from an illegal act for the former is merely voidable which may
be enforced by performance, ratification, or estoppel, while the latter is void
and cannot be validated."
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5. Woodchild Holdings, Inc. v. Roxas Electric
Facts:
Respondent Roxas Electric and Construction Company, Inc.
(RECCI) is the owner of 2 parcels of land (Lot No. 491-A-3-B-1 and Lot No.
491-A-3-B-2). Its Board of Directors approved a resolution authorizing the
corporation, through its president Roberto B. Roxas, to sell the second parcel
of land on behalf of the company. Roxas and petitioner Woodchild Holdings,
Inc. (WHI) as vendee, subsequently executed a contract to sell and a Deed
of Absolute Sale was issued under the condition that WHI be given beneficial
use of and right of way from Sumulong Highway to the property conveyed
consisting of 25 sq. m. wide to be used as the latter's egress from and
ingress to and an additional 25 sq. m. in the corner of Lot No. 491-A-3-B-1,
as turning and/or maneuvering area for WHI's vehicles. In the event that the
right of way is insufficient, RECCI shall sell additional sq. m. from its current
adjacent property. Because of RECCI’s refusal to allow WHI to purchase a
portion of the adjacent lot, the latter filed a complaint for specific performance
and damages with the Makati RTC. The RTC ruled in favor of WHI. CA
reversed the decision
Issue:
Whether or not the deed of absolute which has been made is an ultra
vires act.
Ruling:
Yes. In this case, the respondent denied authorizing its then
president Roberto B. Roxas to sell a portion of Lot No. 491-A-3-B-1 covered
by TCT No. 78085, and to create a lien or burden thereon. The petitioner was
thus burdened to prove that the respondent so authorized Roxas to sell the
same and to create a lien thereon.
Central to the issue at hand is the May 17, 1991 Resolution of the
Board of Directors of the respondent. Evidently, Roxas was not specifically
authorized under the said resolution to grant a right of way in favor of the
petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to sell to the
petitioner a portion thereof. The authority of Roxas, under the resolution, to
sell Lot No. 491-A-3-B-2 covered by TCT No. 78086 did not include the
authority to sell a portion of the adjacent lot, Lot No. 491-A-3-B-1, or to create
or convey real rights thereon. Neither may such authority be implied from the
authority granted to Roxas to sell Lot No. 491-A-3-B-2 to the petitioner "on
such terms and conditions which he deems most reasonable and
advantageous." Under paragraph 12, Article 1878 of the New Civil Code, a
special power of attorney is required to convey real rights over immovable
property. Article 1358 of the New Civil Code requires that contracts which
have for their object the creation of real rights over immovable property must
appear in a public document. The petitioner cannot feign ignorance of the
need for Roxas to have been specifically authorized in writing by the Board of
Directors to be able to validly grant a right of way and agree to sell a portion
of Lot No. 491-A-3-B-1. The rule is that if the act of the agent is one which
requires authority in writing, those dealing with him are charged with notice of
that fact.
Ratification of Ultra Vires Acts
6. NAPOCOR v. Alonzo - Legasto
Facts:
On April 14, 1992, NPC and FUCC entered into a contract
for the construction of power facilities (civil works) – Schedule 1 –
1x20 MW Bacon-Manito II Modular Geothermal Power Plant
(Cawayan area) and Schedule 1A – 1x20 MW Bacon-Manito II
Modular Geothermal Power Plant (Botong area) in Bacon, Sorsogon
(BACMAN II). The total contract price for the two schedules is
P108,493,966.30. Appended with the Contract is the contract price
schedule which was submitted by the respondent FUCC during the
bidding. The price for grading excavation was P76.00 per cubic
meter.
Construction activities commenced in August 1992. In the
latter part of September 1992 and after excavating 5.0 meters above
the plant elevation, FUCC requested NPC that it be allowed to blast
to the design grade of 495 meters above sea level as its dozers and
rippers could no longer excavate. It further requested that it be paid
P1,346.00 per cubic meter similar to the rate of NPC's project in
Palinpinon.
5
 While blasting commenced on October 6, 1992, NPC and
FUCC were discussing the propriety of an extra work order and if
such is in order, at what price should FUCC be paid.
Several written and verbal warnings were given by NPC to
FUCC. On March 14, 1994, NPC's Board of Directors passed
Resolution No. 94-63 approving the recommendation of President
Francisco L. Viray to take over the contract. President Viray's
recommendation to
To prevent NPC from taking over the project, on March 28,
1994, FUCC filed an action for Specific Performance and Damages
with Preliminary Injunction and Temporary Restraining Order before
Branch 99, Regional Trial Court, Quezon City.
Pending the petition filed by FUCC before the Supreme
Court, on April 20, 1995 the NPC and FUCC entered into a
Compromise Agreement.
The Compromise Agreement was subsequently approved by
the Court on May 24, 1995.
The case was subsequently referred by the parties to the arbitration
board pursuant to their Compromise Agreement.
Issue:
Whether or not the compromise agreement ratifying the prior acts is
valid.
Ruling:
Yes. It is true that petitioner's argument that it is not bound by the
acts of its officials who acted beyond the scope of their authority in allowing
the blasting works is correct. Petitioner is a government agency with a
juridical personality separate and distinct from the government. However, the
Compromise Agreement entered into by the parties, petitioner being
represented by its President, Mr. Guido Alfredo A. Delgado, acting pursuant
to its Board Resolution No. 95-54 dated April 3, 1995, is a confirmatory act
signifying petitioner's ratification of all the prior acts of its officers.
Significantly, the parties agreed that "[t]his Compromise Agreement shall
serve as the Supplemental Agreement for the payment of plaintiff's blasting
works at the Botong site" in accordance with CI 1(6) afore-quoted. In other
words, it is primarily by the force of this Compromise Agreement that the
Court is constrained to declare FUCC entitled to payment for the blasting
works it undertook.
Moreover, since the blasting works were already rendered by FUCC
and accepted by petitioner and in the absence of proof that the blasting was
done gratuitously, it is but equitable that petitioner should make
compensation therefor, pursuant to the principle that no one should be
permitted to enrich himself at the expense of another.
Express Power
Related Provisions:
Sec. 36 (see previous)
Section 37. 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 representing at least
two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (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 the
books 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 dissenting stockholder may exercise his
appraisal right under the conditions provided in this code. (n)
Section 81. Instances of appraisal right. – Any stockholder of a corporation
shall have the right to dissent and demand payment of the fair value of his
shares in the following instances:
1. In case any amendment to the articles of incorporation has the
effect of changing or restricting the rights of any stockholder or class
of shares, or of authorizing preferences in any respect superior to
6
 those of outstanding shares of any class, or of extending or
shortening the term of corporate existence;
Section 38. 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, at a stockholder’s
meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital
stock shall favor the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness. Written notice
of the proposed increase or diminution of the capital stock or of the incurring,
creating, or increasing of any bonded indebtedness and of the time and place
of the stockholder’s meeting at which the proposed increase or diminution of
the capital stock or the incurring or increasing of any bonded indebtedness is
to be considered, must be addressed to each stockholder at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the
corporation and countersigned by the chairman and the secretary of the
stockholders’ meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If 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 residences 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 his subscription in cash or
property, or the amount of capital stock or number of shares of no-
par stock allotted to each stock-holder if such increase is for the
purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the
Section 40. Sale or other disposition of assets. – Subject to the provisions of
meeting;
existing laws on illegal combinations and monopolies, a corporation may, by
a majority vote of its board of directors or trustees, sell, lease, exchange,
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital
stock, or the incurring, creating or increasing of any 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 Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of
the corporation and the other shall be filed with the Securities and
Exchange Commission and attached to the original articles of
incorporation. From and after approval by the Securities and
Exchange Commission and the issuance by the Commission of its
certificate of filing, the capital stock shall stand increased or
decreased and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may declare:
Provided, That the Securities and Exchange Commission shall not
accept for filing any certificate of increase of capital stock unless
accompanied by the 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 (25%) percent of such
increased capital stock has been subscribed and that at least twenty-
five (25%) percent of the amount subscribed has been paid either in
actual cash to the corporation or that there has been transferred to
the corporation property the valuation of which is equal to twenty-five
(25%) percent of the subscription: Provided, further, That no
decrease of the capital stock shall be approved by the Commission if
its effect shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or
increase the same, with the approval by a majority vote 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 Securities
and Exchange Commission, which shall have the authority to
determine the sufficiency of the terms thereof. (17a)
7
mortgage, pledge or otherwise dispose of all or substantially all of its property
and assets, including its goodwill, upon such terms and conditions and for
such consideration, which may be money, stocks, bonds or other instruments
for the payment of money or other property or consideration, as its board of
directors or trustees may deem expedient, when authorized by the vote of
the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or in case of non-stock corporation, by the vote of at least to
two-thirds (2/3) of the members, in a stockholder’s or member’s meeting duly
called for the purpose. 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 the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or served
personally: Provided, That any dissenting stockholder may exercise his
appraisal right under the conditions provided in this Code.
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 for which
it was incorporated.
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 said corporation or if the proceeds of the sale or other disposition of such
property and assets be appropriated for the conduct of its remaining
business.
In non-stock 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.
Section 42. 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 or 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 members in the case of
non-stock corporations, at a stockholder’s or member’s meeting duly called
for the purpose. Written notice of the proposed investment and the time and
place of the meeting shall be addressed to each stockholder or member at
his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or served
personally: 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. (17 1/2a)
Section 42. 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 or 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 members in the case of
non-stock corporations, at a stockholder’s or member’s meeting duly called
for the purpose. Written notice of the proposed investment and the time and
place of the meeting shall be addressed to each stockholder or member at
his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or served
personally: 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. (17 1/2a)
Section 43. 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, in 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 first be applied to the unpaid balance
on the subscription plus costs and expenses, while stock dividends shall be
withheld from the delinquent stockholder until his unpaid subscription is fully
paid: Provided, further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds (2/3) of the
8
outstanding capital stock at a regular or special meeting duly called for the
purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of
one hundred (100%) percent of their paid-in capital stock, except: (1) when
justified by definite corporate expansion projects or programs approved by
the board of directors; or (2) when the corporation is prohibited under any
loan agreement with any financial institution or creditor, whether local or
foreign, from declaring dividends without its/his consent, and such consent
has not yet been secured; or (3) 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. (n)
Section 44. Power to enter into management contract. – No corporation shall
conclude a management contract with another corporation unless such
contract shall have been approved by the board of directors and by
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 non-stock corporation,
of both the managing and the managed corporation, at a meeting duly called
for the purpose: Provided, That (1) 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 (2) where a
majority of 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 non-stock corporation.
No management contract shall be entered into for a period longer than five
years for any one term.
7. Central Textile Mills, Inc. v. NWPC
Facts:
The "Guidelines on Exemption From Compliance With the
Prescribed Wage/Cost of Living Allowance Increase Granted by the Regional
Tripartite Wage and Productivity Boards," issued on February 25, 1991,
defined "capital" as the "paid-up capital at the end of the last full accounting
period (in case of corporations)." Under said guidelines, "(a)n applicant firm
may be granted exemption from payment of the prescribed increase in
wage/cost-of-living allowance for a period not to exceed one (1) year from
effectivity of the
order . . . when accumulated losses at the end of the period under review
have impaired by at least 25 percent the paid-up capital at the end of the last
full accounting period preceding the application."
On February 4, 1992, petitioner's motion for reconsideration was
dismissed by the Board for lack of merit. The Board, except for Vice-
Chairman Gorospe who took no part in resolving the said motion for
reconsideration, opined that according to the audited financial statements
submitted by petitioner to them, to the Securities and Exchange Commission
and to the Bureau of Internal Revenue, petitioner had a total paid-up capital
of P305,767,900.00 as of December 31, 1990, which amount should be the
basis for determining the capital impairment of petitioner, instead of the
authorized capital stock of P128,000,000.00 which it insists should be the
basis of computation.
Petitioner maintains in the instant action that its authorized capital
stock, not its unauthorized paid-up capital, should be used in arriving at its
capital impairment for 1990. Citing two SEC Opinions dated August 10, 1971,
and July 28, 1978, interpreting Section 38 of the Corporation Code, it claims
that "the capital stock of a corporation stand(s) increased or decreased only
from and after approval and the issuance of the certificate of filing of increase
of capital stock."
Issue:
Whether or not petitioner's contention that authorized capital stock
should be used as basis on capital impairment is correct.
Ruling:
Yes. The guidelines on exemption specifically refer to paid-up
capital, not authorized capital stock, as the basis of capital impairment for
exemption from WO No. NCR-02. The records reveal, however, that
petitioner included in its total paid-up capital payments on advance
subscriptions, although the proposed increase in its capitalization had not yet
been approved by, let alone presented for the approval of, the SEC. As
observed by the Board in its order of February 4, 1992, "the aforementioned
(r)esolution (of August 15, 1990) has not been filed by the corporation with
9
the SEC, nor was a petition to amend its Articles of Incorporation by reason
of the increase in its capitalization filed by the same." These payments
cannot as yet be deemed part of petitioner's paid-up capital, technically
speaking, because its capital stock has not yet been legally increased. Thus,
its authorized capital stock in the year when exemption from WO No. NCR-
02 was sought stood at P128,000,000.00, which was impaired by losses of
nearly 50%. Such payments constitute deposits on future subscriptions,
money which the corporation will hold in trust for the subscribers until it files a
petition to increase its capitalization and a certificate of filing of increase of
capital stock is approved and issued by the SEC. As a trust fund, this money
is still withdrawable by any of the subscribers at any time before the issuance
of the corresponding shares of stock, unless there is a pre-subscription
agreement to the contrary, which apparently is not present in the instant
case. Consequently, if a certificate of increase has not yet been issued by
the SEC, the subscribers to the unauthorized issuance are not to be deemed
as stockholders possessed of such legal rights as the rights to vote and
dividends.
8. Madrigal & Co. v. Zamora
Facts:
The petitioner was engaged, among several other corporate
objectives, in the management of Rizal Cement Co., Inc. Admittedly, the
petitioner and Rizal Cement Co., Inc. are sister companies. Both are owned
by the same or practically the same stockholders. On December 28, 1973,
the respondent, the Madrigal Central Office Employees Union, sought for the
renewal of its collective bargaining agreement with the petitioner, which was
due to expire on February 28, 1974. Specifically, it proposed a wage
increase of P200.00 a month, an allowance of P100.00 a month, and other
economic benefits. The petitioner, however, requested for a deferment in the
negotiations.
On July 29, 1974, by an alleged resolution of its stockholders, the
petitioner reduced its capital stock from 765,000 shares to 267,366 shares.
This was effected through the distribution of the marketable securities owned
by the petitioner to its stockholders in exchange for their shares in an
equivalent amount in the corporation.
On August 22, 1975, by yet another alleged stockholders' action, the
petitioner reduced its authorized capitalization from 267,366 shares to
110,085 shares, again, through the same scheme.
After the petitioner's failure to sit down with the respondent union, the
latter, on August 28, 1974, commenced Case No. LR-5415 with the National
Labor Relations Commission on a complaint for unfair labor practice.
On January 19, 1976, the labor arbiter rendered a decision granting, among
other things, a general wage increase of P200.00 a month beginning March
1, 1974 plus a monthly living allowance of P100.00 monthly in favor of the
petitioner's employees. The arbiter specifically found that the petitioner "had
been making substantial profits in its operation" since 1972 through 1975.
The petitioner appealed.
Petitioner also applied for clearance to terminate the services of a
number of employees pursuant supposedly to its retrenchment program.
Acting on this complaint, the Secretary of Labor, in a decision dated
December 14, 1976, 22 found the dismissals "to be contrary to law" and
ordered the petitioner to reinstate some 40 employees, 37 of them with
backwages. The petitioner then moved for reconsideration, which the Acting
Labor Secretary, Amado Inciong.
Issue:
Whether or not there is merit from petitioner's contention to dismiss
the employees, as part of their powers, and that the decision of the
administrative body is arbitrarily rendered.
Ruling:
As a general rule, the findings of administrative agencies are
accorded not only respect but even finality. This is especially true with
respect to the Department of Labor, which performs not only a statutory
function but carries out a Constitutional mandate as well. Our jurisdiction, as
a rule, is confined to cases of grave abuse of discretion. 35But for certiorari to
10
lie, there must be such arbitrary and whimsical exercise of power, or that
discretion was exercised despotically.
What clearly emerges from the recorded facts is that the petitioner,
awash with profits from its business operations but confronted with the
demand of the union for wage increases, decided to evade its responsibility
towards the employees by a devised capital reduction. While the reduction in
capital stock created an apparent need for retrenchment, it was, by all
indications, just a mask for the purge of union members, who, by then, had
agitated for wage increases. In the face of the petitioner company's piling
profits, the unionists had the right to demand for such salary adjustments.
Moreover, it is incorrect to say that such profits — in the form of
dividends — are beyond the reach of the petitioner's creditors since the
petitioner had received them as compensation for its management services
in favor of the companies it managed as a shareholder thereof. As such
shareholder, the dividends paid to it were its own money, which may then be
available for wage increments. It is not a case of a corporation distributing
dividends in favor of its stockholders, in which case, such dividends would be
the absolute property of the stockholders and hence, out of reach by
creditors of the corporation. Here, the petitioner was acting as stockholder
itself, and in that case, the right to a share in such dividends, by way of
salary increases, may not be denied its employees.
Accordingly, this court is convinced that the petitioner's capital
reduction efforts were, to begin with, a subterfuge, a deception as it were, to
camouflage the fact that it had been making profits, and consequently, to
justify the mass layoff in its employee ranks, especially of union members.
They were nothing but a premature and plain distribution of corporate assets
to obviate a just sharing to labor of the vast profits obtained by its joint efforts
with capital through the years. Surely, we can neither countenance nor
condone this. It is an unfair labor practice.
9. Litonjua v. Eternit Corp.
Facts:
The Eternit Corporation (EC) is a corporation duly organized and
registered under Philippine laws. Since 1950, it had been engaged in the
manufacture of roofing materials and pipe products. Its manufacturing
operations were conducted on eight parcels of land with a total area of
47,233 square meters. The properties, located in Mandaluyong City, Metro
Manila, were covered by Transfer Certificates of Title Nos. 451117, 451118,
451119, 451120, 451121, 451122, 451124 and 451125 under the name of
Far East Bank & Trust Company, as trustee. Ninety (90%) percent of the
shares of stocks of EC were owned by Eteroutremer S.A. Corporation
(ESAC), a corporation organized and registered under the laws of
Belgium. Jack Glanville, an Australian citizen, was the General Manager and
President of EC, while Claude Frederick Delsaux was the Regional Director
for Asia of ESAC. Both had their offices in Belgium.
In 1986, the management of ESAC grew concerned about the
political situation in the Philippines and wanted to stop its operations in the
country. The Committee for Asia of ESAC instructed Michael Adams, a
member of EC’s Board of Directors, to dispose of the eight parcels of land.
Adams engaged the services of realtor/broker Lauro G. Marquez so that the
properties could be offered for sale to prospective buyers. Glanville later
showed the properties to Marquez.
Marquez thereafter offered the parcels of land and the improvements
thereon to Eduardo B. Litonjua, Jr. of the Litonjua & Company, Inc. In a
Letter dated September 12, 1986, Marquez declared that he was authorized
to sell the properties for P27,000,000.00 and that the terms of the sale were
subject to negotiation.
Sometime later, Marquez and the Litonjua brothers inquired from
Glanville when the sale would be implemented. In a telex dated April 22,
1987, Glanville informed Delsaux that he had met with the buyer, which had
given him the impression that "he is prepared to press for a satisfactory
conclusion to the sale." He also emphasized to Delsaux that the buyers were
concerned because they would incur expenses in bank commitment fees as
a consequence of prolonged period of inaction.
Meanwhile, with the assumption of Corazon C. Aquino as President
of the Republic of the Philippines, the political situation in the Philippines had
improved. Marquez received a telephone call from Glanville, advising that the
sale would no longer proceed. Glanville followed it up with a Letter dated
May 7, 1987, confirming that he had been instructed by his principal to inform
Marquez that "the decision has been taken at a Board Meeting not to sell the
properties on which Eternit Corporation is situated."
When apprised of this development, the Litonjuas, through counsel,
wrote EC, demanding payment for damages they had suffered on account of
the aborted sale. EC, however, rejected their demand.
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 The Litonjuas then filed a complaint for specific performance and
damages against EC. Petitioners assert that there was no need for a written
authority from the Board of Directors of EC for Marquez to validly act as
broker/middleman/intermediary. As broker, Marquez was not an ordinary
agent because his authority was of a special and limited character in most
respects. His only job as a broker was to look for a buyer and to bring
together the parties to the transaction. He was not authorized to sell the
properties or to make a binding contract to respondent EC; hence, petitioners
argue, Article 1874 of the New Civil Code does not apply.
Issue:
Whether or not petitioner is correct that there is no need for an
written authorization from the Board of Directors for the broker to have
authority to transact in the company's behalf.
Ruling:
Petition has no merit. The property of a corporation, however, is not
the property of the stockholders or members, and as such, may not be sold
without express authority from the board of directors. Physical acts, like the
offering of the properties of the corporation for sale, or the acceptance of a
counter-offer of prospective buyers of such properties and the execution of
the deed of sale covering such property, can be performed by the corporation
only by officers or agents duly authorized for the purpose by corporate by-
laws or by specific acts of the board of directors. Absent such valid
delegation/authorization, the rule is that the declarations of an individual
director relating to the affairs of the corporation, but not in the course of, or
connected with, the performance of authorized duties of such director, are
not binding on the corporation.
10.Islamic Directorate v. CA
Facts:
Petitioner IDP-Tamano Group alleges that sometime in 1971, Islamic
leaders of all Muslim major tribal groups in the Philippines headed by Dean
Cesar Adib Majul organized and incorporated the ISLAMIC DIRECTORATE
OF THE PHILIPPINES (IDP), the primary purpose of which is to establish an
Islamic Center in Quezon City for the construction of a "Mosque (prayer
place), Madrasah (Arabic School), and other religious infrastructures" so as
to facilitate the effective practice of Islamic faith in the area.
Towards this end, that is, in the same year, the Libyan government
donated money to the IDP to purchase land at Culiat, Tandang Sora, Quezon
City, to be used as a Center for the Islamic populace. The land, with an area
of 49,652 square meters, was covered by two titles: Transfer Certificate of
Title Nos. RT-26520 (176616) 3 and RT-26521 (170567), 4 both registered in
the name of IDP.
According to the petitioner, in 1972, after the purchase of the land by
the Libyan government in the name of IDP, Martial Law was declared by the
late President Ferdinand Marcos. Most of the members of the 1971 Board of
Trustees like Senators Mamintal Tamano, Salipada Pendatun, Ahmad
Alonto, and Congressman Al-Rashid Lucman flew to the Middle East to
escape political persecution.
Thereafter, two Muslim groups sprung, the Carpizo Group, headed
by Engineer Farouk Carpizo, and the Abbas Group, led by Mrs. Zorayda
Tamano and Atty. Firdaussi Abbas. Both groups claimed to be the legitimate
IDP. Thereafter, two contending groups claiming to be the IDP Board of
Trustees sprung: the Carpizo group and Abbas group.
In a suit between the two groups, SEC rendered a decision in 1986
declaring both groups to be null and void. SEC recommeded that the a new
by-laws be approved and a new election be conducted upon the approval of
the by-laws. However, the SEC recommendation was not heeded.
In 1989, the Carpizo group passed a Board Resolution authorizing the sale of
the land to Iglesia Ni Cristo ("INC"), and a Deed of Sale was eventually
executed.
In 1991, the Tamano Group filed a petition before the SEC questioning the
12
sale.
Meanwhile, INC filed a suit for specific performance before RTC Branch 81
against the Carpizo group. INC also moved to compel a certain Leticia Ligon
(who is apparently the mortgagee of the lot) to surrender the title.
The Tamano group sought to intervene, but the intervention was denied
despite being informed of the pending SEC case. In 1992, the Court
subsequently ruled that the INC as the rightful owner of the land, and ordered
Ligon to surrender the titles for annotation. Ligon appealed to CA and SC,
but her appeals were denied.
The subject lot constitutes the only property of IDP. Hence, its sale to
a third-party is a sale or disposition of all the corporate property and assets of
IDP. For the sale to be valid, the majority vote of the legitimate Board of
Trustees, concurred in by the vote of at least 2/3 of the bona fide members of
the corporation should have been obtained. These twin requirements were
not met in the case at bar.
(...to be followed)

In 1993, the SEC ruled that the sale was null and void . On appeal CA
reversed the SEC ruling.

Issue:

Whether or not sale between the Carpizo group and INC is null and void
because of lack of authority from the legitimate Board of Trustees.

Ruling:

Yes. Since the SEC has declared the Carpizo group as a void Board
of Trustees, the sale it entered into with INC is likewise void. Without a valid
consent of a contracting party, there can be no valid contract.

In this case, the IDP, never gave its consent, through a legitimate
Board of Trustees, to the disputed Deed of Absolute Sale executed in favor
of INC. Therefore, this is a case not only of vitiated consent, but one where
consent on the part of one of the supposed contracting parties is totally
wanting. Ineluctably, the subject sale is void and produces no effect
whatsoever.

Further, the Carpizo group failed to comply with Section 40 of the

Corporation Code, which provides that: " ... a corporation may, by a majority
vote of its board of directors or trustees, sell, lease, exchange, mortgage,
pledge or otherwise dispose of all or substantially all of its property and
assets... when authorized by the vote of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock; or in case of non-stock
corporation, by the vote of at least two-thirds (2/3) of the members, in a
stockholders' or members' meeting duly called for the purpose...."

13