Law on Corporation: Corporate Powers

8/19/2019 Law on Corporation: Corporate Powers

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LAW ON corporation


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CORPORATE POWERS

AND CAPACITY36SECTION

Classification of Corporate Powers

Expressly granted or authorized by law

Necessary to the exercise of the existence or

incidental powers

Incidental to its existence


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36SECTION CORPORATE POWERS

AND CAPACITY

POWER TO SUE AND BE SUED

POWER TO ADOPT AND USE CORPORATE SEAL

POWER TO ACQUIRE AND CONVEY PROPERTYInherent in every corporation; Subject to constitutional

and statutory requirements

POWER TO ACQUIRE SHARES OR SECURITIESShares of other corporations;

Shares of the acquiring corporation


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36SECTION CORPORATE POWERS

AND CAPACITY

POWER TO CONTRIBUTE TO CHARITY

Public responsibility of corporations;

Limitations on power

POWER TO ESTABLISH PENSION, RETIREMENT

AND OTHER PLANS


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37SECTION POWER TO SHORTEN OR EXTEND

CORPORATE TERM

Must be taken at a meeting of stockholders or

members and upon a vote.

A voluntary dissolution2

Extensions of the corporate term as stated in the articles of

incorporation is subject to limitations provided in Section 11


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38SECTION POWER TO INCREASE OR DECREASE

CAPITAL STOCK

LIMITATIONS ON THE POWER(1) As a general rule, a corporation cannot lawfully

decrease its capital stock if such decrease will havethe effect of relieving existing subscribers from theobligation of paying for their unpaid subscriptionswithout a valuable consideration for such release

(2) A corporation cannot issue stock in excess of the

amount limited by its articles of incorporation(3) A reduction or increase of the capital stock can take

place only in the manner under the conditionsprescribed by law.


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38SECTION

NECESSITY FOR INCREASING CAPITAL STOCK

POWER TO INCREASE OR DECREASE

CAPITAL STOCK

INCREASE OF CORPORATE ASSET ISSUANCE OF STOCK DIVIDENDS

The capital stock may also be increased without any corresponding

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


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38SECTION POWER TO INCREASE OR DECREASE

CAPITAL STOCK

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

quite clear that the pre-incorporation subscription requirements under

Section 13 can easily be circumvented.

Illustration:

A corporation has an authorized capital stock of P80,000 and it is proposed

to increase it to P100,000.

• P25,000(100,000 x 25 ) had already been subscribed

• P6,250(25,000 x 25 ) thereof paid


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38SECTION

Ways of increasing (decreasing) authorized capital stock


CAPITAL STOCK

By increasing (decreasing) the number of shares authorized

to be issued without increasing (decreasing) the par value

By increasing (decreasing) the par value of share without

increasing (decreasing) the number

By increasing (decreasing) both the number of shares

authorized to be issued and the par value.


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38SECTION

Power to incur bond indebtedness


CAPITAL STOCK

Corporate bond – an obligation to pay a definite sum of money at a future date

at fixed rate of interest.

(1) Stock and non-stock corporation.- A business corporation, in the absence of

restriction, may borrow money whenever the necessity of its business so

requires and issue security or customary evidence of debt such as notes,

bonds, or mortgages. Under Section 38, non-stock corporations are now

expressly authorized to incur, create, or increase bonded indebtedness.(2) Procedure- the same as the procedure for increasing or decreasing the

capital stock

(3) Prior approval of, and registration of bonds with SEC.


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39SECTION

POWER TO DENY PRE-EMPTIVE RIGHT

CONCEPTS AND PURPOSEThis refers to the right of existing stockholders to

subscribe to all issuances or disposition of shares ofany class, in proportion to their respective

stockholdings, before such shares are offered to thepublic.

Its purpose is to enable the stockholders to maintain

their proportionate control of the corporation


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39SECTION


SHARES COVERED BY THE EXERCISE OF PRE-EMPTIVE RIGHT

Issued as a result of increase in capital stock

Issued out of the unsubscribed portion of the authorized

capital stock

Other shares that may disposed by the corporation


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39SECTION


WHEN IS RIGHT NOT AVAILABLE?

Denied by the Articles of Incorporation or anamendment thereto.

Shares are to be issued in compliance with laws

requiring stock offerings or minimum stockownership by the public2


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39SECTION


Shares are to be issued in good faith with the

approval of the stockholders representing 2/3 of the

outstanding capital stock;

in exchange for property needed for corporate

purposes and;

in payment of a previously contracted debt.


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40SECTION SALE OR OTHER DISPOSITION OF

ASSETS

POWER TO SELL, LEASE, ETC. ALL OR SUBSTANTIALLY ALL CORPORATE ASSETSRequisites for the validity of such sale

Must be approved by the board of directors or trustees;

The action of the board of directors or trustees must be

authorized by the vote of stockholders representing 2/3 of

the outstanding capital stock or 2/3 of the members, as the

case may be; and

The authorization must be done at a stockholders’ or

members’ meeting duly called for that purpose after written

notice.


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ASSETS

If the corporation would be:

• Rendered incapable of continuing thebusiness, or

• Accomplishing the purpose for which it wasincorporated

What is meant by substantially all of corporate assets?


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ASSETS

AUTHORITY OF THE BOARD

STOCK

CORPORATIONS

NON-STOCK

CORPORATIONS


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41SECTION

POWER TO ACQUIRE OWN SHARES

Instances where corporation may acquire its own sharesTo eliminate fractional shares out of stock dividends;

To collect or compromise an indebtedness to the corporation, arising out of unpaid

subscription, in a delinquency sale and to purchase delinquent shared sold during saidsale;

To pay dissenting or withdrawing stockholders (in the exercise of the stockholder’s

appraisal right);

To acquire treasury shares

Redeemable shares regardless of existence of retained earnings

To effect a decrease of capital stock

In close corporations, when there is a deadlock in the management of the business


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41SECTION

POWER TO ACQUIRE OWN SHARES

CONDITIONS FOR THE EXERCISE OF THE POWER•The capital of the corporation must not be impaired

•Legitimate and proper corporate objective is advanced

•Condition of the corporate affairs warrants it

•Transaction is designed and carried out in good faith

•Interest of creditors not impaired, that is, not violative of

the trust fund doctrine


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42SECTION

POWER TO INVEST CORPORATE FUNDS IN

ANOTHER CORPORATION OR BUSINESS

OR FOR ANY OTHER PURPOSE

REQUIREMENTS Approval by the majority vote of the BOD or BOT.

Ratification by the stockholders representing at least 2/3 ofthe outstanding capital stock or by at least 2/3 of the

members in case of non-stock corporation

Ratification must be made at a meeting duly called for the

purposes

Prior written notice of the proposed investment.


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43SECTION

POWER TO DECLARE DIVIDENDS

CONCEPT OF DIVIDENDS

It is a part or portion of the profits of a corporation set aside,declared, and ordered by the directors to be paid ratably to the

stockholders on demand or at a fixed time.

It is considered as a return on the investment of stockholders intheir interest in the corporation.


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POWER TO DECLARE DIVIDENDS43SECTION

DIVIDENDS VS. PROFITS/EARNINGS

DIVIDENDS PROFITS/EARNINGS

Portion of the profit or net

earnings set aside for ratable

distribution among the

stockholders.

Part of the assets of the

corporation and do not

belong to stockholders

individually.

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


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POWER TO DECLARE DIVIDENDS 43SECTION

DIVIDENDS PAYABLE OUT OF UNRESTRICTED RETAINED EARNINGS

It shall not be issued without the approval of

stockholders representing at least 2/3 of thecapital stock then outstanding at a

regular/special meeting of the corporation.

A mere majority of the quorum of the board ofdirectors is sufficient to declare other dividends;

hence, without a need off stockholder’s

approval.

STOCK

DIVIDENDS

OTHER

DIVIDENDS


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DIVIDENDS PAYABLE OUT OF UNRESTRICTED RETAINED EARNINGS

Payment of dividends other than from retained

earnings is prohibited; likewise, payment out of capitalis unlawful and void.

There should be sufficient unrestricted retained

earnings to cover the shares to be reacquired.

BOD is at liberty to distribute or not to distribute at all

any dividends. No legal obligation exists. However,

subject to prohibition of this Section. (DISCRETION)


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RULES AS TO NO-PAR VALUE STOCK

The entire consideration received from payment of no-par value

shares shall be treated as capital and shall not be available for

distribution as dividends.

Consideration received shall constitute the basic business fund

of the corporation.


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43SECTION


UNRESTRICTED RETAINED EARNINGS

Such earnings or portions thereof available for

dividend distribution, if not have been reserved or set

aside by the BOD for some corporate purpose nor are

required by law to be earmarked for some other

purpose specified by such law.


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43SECTION

Dividends cannot be declared out of borrowed money – it is

not a profit. However, borrowed money may be temporarily

used to pay dividends.

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

Earnings which have not yet been received cannot be

included in the profits out of which dividends may be paid.


EXISTENCE OF ACTUAL PROFITS OR EARNINGS


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43SECTION


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

EXISTENCE OF ACTUAL PROFITS OR EARNINGS

Payment of accumulated surplus out of previous years is

allowed although realizing no profit from current earnings.

Dividends may not be declared so long as deficit exists.


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43SECTION

POWER TO declare dividends

DECLARATION OF DIVIDENDS

CONDITIONS

DD’L REQUIREMENT FOR

STOCK DIVIDENDS

Existence of UNRESTRICTED

RETAINED EARNINGS Approval of BOD resolution by

the stockholders.

Corporate resolution of BOD

declaring payment of

dividends

Sufficient number of

unauthorized unissued shares


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43SECTION

CLASSSES OF DIVIDENDS


Cash Dividend

Property

Dividend

Stock Dividend

Optional

Dividend

Composite

Dividend

Bond/Scrip

Dividend

Preferred

Dividend

Cumulative

Dividend

Liquidating

Dividends


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43SECTION

CASH DIVIDEND VS. STOCK DIVIDEND


CASH DIVIDEND

STOCK DIVIDEND

Cannot be revoked after

declaration

Can be revoked after

declaration but before issuance

Applied to unpaid balance of

delinquent shares

Can be withheld until payment of

unpaid balance of delinquent shares

Corporation becomes debtor of

the shareholders

No debt is created by its

declaration

Does not increase the capital Increases the capital


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Power to enter into

management contract44SECTION

Under Section 44, a corporation is expressly allowedto enter into a management contract with another

corporation, which refers “to any contract whereby a

corporation undertakes to manage or operate all or

substantially all of the business of another corporation,whether such contracts are called service contracts,

operating agreements or otherwise.

WITH ANOTHER CORPORATION


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POWER TO ENTER INTO

MANAGEMENT CONTRACT44SECTION

In the absence of fraud or bad faith, contracts

entered into by a parent corporation with a

subsidiary or affiliate may be held legal where

the purpose is to provide more efficient

operation and greater convenience to both.

WITH PARENT CORPORATION


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POWER TO ENTER INTO


WITH A NATURAL PERSON

Section 44 refers only to a management

contract with another corporation. Hence, it

does not apply to management contracts

entered into by a corporation with naturalpersons.


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POWER TO ENTER INTO

MANAGEMENT CONTRACT

LIMITATIONS ON THE POWER

44SECTION

The contract must be approved by a majority of thequorum of the board of directors or trustees and

ratified by the prescribed vote of the stockholders or

members, as the case may be, of both the managing

and the managed corporations, at a meeting dulycalled for the purpose;


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POWER TO ENTER INTO


LIMITATIONS ON THE POWER

The period of the contract must not be longer thanfive (5) years for any one term except that contracts

which relate to the exploration, development,

exploitation or utilization of natural resources may be

entered into for such periods as may be provided be

pertinent laws or regulations.


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ULTRA VIRES ACTS OF CORPORATION

ULTRA VIRES AND INTRA VIRES ACTS EXPLAINED

45SECTION

It is well-settled that a corporation is not restrictedto the exercise of powers expressly conferred upon

it but has the implied or incidental powers to do

what is reasonably necessary to carry out itsexpress powers and to accomplish the purposes

for which it was formed.


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Ultra vires act distinguished from an illegal act

45SECTION

When properly used, an ultra vires act means

simply an act which is beyond the conferred

powers of a corporation or the purposes for

which it is created.


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RATIFICATION OF ULTRA VIRES ACTS

45SECTION

Where the contract is illegal per se, it is wholly void or

inexistent. It cannot be ratified or validated.

Where the contract is not illegal per se but merely beyond

the power of a corporation, the same is merely voidable

and may be enforced by performance, ratification, or

estoppel, or on equitable ground.


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ULTRA VIRES ACTS OF CORPORATION45SECTION

EFFECTS OF ULTRA VIRES ACTS WHICH ARE NOT ILLEGAL

An ultra vires contract, as long as it is executory on both sides,cannot be enforced by either party thereto.

When an ultra vires contract has been fully performed on both

sides , neither party thereto can lawfully set aside the same or torecover what has been given.


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Law on Corporation: Corporate Powers