CORPORATION NOTES

Chapter VI Corporate Powers

Section 23. The board of directors or trustees. - Uness otherwse provded n
ths Code, the corporate powers of a corporatons formed under ths Code
sha be exercsed, a busness conducted and a property of such
corporatons controed and hed by the board of drectors or trustees to be
eected from among the hoders of stocks, or where there s no stock, from
among the members of the corporaton, who sha hod offce for one (1)
year unt ther successors are eected and quafed. (28a)
Every drector must own at east one (1) share of the capta stock of the
corporaton of whch he s a drector, whch share sha stand n hs name on
the books of the corporaton. Any drector who ceases to be the owner of at
east one (1) share of the capta stock of the corporaton of whch he s a
drector sha thereby cease to be a drector. Trustees of non-stock
corporatons must be members thereof. A ma|orty of the drectors or
trustees of a corporatons organzed under ths Code must be resdents of
the Phppnes.
Prmary rue: a corporate powers sha be exercsed and a
corporate busnesses sha be conducted by the board of drectors
of the corporaton
Excepton: specfc nstances where the Code requres the
consent and ratfcaton of the SHs, partcuary those where the
underyng contractua reatonshp between the partes: the
corporaton, the SHs/members, and the State, s beng amended
or atered
How s consent expressed by the partes?
o Corporaton= through the Board
o State= through act of the reguatory body
o SHs= through ma|orty or 2/3 vote where appcabe
But dssentng SHs n certan nstances are gven the
opton to wthdraw from the reatonshp through the
exercse of hs apprasa rght
Section 45. Utra vres acts of corporatons. - No corporaton under ths Code
sha possess or exercse any corporate powers except those conferred by ths
Code or by ts artces of ncorporaton and except such as are necessary or
ncdenta to the exercse of the powers so conferred. (n)
1. A corporaton has ony three (3) types of power:
a. Express (Sec 36)
b. Imped or Necessary
c. Incdenta
Genera Powers o! Corporations
a. E"press Powers
Genera
Section 3#. Corporate powers and capacity. - Every corporaton ncorporated
under ths Code has the power and capacty:
1. To sue and be sued n ts corporate name;
2. Of successon by ts corporate name for the perod of tme stated n
the artces of ncorporaton and the certfcate of ncorporaton;
3. To adopt and use a corporate sea;
4. To amend ts artces of ncorporaton n accordance wth the
provsons of ths Code;
5. To adopt by-aws, not contrary to aw, moras, or pubc pocy, and
to amend or repea the same n accordance wth ths Code;
6. In case of stock corporatons, to ssue or se stocks to subscrbers
and to se stocks to subscrbers and to se treasury stocks n
accordance wth the provsons of ths Code; and to admt members to
the corporaton f t be a non-stock corporaton;
7. To purchase, receve, take or grant, hod, convey, se, ease,
pedge, mortgage and otherwse dea wth such rea and persona
property, ncudng securtes and bonds of other corporatons, as the
transacton of the awfu busness of the corporaton may reasonaby
and necessary requre, sub|ect to the mtatons prescrbed by aw
and the Consttuton;
8. To enter nto merger or consodaton wth other corporatons as
provded n ths Code;
9. To make reasonabe donatons, ncudng those for the pubc
wefare or for hospta, chartabe, cutura, scentfc, cvc, or smar
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purposes: Provded, That no corporaton, domestc or foregn, sha
gve donatons n ad of any potca party or canddate or for
purposes of partsan potca actvty;
10. To estabsh penson, retrement, and other pans for the beneft of
ts drectors, trustees, offcers and empoyees; and
11. To exercse such other powers as may be essenta or necessary
to carry out ts purpose or purposes as stated n the artces of
ncorporaton. (13a)
Sources of express powers are provded for by aw and those enumerated
n ts charter
Other express powers are n ts AOI
These are exercsed by the Board
In the absence of authorty from the Board, no person, not even the
offcers, can vady bnd the corporaton n the exercse of express
powers
Code aws down two (2) genera restrctons on the power of any
corporaton to purchase and hod propertes
o (1) property must be reasonabe and necessary requred by the
transacton of ts awfu busness
depends on the nature of the busness
o (2) must be sub|ect to mtatons prescrbed by aw and the
Consttuton
cannot acqure avaabe pubc ands except by ease of not
more than 1000 hectares (const Art XII Sec 3)
exporaton, deveopment, expotaton, etc, of natura
resources= 60% Fpno-owned, and ony n |V wth the state
Genera powers n Sec 36 are to be exercsed by the Board of Drectors n
accordance wth Sec 23 (except where otherwse provded)
Speci!ic Powers

$. To e"ten% or shorten the corporate ter& '3()
Section 3(. Power to extend or shorten corporate term. - A prvate corporaton
may extend or shorten ts term as stated n the artces of ncorporaton when
approved by a ma|orty vote of the board of drectors or trustees and ratfed
at a meetng by the stockhoders representng at east two-thrds (2/3) of the
outstandng capta stock or by at east two-thrds (2/3) of the members n
case of non-stock corporatons. Wrtten notce of the proposed acton and of
the tme and pace of the meetng sha be addressed to each stockhoder or
member at hs pace of resdence as shown on the books of the corporaton
and deposted to the addressee n the post offce wth postage prepad, or
served personay: Provded, That n case of extenson of corporate term, any
dssentng stockhoder may exercse hs apprasa rght under the condtons
provded n ths code. (n)
Sec 37: extenson or shortenng of term of exstence
o Vote requred: ma|orty of board
o Ratfcaton: vote of at east 2/3 of OCS or members
o Amendment to AOI: YES
o Apprasa rghts? YES (37 & 81)
2. To increase or %ecrease capita stoc* '3+)
o Vote requred: ma|orty of board
o Ratfcaton: vote of at east 2/3 of OCS or members
o Pror approva of SEC requred to take effect
o Amendment to AOI: YES
o Apprasa rghts? NO
Dssentng SH can smpy se hs shares
A grant of apprasa rghts woud defeat the purpose
-to rase funds
3. To inc,r- create- or increase .on%e% in%e.te%ness '3+)
Section 3+. Power to increase or decrease capital stock; incur, create or increase
bonded indebtedness. - No corporaton sha ncrease or decrease ts capta
stock or ncur, create or ncrease any bonded ndebtedness uness approved
by a ma|orty vote of the board of drectors and, at a stockhoder's meetng
duy caed for the purpose, two-thrds (2/3) of the outstandng capta stock
sha favor the ncrease or dmnuton of the capta stock, or the ncurrng,
creatng or ncreasng of any bonded ndebtedness. Wrtten notce of the
proposed ncrease or dmnuton of the capta stock or of the ncurrng,
creatng, or ncreasng of any bonded ndebtedness and of the tme and pace
of the stockhoder's meetng at whch the proposed ncrease or dmnuton of
the capta stock or the ncurrng or ncreasng of any bonded ndebtedness s
to be consdered, must be addressed to each stockhoder at hs pace of
resdence as shown on the books of the corporaton and deposted to the
addressee n the post offce wth postage prepad, or served personay.
A certfcate n dupcate must be sgned by a ma|orty of the drectors of the
corporaton and countersgned by the charman and the secretary of the
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stockhoders' meetng, settng forth:
(1) That the requrements of ths secton have been comped wth;
(2) The amount of the ncrease or dmnuton of the capta stock;
(3) If an ncrease of the capta stock, the amount of capta stock or
number of shares of no-par stock thereof actuay subscrbed, the
names, natonates and resdences of the persons subscrbng, the
amount of capta stock or number of no-par stock subscrbed by
each, and the amount pad by each on hs subscrpton n cash or
property, or the amount of capta stock or number of shares of no-par
stock aotted to each stock-hoder f such ncrease s for the purpose
of makng effectve stock dvdend therefor authorzed;
(4) Any bonded ndebtedness to be ncurred, created or ncreased;
(5) The actua ndebtedness of the corporaton on the day of the
meetng;
(6) The amount of stock represented at the meetng; and
(7) The vote authorzng the ncrease or dmnuton of the capta
stock, or the ncurrng, creatng or ncreasng of any bonded
ndebtedness.
Any ncrease or decrease n the capta stock or the ncurrng, creatng or
ncreasng of any bonded ndebtedness sha requre pror approva of the
Securtes and Exchange Commsson.
One of the dupcate certfcates sha be kept on fe n the offce of the
corporaton and the other sha be fed wth the Securtes and Exchange
Commsson and attached to the orgna artces of ncorporaton. From and
after approva by the Securtes and Exchange Commsson and the ssuance
by the Commsson of ts certfcate of fng, the capta stock sha stand
ncreased or decreased and the ncurrng, creatng or ncreasng of any
bonded ndebtedness authorzed, as the certfcate of fng may decare:
Provded, That the Securtes and Exchange Commsson sha not accept for
fng any certfcate of ncrease of capta stock uness accompaned by the
sworn statement of the treasurer of the corporaton awfuy hodng offce at
the tme of the fng of the certfcate, showng that at east twenty-fve (25%)
percent of such ncreased capta stock has been subscrbed and that at east
twenty-fve (25%) percent of the amount subscrbed has been pad ether n
actua cash to the corporaton or that there has been transferred to the
corporaton property the vauaton of whch s equa to twenty-fve (25%)
percent of the subscrpton: Provded, further, That no decrease of the capta
stock sha be approved by the Commsson f ts effect sha pre|udce the
rghts of corporate credtors.
Non-stock corporatons may ncur or create bonded ndebtedness, or ncrease
the same, wth the approva by a ma|orty vote of the board of trustees and of
at east two-thrds (2/3) of the members n a meetng duy caed for the
purpose.
Bonds ssued by a corporaton sha be regstered wth the Securtes and
Exchange Commsson, whch sha have the authorty to determne the
suffcency of the terms thereof. (17a)
Sec 38: ncur, create, or ncrease bonded ndebtedness
o Bonded ndebtedness: covers ndebtedness of the corporaton
whch are secured by mortgage on rea or persona property
(does not ncude debentures)
o Vote requred: ma|orty vote of the board
o Ratfcaton: vote of at east 2/3 OCS or members
o Pror approva of SEC requred
o Apprasa rghts? NONE
4. To %en/ pree&pti0e ri1ht '32)
Section 32. Power to deny pre-emptive right. - A stockhoders of a stock
corporaton sha en|oy pre-emptve rght to subscrbe to a ssues or
dsposton of shares of any cass, n proporton to ther respectve
sharehodngs, uness such rght s dened by the artces of ncorporaton or
an amendment thereto: Provded, That such pre-emptve rght sha not
extend to shares to be ssued n compance wth aws requrng stock
offerngs or mnmum stock ownershp by the pubc; or to shares to be ssued
n good fath wth the approva of the stockhoders representng two-thrds
(2/3) of the outstandng capta stock, n exchange for property needed for
corporate purposes or n payment of a prevousy contracted debt.
5. To se or otherwise %ispose o! s,.stantia/ a its assets '43)
Section 43. ale or other disposition of assets. - Sub|ect to the provsons of
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exstng aws on ega combnatons and monopoes, a corporaton may, by a
ma|orty vote of ts board of drectors or trustees, se, ease, exchange,
mortgage, pedge or otherwse dspose of a or substantay a of ts property
and assets, ncudng ts goodw, upon such terms and condtons and for
such consderaton, whch may be money, stocks, bonds or other nstruments
for the payment of money or other property or consderaton, as ts board of
drectors or trustees may deem expedent, when authorzed by the vote of the
stockhoders representng at east two-thrds (2/3) of the outstandng capta
stock, or n case of non-stock corporaton, by the vote of at east to two-thrds
(2/3) of the members, n a stockhoder's or member's meetng duy caed for
the purpose. Wrtten notce of the proposed acton and of the tme and pace
of the meetng sha be addressed to each stockhoder or member at hs pace
of resdence as shown on the books of the corporaton and deposted to the
addressee n the post offce wth postage prepad, or served personay:
Provded, That any dssentng stockhoder may exercse hs apprasa rght
under the condtons provded n ths Code.
A sae or other dsposton sha be deemed to cover substantay a the
corporate property and assets f thereby the corporaton woud be rendered
ncapabe of contnung the busness or accompshng the purpose for whch t
was ncorporated.
After such authorzaton or approva by the stockhoders or members, the
board of drectors or trustees may, nevertheess, n ts dscreton, abandon
such sae, ease, exchange, mortgage, pedge or other dsposton of property
and assets, sub|ect to the rghts of thrd partes under any contract reatng
thereto, wthout further acton or approva by the stockhoders or members.
Nothng n ths secton s ntended to restrct the power of any corporaton,
wthout the authorzaton by the stockhoders or members, to se, ease,
exchange, mortgage, pedge or otherwse dspose of any of ts property and
assets f the same s necessary n the usua and reguar course of busness of
sad corporaton or f the proceeds of the sae or other dsposton of such
property and assets be approprated for the conduct of ts remanng
busness.
In non-stock corporatons where there are no members wth votng rghts, the
vote of at east a ma|orty of the trustees n offce w be suffcent
authorzaton for the corporaton to enter nto any transacton authorzed by
ths secton.
Sec 40: power to se, dspose, ease, or encumber a or
substantay a assets
o Vote requred: ma|orty vote of the board
o Ratfcaton: vote of at east 2/3 OCS or members
o Nature of transactons covered: onerous contracts
o Transactons no covered by SH vote: (does not nvove the
corporate purpose, but the corporate busness)
Necessary n the usua and reguar course of
busness, or.
. proceeds of dsposton s approprate for the
conduct of remanng busness
o "substantay a" property/assets:
f dsposton renders corporaton ncapabe of dong
busness
f dsposton renders corporaton ncapabe of
accompshng ts purpose n the AOI
apprasa rght? YES
#. To ac4,ire its own shares '4$)
Section 4$. Power to ac!uire own shares. - A stock corporaton sha have the
power to purchase or acqure ts own shares for a egtmate corporate
purpose or purposes, ncudng but not mted to the foowng cases:
Provded, That the corporaton has unrestrcted retaned earnngs n ts books
to cover the shares to be purchased or acqured:
1. To emnate fractona shares arsng out of stock dvdends;
2. To coect or compromse an ndebtedness to the corporaton, arsng out of
unpad subscrpton, n a denquency sae, and to purchase denquent shares
sod durng sad sae; and
3. To pay dssentng or wthdrawng stockhoders entted to payment for ther
shares under the provsons of ths Code. (a)
Sec 41: power to purchase own shares
o Corporaton must frst have unrestrcted retaned earnngs
o But redeemabe shares may be acqured even wthout
unrestrcted retaned earnngs (Sec 8)
(. To in0est in another corporation or .,siness '42)
Section 42. Power to invest corporate funds in another corporation or business or
for any other purpose. - Sub|ect to the provsons of ths Code, a prvate
corporaton may nvest ts funds n any other corporaton or busness or for
any purpose other than the prmary purpose for whch t was organzed when
approved by a ma|orty of the board of drectors or trustees and ratfed by
the stockhoders representng at east two-thrds (2/3) of the outstandng
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capta stock, or by at east two thrds (2/3) of the members n the case of
non-stock corporatons, at a stockhoder's or member's meetng duy caed
for the purpose. Wrtten notce of the proposed nvestment and the tme and
pace of the meetng sha be addressed to each stockhoder or member at hs
pace of resdence as shown on the books of the corporaton and deposted to
the addressee n the post offce wth postage prepad, or served personay:
Provded, That any dssentng stockhoder sha have apprasa rght as
provded n ths Code: Provded, however, That where the nvestment by the
corporaton s reasonaby necessary to accompsh ts prmary purpose as
stated n the artces of ncorporaton, the approva of the stockhoders or
members sha not be necessary. (17 1/2a)
Sec 42: power to nvest n another corporaton
o Vote requred: ma|orty of the board
o Ratfcaton: vote of at east 2/3 OCS or members
EXCEPT: where the nvestment s reasonaby
necessary to accompsh ts PRIMARY PURPOSE
If secondary purpose, ratfcatory vote s requred
o Effect of ratfcaton: corporaton can now egay nvest ts
funds OUTSIDE of ts prmary purpose, but LIMITED to ts
secondary purpose
o Coverage of "funds"-any corporate property to be used to
further ts busness
o No ratfcatory vote: ULTRA VIRES
+. To %ecare %i0i%en%s '43)
Section 43. Power to declare dividends. - The board of drectors of a stock
corporaton may decare dvdends out of the unrestrcted retaned earnngs
whch sha be payabe n cash, n property, or n stock to a stockhoders on
the bass of outstandng stock hed by them: Provded, That any cash
dvdends due on denquent stock sha frst be apped to the unpad baance
on the subscrpton pus costs and expenses, whe stock dvdends sha be
wthhed from the denquent stockhoder unt hs unpad subscrpton s fuy
pad: Provded, further, That no stock dvdend sha be ssued wthout the
approva of stockhoders representng not ess than two-thrds (2/3) of the
outstandng capta stock at a reguar or speca meetng duy caed for the
purpose. (16a)
Stock corporatons are prohbted from retanng surpus profts n excess of
one hundred (100%) percent of ther pad-n capta stock, except: (1) when
|ustfed by defnte corporate expanson pro|ects or programs approved by
the board of drectors; or (2) when the corporaton s prohbted under any
oan agreement wth any fnanca nsttuton or credtor, whether oca or
foregn, from decarng dvdends wthout ts/hs consent, and such consent
has not yet been secured; or (3) when t can be ceary shown that such
retenton s necessary under speca crcumstances obtanng n the
corporaton, such as when there s need for speca reserve for probabe
contngences. (n)
Sec 43: power to decare dvdends out of restrcted retaned
earnngs
o Payabe n cash, property, or stock
o Cash dvdends due on unpad stock sha be apped to the
unpad baance on the subscrpton pus costs and expenses
o Prmary of SHs to DEMAND dvdends
o Vote requred: ma|orty of the board
o Ratfcaton: vote of at east 2/3 of OCS or members
o Cannot retan surpus profts n excess of 100% of pad up
capta stock
o Excepton:
When |ustfed by defnte corporate expanson
pro|ects approved by the board
When prohbted under any oan agreement
When t s cear that the retenton s necessary under
speca crcumstances
o Surpus profts n excess of 100%= dstrbute as dvdends
2. To enter into &ana1e&ent contracts '44)
Section 44. Power to enter into management contract. - No corporaton sha
concude a management contract wth another corporaton uness such
contract sha have been approved by the board of drectors and by
stockhoders ownng at east the ma|orty of the outstandng capta stock, or
by at east a ma|orty of the members n the case of a non-stock corporaton,
of both the managng and the managed corporaton, at a meetng duy caed
for the purpose: Provded, That (1) where a stockhoder or stockhoders
representng the same nterest of both the managng and the managed
corporatons own or contro more than one-thrd (1/3) of the tota outstandng
capta stock entted to vote of the managng corporaton; or (2) where a
ma|orty of the members of the board of drectors of the managng
corporaton aso consttute a ma|orty of the members of the board of
drectors of the managed corporaton, then the management contract must
be approved by the stockhoders of the managed corporaton ownng at east
two-thrds (2/3) of the tota outstandng capta stock entted to vote, or by at
east two-thrds (2/3) of the members n the case of a non-stock corporaton.
No management contract sha be entered nto for a perod onger than fve
5
years for any one term.
The provsons of the next precedng paragraph sha appy to any contract
whereby a corporaton undertakes to manage or operate a or substantay
a of the busness of another corporaton, whether such contracts are caed
servce contracts, operatng agreements or otherwse: Provded, however,
That such servce contracts or operatng agreements whch reate to the
exporaton, deveopment, expotaton or utzaton of natura resources may
be entered nto for such perods as may be provded by the pertnent aws or
reguatons. (n)
Sec 44: power to enter nto a management contract
o Vote requred: ma|orty of the board
o Ratfcaton: vote of at east 2/3 of OCS or members, but.
o Speca rue: vote of SH of MANAGED corporaton ownng at
east 2/3 of TOTAL outstandng stock or members entted to
vote, ff:
SH(s) representng the same nterest n both
managed and managng corporatons own or contro
more than 1/3 of TOTAL outstandng capta stock,
or.
. ma|orty of Board of drectors of the MANAGING
corporaton aso consttute a MA|ORITY of the board n
the MANAGED
o ratonae for the speca rue: enterng nto a management
contract s a devaton from the GR that the board manages
the corporaton and that the board of the managng company
shoud devote ts affars to ts own corporaton
o Not covered by Sec 44:
f managng other corporatons s the prmary
purpose, ratfcatory vote s not requred!
If managng a partnershp or ndvdua not a
corporaton, not covered!
$3. To .,/ the shares o! another corporation '3#) pro0i%e%5
a. Reasonaby necessary for ts awfu busness
b. The other corporaton must be engaged n an aed busness
or not aen to the purposes of the purchasng corporaton
(42)
Ths means a corporaton can enter nto a |ont venture wth
another person, partnershp or another corporaton
But a corporaton cannot enter nto a partnershp contract
$$. Power to enter into a partnership
GR: corporaton cannot enter nto partnershps wth other
corporatons or wth ndvduas
Excepton: expressy aowed by statute or charter
o |ont ventures
o Lmted partnershps (US Law)
.. I&pie% or Necessar/ Powers
GR: a acts other than those specfed n Sec 36-44 and n other speca
provsons woud be utra vres
E"ception: those whch are:
necessary or inci%enta to the e"ercise o! the powers so conferred
(45), or
essenta or necessar/ to carry out ts p,rpose or p,rposes as
stated n the AOI. (38)
Presumpton that a corporaton can act wthn ts powers and when a contract
s not on ts face necessary beyond ts authorty, t w, n the absence of
proof to the contrary, presumed to be vad.
Sec 36(11): corporatons have the power and capacty to exercse
such other powers as may be essenta or necessary to carry out
ts purpose(s) as provded for n the AOI
o Restated: the management of a corporaton has dscretonary
authorty, n the absence of expct restrctons, to enter nto
contracts or transactons deemed reasonaby necessary or
ncdenta to ts busness purposes.
c. Inci%enta Powers
Sec 2: powers, attrbutes, and propertes expressy
authorzed by aw or inci%ent to its e"istence
Incdenta powers: those that attach to a corporaton at the
moment of ts creaton wthout regard to ts express powers
or partcuar prmary purpose, and s nherent n t as a ega
entty
Exampes:
. To sue and be sued
. To grant and receve n the corporate name
. To purchase hod and convey rea and persona
property for ts purposes
v. To have a corporate sea
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v. To adopt and amend by-aws for ts government
v. To dsenfranchse or remove members
Powers that go nto the very nature and extent of a
corporatons |urdca entty cannot be presumed to be
ncdenta or nherent powers
The 6tra Vires 7octrine
Section 45. Utra vres acts of corporatons. - No corporaton under ths Code
sha possess or exercse any corporate powers except those conferred by ths
Code or by ts artces of ncorporaton and except such as are necessary or
ncdenta to the exercse of the powers so conferred. (n)
Sec 45 embodes the utra vres doctrne
Based on two (2) prncpes:
1. Corporaton s a creature of aw and has ony such powers and
prveges as are granted by the State
2. The doctrne uphods the duty of trust and obedence owed by the
corporatons drectors and offcers to the SHs
a. Defense of utra vres rests on the voaton of trust or duty
towards SHs, and shoud not be entertaned where ts
aowance w do greater wrong to nnocent 3
rd
partes
Three (3) types of utra vres acts:
(1) acts beyond the powers of the corporaton as stpuated n the aw or
AOI. The TEST: ogca reaton of the act to the corporate purpose:
a. W/N the act s n drect and mmedate furtherance of the
corporatons busness
b. W/N the act s fary ncdent to the express powers and
reasonaby necessary for ts exercse
(2) acts or contracts entered n behaf of the corporaton by persons
wthout corporate authorty
a. GR: ony acts of corporate offcers wthn the scope of ther
authorty are bndng on the corporaton; acts beyond the
authorty cannot bnd the corporaton
b. Excepton: ratfcaton by the Board or estoppe
c. Prmary rue: In the absence of an authorty from the board,
no person, not even the offcers, can vady bnd the
corporaton
d. Excepton:
. Doctrne of apparent authorty: n deang wth
corporatons, the pubc at arge s bound to rey upon
outward appearances, and reyng on such, f t be
found that the drectors permtted the agent to hod
hmsef out as havng authorty to bnd or acquesced
n the contract and accepted the benefts therefrom,
the corporaton w be bound. (Ramrez v Orentast)
1. Pubc s not expected to know what goes on
nsde the boardroom, or cannot be requred
to ook beyond the offcers actng for a
corporaton
2. If the corporaton desres to set up the
defense of ack of authorty, t must pead and
prove t.
3. .but once t dscharges that duty, then the
burden of proof shfts to the agent to proof
that by prevous acts of the corporaton he
had been cothed wth apparent authorty
(3) acts or contracts whch are per se ega
a. cannot be gven effect and are vod
. but n Harden, the Court uphed a patenty vod
contract as between the contractng partes; a narrow
excepton s made n that snce the voaton of the
partcuar aw pertans to pubc pocy concerns and
may ony be proceeded through a quo warranto, not
by any of the partes
. thus f no cv wrong was commtted, the courts w
eave the partes as they were (Harden)
b. utra vres acts whch are NOT per se ega are merey
vodabe can be ratfed by the SHs (Provano)
. t cures the nfrmty and makes t perfecty vad and
enforceabe, provded that t pre|udces no credtors
and f t has been partay executed and not merey
executory
1. ratfcaton may be by express act of the SH
(f the act s by the Board) or the Board (f the
act s by the offcers).
2. .or mpedy through acceptance of
benefts.
3. .or through estoppe on the part of the
Board or the offcers
Corporatons are now more of a product of the agreement of the
ncorporatng partes rather than a mere "creature of the State:"
Sec 10 aows 5 or more persons to form a prvate corporaton for
any awfu purpose/s
Sec 36 par 11 aows every corporaton the power to exercse
such other powers as may be essenta or necessary to carry out
the purpose/s n the AOI
The corporatons powers depends on ts purpose n the AOI
7
Snce partes are entrey free to nsert any number of purposes n
ts AOI, t foows that the extent of the corporatons powers
depends argey on ther agreement, and not merey on a drect
grant from the State, uness of course the purposes are ega.
Instances where an act can or cannot be reasonaby mped from
the purposes due to poor draftsmanshp or ack of foresght of the
drafters, the purpose cause may be reasonaby stretched to
accommodate the new and unexpected stuatons, otherwse, a
proper amendment of the AOI woud be necessary.
Lega consequences of acts ceary beyond the powers of the corporaton or
utra vres?
On the corporaton:
o f the act s ega, nvountary dssouton under a quo
warranto proceedng by the SoGen
o revocaton or suspenson of the certfcate of regstraton by
the SEC
On the partes to the utra vres contract:
o Partes are "eft as they are" and no rescsson woud e.
o Where there has been parta performance by one party, and
the other has not, the atter, havng benefted from the
performance, s estopped from camng utra vres
On the rghts of stockhoders:
o A stockhoder can fe an ndvdua or dervatve sut to en|on
a threatened utra vres act or contract or a dervatve sut for
damages f the contract has been performed
o Labty woud depend on whether the contractng partes
acted n GF and wth reasonabe dgence; an honest mstake
woud not gve rse to abty
If acton s based on tort, the stockhoders cannot set up the
defense of utra vres aganst the n|ured party who had no
knowedge that the corporaton was engagng n an act not
ncuded expressy or mpedy n ts purpose cause.

RP 0 Aco8e 9inin1. F: Aco|e Mnng requested the openng of a post offce at ts
mnng camp n Zambaes to servce empoyees vng n the camp. The
Drector of Posts agreed to set up the offce, provded that n the meantme
that funds are not avaabe, the company woud provde for a essenta
equpment and assgn a responsbe empoyee to perform the dutes of a
postmaster. He aso added that the company sha assume drect
responsbty for whatever pecunary oss may be suffered by the Bureau of
Posts by reason of the dshonesty or neggence of the empoyee assgned. A
Resouton by the Aco|e Board of Drectors was passed. The postmaster
assgned, Haro Sanchez, went on eave and never returned. It was soon
dscovered that a shortage was ncurred ao P13,867.24, apparenty
embezzed by Sanchez. Bureau of Posts sues for the shortage. Aco|e dened
ts abty contendng that the resouton ssued by the board was utra vres,
and ts abty f any woud ony be that of a guarantor.
H: It shoud be noted that t was Aco|e tsef that requested for the settng up
of a post offce for the convenence of ts empoyees, whch the SC hed to
cover a sub|ect whch s "a reasonabe and proper ad|unct to the conduct of
the busness of Aco|e Mnng." An utra vres act s one commtted outsde the
ob|ect for whch a corporaton s created, but there are certan corporate acts
that may be performed outsde the scope of the powers expressy conferred
f they are necessary to promote the nterest and wefare of the corporaton."
Even n the case of utra vres acts whch are not ega per se, a corporaton
cannot be heard to compan that t s not abe for the acts of ts board,
because of estoppe by representaton. The term utra vres shoud be
dstngushed from an ega act for the former s merey vodabe whch may
be enforced by performance, ratfcaton, or estoppe, whe the atter s vod
and cannot be nvadated. It beng merey vodabe, an utra vres act can be
enforced or vadated f there are equtabe grounds for takng such acton. In
ths case, t s far that the resouton be uphed at east on the ground of
estoppe.
The defense of utra vres rests on voaton of trust or duty towards the
stockhoders, and shoud not be entertaned where ts aowance w do
greater wrong to nnocent partes deang wth the corporaton. The
acceptance of benefts arsng from the performance of the other party gves
rse to an estoppe precudng the repudaton of the contract.

Napocor 0 Vera. Sea Lion is a port and arrastre operator with a contract for
stevedoring services with NPC which had already expired. Its PPA permit for cargo
handling services at the NPC Calaca pier had expired as well. Napocor did not
renew Sea Lions contract for Stevedoring Services for Coal-Handling Operations at
Calaca plant, and took over its stevedoring services pursuant to a provision in its
charter, [t[o exercise such powers and do such things as may be reasonably
necessary to carry out the business and purposes for which it was organized, or
which, from time to time, may be declared by the Board to be necessary, useful,
incidental or auxiliary to accomplish said purpose. Sea Lion sues, alleging that
NPC had acted in bad faith and with grave abuse of discretion in not renewing its
Contract for Stevedoring Services for Coal-Handling Operations at the Calaca plant,
and in taking over its stevedoring services. Judge Vera, acting on Sea Lions suit,
issued a writ of preliminary injunction enjoining NPC from further undertaking
stevedoring and arrastre services in its pier located at the Batangas Coal-Fired
Thermal Power Plant at Calaca, Batangas and directing it either to enter into a
8
contract for stevedoring and arrastre services or to conduct a public bidding therefor.
Sea Lion was also allowed to continue stevedoring and arrastre services at the pier.
H: In determining whether or not the act of NPC falls within the purview of the
charter which creates it, the Court must decide whether or not a logical and
necessary relation exists between the act questioned and the corporate purpose
expressed in the NPC charter. For if that act is one which is lawful in itself and not
otherwise prohibited, and is done for the purpose of serving corporate ends, and
reasonably contributes to the promotion of those ends in a substantial and not in a
remote and fanciful sense, it may be fairly considered within the corporation's
charter powers. A pier located at Calaca, Batangas, which is owned by NPC, receives
the various shipments of coal which is used exclusively to fuel the Batangas Coal-
Fired Thermal Power Plant of the NPC for the generation of electric power. The
stevedoring services which involve the unloading of the coal shipments into the NPC
pier for its eventual conveyance to the power plant are incidental and indispensable
to the operation of the plant. The Court holds that NPC is empowered under its
Charter to undertake such services, it being reasonably necessary to the operation
and maintenance of the power plant. This Court is, guided by the case of Republic of
the Philippines v. Acoje Mining Company, Inc., where the Court affirmed the rule
that a corporation is not restricted to the exercise of powers expressly conferred
upon it by its charter, but has the power to do what is reasonably necessary or
proper to promote the interest or welfare of the corporation. Whether NPC will enter
into a contract for stevedoring and arrastre services to handle its coal shipments to
its pier, or undertake the services itself, is entirely and exclusively within its
corporate discretion. It does not involve a duty the performance of which is enjoined
by law. Thus, the courts cannot direct the NPC in the exercise of this prerogative.
9a%ri1a : Co 0 ;a&ora. Madrigal & Co was engaged in the management
of Rizal Cement Co., Inc. and is also its sister company, both
being owned by the same or practically the same stockholders.

The
Madrigal Central Office mployees !nion so"ght for the renewal of
its collecti#e bargaining agreement and proposed a wage increase
of $%&&.&& a month, an allowance of $'&&.&& a month, and other
economic benefits.

Madrigal re("ested for a deferment in the
negotiations.
Thereafter, Madrigal on two occasions red"ced its capital stock
from )*+,&&& shares to %*),,** shares and from %*),,** shares to
''&,&-+ shares by #irt"e of two alleged resol"tions of its
stockholders, which was effected thro"gh the distrib"tion of the
marketable sec"rities owned by the petitioner to its stockholders
in e.change for their shares in an e("i#alent amo"nt in the
corporation.
The !nion filed a case for !/$ with the 0/RC. Madrigal answered
citing operational losses. Madrigal then informed the 1ecretary
of /abor that Rizal Cement Co., Inc., 2from which it deri#es
income as the 3eneral Manager or 4gent2 had 2ceased operating
temporarily. In addition, beca"se of the desire of the
stockholders to phase o"t the operations of the Madrigal & Co.,
Inc. d"e to lack of b"siness incenti#es and prospects, and in
order to pre#ent f"rther losses,2 it had to red"ce its capital
stock on two occasions. The labor arbiter, ha#ing fo"nd that the
petitioner 2had been making s"bstantial profits in its operation2
since '5)% thro"gh '5)+, granted the wage increase, and was
affirmed by 0/RC. Meanwhile Madrigal tried to terminate the
ser#ices of !nion members citing retrenchment b"t its application
was declared illegal by 6O/. !pon appeal to O$, Ronaldo 7amora
affirmed the decision of 6O/.
89 :hat clearly emerges from the recorded facts is that the
petitioner, awash with profits from its b"siness operations b"t
confronted with the demand of the "nion for wage increases,
decided to e#ade its responsibility towards the employees by a
de#ised capital red"ction. :hile the red"ction in capital stock
created an apparent need for retrenchment, it was, by all
indications, ;"st a mask for the p"rge of "nion members, who, by
then, had agitated for wage increases. In the face of the
petitioner company<s piling profits, the "nionists had the right
to demand for s"ch salary ad;"stments. That the petitioner made
("ite handsome profits is clear from the records. :e agree with
the 0ational /abor Relations Commission that 2=t>he di#idends
recei#ed by the company are corporate earnings arising from
corporate in#estment.2
42
Indeed, as fo"nd by the Commission, the
petitioner had entered s"ch earnings in its financial statements
as profits, which it wo"ld not ha#e done if they were not in fact
profits.
43

Moreo#er, it is incorrect to say that s"ch profits ? in the form
of di#idends ? are beyond the reach of the petitioner<s creditors
since the petitioner had recei#ed them as compensation for its
management ser#ices in fa#or of the companies it managed as a
shareholder thereof. 4s s"ch shareholder, the di#idends paid to
it were its own money, which may then be a#ailable for wage
increments. It is not a case of a corporation distrib"ting
di#idends in fa#or of its stockholders, in which case, s"ch
di#idends wo"ld be the absol"te property of the stockholders and
hence, o"t of reach by creditors of the corporation. 8ere, the
petitioner was acting as stockholder itself, and in that case,
the right to a share in s"ch di#idends, by way of salary
increases, may not be denied its employees.
9
4ccordingly, this co"rt is con#inced that the petitioner<s
capital red"ction efforts were, to begin with, a s"bterf"ge, a
deception as it were, to camo"flage the fact that it had been
making profits, and conse("ently, to ;"stify the mass layoff in
its employee ranks, especially of "nion members. They were
nothing b"t a premat"re and plain distrib"tion of corporate
assets to ob#iate a ;"st sharing to labor of the #ast profits
obtained by its ;oint efforts with capital thro"gh the years.
1"rely, we can neither co"ntenance nor condone this. It is an
"nfair labor practice.
Go0<t o! Phiippines 0 E =o1ar. This is a quo warranto proceeding, alleging 17 causes of
action, instituted originally in this court by the Government of the Philippine Islands on
the relation of the Attorney-General against the building and loan association knon as
!l "ogar #ilipino, for the purpose of depriving it of its corporate franchise, e$cluding it
from all corporate rights and privileges, and effecting a final dissolution of said
corporation% The respondent, !l "ogar #ilipino, as apparently the first corporation
organi&ed in the Philippine Islands under the provisions cited, and the association has
been favored ith e$traordinary success% The articles of incorporation bear the date of
'ecember (), 1*1+, at hich time capital stock in the association had been subscribed
to the amount of P1,+,+++ of hich the sum of P1+,-(+ had been paid in% .nder the la
as it then stood, the capital of the Association as not permitted to e$ceed P/,+++,+++,
but by Act 0o% (+*(, passed 'ecember (/, 1*11, the statute as so amended as to
permit the capitali&ation of building and loan associations to the amount of ten millions%
1oon thereafter the association took advantage of this enactment by amending its
articles so as to provide that the capital should be in an amount not e$ceeding the then
laful limit% #rom the time of its first organi&ation the number of shareholders has
constantly increased, ith the result that on 'ecember /1, 1*(,, the association had
,,)(- shareholders holding 1(,,7,+ shares, ith a total paid-up value of P),7+/,-+(%(,%
'uring the period of its e$istence prior to the date last above-mentioned the association
paid to ithdraing stockholders the amount of P7,-1),(,7,%7(2 and in the same period
it distributed in the form of dividends among its stockholders the sum of P7,-(1,,-,%)1%
I3 450 !l "ogar is illegally holding title to real property in e$cess of , years, in violation
of the la that hile corporations may loan funds upon real estate security, they shall
dispose of the same ithin , years after receiving title
"3 the corporation has not been shon to have offended against the la in a manner
hich ould entail forfeiture of its charter% The evident purpose behind the la restricting
the rights of corporations ith respect to the tenure of land as to prevent the revival of
the entail or other similar institution by hich land could be fettered and its alienation
hampered% In the case, !l "ogar had in G# disposed of the property at the e$piration of
the period fi$ed by la% .nder the circumstances the destruction of the corporation
ould bring irreparable loss upon thousands of innocent shareholders of the corporation
ithout any corresponding benefit to the public%
I3 450 el "ogar is illegally oning and holding a business lot in e$cess of the
reasonable re6uirements and in contravention of the 7orpo la that every corporation
has the poer to purchase hold lease real property as reasonable and necessary
re6uired for the transaction of the laful business
"3 The la e$pressly declares that corporations may ac6uire such real estate as is
reasonably necessary to enable them to carry out the purposes for hich they ere
created2 and e are of the opinion that the oning of a business lot upon hich to
construct and maintain its offices is reasonably necessary to a building and loan
association such as the respondent as at the time this property as ac6uired% A
different ruling on this point ould compel important enterprises to conduct their
business e$clusively in leased offices a result hich could serve no useful end but
ould retard industrial groth and be inimical to the best interests of society% 4e are
furthermore of the opinion that, inasmuch as the lot referred to as lafully ac6uired by
the respondent, it is entitled to the full beneficial use thereof% 0o legitimate principle can
discovered hich ould deny to one oner the right to en8oy his 9or its: property to the
same e$tent that is conceded to any other oner%
I3 450 el "ogar has engaged in activities foreign to the purposes for hich the
corporation as created and not reasonably necessary to its legitimate ends,
specifically3 91: the administration of the offices in the !l "ogar building not used by the
respondent itself and the renting of such offices to the public2 9(: the administration and
management of properties belonging to delin6uent shareholders of the association2 9/:
10
the management of some parcels of improved real estate situated in ;anila not under
mortgage to it, but oned by shareholders, and has held itself out by advertisement as
prepared to do so
"3 91: The activities here critici&ed clearly fall ithin the legitimate poers of the
respondent, as shon in hat e have said above relative to the second cause of
action% This matter ill therefore no longer detain us% If the respondent had the poer to
ac6uire the lot, construct the edifice and hold it beneficially, as there decided, the
beneficial administration by it of such parts of the building as are let to others must
necessarily be laful%
9(: The case for the government supposes that the only remedy hich the respondent
has in case of default on the part of its shareholders is to proceed to enforce collection of
the hole loan in the manner contemplated in section 1), of the 7orporation <a% It ill
be noted, hoever, that, according to said section, the association may treat the hole
indebtedness as due, =at the option of the board of directors,= and this remedy is not
made e$clusive% 4e see no reason to doubt the validity of the clause giving the
association the right to take over the property hich constitutes the security for the
delin6uent debt and to manage it ith a vie to the satisfaction of the obligations due to
the debtor than the immediate enforcement of the entire obligation, and the validity of the
clause alloing this course to be taken appears to us to be not open to doubt%
9/: The practice described in the passage above 6uoted from the agreed facts is in our
opinion unauthori&ed by la% The administration of property in the manner described is
more befitting to the business of a real estate agent or trust company than to the
business of a building and loan association% The practice to hich this criticism is
directed relates of course solely to the management and administration of properties
hich are not mortgaged to the association% The circumstance that the oner of the
property may have been re6uired to subscribe to one or more shares of the association
ith a vie to 6ualifying him to receive this service is of no significance% It is a general
rule of la that corporations possess only such e$press poers% The management and
administration of the property of the shareholders of the corporation is not e$pressly
authori&ed by la, and e are unable to see that, upon any fair construction of the la,
these activities are necessary to the e$ercise of any of the granted poers% The
corporation, upon the point no under the criticism, has clearly e$tended itself beyond
the legitimate range of its poers% >ut it does not result that the dissolution of the
corporation is in order, and it ill merely be en8oined from further activities of this sort%
I3 450 the royalty paid to the founder of el "ogar, Antonio ;elian, as compensation for
his services rendered by him during the early stages of the organi&ation of the
corporation, is unconscionable, e$cessive, and thus necessitates dissolution
"3 0o possible doubt e$ists as to the poer of a corporation to contract for services
rendered and to be rendered by a promoter in connection ith organi&ing and
maintaining the corporation% It is true that contracts ith promoters must be
characteri&ed by good faith2 but could it be said ith certainty, in the light of facts
e$isting at the time this contract as made, that the compensation therein provided as
e$cessive? If the amount of the compensation no appears to be a sub8ect of legitimate
criticism, this must be due to the e$traordinary development of the association in recent
years% If the ;elian contract had been clearly ultra vires hich is not charged and is
certainly untrue its continued performance might conceivably be en8oined in such a
proceeding as this2 but if the defect from hich it suffers is mere matter for an action
because ;elian is not a party% It is rudimentary in la that an action to annul a contract
cannot be maintained ithout 8oining both the contracting parties as defendants%
;oreover, the proper party to bring such an action is either the corporation itself, or
some shareholder ho has an interest to protect%
I3 450 el "ogar had abused its franchise in issuing special shares, hich is alleged to
be illegal and inconsistent ith the plan and purposes of building and loan
associations,and that these are held by ell-to-do people purely for investment purposes
and not by age-earners for savings
"3 The ground for supposing the issuance of the =special= shares to be unlaful is that
special shares are not mentioned in the 7orporation <a as one of the forms of security
hich may be issued by the association% .pon e$amination of the nature of the special
shares in the light of American usage, it ill be found that said shares are precisely the
same kind of shares that, in some American 8urisdictions, are generally knon as
advance payment shares2 in if close attention be paid to the language used in the last
sentence of section 17) of the 7orporation <a, it ill be found that special shares
11
here evidently created for the purpose of meeting the condition cause by the
prepayment of dues that is there permitted% The language of this provision is as follo
=payment of dues or interest may be made in advance, but the corporation shall not
allo interest on such advance payment at a greater rate than si$ per centum per annum
nor for a longer period than one year%= In one sort of special shares the dues are prepaid
to the e$tent of P1-+ per share2 in the other sort prepayment is made in the amount of
P1+ per share, and the subscribers assume the obligation to pay P1+ monthly until P1-+
shall have been paid%
It ill escape notice that the provision 6uoted say that interest shall not be alloed on
the advance payments at a greater rate than si$ per centum per annum nor for a longer
period than one year% The ord =interest = as there used must be taken in its true sense
of compensation for the used of money loaned, and it not must not be confused ith the
dues upon hich it is contemplated that the interest may be paid% 0o, in the absence of
any shoing to the contrary, e infer that no interest is ever paid by the association in
any amount for the advance payments made on these shares2 and the reason is to be
found in the fact that the participation of the special shares in the earnings of the
corporation, in accordance ith section 1)) of the 7orporation <a, sufficiently
compensates the shareholder for the advance payments made by him2 and no other
incentive is necessary to induce inventors to purchase the stock%
It ill be observed that the final (+ per centum of the par value of each special share is
not paid for by the shareholder ith funds out of the pocket% The amount is satisfied by
applying a portion of the shareholder@s participation in the annual earnings% >ut as the
right of every shareholder to such participation in the earnings is undeniable, the portion
thus annually applied is as much the property of the shareholder as if it ere in fact
taken out of his pocket% It follos that the mission of the special shares does not involve
any violation of the principle that the shares must be sold at par%
#rom hat has been said it ill be seen that there is e$press authority, even in the very
letter of the la, for the emission of advance-payment or =special= shares, and the
argument that these shares are invalid is seen to be baseless% In addition to this it is
satisfactorily demonstrated in Severino vs. El Hogar Filipino, supra, that even assuming that
the statute has not e$pressly authori&ed such shares, yet the association has implied
authority to issue them% The complaint conse6uently fails also as regards the stated in
the ninth cause of action%
I3 45n !l "ogar is pursuing illegally a policy of depreciating, at an e$cessive rate at the
discretion of its >oard, the value of real properties ac6uired by it at its sales, thereby
frustrating the right of 1"s to participate annually and e6ually in the earnings%
"3 This count for the complaint proceeds, in our opinion, upon an erroneous notion as to
hat a court may do in determining the internal policy of a business corporation% If the
criticism contained in the brief of the Attorney-General upon the practice of the
respondent association ith respect to depreciation be ell founded, the <egislature
should supply the remedy by defining the e$tent to hich depreciation may be alloed
by building and loan associations% 7ertainly this court cannot undertake to control the
discretion of the board of directors of the association about an administrative matter as
to hich they have legitimate poer of action% The tenth cause of action is therefore not
ell founded%
I3 45n el "ogar s charter should be revoked because it illegally maintains e$cessive
reserve funds and because it pursues a policy, allegedly unlaful, of paying a straight
annual dividend of 1+A regardless of losses suffered and profits made by the
corporation and in violation of the re6uirement s of the corpo code%
"3 It is insisted in the brief of the Attorney-General that the maintenance of reserve
funds is unnecessary in the case of building and loan associations, and at any rate the
keeping of reserves is inconsistent ith section 1)) of the 7orporation <a% .pon
careful consideration of the 6uestions involved e find no reason to doubt the right of the
respondent to maintain these reserves% It is true that the corporation la does not
e$pressly grant this poer, but e think it is to be implied% It is a fact of common
observation that all commercial enterprises encounter periods hen earnings fall belo
the average, and the prudent manager makes provision for such contingencies% To
regard all surplus as profit is to neglect one of the primary canons of good business
practice% >uilding and loan associations, though among the most solid of financial
institutions, are nevertheless sub8ect to vicissitudes% #luctuations in the dividend rate are
12
highly detrimental to any fiscal institutions, hile uniformity in the payments of dividends,
continued over long periods, supplies the surest foundations of public confidence%
;oreover, it is said that the practice of the association in declaring regularly a 1+ per
cent dividend is in effect a guaranty by the association of a fi$ed dividend hich is
contrary to the intention of the statute% The government insists upon an interpretation of
section 1)) of the 7orporation <a that is altogether too strict and literal% #rom the fact
that the statute provides that profits and losses shall be annually apportioned among the
shareholders it is argued that all earnings should be distributed ithout carrying anything
to the reserve% >ut it ill be noted that it is provided in the same section that the profits
and losses shall be determined by the board of directors3 and this means that they shall
e$ercise the usual discretion of good businessmen in allocating a portion of the annual
profits to purposes needful to the elfare of the association% The la contemplates the
distribution of earnings and losses after other legitimate obligations have been met% Bur
conclusion is that the respondent has the poer to maintain the reserves critici&ed in the
eleventh and telfth counts of the complaint2 and at any rate, if it be supposed that the
reserves referred to have become e$cessive, the remedy is in the hands of the
<egislature% It is no proper function of the court to arrogate to itself the control of
administrative matters hich have been confided to the discretion of the board of
directors% The causes of action under discussion must be pronounced to be ithout
merit%
I3 45n el "ogar illegally departed from its charter because it has made loans hich ere
intended to be used by the borroers for other purposes than the building of homes%
There is no statute here e$pressly declaring that loans may be made by these
associations solely for the purpose of building homes% Bn the contrary, the building of
homes is mentioned in section 171 of the 7orporation <a as only one among several
ends hich building and loan associations are designed to promote% #urthermore,
section 1)1 of the 7orporation <a e$pressly authorities the >oard of directors of the
association from time to time to fi$ the premium to be charged% In the brief of the plaintiff
a number of e$cerpts from te$tbooks and decisions have been collated in hich the idea
is developed that the primary design of building and loan associations should be to help
poor people to procure homes of their on% This beneficent end is undoubtedly served
by these associations, and it is not to be denied that they have been generally fostered
ith this end in vie% >ut in this 8urisdiction at least the lamaker has taken care not to
limit the activities of building and loan associations in an e$clusive manner, and the
e$ercise of the broader poers must in the end approve itself to the business
community%
I3 45n the el "ogar charter may be revoked because various loans no outstanding
have been made by the respondent to corporations and partnerships, and that these
entities have in some instances subscribed to shares in the respondent for the sole
purpose of obtaining such loans, and that some of these 8uridical entities became
shareholders merely for the purpose of 6ualifying themselves to take loans from the
association%
"3 the 7orporation <a declares that =any person= may become a stockholder in
building and loan associations% The ord =person= appears to be here used in its general
sense, and there is nothing in the conte$t to indicate that the e$pression is used in the
restricted sense of both natural and artificial persons, as indicated in section ( of the
Administrative 7ode% 4e ould not say that the ord =person= or persons,= is to be
taken in this broad sense in every part of the 7orporation <a% #or instance, it ould
seem reasonable to say that the incorporators of a corporation ought to be natural
persons, although in section - it is said that five or more =persons=, although in section -
it is said that five or more =persons,= not e$ceeding fifteen, may form a private
corporation% >ut the conte$t there, as ell as the common sense of the situation,
suggests that natural persons are meant% 4hen it is said, hoever, in section 17/, that
=any person= may become a stockholder in a building and loan association, no reason is
seen hy the phrase may not be taken in its proper broad sense of either a natural or
artificial person% At any rate the 6uestion hether these loans and the attendant
subscriptions ere properly made involves a consideration of the poer of the
subscribing corporations and partnerships to on the stock and take the loans2 and it is
not alleged in the complaint that they ere ithout poer in the premises% Bf course the
mere motive ith hich subscriptions are made, hether to 6ualify the stockholders to
take a loan or for some other reason, is of no moment in determining hether the
13
subscribers ere competent to make the contracts% The result is that e find nothing in
the allegations of the si$teenth cause of action, or in the facts developed in connection
thereith, that ould 8ustify us in granting the relief%
I3 45n el "ogar, in disposing of real estate purchased in the collection of defaulted
loans, on credit at first and then sold and mortgaged to el "ogar to secure payment of
the purchase price, had incurred several outstanding loans, and that that the persons
and entities to hich said properties are sold under the condition charged are not
members or shareholders nor are they made members or shareholders of the defendant%
"3 This part of the complaint is based upon a mere technicality of bookkeeping% The
central idea involved in the discussion is the provision of the 7orporation <a re6uiring
loans to be stockholders only and on the security of real estate and shares in the
corporation, or of shares alone% It seems to be supposed that, hen the respondent sells
property ac6uired at its on foreclosure sales and takes a mortgage to secure the
deferred payments, the obligation of the purchaser is a true loan, and hence prohibited%
>ut in re6uiring the respondent to sell real estate hich it ac6uires in connection ith the
collection of its loans ithin five years after receiving title to the same, the la does not
prescribe that the property must be sold for cash or that the purchaser shall be a
shareholder in the corporation% 1uch sales can of course be made upon terms and
conditions approved by the parties2 and hen the association takes a mortgage to
secure the deferred payments, the obligation of the purchaser cannot be fairly described
as arising out of a loan% 0or does the fact that it is carried as a loan on the books of the
respondent make it a loan on the books of the respondent make it a loan in la% The
contention of the Government under this head is untenable%
Piro0ano 0 7ea Ra&a. Under the leadership and management of Enrico
Pirovano, president of Del Rama Steamship, the company grew and
progressed until it became a multi-million corporation, the
assets of which grew and increased from P240K to around P15M. He
was insured by the company for P1M. Esteban dela Rama, majority
stockholder, distributed his shares among his 5 daughters,
including the NDC, to which Dela Rama had an outstanding bonded
indebtedness iao P7.5M, through a debt-equity swap arrangement
which also gave the NDC representation in the Board. Pirovano was
killed by the Japanese during the war, and a Boardres was adopted
granting to the Pirovano children the proceeds of the insurance
policies taken on the life of the late president. However, the
policy had lapse because the company was not able to pay the
premiums regularly. The BoardRes authorizes the allocation of
P400K convertible into 4000 shares of stock ifo of the Pirovano
children, as well as a waiver of the preemptive rights of the
former owners, the Dela Rama siblings. This was submitted to the
stockholders which duly approved the same. It appears, however,
that Don Esteban did not realize that the dole out would actually
be giving to the Pirovano children more than what they intended
to give. This was because the value then of the shares was 3.6
times the par value thereof, thus the donation iao P400K would
amount to a total of P1.44M. Thus the voting strength of the
Pirovano children would be twice as much as that of the dela Rama
sisters. The old Resolution having been nullified, the Board
adopted a new BR changing the form of the donation from 4000
shares into a renunciation of the Companys right and title to
the life insurance policies of Pirovano. It also provides that
the proceeds of the policy be retained by the Company as a loan
drawing interest payable to the Pirovano children whenever the
company is in a position to meet this financial obligation and
after the Company settles its bonded indebtedness ifo NDC. This
was ratified by the Dela Rama stockholders. Mrs Pirovano accepted
the donation, and buys property in the US. Upon inquiry with the
Sec, it was found that the donation was illegal and thus void on
the grounds that the corporation acted ultra vires and that it
could not dispose of its assets through donation. The
stockholders then voted to revoke the donation. Mrs Pirovano sued
to demand the credit owed to them by the Company.
I: w/n the donation by the corporation of the proceeds of the
insurance is an ultra vires act
H: Under the AOI of Dela Rama Steamship it is provided under (g)
that the company may invest and deal with moneys of the company
not immediately required, in such a manner as from time to time
may be determined, and under (i) to lend money or to aid in any
other manner any person association, or corporation of which any
obligation or in which any interest is held by the corporation or
in the affairs of prosperity of which the corporation has a
lawful interest. The corporation was thus given broad and almost
unlimited powers to carry out the purposes for which it was
organized. The word deal is broad enough to include any manner
of disposition, and thus the donation comes within the scope of
this broad power. The company was in fact very much solvent as it
was able to declare and issue dividends to its stockholders, and
shows that the excess funds which were not needed by the company
which was donated to the children was justified under the AOI.
14
Under the second broad power, the corporation knew well its scope
such that noone lifted a finger to dispute its validity. The
company gave the donation not only because it was indebted to him
but also because it was fit and proper to make provisions for the
children and out of a sense of gratitude.
Even assuming that the donation was ultra vires, still it cannot
be invalidated or declared legally ineffective for that reason
alone, it appearing that the donation represents not only the act
of the Board but also that of the stockholders themselves since
they expressly ratified the resolution. By this ratification, the
infirmity of the corporate act, if any, has been obliterated
thereby making the act perfectly valid and enforceable,
especially so if the donation is not merely executory but
consummated. The defense of ultra vires cannot be set up against
completed or consummated transactions.
An ultra vires act may either be an act performed merely outside
the scope of the powers granted to the corporation by its AOI or
one which is contrary to law or violative of any principle which
would void any contract. A distinction has to be made with
respect to corporate acts which are illegal and those merely
ultra vires. The former are contrary to law, morals, public order
or policy, while the latter are not void ab initio, but merely go
beyond the scope of the powers in the AOI, and which renders the
act merely voidable and thus ratifiable by the stockholders.
=ar%en 0 >en1,et. Baatoc Mnng, engaged n the mnng of god, sorey
needed the nfuson of new capta to resusctate ts staed operatons. The
offcers approached the Benguet Mnng Co, an entty aso engaged n god
mnng. A contract was executed, whch states that Benguet agrees to
construct a mng pant for the Baatoc mne and erect a power pant, n
exchange for Baatoc Mnng shares vaued at P600K and the excess n cash
to compensate for the cost of the contract. By the tme of the compant, the
vaue of the stock of Baatoc had soared for a nomna vauaton to more than
P11 per share. It was aeged by Harden of Baatoc that the Benguet Mnng
Co hed shares of stock n another mnng corporaton, the Baatoc Mnng
Company, n voaton of a prohbton aganst mnng corporatons from
ownng stock of another mnng corporaton n the od Corpo aw. The
sharehoders of Baatoc sued Benguet Mnng to annu stock certfcates of
Baatoc ssued fo Benguet and to recover money earned from the
transacton. TC dsmssed compant.
H: Athough the contract between the two mnng companes was ega for
contravenng the od Corpo Law, the Legsature, n adoptng such a provson
had the ntenton that pubc pocy shoud be controng n the grantng of
mnng rghts. The voaton n ths case was of such a nature that t can be
proceeded upon ony by way of a crmna prosecuton, or by acton quo
warranto, whch can be mantaned ony by the State. Insofar as the partes
are concerned, no cv wrong had been commtted between them, and f
pubc wrong had been commtted, then the drectors of Baatoc Mnng and
Harden were the actve nducers of that wrong. The contract has n fact been
performed on both sdes, and there s no possbty of undong what had
been done. Thus even where corporate contracts are ega per se, when ony
pubc or government pocy or nterests are at stake and no prvate wrong s
commtted, the courts w eave the partes as they are, n accordance wth
ther orgna contractua expectatons.
15
Corporate powers: WYSIWYG
AOI reated to reevant code provsons
Powers are but-n n the AOI, mted by
prmary purpose
45: a encompassng powers
Necessary and ncdenta rue: necessary s
dfferent from ncdenta
Common denomnator contaned n AOI
Code sets parameters/requrements (36-44)
Statute sets parameters (.e. banks, Gen
Bankng Act)
Specfc powers: deang wth SHs and 3
rd

partes
Cannot dvorce exercse of corporate
powers from contro and management
Extent of corporate powers woud mt
contro and management
Unmted dscreton cannot be exercsed for
furtherance of secondary purposes n AOI