Business Laws and Regulations

LAW 202

MODULE 9
TITLE IV
POWERS OF THE CORPORATION
Sections 35-44, R.A. No. 11232

Prepared by:
Atty. Janice S. Gonzales
Atty. Leoncio B. Hernandez
Atty. Noel Alberto S. Omandap
Atty. April M. Uy-Laurio

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Module Introduction

This module primarily focuses on the powers of private corporations under

Sections 35 to 44 of the Revised Corporation Code. Basically, the module deals
with the following sub-topics: (a) general powers of corporations under Section
35; (b) specific powers of corporations under Sections 15, 36 to 43; (c) the
nature, requirements, effects and exercise of appraisal right in such general and
specific powers; and (d) the ultra vires doctrine, its kinds and consequences.

Intended Learning Outcomes

At the end of the module, the students should be able to:

1) Acquire legal knowledge of the general and specific powers of corporations

as well as the pertinent codal provisions governing the same;

2) Explain the importance or significance of understanding the nature,

requirements, effects, and the existence of the appraisal right with respect
to the general and specific corporate powers; and

3) Develop analytical skills in the application of the relevant law and

jurisprudence on daily transactions particularly in business dealings.

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TITLE IV
POWERS OF THE CORPORATION

Section 35. Corporate Powers and Capacity. - Every corporation incorporated

under this Code has the power and capacity:

(a) To sue and be sued in its corporate name;

(b) To have perpetual existence unless the certificate of incorporation

provides otherwise;

(c) To adopt and use a corporate seal;

(d) To amend its articles of incorporation in accordance with the

provisions of this Code;

(e) To adopt by-laws, not contrary to law, morals or public policy, and
to amend or repeal the same in accordance with this Code;

(f) In case of stock corporations, to issue or 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;

(g) 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;

(h) To enter into a partnership, joint venture, merger, consolidation, or

any other commercial agreement with natural and juridical persons;

(i) To make reasonable donations, including those for the public

welfare or for hospital, charitable, cultural, scientific, civic, or
similar purposes: Provided, That no foreign corporation shall give
donations in aid of any political party or candidate or for purpose s
of partisan political activity;

(j) To establish pension, retirement, and other plans for the benefit of
its directors, trustees, officers, and employees; and

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(k) 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.

Corporate Powers

i. Express Powers – such powers as are expressly granted by law and its articles
of incorporation;

ii. Implied Powers – those reasonably necessary to accomplish its purposes, as

stated in its articles of incorporation; and

iii. Incidental Powers – those which may be incident to its existence as a juridical
entity.

Theory of General Capacity

The Theory of General Capacity states that a corporation is said to hold such powers as
are not prohibited or withheld from it by general law.

General Powers of Corporations

(a) To sue and be sued in its corporate name;

(b) To have perpetual existence, unless the certificate of incorporation provides

otherwise;

(c) To adopt and use a corporate seal;

(d) To amend its articles of incorporation in accordance with the provisions of

the Code;

(e) To adopt by-laws, and to amend or repeal the same in accordance with the
Code;

(f) In case of stock corporations: To issue or sell stocks to subscribers and to sell
treasury stocks in accordance with the provisions of the Code; and

(g) In case of non-stock corporations: To admit members to the corporation;

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(h) 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, and

- Subject to the limitations prescribed by law and the Constitution.

(i) To enter, with natural and juridical persons, into a:

i. Partnership, (Note: New in the RCC)

ii. Joint venture, (Note: New in the RCC)
iii. Merger,
iv. Consolidation, or
v. Any other commercial agreement

- To make reasonable donations, including those for the public welfare

or for hospital, charitable, cultural, scientific, civic, or similar purposes;

- Provided, That no foreign corporation shall give donations in aid of any

political party or candidate or for purposes of partisan political activity.

(j) To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers, and employees; and

(k) 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. [Sec. 35]

Theory of Specific Capacity

The Theory of Specific Capacity states that the corporation cannot exercise powers
except those expressly/impliedly given.

Specific Powers of Corporations

(a) Power to extend or shorten corporate term [Sec. 36]

(b) Power to increase or decrease capital stock, or incur, create, increase bonded
indebtedness [Sec. 37]

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(c) Power to deny pre-emptive rights [Sec. 38]

(d) Power to sell or dispose corporate assets [Sec. 39]

(e) Power to acquire own shares [Sec. 40]

(f) Power to invest corporate funds in another corporation or business, or for any
other purpose [Sec. 41]

(g) Power to declare dividends [Sec. 42]

(h) Power to enter into management contract [Sec. 43]

(i) Power to amend AOI [Sec. 15]

Section 36. 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 or members
representing at least two-thirds (2/3) of the outstanding capital stock or of
its members. Written notice of the proposed action and the time and place of
the meeting shall be sent to the stockholders or members at their respective
place of residence as shown in the books of the corporation, and must be
deposited to the addressee in the post office with postage prepaid, served
personally, or when allowed in the bylaws or done with the consent of the
stockholder, sent electronically in accordance with the rules and regulations
of the Commission on the use of electronic data messages. In case of
extension of corporate term, a dissenting stockholder may exercise the right
of appraisal under the conditions provided in this Code.

Power to Extend or Shorten the Corporate Term

A private corporation may extend or shorten its term as stated in the articles of
incorporation. The AOIs shall be deemed amended to reflect its perpetual term,
unless the corporation elects to retain its limited term. [Sec. 36]

When Exercised

Period to extend the corporate term has been reduced by the RCC to three years
before expiration. When the term expires, it is not ipso facto dissolved but may apply
for a revival of its corporate existence.

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Requirements

i. Approval by majority vote of the board of directors or trustees; and

ii. Ratification at a meeting by the stockholders or members representing at least

two-thirds (2/3) of the outstanding capital stock or of its members;

iii. Notice Requirement – Written notice of the proposed action and the time and
place of the meeting sent to stockholders or members.

Exercise of Appraisal Right

In case of extension of corporate term, a dissenting stockholder may exercise the right
of appraisal under the conditions provided in this Code. [Sec. 36]

Shortening the corporate term DOES NOT trigger the right of appraisal because there
would be no violation of the original contractual intent, since shortening would
mean the early realization of the value of the shares of a dissenting stockholder with
the dissolution of the corporation.

Section 37. 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 by two-thirds (2/3)
of the outstanding capital stock at a stockholders' meeting duly called for the
purpose. Written notice of the time and place of the stockholders' meeting
and the purpose for said meeting must be sent to the stockholders at their
places of residence as shown in the books of the corporation served on the
stockholders personally, or through electronic means recognized in the
corporation's bylaws and/or the Commission's rules as a valid mode for
service of notices.

A certificate must be signed by a majority of the directors of the corporation

and countersigned by the chairperson and secretary of the stockholders'
meeting, setting forth:

(a) That the requirements of this section have been complied with;

(b) The amount of the increase or decrease of the capital stock;

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(c) In case of 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 addresses of the persons subscribing, the amount of capital
stock or number of no-par stock subscribed, the names, nationalities and
addresses 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 the
subscription in cash or property, or the amount of capital stock or number of
shares of no-par stock allotted to each stockholder if such increase is for the
purpose of making effective stock dividend therefor authorized;

(d) Any bonded indebtedness to be incurred, created or increased;

(e) The amount of stock represented at the meeting; and

(f) The vote authorizing the increase or decrease of capital stock, or

incurring, creating or increasing of 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
Commission and where appropriate, of the Philippine Competition
Commission. The application with the Commission shall be made within six
(6) months from the date of approval of the board of directors and
stockholders, which period may be extended for justifiable reasons.

Copies of the certificate shall be kept on file in the office of the corporation
and filed with the Commission and attached to the original articles of
incorporation. After approval by the Commission and the issuance by the
Commission of its certificate of filing may declare: Provided, That the
Commission shall not accept for filing any certificate of increase of capital
stock unless accompanied by a sworn statement of the treasurer of the
corporation accompanied by a 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 percent (25%) of the increase in capital
stock has been subscribed and that at least twenty-five percent (25%) of the
amount subscribed has been paid in actual cash to the corporation or that
property, the valuation of which is equal to twenty-five percent (25%) of the
subscription, has been transferred to the corporation: Provided, further, That
no decrease in capital stock shall be approved by the Commission if its effect
shall prejudice the rights of corporate creditors.

Non-stock corporations may incur, create or increase bonded indebtedness

when approved by a majority of the board of trustees and of at least two-
thirds (2/3) of the members in a meeting duly called for the purpose.

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Bonds issued by a corporation shall be registered with the Commission,

which shall have the authority to determine the sufficiency of the terms
thereof.

Power to Increase or Decrease Capital Stock

An increase or decrease of the capital stock amends the underlying contractual

relationships between and among members of the corporation.

Power to Incur, Create, or Increase Bonded Indebtedness

“Bonded indebtedness” are long term debts of the corporation, secured by mortgage on
real or personal property of the corporation.

Requirements

(1) Approval by a majority vote of the board of directors or trustees;

(2) Approval by two-thirds (2/3) of the outstanding capital stock or at

least two-thirds (2/3) of the members at a stockholders’ meeting duly
called for the purpose;

(3) Notice Requirement – Written notice of the time and place of the
stockholders’ meeting;

(4) Certification Requirement – A certificate signed by a majority of the directors

and setting forth that the requirements of Section 37 have been complied with;

(5) In case of an increase in the capital stock, a treasurer’s affidavit stating that
25% of the increased capital stock has been subscribed and 25% thereof has
been paid;

(6) Prior SEC Approval – The application with the Commission shall be made
within six (6) months from the date of approval of the board of directors and
stockholders, which may be extended for justifiable reasons;

(7) Prior PCC Approval – Where appropriate in certain circumstances;

(8) SEC Registration – Applicable only to bonds issued by a corporation.

Exercise of Appraisal Right

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In Cases of Increase or Decrease of Capital Stock

The right of appraisal can be exercised in cases of increase of capital stock because
it has the potential effect of diluting the proportionate interest of a stockholder in the
corporation.

The right of appraisal CANNOT be exercised in cases of decrease in capital stock

since the decrease would result in returning part of the investments of the stockholders,
including dissenting stockholders.

In Cases of Incurring, Creating or Increasing Bonded Indebtedness

The appraisal right CANNOT be exercised by dissenting stockholders when the

corporation validly incurs, creates, or increases bonded indebtedness.

To allow them to do so would drain the financial resources of the corporation, which is
contrary to the purpose for which the power is exercised, which is to raise funds for
corporate affairs.

Section 38. Power to Deny Pre-emptive Right. - All stockholders of a stock

corporation shall enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles of incorporation or
an amendment thereto: Provided, That such pre-emptive right shall not
extend to shares issued in compliance with laws requiring stock offerings or
minimum stock ownership by the public; or to shares issued in good faith
with the approval of the stockholders representing two-thirds (2/3) of the
outstanding capital stock in exchange for property needed for corporate
purposes or in payment of previously contracted debt.

Pre-emptive Right

The preferential right of shareholders to subscribe to all issues or disposition of shares

of any class in proportion to their present shareholdings. [Sec 38]

The purpose of pre-emptive right is to enable the shareholder to retain his

proportionate control in the corporation and to retain his equity in the surplus.

General Rule: All shareholders of a stock corporation have the pre-emptive right to
subscribe to all issues or disposition of shares of any class, in proportion to their
respective shareholdings.

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Exception: If such right is denied by the AOI or an amendment thereto. [Sec. 38]

Requirements

i. Approval by majority vote of the board of directors; and

ii. Ratification at a meeting by the stockholders or members representing at least

two-thirds (2/3) of the outstanding capital stock;

iii. Notice Requirement – Written notice of the proposed action and the time and
place of the meeting sent to stockholders.

Exercise of Appraisal Right

Such amendment to the AOI to deny pre-emptive right may trigger the exercise of a
dissenting stockholder of his appraisal right. This is because such amendment prevents
the dissenting stockholder from maintaining his equity interest in the corporation.

Section 39. Sale or Other Disposition of Assets. - Subject to the provisions of

Republic Act No. 10667, otherwise known as the "Philippine Competition
Act", and other related laws a corporation may, by a majority vote of its
board of directors or trustees, sell, lease, exchange, mortgage, pledge, or
otherwise dispose of its property and assets, upon such terms and conditions
and for such consideration, which may be money, stock, bonds, or other
instruments for the payment of money or other property or consideration, as
its board of directors or trustees may deem expedient.

A sale of all or substantially all of the corporation's properties and assets,

including its goodwill, must be authorized by the vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or at
least two-thirds (2/3) of the members, meeting duly called for the purpose.

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.

The determination of whether or not the sale involves all or substantially all
of the corporation's properties and assets must be computed based on its net
asset value, as shown in its latest financial statements. A sale or other

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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 of which it was
incorporated.

Written notice of the proposed action and of the time and place for the
meeting shall be addressed to stockholders or members at their places of
residence as shown in the books of the corporation and deposited to the
addressee in the post office with postage prepaid, served personally, or when
allowed by the bylaws or done with the consent of the stockholder, sent
electronically: Provided, That any dissenting stockholder may exercise the
right of appraisal under the conditions provided in this Code.

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
the corporation or if the proceeds of the sale or other disposition of such
property and assets shall be appropriated for the conduct of its remaining
business.

Power to Sell or Dispose Corporate Assets

A corporation may sell, lease, exchange, mortgage, pledge, or otherwise dispose of its
property and assets:

(1) For such consideration as its board of directors or trustees may deem expedient,
which may be:

a. Money
b. Stocks
c. Bonds, or
d. Other instruments for the payment of money or
e. Other property or consideration;

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(2) Subject to the provisions of Republic Act No. 10667, otherwise known as
“Philippine Competition Act”, and other related laws.
Requirements

(1) Vote of at least a majority of the directors or trustees;

(2) Vote of the stockholders representing at least two- thirds (2/3) of the
outstanding capital stock, or at least two-thirds (2/3) of the members,
in a stockholders’ or members’ meeting duly called for the purpose;

(3) Notice Requirement – Written notice of the proposed action and of the time
and place for the meeting shall be addressed to stockholders or members.

Where only the approval of a quorum of the BOD/T is required

i. If the sale or disposition is necessary in the usual and regular course of

business of the corporation; or

ii. If the proceeds of the sale will be appropriated for the conduct of its
remaining business; or

iii. If the transaction does not cover all or substantially all of the assets. [Sec.
39]

Exercise of Appraisal Right

Any stockholder who disagrees from the sale, lease, exchange, mortgage, pledge and
any other disposition may exercise his appraisal right. [Sec. 39]

Section 40. Power to Acquire Own Shares. - Provided, That the corporation
has unrestricted retained earnings in its books to cover the shares to be
purchased or acquired, a stock corporation shall have the power to
purchased or acquired, a stock corporation shall have the power to purchase
or acquire its own shares for a legitimate corporate purpose or purposes,
including the following cases:

(a) To eliminate fractional shares arising out of stock dividends;

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(b) To collect or compromise an indebtedness to the corporation, arising out

of unpaid subscription, in a delinquency sale, and to purchase delinquent
shares sold during said sale; and

(c) To pay dissenting or withdrawing stockholders entitled to payment for

their shares under the provisions of this Code.

Power to Acquire Its Own Shares

A stock corporation shall have the power to purchase or acquire its own shares for a
legitimate corporate purpose/s. This corporate power does not need
shareholder’s approval. Discretion solely rests on the board, subject to the
existence of unrestricted retained earnings (“URE”) and for a legitimate corporate
purpose/s. [Sec. 40]

Unrestricted Retained Earnings

This is defined as the amount which is:

(1) The accumulated profits and gains realized out of the normal and continuous
operations of the company AFTER deducting therefrom:

a. Distributions to stockholders and

b. Transfers to capital stock or other accounts, and

(2) NOT appropriated by its Board of Directors for corporate expansion projects or
programs;

(3) NOT covered by a restriction for dividend declaration under a loan agreement;
and

(4) NOT required to be retained under special circumstances obtaining in the

corporation such as when there is a need for a special reserve for probable
contingencies. [SEC Memorandum Circular No. 11-08, (December 5, 2008)]

General Rule: The corporation may only acquire its own stocks in the presence of
URE. [Sec. 40]

Exceptions:

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a. Redeemable shares may be acquired even without surplus profit for as long as it
will not result to the insolvency of the corporation;

b. In cases that the corporation conveys its stocks in payment of a debt;

c. In a Close corporation, a stockholder may demand the payment of the fair value of
shares regardless of existence of retained earnings for as long as it will not result
to the insolvency of the corporation.

Section 41. 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, 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 outstanding
capital stock, or by at least two-thirds (2/3) of the members in the case of
non-stock corporations at a meeting duly called for the purpose. Notice of
the proposed investment and the time place of residence as shown in the
books of the corporation and deposited to the addressee in the post office
with the postage prepaid. Served personally, or sent electronically in
accordance with the rules and regulations of the Commission on the use of
electronic data message, when allowed by the bylaws or done with the
consent of the stockholders: 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.

Power to Invest Corporate Funds in Another Corporation or Business

General Rule: The corporation is not allowed to engage in a business different from
those enumerated in its AOI.

Exception: The purpose will be amended to include the desired business activity
among its secondary purpose.

Rules in case a corporation wants to invest in an undertaking

 Investment of a corporation in a business which is in line with its primary

purpose requires only the approval of the board.

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 Investment of assets for any of its secondary purposes requires the prior
approval of its shareholders/members.

 If the investment is outside the purpose/s for which the corporation was
organized,
Articles of Incorporation must be amended first, otherwise it will be an
Ultra Vires act.

Requirements

i. Approval by majority vote of the board of directors or trustees; and

ii. Ratification at a meeting by the stockholders or members representing at least

two-thirds (2/3) of the outstanding capital stock or of its members;

iii. Notice Requirement – Written notice of the proposed action and the time and
place of the meeting sent to stockholders or members.

Exercise of Appraisal Right

Any stockholder who disagrees from the investment of corporate funds in another
corporation or business may exercise his appraisal right.

Section 42. 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, 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 be first be applied to the unpaid
balance on the subscription plus costs and expenses, while stock holders
until their unpaid subscription is fully paid: Provided, further, That no stock
dividend shall be issued without the approval of stockholders representing at
least two-thirds (2/3)of the outstanding capital stock at a regular or special
meeting duly called for the purpose.

Stock corporations are prohibited from restraining surplus profits in excess

of one hundred percent (100%} of their paid-in capital stock, except: (a)
when justified by the definite corporate expansion projects or programs
approved by the board of directors; or (b) when the corporation is prohibited

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under any loan agreement with financial institutions or creditors, whether

local or foreign, from declaring dividends without their consent, and such
consent has not yet been secured; or (c) 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.
Power to Declare Dividends

Requirements

i. Must be distributed out of URE;

ii. Payable in cash, in property, or in stock to all shareholders on the basis of

outstanding stock held by them; and

iii. Resolution by the Board.

Additional requirement for stock dividend

Approval of the 2/3 shareholders representing the outstanding capital stock at a

regular/special meeting called for that purpose

Prohibition imposed by law on UREs of a stock corporation

General Rule: Stock corporations are prohibited from retaining surplus profits in
excess of 100% of their paid-in capital stock.

Exceptions:

a. When justified by definite corporate expansion projects or programs approved by

the BOD;

b. When allowed under any loan agreement with any financial institution or creditor
from declaring dividends provided there is consent by the latter; or

c. When it can be clearly shown that such retention is necessary under special
circumstances.

Note: In case a corporation unjustifiably retains surplus profits in excess of one hundred
(100%) percent of the paid-in accumulated capital, it will be liable for Improperly
Accumulated Earnings Tax (IAET) equal to 10% of the improperly accumulated taxable
income. [Sec. 29 (A), NIRC]

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Moreover, it will also be liable to pay a penalty imposed by the SEC. [SEC Memo. Circ. No.
6, s. 2005]

Forms of Dividends

i. Cash - Any cash dividend due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus cost and expenses. [Sec. 42]

ii. Stock - Stock dividends shall be withheld from the delinquent stockholder until
his unpaid subscription is fully paid; Stock dividends cannot be issued to a person
who is not a stockholder in payment of services rendered.

iii. Property - Stockholders are entitled to dividends pro-rata based on the total
number of shares and not on the amount paid on shares.

Section 43. Power to Enter into Management Contract. - No corporation shall

conclude a management contract with another corporation unless such
contract is approved by the board of directors and by the 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, or both the
managing and the managed corporation, at a meeting duly called for the
purpose: Provided, That (a) 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 (b)
where a majority if 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.

These shall apply to any contract whereby a corporation undertakes to

manage or operate all or substantially all of the called services contracts,
operating agreements or otherwise: Provided, however, That such service
contracts or operating agreements which relate to the exploration,
development exploitation or utilization of natural resources may entered into
such periods as may be provided by the pertinent laws or regulations.

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No management contracts shall be entered into for period longer that five (5)
years for any one term.

Management Contract

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.

This refers only to a management contract with another corporation and does not apply
to management contracts entered into by a corporation with natural persons. Corollary
to this, management contract with a natural person need not comply with the requisites
of Sec. 43.

Period of every management contract

General Rule: No management contract shall be entered into for a period longer than
5 years for any one term.

Exception: Service contracts or operating agreements which relate to exploration,

development, exploitation or utilization of natural resources may be entered into for
such periods as may be provided in the pertinent laws and regulations.

Requirements

(1) Approval by majority vote of the BOD of both the managing and the managed
corporation;

(2) Approval by shareholders owning at least the majority of the outstanding

capital stock or at least a majority of the members of both the managing
and the managed corporation;

Note: However, the contract must be approved by 2/3 of stockholders

owning outstanding capital stock/members of the managed corporation
when:

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i. Stockholders representing the same interest of both the managing and

managed corporations own more than 1/3 of the total outstanding capital
stock entitled to vote of the managing corporation (Interlocking
stockholders); or

ii. A majority of the members of the BOD of the managing corporation also
constitute a majority of the BOD of the managed corporation (Interlocking
directors).

For the managed corporation: There is a need for such ratification as such contract is a
deviation from the principle that corporate affairs shall be managed by the BOD.

For the managing corporation: There is a need for such ratification as such contract is a
deviation from the principle that the BOD would devote their time and resources for the
affairs of the corporation.

Section 44. Ultra Vires Acts of the Corporations. - No corporation shall

possess or exercise corporate powers other than those conferred by this
Code or by its articles of incorporation and except as necessary or incidental
to the exercise of the powers conferred.

Ultra Vires Acts

Those acts which a corporation is not empowered to do or perform because they are
outside or beyond the express and implied powers conferred by its Articles of
Incorporation or by the Revised Corporation Code, or not necessary or incidental to the
exercise of the powers so conferred. [Sec. 44]

Types of Ultra Vires Acts

a. Acts done beyond the powers of the corporation as provided in the law or its
articles of incorporation;

b. Ultra Vires acts of officers and not of the corporation;

c. Acts or contracts, which are per se illegal as being contrary to law.

Consequences of Ultra Vires Acts

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 Business Laws and Regulations
LAW 202

Ultra vires acts, which are per se illegal are generally void.

While ultra vires acts which are not illegal but are within the scope of the articles of
incorporation, are merely voidable and may become binding and enforceable when
ratified by stockholders.

Consequences of Ultra Vires Acts with respect to contracts

a. Executed contract – courts will not set aside or interfere with such contracts;

b. Executory contracts – no enforcement even at the suit of either party (void

and unenforceable);

c. Partly executed and partly executory – principle of “no unjust enrichment

at the expense of another” shall apply;

d. Executory contracts apparently authorized but Ultra Vires – the principle

of estoppel shall apply.

Remedies in case of Ultra Vires Acts

A. State

i. Dissolution of the corporation thru a quo warranto proceeding;

ii. Injunction;
iii. Suspension or revocation of the certificate of registration by the SEC.

B. Stockholders

i. Injunction;
ii. Derivative suit;
iii. Ratification. (except when a 3rd party is prejudiced or the act is illegal)

C. Creditors - Nullification of contract in fraud of creditors.

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