Powers of Corporations

This post will discuss the different powers of corporations including express, implied, and inherent powers.

Kinds of Powers

  • Express powers – Granted by law, Corporation Code, and its Articles of Incorporation or Charter, and administrative regulations
    • General Powers (RCC Sec. 35)
    • Specific Powers (RCC Sec. 36-43)
  • Inherent/incidental – are deemed to be within the capacity of corporate entities.
  • Implied/necessary – Exists as a necessary consequence of the exercise of the express powers of the corporation or the pursuit of its purposes as provided for in the Charter

Inherent Powers of Corporations Examples

  • Power of succession
  • Power to have a corporate name
  • Power to adopt a corporate seal
  • Power to acquire, hold or dispose of property as its business may reasonably require
  • Power to adopt and amend its bylaws

Implied Powers of Corporations Examples

  • Acts in the usual course of business
  • Acts to protect debts due to the corporation
  • Acts that involve embarking on a different line of business
  • Acts designed to protect or aid employees
  • Acts to increase the business of the corporation

General Powers of Corporations

  1. To sue and be sued in its corporate name;
  2. To have perpetual existence unless the certificate of incorporation provides otherwise;
  3. To adopt and use a corporate seal;
  4. To amend its articles of incorporation in accordance with the provisions of this Code;
  5. To adopt bylaws, not contrary to law, morals or public policy, and to amend or repeal the same in accordance with this Code;
  6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code, and to admit members to the corporation if it is a nonstock corporation;
  7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution
  8. To enter into a partnership, joint venture, merger, consolidation, or any other commercial agreement with natural and juridical persons;
  9. 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;
  10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers, and employees; and
  11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation.

Specific Powers of Corporations

Power to Extend or Shorten Corporate Term (Sec 36)

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 stockholders or members at their respective place of residence as shown in the books of the corporation and must either 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 the corporate term, a dissenting stockholder may exercise the right of appraisal under the conditions provided in this Code.

Sec. 11 – A corporate term for a specific period may be extended or shortened by amending the articles of incorporation: Provided, That no extension may be made earlier than three (3) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Commission: Provided, further, That such extension of the corporate term shall take effect only on the day following the original or subsequent expiry date(s).

Power to Increase or Decrease Capital Stock; Incur, Create or Increase Bonded Indebtedness (Sec. 37)

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 and 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

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.

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.

Power to Deny Pre-emptive Right (Sec. 38)

All stockholders of a stock corporation shall enjoy preemptive 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 preemptive 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 a previously contracted debt.

What is pre‐emptive right?

It is the preferential right of shareholders to subscribe to all issues or disposition of shares of any class in proportion to their present shareholdings.

What is the purpose of pre‐emptive right?

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

Is there pre‐emptive right on the re‐issuance of treasury shares?

Yes. When a corporation reacquires its own shares which thereby become treasury shares, all shareholders are entitled to pre‐emptive right when the corporation reissues or sells these treasury shares.

May pre‐emptive right be waived by the stockholder?

Yes when the stockholder fails to exercise his pre‐emptive right after being notified and given an opportunity to avail of such right.

Is the pre‐emptive right of a stockholder transferable?

Yes, unless there is an express restriction in the AOI

Sale or Other Disposition of Assets (Sec. 39)

Subject to the provisions of Republic Act No. 10667, otherwise known as “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, stocks, bonds, or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient.

A sale of all or substantially all of the corporation’s properties and assets, including its goodwill, must be authorized by the 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.

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 disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated.

Power to Acquire Own Shares (Sec. 40)

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 purchase or acquire its own shares for a legitimate corporate purpose or purposes, including the following cases:

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

Conditions in order to acquire own shares

  • Its capital is not thereby impaired
  • A legitimate and proper corporate objective is advanced
  • The condition of corporate affairs warrants it
  • The transaction is designed and carried out in good faith
  • It is intended and there results no undue advantage to a few favored stockholders at the expense of the remainder
  • The rights of creditors are not jeopardized
  • There must be unrestricted retained earnings to acquire the same

Power to Invest Corporate Funds in Another Corporation or Business or for Any Other Purpose (Sec. 41)

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 members in the case of nonstock corporations, at a meeting duly called for the purpose. Notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at the place 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 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 Declare Dividends (Sec. 42)

When may corporation declare dividends?

Even if there are existing profits, BOD has the discretion to determine whether dividends are to be declared.

Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid‐in capital stock.

Exceptions:

  1. Definite corporate expansion projects approved by the board of directors;
  2. The corporation is prohibited under any loan agreement with any financial institution or creditor from declaring dividends without its/his consent and such consent has not yet been secured;
  3. The retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies.

What if there is a wrongful or illegal declaration of dividends?

The Board of Directors is liable. The stockholders should return the dividends to the corporation (solutio indebiti).

What are the sources of dividends?

Dividends can only be declared out of actual and bona fide unrestricted retained earnings. Dividends can be declared out of capital in the following instances:

  1. Dividends from investments wasting assets corporation;
  2. Liquidating dividends

Distinguish cash and stock dividends

Cash DividendsStock Dividends
Part of the general fundPart of capital
Results in cash outlayNo cash outlay
Not subject to levy by corporate creditorsOnce issued, can be levied by corporate creditors because they’re part of corporate capital
Declared only by the board of directors at its discretion (the majority of the quorum only, not the majority of all the board)Declared by the board with the concurrence of the stockholders representing at least 2/3 of the outstanding capital stock at a regular/special meeting
Does not increase the corporate capitalCorporate capital is increased
Its declaration creates a debt from the corporation to each of its stockholdersNo debt is created by its declaration
If received by an individual: subject to tax; If received by a corporation: not subject to taxNot subject to tax either received by an individual or a corporation
Cannot be revoked after announcementCan be revoked despite announcement but before issuance
Applied to the unpaid balance of delinquent sharesCan be withheld until payment of the unpaid balance of delinquent shares

May stock dividends be issued to a person who is not a stockholder in payment of services rendered?

No. Only stockholders are entitled to payment of stock dividends.

Power to Enter into Management Contract (Sec. 43)

No corporation shall conclude a management contract with another corporation unless such contract is approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a nonstock corporation, of 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 of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a nonstock corporation.

These shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations.

No management contract shall be entered into for a period longer than five (5) years for any one (1) term.

Ultra Vires Acts of Corporations (Sec. 44)

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.

  • Not Illegal – Voidable
  • Illegal – Void