Corporate Law Notes: Historical Background (01/21)

1. Philippine Corporate Law: A sort of codification of American Corporate Law


2. Corporation Law (Act. No 1459) - Effective April 1 1906


3. The Corporation Code (B.P. 68) - Effective May 1, 1980 (adopted the old, clarified the obligations of BOD, Trustees and officers and added provisions on closed corporations)


4. Proper Treatment of Philippine Corporate Law - adopts with changing times (i.e. commerce)

Corporate Law Case Digest: Palting v. San Jose Petroleum (1966)

Palting v. San Jose Petroleum

G.R. No. L-14441      December 17, 1966

Lessons Applicable: 

• Up to what level do you apply the grandfather rule? (Corporation Law)
• Pre-Corporation Code (Corporation Law)

FACTS:

• September 7, 1956: San Jose Petroleum (SJP) filed with the Philippine Securities and Exchange Commission a sworn registration statement, for the registration and licensing for sale in the Philippines Voting Trust Certificates representing 2,000,000 shares of its capital stock of a par value of $0.35 a share, at P1.00 per share
• It was alleged that the entire proceeds of the sale of said securities will be devoted or used exclusively to finance the operations of San Jose Oil Company, Inc. (Domestic Mining Oil Company)
• express condition of the sale that every purchaser of the securities shall not receive a stock certificate, but a registered or bearer-voting-trust certificate from the voting trustees James L. Buckley and Austin G.E. Taylor
• June 20, 1958: SJP amended Statement increasing 2,000,000 to 5,000,000, at a reduced offering price of from P1.00 to P0.70 per share
• Pedro R. Palting together with other investors in the share of SJP filed with the SEC an opposing the registration and licensing of the securities on the grounds that:

1. tie-up between the issuer, SJP, a Panamanian corp. and San Jose Oil (SJO), a domestic corporation, violates the Constitution of the Philippines, the Corporation Law and the Petroleum Act of 1949
2. issuer has not been licensed to transact business in the Philippines
3. sale of the shares of the issuer is fraudulent, and works or tends to work a fraud upon Philippine purchasers
4.  issuer as an enterprise, as well as its business, is based upon unsound business principles

 ISSUES: 

1. W/N Pedro R. Palting, as a "prospective investor" in SJP's securities, has personality to file -YES
2. W/N the tie-up violates the Constitution of the Philippines, the Corporation Law and the Petroleum Act of 1949 (Up to what level do you apply the grandfather rule?) - YES

HELD: motion of respondent to dismiss this appeal, is denied and the orders of the Securities and Exchange Commissioner, allowing the registration of Respondent's securities and licensing their sale in the Philippines are hereby set aside. The case is remanded to the Securities and Exchange Commission for appropriate action in consonance with this decision.

1. YES

• any person (who may not be "aggrieved" or "interested" within the legal acceptation of the word) is allowed or permitted to file an opposition to the registration of securities for sale in the Philippines
• eliminating the word "aggrieved" appearing in the old Rule, being procedural in nature, and in view of the express provision of Rule 144 that the new rules made effective on January 1, 1964 shall govern not only cases brought after they took effect but all further proceedings in cases then pending, except to the extent that in the opinion of the Court their application would not be feasible or would work injustice, in which event the former procedure shall apply

*amiscus curae -stranger to the case

    2.  YES

• SJO (domestic)- 90% owned by SJP (foreign) wholly owned by Pantepec Oil Co. and Pancoastel Petroleum, both organized and existing under the laws of Venezuela
• CANNOT go beyond the level of what is reasonable
• SJO is not a party and it is not necessary to do so to dispose of the present controversy. 
• SJP actually lost $4,550,000.00, which was received by SJO
• Articles of Incorporation of SJP is unlawful:

1. the directors of the Company need not be shareholders;
2. that in the meetings of the board of directors, any director may be represented and may vote through a proxy who also need not be a director or stockholder; and
3. that no contract or transaction between the corporation and any other association or partnership will be affected, except in case of fraud, by the fact that any of the directors or officers of the corporation is interested in, or is a director or officer of, such other association or partnership, and that no such contract or transaction of the corporation with any other person or persons, firm, association or partnership shall be affected by the fact that any director or officer of the corporation is a party to or has an interest in, such contract or transaction, or has in anyway connected with such other person or persons, firm, association or partnership; and finally, that all and any of the persons who may become director or officer of the corporation shall be relieved from all responsibility for which they may otherwise be liable by reason of any contract entered into with the corporation, whether it be for his benefit or for the benefit of any other person, firm, association or partnership in which he may be interested.

Corporate Law Case Digest: Valle Verde Country Club v. Africa (2009)

G.R. No. 151969      September 4, 2009

Lessons Applicable: Election of Directors; Vacancy in the Board (Corporate Law)

FACTS:

• February 27, 1996: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa were  elected as BOD during the Annual Stockholders’ Meeting of  petitioner Valle Verde Country Club, Inc. (VVCC)
• 1997 - 2001: Requisite quorum could not be obtained so they continued in a hold-over capacity
• September 1, 1998: Dinglasan resigned, BOD still constituting a quorom elected Eric Roxas (Roxas) 
• November 10, 1998: Makalintal resigned  
• on March 6, 2001: Jose Ramirez (Ramirez) was elected by the remaining BOD
• Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas and Ramirez as members of the VVCC Board with the Securities and Exchange Commission (SEC) and the Regional Trial Court (RTC) as contrary to:
• Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for 1 year until their successors are elected and qualified. 
• Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office. xxx. 
• Makalintal's term should have expired after 1996 there being no unexpired term.  The vacancy should have been filled by the stockholders in a regular or special meeting called for that purpose
• RTC: Favored Africa - Ramirez as Makalintal's replacement = null and void
• SEC:  Roxas as Vice hold-pver director of Dinglasan = null and void
• VVCC appealed in SC for certiorari being partially contrary to law and jurisprudence

ISSUES:

1.     W/N there is an unexpired term - NO

2.     W/N the remaining directors of a corporation’s Board, still constituting a quorum, can elect another director to fill in a vacancy caused by the resignation of a hold-over director. - NO

HELD: Petition Denied. RTC Affirmed.

1.     NO 

• “term”  time during which the officer may claim to hold the office as of right
• not affected by the holdover
• fixed by statute and it does not change simply because the office may have become vacant, nor because the incumbent holds over in office beyond the end of the term due to the fact that a successor has not been elected and has failed to qualify.
• “tenure” 
• term during which the incumbent actually holds office.  
• Section 23 of the Corporation Code: term of BOD only 1 year - fixed and has expired (1 yr after 1996)

    2.  NO

• underlying policy of the Corporation Code is that the business and affairs of a corporation must be governed by a board of directors whose members have stood for election, and who have actually been elected by the stockholders, on an annual basis. Only in that way can the directors' continued accountability to shareholders, and the legitimacy of their decisions that bind the corporation's stockholders, be assured. The shareholder vote is critical to the theory that legitimizes the exercise of power by the directors or officers over properties that they do not own.
• theory of delegated power of the board of directors
• Section 29 contemplates a vacancy occurring within the director’s term of office (unexpired)
• vacancy caused by Makalintal’s leaving lies with the VVCC’s stockholders, not the remaining members of its board of directors

Corporate Law Case Digest: Filipinas Port v. Go (2007)

G.R. No. 161886             March 16, 2007
Lessons Applicable: Rationale for "Centralized Management" Doctrine

FACTS:

• Sept 4 1992: Eliodoro C. Cruz, Filport’s president from 1968-1991, wrote a letter to the corporation’s BOD questioning the creation and election of the following positions with a monthly remuneration of P13,050.00 each.  Cruz requested the board to take necessary action/actions to recover from those elected to the aforementioned positions the salaries they have received.
• Jun 4 1993: Cruz, purportedly in representation of Filport and its stockholders, among which is herein co-petitioner Mindanao Terminal and Brokerage Services, Inc. (Minterbro), filed with the SEC a derivative suit against Filport's BOD for acts of mismanagement detrimental to the interest of the corporation and its shareholders at large.
• Cruz prayed that the BOD be made to pay Filport, jointly and severally, the sums of money variedly representing the damages incurred as a result of the creation of the offices/positions complained of and the aggregate amount of the questioned increased salaries.
• RTC: BOD have the power to create positions not in the by-laws and can increase salaries.  But Edgar C. Trinidad under the third and fourth causes of action to restore to the corporation the total amount of salaries he received as assistant vice president for corporate planning; and likewise ordering Fortunato V. de Castro and Arsenio Lopez Chua under the fourth cause of action to restore to the corporation the salaries they each received as special assistants respectively to the president and board chairman. In case of insolvency of any or all of them, the members of the board who created their positions are subsidiarily liable.
• Appealed: creation of the positions merely for accommodation purposes - GRANTED

ISSUES: 

1. W/N there was mismanagement - NO
2. W/N there is a proper derivative suit - YES

HELD: CA Affirmed

1. NO

• Section 35 of the Corporation Code, the creation of an executive committee (as powerful as the BOD) must be provided for in the bylaws of the corporation
• Notwithstanding the silence of Filport’s bylaws on the matter, we cannot rule that the creation of the executive committee by the board of directors is illegal or unlawful. One reason is the absence of a showing as to the true nature and functions of executive committee 
• But even assuming there was mismanagement resulting to corporate damages and/or business losses, respondents may not be held liable in the absence of a showing of bad faith in doing the acts complained of. ("dishonest purpose","some moral obliquity","conscious doing of a wrong", "partakes of the nature of fraud") 
• determination of the necessity for additional offices and/or positions in a corporation is a management prerogative which courts are not wont to review in the absence of any proof that such prerogative was exercised in bad faith or with malice

      2. YES

• Besides, the requisites before a derivative suit can be filed by a stockholder: - present
  a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the number of his shares not being material; - a stockholder of Filport 
  b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and
    - he wrote a letter 
  c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit. - wrong against the stockholders of the corporation generally

Negotiable Instruments Case Digest: PNB v. National City Bank New York (1936)

G.R. No. L-43596  October 31, 1936

Lessons Applicable: Forgery (Negotiable Instruments)

FACTS:

• April 7 & 9, 1933: unknown person or persons purchased tires and paid Motor Service Company, Inc.(MSCI) checks purporting to have been issued by the "Pangasinan Transportation Co., Inc. (Pantranco) by J. L. Klar, Manager and Treasurer" against PNB and in favor of International Auto Repair Shop. 
• MSCI indorsed for deposit at the National City Bank of New York and MSCI was accordingly credited with the amounts thereof, or P144.50 and P215.75
• April 8 & 10, 1933: Checks were cleared and PNB credited the National City Bank 
• PNB found out that the signatures of J. L. Klar, Manager and Treasurer were forged and demanded from MSCI and National City Bank New York
• PNB filed the case in the municipal court of Manila against National City Bank and MSCI.
• Pantranco objected to have the proceeds of said check deducted from their deposit.
• RTC: Favored PNB
• MSCI appealed

ISSUES: 

1. W/N acceptance = payment
2. W/N law or business practice prevents the presentation of checks for acceptance before they are paid.
3. W/N MSCI was negligent and therefore PNB should recover
4. W/N the drawee bank should be allowed recovery, as MSCI's position would not become worse than if the drawee had refused the payment of these checks upon their presentation.

HELD: Affirmed

1. NO.

• A check is a bill of exchange payable on demand and only the rules governing bills of exchange payable on demand are applicable to it, according to section 185 of the Negotiable Instruments Law
• Acceptance is a step unnecessary for bills of exchange payable on demand (sec. 143)
• Acceptance implies, subsequent negotiation of the instrument
• From the moment a check is paid it is withdrawn from circulation. 
• That the payment of a check does not include or imply its acceptance in the sense that this word is used in section 62 of the Negotiable Instruments Law
• Payment (in checks) - final act which extinguishes a bill. 
• Acceptance (in certified checks) - a promise to pay in the future and continues the life of the bill.

     2. NO

•  section 187, which provides that "where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance", and it is then that the warranty under section 62 exists
• That if a drawee bank pays a forged check which was previously accepted or certified by the said bank it cannot recover from a holder who did not participate in the forgery and did not have actual notice thereof

     3. YES.

• Circumstances:
• check number 637023-D was dated April 6, 1933, whereas check number 637020-D and is dated April 7, 1933. (later check had prior number)
• accepted the 2 checks from unknown persons
• check 637023-D was indorsed by a subagent of the agent of the payee, International Auto Repair Shop and cross generally
• Section 23 of the Negotiable Instruments Act provides that "when a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.
• PNB did not warrant to MCSI the genuineness of the checks in question, by its acceptance thereof, nor did it perform any act which would have induced MSCI to believe in the genuineness
• PNB is NOT precluded from setting up the forgery

     4. NO.

• A drawee of a check, who is deceived by a forgery of the drawer's signature may recover the payment back, unless his mistake has placed an innocent holder of the paper in a worse position than he would have been in if the discover of the forgery had been made on presentation.
• MSCI has lost nothing by anything which the drawee has done. It had in its hands some forged worthless papers. It did not purchase or acquire these papers because of any representation made to it by the drawee

Court concluded:

1. That where a check is accepted or certified by the bank on which it is drawn, the bank is estopped to deny the genuineness of the drawer's signature and his capacity to issue the instrument;

2. That if a drawee bank pays a forged check which was previously accepted or certified by the said bank it cannot recover from a holder who did not participate in the forgery and did not have actual notice thereof;

3. That the payment of a check does not include or imply its acceptance in the sense that this word is used in section 62 of the Negotiable Instruments Law;

4. That in the case of the payment of a forged check, even without former acceptance, the drawee can not recover from a holder in due course not chargeable with any act of negligence or disregard of duty;

5. That to entitle the holder of a forged check to retain the money obtained thereon, there must be a showing that the duty to ascertain the genuineness of the signature rested entirely upon the drawee, and that the constructive negligence of such drawee in failing to detect the forgery was not affected by any disregard of duty on the part of the holder, or by failure of any precaution which, from his implied assertion in presenting the check as a sufficient voucher, the drawee had the right to believe he had taken;

6. That in the absence of actual fault on the part of the drawee, his constructive fault in not knowing the signature of the drawer and detecting the forgery will nor preclude his recovery from one who took the check under circumstances of suspicion and without proper precaution, or whose conduct has been such as to mislead the drawee or induce him to pay the check without the usual scrutiny or other precautions against mistake or fraud;

7. That on who purchases a check or draft is bound to satisfy himself that the paper is genuine, and that by indorsing it or presenting it for payment or putting it into circulation before presentation he impliedly asserts that he performed his duty;

8. That while the foregoing rule, chosen from a welter of decisions on the issue as the correct one, will not hinder the circulation of two recognized mediums of exchange by which the great bulk of business is carried on, namely, drafts and checks, on the other hand, it will encourage and demand prudent business methods on the part of those receiving such mediums of exchange;

9. That it being a matter of record in the present case, that the appellee bank in no more chargeable with the knowledge of the drawer's signature than the appellant is, as the drawer was as much the customer of the appellant as of the appellee, the presumption that a drawee bank is bound to know more than any indorser the signature of its depositor does not hold;

10. That according to the undisputed facts of the case the appellant in purchasing the papers in question from unknown persons without making any inquiry as to the identity and authority of the said persons negotiating and indorsing them, acted negligently and contributed to the appellee's constructive negligence in failing to detect the forgery;

11. That under the circumstances of the case, if the appellee bank is allowed to recover, there will be no change of position as to the injury or prejudice of the appellant.

Corporate Law Sales Case Digest: Manila Metal Container Corp. v. PNB (2006)

G.R. No. 166862  December 20, 2006 Lessons Applicable: Doctrine of Centralized Management: Powers of Board of Directors (Corporate Law) Doctrine of Centralized Management (Corporate Law) Price (Sales) Earnest Money (Sales) FACTS: Manila Metal Corp. executed a real estate mortgage (TCT. 32098) as a security for its loan from PNB amounting to 900,000 php, later on 1,000,000 php and 653,000 php Aug. 5, 1982: PNB filed a petition for extrajudicial foreclosure for the property to be sold at a public auction 911,532.21 php (outstanding as of June 30) + interest + attorney's fees Sept. 2, 1982: PNB won the public auction at 1,000,000 php Feb. 17, 1983: Certificate of Sale was issued and registered at the Registry of Deeds and was annotated at the dorsal portion of the title (Redeemable until Feb 17,1983) Petitioner requested 1 year extension until Feb 17,1984 but was rejected by PNB saying it is their policy not to accept partial redemption Jun. 1,1984: Since petitioner failed to redeem, TCT. 32098 was cancelled and a new title was issued in favor of PNB Meanwhile, Special Assets Management Department (SAMD) had prepared a statement of account as of Jun 25,1984 amounting to 1,574,560.47 php (bid price + interest + advances of insurance premiums + advances on relaty taxes + reg. exp. +misc. exp + piblication cost) Petitioner deposited 725,000 php as deposit to repurchase and was issued an O.R. PNB management rejected the recommendation of SAMD and demanded that petitioner pay the markt value of 2,660,000 php. Jun 24, 1984: PNB informed petitioner that its B.O.D had agreed to accept its offer to purchase but at 1,931,389.53 less the 725,000 php.   PNB President did not conform to the letter but merely indicated that he has received it.   Petitioner rejected this since PNB has already accepted its downpayment so it can no longer increase the price.   PNB also rejected petitioners payment for the balance. Petitioner filed a complaint against PNB for Annulment of Mortgage and Mortgage Foreclosure, Delivery of Title, or Specific Performance with Damages CA affirmed RTC: Favored PNB and demanded that it refund the 725,000 php (no sale because no meeting of the minds in terms of price) Lot was later transferred to its PNB President Bayani Gabriel Petitioner filed a petition for certiorari ISSUE: W/N the statement of account by SAMD is only a recommendation subject to the approval of the BOD - YES W/N there was a contract of sale - NO W/N earnest money establishes a contract of sale - NO HELD:  Denied.  Costs Against Petitioner. YES Art. 1318 of NCC: no contract unless the following requisites concur:  Consent of the contracting parties;  Object certain which is the subject matter of the contract; Cause of the obligation which is established The fixing of the price can never be left to the decision of one of the contracting parties. But a price fixed by one of the contracting parties, if accepted by the other, gives rise to a perfected sale. When there is merely an offer by one party without acceptance of the other, there is no contract.      2. NO Section 23 of the Corporation Code: corporate powers of all corporations shall be exercised by the board of directors. Just as a natural person may authorize another to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it. Thus, contracts or acts of a corporation must be made either by the board of directors or by a corporate agent duly authorized by the board. Absent such valid delegation/authorization, the rule is that the declarations of an individual director relating to the affairs of the corporation, but not in the course of, or connected with the performance of authorized duties of such director, are held not binding on the corporation. a corporation can only execute its powers and transact its business through its: Board of Directors  officers and agents when authorized by: a board resolution;or  its by-laws     3. NO ART. 1482. Whenever earnest money is given in a contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract The deposit of P725,000 was accepted by PNB on the condition that the purchase price is still subject to the approval of the PNB Board Absent proof of the concurrence of all the essential elements of a contract of sale, the giving of earnest money cannot establish the existence of a perfected contract of sale.

Corporate Law Notes: Corporate Powers and Authority (09/21)

TITLE IV

POWERS OF CORPORATIONS

Sec. 2. Corporation defined. - A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.

Theory of Concession -corporation mere creature and completely within the control of State

Corporate Powers and Capacity

Art. 46. Juridical persons may acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of their organization. (Civil Code)

Classification of Corporate Powers: (Pilipinas Looan Company v. Sec. (2001))

1. Expressed - expressly granted to it by:

• law - Corporation Code

Enumerated Powers (Secs. 36)

Sec. 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity:

1. To sue and be sued in its corporate name (to sue through its BOD)


2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation


3. To adopt and use a corporate seal (no longer necessary)


4. To amend its articles of incorporation in accordance with the provisions of this Code


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


6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation;


7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution;


8. To enter into merger or consolidation with other corporations as provided in this Code;


9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity


10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees


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.

Extend or Shorten Corporate Term (Secs. 37 and 81 [1])

Sec. 37. Power to extend or shorten corporate term.- A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least 2/3 of the outstanding capital stock or members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code.

Sec. 81. Instances of appraisal right. – Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence

Power to extend (State to granted only for a limited period of time) v. Power to shorten (inherent right of the corporation - only integral clause in the AIC, for practical purposes)

Appraisal Right: Art. 37 (only extension of term allowed to have appraisal right) > Art. 81 [1]

NOTE: Since it involves amendment in the AI so 2/3 of outstanding capital stock

Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, 2/3 of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally.

A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth:

(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least 25% of such increased capital stock has been subscribed and that at least 25% of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to 25% of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least 2/3 of the members in a meeting duly called for the purpose.

Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof. 

Power to Increase or Decrease Capital Stock (Secs. 38) (NOT inherent in the corp. bec. concerns item req. in AIC (Ammend AIC Sec. 16) and governed by common law doctrines: trust fund doctrine and pre-emptive rights)

-Requisites:

1. Majority Vote of BOD; and


2. 2/3 Outstanding Capital Stock (at a stockholders' meeting duly called for the purpose

Appraisal Right Issues - No right of appraisal

• Increase 


• Has the potential effect of diluting proportionate interest of SH


• 2 grounds for no appraisal: (1.not prevented from selling 2.purpose to increase is to raise funds)


• Decrease


• Appraisal right = return of investment

• its articles of incorporation

     2.  Implied - may be incidental to such conferred powers and reasonably necessary to accomplish its purposes

   

     4. Incidental - may be incidental to its existence 

Ultra Vires Doctrine 

Concept

• Corporate Principle: Corporation is a creature of limited powers and CANNOT give consent beyond its powers


• Commercial Public Policy: those who deal in Good Faith (G.F.) with a corporate entity must be protected in their contractual expectations

Where Corporate Power Lodged

• Board of Directors (BOD)


• Duly authorized officers and agents (executive committee; officers or contracted managers - must be delegated/authorized for specific purpose) 

NOTE: Absent valid delegation/authorization = NOT binding on the corporation (Manila Metal Container Corp. v. PNB (2006))

Sec. 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred.

3 Types of Ultra Vires Acts: 

1. Outside of the express, implied and incidental powers of a corporation (law and laws of its organization) - classic type

Test to Determine If Act or Contract is Ultra Vires: Whether the act is  direct and immediate furtherance of the corporate business, fairly incident to the express powers and reasonably necessary to their exercise

Supervening Policies in Ultra Vires (NOT per se illegal or prohibited) is liberal because of: 

• 2 public policies:

1. Contract Law


2. Corporate Law

• Business Judgment Rule

Case: Atrium Management Corp. v. CA (2001) 

• Act of issuing the checks - within the ambit of a valid corporate act, for it was for securing a loan to finance the activities of the corporation ≠ ultra vires act - implied


• ultra vires act - committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the power conferred upon it by law 


• Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when

     1.

          a. to a patently unlawful act of the corporation

          b. for bad faith or gross negligence in directing its affairs

          c. for conflict of interest, resulting in damages to the corporation, its stockholders or other persons

     2.  He consents to the issuance of watered down stocks or who, having knowledge thereof, does not

             forthwith file with the corporate secretary his written objection thereto;

     3.  He agrees to hold himself personally and solidarily liable with the corporation; or

     4.  He is made, by a specific provision of law, to personally answer for his corporate action

     2.  Executed on behalf of the corporation WITHOUT proper authority from the Board of Directors

• BOD NOT President exercises corporate powers (Safic Alcan & Cie v. Imperial Vegetable Oil (2001))


• Contracts entered into by corporate officers beyond the scope of authority are unenforceable against the corporation UNLESS: ratified by the corporation (Woodchild Holdings, Inc v. Roxas Electric Constructions Co. (2004))

     3.  per se contrary to laws, morals, or public policy (malum in se or malum prohibitum)

General Judicial Attitude Towards the Ultra Vires Doctrine

The plea of "ultra vires" will not be allowed to prevail, whether interposed for or against a corporations when it will not advance justice but, on the contrary, will accomplish a legal wrong to the prejudice of another who acted in good faith (G.F.) (Zomer Dev. Corp. v. International Exchange Bank (2009))

Doctrine of Estoppel or Ratification of Ultra Vires Acts 

• GENERAL RULE: Acts done in excess of corporate officers' scope of authority CANNOT bind the coporation


• EXCEPTION: Ratification (National Power Corp v. Alonzo-Legasto (2004))

NOTE: Ultra Vires in 1 and 2 (merely voidable which may be enforced by performance, ratification or estoppel) v. in 3 Illegal Act (void)

Case: Pirovano v. De la Rama Steamship Co., Inc (1954)

• By ratification the infirmity of the corporate act has been obliterated thereby making it perfectly valid and enforceable. This is specially so if the donation is not merely executory but executed and consummated and no creditors are prejudice, or if there are creditors affected, the latter has expressly given their conformity