Hi guys and welcome to another episode of Attorney Job Vlogger, Law for the Everyday Layman. Today we continue with our topic on corporations and we'll be talking about the powers of corporations. So if you like my videos and you want to see more, please hit the subscribe button.
Also, please remember that this is only for educational purposes and is not a substitute for proper legal advice or for studying and understanding the law. a like on this video or any of my other videos would also be greatly appreciated okay so today we'll talk about the powers of corporations no remember that a corporation is an artificial being and as such it cannot perform physical acts no a corporation can only act through its board board of directors or through its duly authorized agents or officers and we have discussed this already in the previous episodes. So when we talk about the powers of corporations, this refers to the right or capacity of a corporation to perform all acts in furtherance of its primary purpose or secondary purpose or purposes except those acts which are forbidden by law or by the articles of incorporation under the doctrine of limited capacity under the definition of a corporation under section 2. A corporation only has powers expressly authorized by law or incident to its existence.
So a corporation has express powers as stated in Section 2. Those that are necessary or incidental to the exercise of the powers conferred as stated in Section 2 and Section 44. And those which are essential or necessary to the exercise of the express or incidental powers. or to carry out its purpose or purposes as stated in section 35k okay now express powers are easy enough to understand they are powers expressly conferred on the corporation by law and the articles so section 35 gives gives us a list now which i'll go through very quickly anyway it's a codal it's a codal provision so you can just read it now in the law to review Okay, so the powers include to sue and be sued in its corporate name, to have perpetual existence unless the certificate of incorporation provides otherwise, to adopt and use a corporate seal, to amend its articles in accordance with the law, to adopt bylaws which are not contrary to law, morals, or public policy, and to amend or repeal those bylaws in accordance with law. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with the law.
And in case of a non-stock corporation, to admit members to the corporation. Another power would be 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 lawful business of the corporation may reasonably and necessarily require, subject, of course, to the limitations prescribed by law and the Constitution.
Okay? Another power would be to enter into a partnership. Take note, ha?
The corporation can now enter into a partnership, a joint venture, merger, consolidation. or any other commercial agreement with natural and juridical persons. Take note that this is a new provision, well, a modification to the old provision. And corporations can now enter into partnerships or any other commercial agreement with natural or juridical persons. Another power would be to make reasonable donations, including those for 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. This is also a modification to the old law.
The old law formerly prohibited any corporation from giving donations in aid of any political party, no? Or candidate for purposes of partisan political activity. Now, under the current provision, only foreign corporations are prohibited.
Another power would be to establish pension, retirement, and other plans for the benefit of its directors, trusting... officers and employees and finally under section 35 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 okay and the sections 36 to 43 they give us the other express powers namely the power to extend or shorten corporate term the power to increase or decrease capital stock incur, create, or increase bonded indebtedness, the power to deny preemptive right, the power to sell or otherwise dispose of assets, the power to acquire its own shares, the power to invest corporate funds in another corporation or business or for any other purpose, the power to declare dividends, and the power to enter into management contracts. We'll talk about those more in detail later. First, let's talk about incidental powers or those powers which a corporation can exercise by the mere fact of its being a corporation or those which are necessary to corporate existence.
In other words, they are inherent in the corporation as a legal entity and they exist independently of the express powers. Some examples are the power of succession, the right to have a corporate name. to make bylaws, to sue and be sued, to acquire and hold properties for the purposes authorized in the articles, and the right to enter into contracts.
Now, implied powers are those which are reasonably necessary to exercise the express powers and to accomplish or carry out the purposes for which the corporation was formed. Under the doctrine of necessary implication, If a power that the corporation wishes to exercise is not expressly given in the law or in the articles, or if it is not incidental to the corporate existence as discussed earlier, in order to determine whether a corporation can perform that act, you have to check the articles or the law. And unless that act can be said to be a necessary implication of the power so given or conferred, then it is an unauthorized act. authorized act which is outside the scope of the powers of the corporation or in other words it is an ultra virus act and we'll talk about ultra virus acts later no so some implied powers are acts in the usual course of business no acts to protect debts owing to the corporation acts which involve embarking on a different business to collect debts out of profits acts to protect or aid employees or acts to increase business.
So how do you know if a corporation can perform a certain act? You check if it is within the express, incidental, or implied powers. The test for express powers is if it is stated in the law or in the articles and it should refer to the main business, objects, and purposes of the corporation.
A corporate act will still be valid as an exercise of an implied power. if it refers to the means and methods of attaining the objects or purposes of the corporation. The test is whether it is reasonably necessary to carry out the corporation's business.
So let's say the corporation has the power to enter into a contract. Then necessarily, the duly authorized agent will have the implied power to sign that contract. The power to enter into a contract carries with it the power to sign.
and later on to enforce the contract as the case may be provided of course it is done by the duly authorized agent or officer the acts of signing and enforcing the contract are implied from the power to enter into the contract and they don't have to be expressly stated otherwise we'll have very long articles no okay so now let's talk about some of the specific powers a corporate has the power to sue and be sued as an incident to its existence and this includes de facto corporations but not to entities which have not been incorporated at all there must have been some color of compliance no or those which have been dissolved after the expiration of the three year period to wind up those cannot sue and be sued however take note when we talk about this in the solution i'll bring it up again but take note that cases which have been have been filed within the winding of period can still continue even past the three-year period okay as long as it was filed within the winding up period we'll talk about it at the right time okay take note that since a corporation is an artificial being it cannot experience physical suffering mental anguish etc no and therefore as a general rule a corporation cannot claim moral damages However, in the case of Mambulaw Lumber, the Supreme Court in an obiter mentioned that a corporation may have a good reputation which may have been besmirched and that may serve as a ground for a claim of moral damages. This has been adopted in some cases provided, of course, the acts causing the besmirched reputation and their connection is duly proven. Otherwise, the general rule is... that a corporation is not entitled to moral damages still governs okay as for perpetual existence we have discussed that already just remember that upon incorporation the life of the corp the corporation is perpetual by default no unless of course they claim a shorter period okay The next power would be to adopt and use a corporate seal.
A seal is a device or a symbol used to identify or replace the signature of an individual or organization and to authenticate a written matter purportedly coming from such individual or organization. Or it may be the impression, yung embossed, the impression of such symbol on a document like certificates of stock. printed, embossed, whatever. So a corporation has the power to adopt and use a seal.
And the law says that the certificates of stock issued by corporations, they should be sealed with the seal of the corporation. However, some authorities believe that this is not mandatory and a corporation may exist even without a seal. Another power would be the power to acquire and convey property.
Of course, a corporation needs properties or assets to carry on its business. And according to the El Hogar case, this is to prevent the situation where corporations are compelled to conduct their business exclusively in leased offices, which will be inimical to the best interests of society. So corporations can own property, and as a consequence of ownership, they can convey or dispose of property. Subject, of course, to any limitations provided for in the law or in the constitution.
The corporation also has the power to acquire shares or securities. So it can acquire the shares or securities of other corporations, and it does not need the approval of stockholders if it is in pursuance of the purpose or purposes as stated in its articles. But...
if the acquisition of the stocks or the shares or securities is for investment purposes which are not stated in the articles then you have to secure stockholder approval and this power to acquire shares is also subject to limitations which may be set by the law or constitution the corporation may also acquire its own shares as i discussed in a previous video but this is subject to the existence of unrestricted retained earnings to cover the shares to be purchased or acquired. Another power that we will discuss is the power to enter into partnerships, joint ventures, mergers, consolidations, or other commercial agreements with natural or juridical persons. As I mentioned, this is a new provision allowing corporations to be members of partnerships. Okay, take note of that.
Corporations can now be members of partnerships. Corporations also have the power to donate to charities. And this is a recognition of the public responsibility of corporations with the view that they are also social institutions that should aid in the betterment of social and economic conditions in the community.
However, take note of the limitations that the amount must be reasonable and that foreign corporations cannot donate in aid of any political party or candidate or for purposes of partisan political activity. Again, this modified the old law that both domestic and foreign corporations could not donate for partisan political activity. Now, it's only foreign corporations that are prohibited.
Okay? The next power would be the power to establish pension, retirement, or other funds. And this promotes the purpose or purposes for which the corporation was formed because it aids in the comfort, health, and well-being of its employees.
Okay? Now, let's go on to the... Articles which talk about the express powers of the corporations.
Let's first talk about the power to extend or shorten corporate term. Remember, under the current law, the default term of a corporation is perpetual existence. So, may forever, no? However, the incorporators may choose only a limited term of existence. 5, 10, 15 years, 50 years, whatever, no?
Now after incorporation, the components of the corporation may see that the business is flourishing, no? And they may want to extend the term of existence to keep doing business. Or on the other hand, they may feel like they have done enough and they want to shorten the term. And this is how to do that, no? First, the board must have a meeting where majority vote to extend or shorten the term by amending the articles, no?
There has to be a meeting and the majority vote of the board, okay? Then a written notice of the meeting must be sent personally or if allowed under the bylaws or the SEC rules electronically. That notice must be sent to the stockholders that there will be a meeting. And in that meeting, the vote of the board must be ratified by an affirmative vote of two-thirds of the stockholders owning the outstanding capital stock or two-thirds of the members. Then a copy of the amended articles must be sent to the SEC, Securities and Exchange Commission, for approval.
Remember that in Section 15, amendments should underline the changes made with a copy duly certified under oath by the corporate secretary and majority of the directors or trustees with a statement that the amendments have been duly approved by the required vote of the stockholders or members. and then it will be submitted to the SEC. Further, the amendments will take effect upon their approval by the SEC or from the date of filing with the SEC if it is not acted upon by the SEC within six months from the date of filing for a cost not attributable to the corporation.
And all these are found in Section 36. In the same section, grants an appraisal right to a dissenting stockholder no we'll talk about that more on the video on stockholders no but uh the dissenting right no the appraisal right rather no is the right of a dissenting stockholder in the cases provided by law to demand payment of the fair value of his shares in case of an extension or shortening of the corporate term okay we'll talk about that more in a different episode you Another power that I'd like to talk about would be the power to increase or decrease capital stock. To review, capital stock is different from capital. Because capital includes properties and assets of the corporation that are used for its business or operation.
And they may dissipate. Capital stock, on the other hand, is the amount fixed in the articles. to be subscribed and paid in by the stockholders and upon which the corporation is to conduct its operation so why would a corporation want to increase capital stock okay because it might want to generate more working capital to have more shares with which to pay for acquisition of more assets to have extra shares to meet the requirement for deduction of stock dividend no various reasons And these are some ways to increase or decrease the capital stock in case the corporation so wishes.
It can increase or decrease the number of shares and retain the par value. It can increase or decrease the par value of existing shares without increasing or decreasing the number of shares. Or it can increase or decrease both the number of shares and the par value.
And it can also increase by way of stock dividends as long as there are sufficient retained earnings to cover the increase. And De Leon gives us a concrete example. So let's. Say the capital stock of Corporation X is 1 million divided into 100,000 shares with par value of 10 pesos per share. The number of shares may be increased to 150,000 or decreased to 50,000 but retaining the par value of 10 pesos per share.
So that's the first way. Or the par value per share may be increased to 15 pesos. Or it may be decreased to 5 pesos without increasing or decreasing the number of shares.
Or the number of shares is increased to 150,000 while increasing its par value to 15 pesos or decreasing the shares to 75,000 and decreasing the par value to 5 pesos. Okay, so those are some examples. And there are also other ways to decrease capital stock.
By redeeming redeemable shares under Section 8. By canceling or retiring shares, including treasury shares, under Section 9. By accepting a surrender of shares and giving the holders a proportionate share of assets in exchange, provided no creditors will be prejudiced. Or by canceling shares which have not yet been issued. Take note that the law imposes limitations on the power to increase or decrease capital stock.
As a general rule, a corporation cannot lawfully decrease its capital stock if such decrease will have the effect of relieving existing subscribers from the obligation of paying for their unpaid subscriptions without a valuable consideration for such release. Why? Because this will violate the trust fund doctrine, as this will in effect be the corporation withdrawing capital upon which the creditors rely. Next, a corporation cannot issue stock in excess of the amount limited by its articles, and the stock so issued will be void even in the hands of a bona fide purchaser for value.
It is... And finally, a reduction or increase of the capital stock can take place only in the manner and under the conditions prescribed by law. So to increase or decrease capital stock, there must first be a majority vote of the board at a meeting.
Then written notice of the meeting must be sent personally or if allowed electronically to the stockholders and in that meeting. The vote of the board must be ratified by an affirmative vote of two-thirds of the stockholders holding the outstanding capital stock. Next, 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 that the requirements of this section have been complied with the amount of the increase or decrease of the capital stock in case of an increase in the capital stock the amount of capital stock or number of shares of no power stock thereof actually subscribed the names nationalities and addresses of the person subscribing the amount of capital stock or the number of no power value stock subscribe the the amount of stock represented at the meeting, and the vote authorizing the increase or decrease of capital stock. Now, that certificate containing that information, you can just check that information in the law, no? That's code alagit, okay?
That certificate now, it has to be filed with the SEC within six months from the date of approval of the board and stockholders. And that period may be extended for justifiable reasons. This certificate must be accompanied by a sworn statement of the treasurer of the corporation.
Okay, it should be accompanied by a sworn statement of the treasurer of the corporation who is holding office at the time of filing of the certificate showing that at least 25% of the increase in the capital stock has been subscribed and that at least 25% of the amount subscribed has been paid in actual cash to the corporation. or that property the valuation of which is equal to 25% of the subscription has been transferred to the corporation. So clearly the exercise of this power requires the prior approval of the SEC and the law adds another...
Qualification, no? Where appropriate, it also needs the prior approval of the Philippine Competition Commission. After approval by the SEC and issuance by the SEC of its Certificate of Filing, Now the capital stock shall be deemed increased or decreased as the certificate of filing may so declare.
Now let's move on to the power to incur, create, or increase bonded interest. indebtedness. First, let's define a corporate bond.
It's an obligation to pay a definite sum of money at a future date at a fixed rate of interest. So a corporation, in the absence of any restriction, may borrow money whenever its business requires and issue security or other evidence of debt, such as notes, bonds, or mortgages. Even non-stock corporations can incur, create, or increase bonded indebtedness. The procedure is substantially the same as what I earlier discussed. There must be a majority vote of the board.
Written notice of the meeting must be sent personally or electronically to the stockholders. The stockholders in the meeting should ratify the board's decision through an affirmative vote of two-thirds of the outstanding capital stock or two-thirds of the members. Also, the certificate must be be signed by a majority of the directors of the corporation and countersigned by the chairperson and secretary of the stockholders'meeting setting forth that the requirements of this section have been complied with, any bonded indebtedness to be incurred, created, or increased, the amount of stock represented at the meeting, and the vote authorizing the incurring, creating, or increasing of bonded indebtedness.
Prior approval of the sec and where appropriate the pcc is required so the certificate must be filed with the sec within six months from the date of approval of the board and stockholders which period again may be extended for justifiable reasons take note that the bonds issued by a corporation shall be registered with the sec which shall have the authority to determine the sufficiency of the terms thereof okay Finally, let's talk about one last power and I'll continue with the rest in part 2 of this discussion. Let's just talk about the power to deny preemptive right. What is preemptive right or the right of preemption? It is the preferential right of stockholders to subscribe to all issues or disposition of shares of any class in proportion to their present shareholdings. Whenever the capital stock of a corporation is in the stock market, it is the right of the stockholders to subscribe to all issues or disposition of shares of any class in proportion to their present shareholdings.
is increased and new shares of stock are issued, the new issue must be offered first to the stockholders who are such at the time the increase was made in proportion to their existing shareholdings. The purpose is to enable the stockholder to retain his proportionate control in the corporation and to retain his equity in the surplus. So this refers to rights like voting control, dividend payments, net assets, assets, etc.
Okay? If the preemptive right is not observed, then the stockholder with such right may lose control when the stocks are offered to other stockholders without preemptive rights who may buy more stock and thus have more control over the corporation over the stockholder with the preemptive right. Okay?
But take note that the stockholder may waive his preemptive right. He may waive it if he does not want to use it. Okay? This is...
This preemptive right extends not only to issues of shares arising from any increase of capital stock but may also be available with respect to issues or disposition of unissued shares belonging to the original stock of the corporation. So it extends to the unsubscribed portion and even to treasury shares. This right may be denied by the corporation only by the Articles of Incorporation or by an American.
amendment okay that's the only time when the corporation can deny the preemptive right so if a stockholder is denied the use of the preemptive right he may file a case to compel the corporation to allow him to use the right and if the if the denial of the preemptive right is through amendment of the articles then he can exercise his appraisal right okay preemptive appraisal right we'll talk about that in the episode on stockholders Now they The instances when the preemptive right is not available are as follows. First, it's not available if there are shares to be issued in compliance with laws requiring stock offering or minimum stock ownership by the public. Second, shares being offered again by the corporation after they were already initially offered with all other shares. Third, shares issued in good faith. with the approval of the stockholders representing two-thirds of the outstanding capital stock in exchange for property needed for corporate purposes.
Fourth, shares issued with the approval of the stockholders representing two-thirds of the outstanding capital stock in payment of previously contracted debts. Fifth, in case the right is denied in the Articles of Incorporation or an amendment. they're off sixth waiver of the right by the stockholder seventh in case of non-stock corporations eight where the assignors have previously exercised the right otherwise and they will be exercising it twice no you can only exercise the preemptive right once no so those are the instances when the preemptive right is not available okay So that's it for part one of the discussion on the powers of a corporation. And I'll be creating the part two very soon.
Okay. So I hope you may have picked up a thing or two. And I hope to see you soon, guys. Okay. Bye.