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8/19/2019 Law on Corporation: Corporate Powers
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LAW ON corporation
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CORPORATE POWERS
AND CAPACITY36SECTION
Classification of Corporate Powers
Expressly granted or authorized by law
Necessary to the exercise of the existence or
incidental powers
Incidental to its existence
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36SECTION CORPORATE POWERS
AND CAPACITY
POWER TO SUE AND BE SUED
POWER TO ADOPT AND USE CORPORATE SEAL
POWER TO ACQUIRE AND CONVEY PROPERTYInherent in every corporation; Subject to constitutional
and statutory requirements
POWER TO ACQUIRE SHARES OR SECURITIESShares of other corporations;
Shares of the acquiring corporation
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36SECTION CORPORATE POWERS
AND CAPACITY
POWER TO CONTRIBUTE TO CHARITY
Public responsibility of corporations;
Limitations on power
POWER TO ESTABLISH PENSION, RETIREMENT
AND OTHER PLANS
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37SECTION POWER TO SHORTEN OR EXTEND
CORPORATE TERM
Must be taken at a meeting of stockholders or
members and upon a vote.
A voluntary dissolution2
Extensions of the corporate term as stated in the articles of
incorporation is subject to limitations provided in Section 11
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38SECTION POWER TO INCREASE OR DECREASE
CAPITAL STOCK
LIMITATIONS ON THE POWER(1) As a general rule, a corporation cannot lawfully
decrease its capital stock if such decrease will havethe effect of relieving existing subscribers from theobligation of paying for their unpaid subscriptionswithout a valuable consideration for such release
(2) A corporation cannot issue stock in excess of the
amount limited by its articles of incorporation(3) A reduction or increase of the capital stock can take
place only in the manner under the conditionsprescribed by law.
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38SECTION
NECESSITY FOR INCREASING CAPITAL STOCK
POWER TO INCREASE OR DECREASE
CAPITAL STOCK
INCREASE OF CORPORATE ASSET ISSUANCE OF STOCK DIVIDENDS
The capital stock may also be increased without any corresponding
increase in the corporate asset by the issuance of stock dividends.
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38SECTION POWER TO INCREASE OR DECREASE
CAPITAL STOCK
(2) When new subscriptions not necessary. – Without the provision, it is
quite clear that the pre-incorporation subscription requirements under
Section 13 can easily be circumvented.
Illustration:
A corporation has an authorized capital stock of P80,000 and it is proposed
to increase it to P100,000.
• P25,000(100,000 x 25 ) had already been subscribed
• P6,250(25,000 x 25 ) thereof paid
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38SECTION
Ways of increasing (decreasing) authorized capital stock
POWER TO INCREASE OR DECREASE
CAPITAL STOCK
By increasing (decreasing) the number of shares authorized
to be issued without increasing (decreasing) the par value
By increasing (decreasing) the par value of share without
increasing (decreasing) the number
By increasing (decreasing) both the number of shares
authorized to be issued and the par value.
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38SECTION
Power to incur bond indebtedness
POWER TO INCREASE OR DECREASE
CAPITAL STOCK
Corporate bond – an obligation to pay a definite sum of money at a future date
at fixed rate of interest.
(1) Stock and non-stock corporation.- A business corporation, in the absence of
restriction, may borrow money whenever the necessity of its business so
requires and issue security or customary evidence of debt such as notes,
bonds, or mortgages. Under Section 38, non-stock corporations are now
expressly authorized to incur, create, or increase bonded indebtedness.(2) Procedure- the same as the procedure for increasing or decreasing the
capital stock
(3) Prior approval of, and registration of bonds with SEC.
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39SECTION
POWER TO DENY PRE-EMPTIVE RIGHT
CONCEPTS AND PURPOSEThis refers to the right of existing stockholders to
subscribe to all issuances or disposition of shares ofany class, in proportion to their respective
stockholdings, before such shares are offered to thepublic.
Its purpose is to enable the stockholders to maintain
their proportionate control of the corporation
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39SECTION
POWER TO DENY PRE-EMPTIVE RIGHT
SHARES COVERED BY THE EXERCISE OF PRE-EMPTIVE RIGHT
Issued as a result of increase in capital stock
Issued out of the unsubscribed portion of the authorized
capital stock
Other shares that may disposed by the corporation
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39SECTION
POWER TO DENY PRE-EMPTIVE RIGHT
WHEN IS RIGHT NOT AVAILABLE?
Denied by the Articles of Incorporation or anamendment thereto.
Shares are to be issued in compliance with laws
requiring stock offerings or minimum stockownership by the public2
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39SECTION
POWER TO DENY PRE-EMPTIVE RIGHT
Shares are to be issued in good faith with the
approval of the stockholders representing 2/3 of the
outstanding capital stock;
in exchange for property needed for corporate
purposes and;
in payment of a previously contracted debt.
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40SECTION SALE OR OTHER DISPOSITION OF
ASSETS
POWER TO SELL, LEASE, ETC. ALL OR SUBSTANTIALLY ALL CORPORATE ASSETSRequisites for the validity of such sale
Must be approved by the board of directors or trustees;
The action of the board of directors or trustees must be
authorized by the vote of stockholders representing 2/3 of
the outstanding capital stock or 2/3 of the members, as the
case may be; and
The authorization must be done at a stockholders’ or
members’ meeting duly called for that purpose after written
notice.
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40SECTION SALE OR OTHER DISPOSITION OF
ASSETS
If the corporation would be:
• Rendered incapable of continuing thebusiness, or
• Accomplishing the purpose for which it wasincorporated
What is meant by substantially all of corporate assets?
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40SECTION SALE OR OTHER DISPOSITION OF
ASSETS
AUTHORITY OF THE BOARD
STOCK
CORPORATIONS
NON-STOCK
CORPORATIONS
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41SECTION
POWER TO ACQUIRE OWN SHARES
Instances where corporation may acquire its own sharesTo eliminate fractional shares out of stock dividends;
To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale and to purchase delinquent shared sold during saidsale;
To pay dissenting or withdrawing stockholders (in the exercise of the stockholder’s
appraisal right);
To acquire treasury shares
Redeemable shares regardless of existence of retained earnings
To effect a decrease of capital stock
In close corporations, when there is a deadlock in the management of the business
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41SECTION
POWER TO ACQUIRE OWN SHARES
CONDITIONS FOR THE EXERCISE OF THE POWER•The capital of the corporation must not be impaired
•Legitimate and proper corporate objective is advanced
•Condition of the corporate affairs warrants it
•Transaction is designed and carried out in good faith
•Interest of creditors not impaired, that is, not violative of
the trust fund doctrine
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42SECTION
POWER TO INVEST CORPORATE FUNDS IN
ANOTHER CORPORATION OR BUSINESS
OR FOR ANY OTHER PURPOSE
REQUIREMENTS Approval by the majority vote of the BOD or BOT.
Ratification by the stockholders representing at least 2/3 ofthe outstanding capital stock or by at least 2/3 of the
members in case of non-stock corporation
Ratification must be made at a meeting duly called for the
purposes
Prior written notice of the proposed investment.
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43SECTION
POWER TO DECLARE DIVIDENDS
CONCEPT OF DIVIDENDS
It is a part or portion of the profits of a corporation set aside,declared, and ordered by the directors to be paid ratably to the
stockholders on demand or at a fixed time.
It is considered as a return on the investment of stockholders intheir interest in the corporation.
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POWER TO DECLARE DIVIDENDS43SECTION
DIVIDENDS VS. PROFITS/EARNINGS
DIVIDENDS PROFITS/EARNINGS
Portion of the profit or net
earnings set aside for ratable
distribution among the
stockholders.
Part of the assets of the
corporation and do not
belong to stockholders
individually.
Dividends come from profits, while profits are source of dividends.
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POWER TO DECLARE DIVIDENDS 43SECTION
DIVIDENDS PAYABLE OUT OF UNRESTRICTED RETAINED EARNINGS
It shall not be issued without the approval of
stockholders representing at least 2/3 of thecapital stock then outstanding at a
regular/special meeting of the corporation.
A mere majority of the quorum of the board ofdirectors is sufficient to declare other dividends;
hence, without a need off stockholder’s
approval.
STOCK
DIVIDENDS
OTHER
DIVIDENDS
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POWER TO DECLARE DIVIDENDS43SECTION
DIVIDENDS PAYABLE OUT OF UNRESTRICTED RETAINED EARNINGS
Payment of dividends other than from retained
earnings is prohibited; likewise, payment out of capitalis unlawful and void.
There should be sufficient unrestricted retained
earnings to cover the shares to be reacquired.
BOD is at liberty to distribute or not to distribute at all
any dividends. No legal obligation exists. However,
subject to prohibition of this Section. (DISCRETION)
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POWER TO DECLARE DIVIDENDS43SECTION
RULES AS TO NO-PAR VALUE STOCK
The entire consideration received from payment of no-par value
shares shall be treated as capital and shall not be available for
distribution as dividends.
Consideration received shall constitute the basic business fund
of the corporation.
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43SECTION
POWER TO DECLARE DIVIDENDS
UNRESTRICTED RETAINED EARNINGS
Such earnings or portions thereof available for
dividend distribution, if not have been reserved or set
aside by the BOD for some corporate purpose nor are
required by law to be earmarked for some other
purpose specified by such law.
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43SECTION
Dividends cannot be declared out of borrowed money – it is
not a profit. However, borrowed money may be temporarily
used to pay dividends.
THERE MUST BE AN ACTUAL BONA FIDE SURPLUS PROFITS OR EARNINGS OVER AND ABOVE ALL DEBTS AND LIABILITIES.
Earnings which have not yet been received cannot be
included in the profits out of which dividends may be paid.
POWER TO DECLARE DIVIDENDS
EXISTENCE OF ACTUAL PROFITS OR EARNINGS
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43SECTION
POWER TO DECLARE DIVIDENDS
THERE MUST BE AN ACTUAL BONA FIDE SURPLUS PROFITS OR EARNINGS OVER AND ABOVE ALL DEBTS AND LIABILITIES.
EXISTENCE OF ACTUAL PROFITS OR EARNINGS
Payment of accumulated surplus out of previous years is
allowed although realizing no profit from current earnings.
Dividends may not be declared so long as deficit exists.
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43SECTION
POWER TO declare dividends
DECLARATION OF DIVIDENDS
CONDITIONS
DD’L REQUIREMENT FOR
STOCK DIVIDENDS
Existence of UNRESTRICTED
RETAINED EARNINGS Approval of BOD resolution by
the stockholders.
Corporate resolution of BOD
declaring payment of
dividends
Sufficient number of
unauthorized unissued shares
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43SECTION
CLASSSES OF DIVIDENDS
POWER TO DECLARE DIVIDENDS
Cash Dividend
Property
Dividend
Stock Dividend
Optional
Dividend
Composite
Dividend
Bond/Scrip
Dividend
Preferred
Dividend
Cumulative
Dividend
Liquidating
Dividends
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43SECTION
CASH DIVIDEND VS. STOCK DIVIDEND
POWER TO DECLARE DIVIDENDS
CASH DIVIDEND
STOCK DIVIDEND
Cannot be revoked after
declaration
Can be revoked after
declaration but before issuance
Applied to unpaid balance of
delinquent shares
Can be withheld until payment of
unpaid balance of delinquent shares
Corporation becomes debtor of
the shareholders
No debt is created by its
declaration
Does not increase the capital Increases the capital
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Power to enter into
management contract44SECTION
Under Section 44, a corporation is expressly allowedto enter into a management contract with another
corporation, which refers “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.
WITH ANOTHER CORPORATION
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POWER TO ENTER INTO
MANAGEMENT CONTRACT44SECTION
In the absence of fraud or bad faith, contracts
entered into by a parent corporation with a
subsidiary or affiliate may be held legal where
the purpose is to provide more efficient
operation and greater convenience to both.
WITH PARENT CORPORATION
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POWER TO ENTER INTO
MANAGEMENT CONTRACT44SECTION
WITH A NATURAL PERSON
Section 44 refers only to a management
contract with another corporation. Hence, it
does not apply to management contracts
entered into by a corporation with naturalpersons.
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POWER TO ENTER INTO
MANAGEMENT CONTRACT
LIMITATIONS ON THE POWER
44SECTION
The contract must be approved by a majority of thequorum of the board of directors or trustees and
ratified by the prescribed vote of the stockholders or
members, as the case may be, of both the managing
and the managed corporations, at a meeting dulycalled for the purpose;
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POWER TO ENTER INTO
MANAGEMENT CONTRACT44SECTION
LIMITATIONS ON THE POWER
The period of the contract must not be longer thanfive (5) years for any one term except that contracts
which relate to the exploration, development,
exploitation or utilization of natural resources may be
entered into for such periods as may be provided be
pertinent laws or regulations.
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ULTRA VIRES ACTS OF CORPORATION
ULTRA VIRES AND INTRA VIRES ACTS EXPLAINED
45SECTION
It is well-settled that a corporation is not restrictedto the exercise of powers expressly conferred upon
it but has the implied or incidental powers to do
what is reasonably necessary to carry out itsexpress powers and to accomplish the purposes
for which it was formed.
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ULTRA VIRES ACTS OF CORPORATION
Ultra vires act distinguished from an illegal act
45SECTION
When properly used, an ultra vires act means
simply an act which is beyond the conferred
powers of a corporation or the purposes for
which it is created.
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ULTRA VIRES ACTS OF CORPORATION
RATIFICATION OF ULTRA VIRES ACTS
45SECTION
Where the contract is illegal per se, it is wholly void or
inexistent. It cannot be ratified or validated.
Where the contract is not illegal per se but merely beyond
the power of a corporation, the same is merely voidable
and may be enforced by performance, ratification, or
estoppel, or on equitable ground.
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ULTRA VIRES ACTS OF CORPORATION45SECTION
EFFECTS OF ULTRA VIRES ACTS WHICH ARE NOT ILLEGAL
An ultra vires contract, as long as it is executory on both sides,cannot be enforced by either party thereto.
When an ultra vires contract has been fully performed on both
sides , neither party thereto can lawfully set aside the same or torecover what has been given.
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