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Powers of Corporation

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Paola Marivelez

on 3 February 2015

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Transcript of Powers of Corporation

"POWERS Of CORPORATIONS"
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;
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;
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; 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.
"powers of corporation"
• Refers to the right or capacity of a corporation to perform all acts or things, except only those forbidden by law and its articles of the incorporation in furtherance of their purpose/s.
Classification of corporate powers
(1) Those expressly granted or authorized by law .

(2) Those that are necessary to the exercise of the express or incidental powers.

(3) Those incidental to its existence

Acts or contracts of a corporation outside scope of its express, implied and incidental powers are ULTRA VIRES
• EXPRESS POWERS

are the powers expressly conferred upon the corporation by law. These powers can be ascertained from the special law creating the corporation, or from the general incorporation law under which it is created, the general laws of the land applicable to corporations and its articles of incorporations.

• IMPLIED POWERS

are those powers which are reasonably necessary to exercise the express powers and to accomplish or carry out the purposes for which the corporation was formed.

(1) Acts in the usual course of business
(2) Acts to protect debts owing to a corporation
(3) Embarking in different business
(4) Acts in part or wholly to protect or aid employees
(5) Acts to increase business

• INCIDENTAL OR INHERENT POWERS
are powers which a corporation can exercise by the mere fact of its being a corporation or powers which are necessary to corporate existence and are, therefore, impliedly granted.
Examples of INCIDENTAL POWERS
1. Power to sue and be sued
2. Power to adopt and use a corporate seal
3. Power to acquire and convey property
4. Power to acquire shares or securities
5. Power to contribute to charity
6. Power to establish pension, retirement and other plans

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 bored of directors or trustees and ratified at a meeting 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 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 ember 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. 38
-Power to increase or decrease the capital stock; incur, create, or increase bond indebtedness.
Certificate in Duplicate – setting forth

1. Requirements of this section have been complied with;

2. Amount of the increase or decrease in capital stock;

3. If an increase in capital stock, amount of capital stock or number of shares of no-par stock there of actually subscribed and paid, name, nationalities and residences of the persons subscribing, if and only if the increase for the purpose making effective stock dividend thereof authorized;

4. Any bonded indebtedness to be incurred, created or increased;

5. Actual indebtedness of the corporation on the day of meeting;

6. Amount of stock represented at the meeting;

7. The vote authorizing…

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 (SEC).
Non-stock corporations may incur, create or increase any bonded indebtedness with the approval by a majority of the board of trustees and at last 2/3 of the members in a meeting dully 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.
sec. 39
Power to deny pre-emptive right.
sec. 41
power to Acquire own shares
sec. 42
power to invest corporate funds in another corporation or business or for any other purposes
Sec. 40
sec. 44
power to enter into management contract
sec. 45
sec. 43
power to declare dividends
Reporters:
Ann Panlilio
Tiffany Macabuhay
Cloyd Torno
Paola Marivelez
Nathaniel Perez
Princes Oberos
Aly Serrano
Jun Ong

Limitations on the power

1. As a general rule, a corporation cannot lawfully
decrease its capital stock if such decrease will have the effect of relieving existing subscriber from their obligation of paying for their unpaid subscription without a valuable consideration.

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 under the conditions prescribed by law.

Subscription requirement in case of
increase of capital stock.

1. When new subscription necessary.
2. When new subscription not necessary.

Ways of increasing (decreasing/) authorized capital stock.

1. By increasing (decreasing) the number of shares authorized to be issued
without increasing (decreasing) the par value thereof;

2. By increasing (decreasing) the par value of share without increasing
(decreasing) the number thereof;

3. By increasing (decreasing) both the number of shares authorized to be
issued and the par value thereof.

Effects of reduction of capital stock on liability for unpaid subscription.

1.
As against corporate creditors.

A reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute.

2.
As between the corporations and stockholders
. –
The capital stock of a corporation can be distributed only at corporate meetings duly called for the purpose.

Distribution of surplus on reduction.

1. Where there is no impairment of capital.
2. Where reduction is made to meet impairment.
3. Distribution not mandatory.

Power to incur bonded indebtedness


Corporate bond
– is an obligation to pay a definite sum
of money at a future date at a fixed rate of interest.

1. Stock and non-stock corporation.
2. Procedure.
3. Prior approval of, and registration of bonds with, SEC.


Sale or other disposition of assets.
Right of pre-emption of stockholders
Reason for the grant of right
Power to deny pre-emptive right
Shares to which right NOT available

1. Shares specified by law
2. Remaining unsubscribed shares
Pre-emptive right as to treasury share
Availability of right to issue originally authorized shares

1. All originally authorized shares initially offered for subscription.

2. Number of such shares initially offered specified.
Power to sell, lease, etc. all substantially all corporate assets

Requisites
1. The sale etc., must be approved by the board of directors or trustees;

2. 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 case may be; and

3. The authorization must be done at a stockholders' or members' meeting duly called for that purpose after written notice.
Authority of the board

1. Stock corporations
2. Non-stock corporations
Appraisal right of dissenting stockholder
• A corporation is not authorized to ARBITRARILY purchase the share it issued.
ACQUISITION OF SHARES FOR LEGITIMATE PURPOSE:

1. Elimination of Fractional shares
2. Satisfaction of indebtedness to corporation
3. Payment of shares of dissenting or withdrawing stockholders

Other case:
Purchase of treasury shares

CONDITIONS FOR THE EXERCISE OF THE POWER:

1. Capital is not impaired
2. For legitimate purpose
3. There should be unrestricted earnings
4. The corporation acts in good faith

THE FUND DOCTRINE


Capital stocks are “trust fund”
– not to be impaired

• This doctrine holds that the creditors should be preferred over the stockholders.

IF
Investment was made for primary purpose:

• The approval of stockholders/members is not necessary.

IF
investment was made for other purpose:

• It must be approved by the BOD.

• Authorized by the vote of stockholders representing 2/3 of the outstanding capital or 2/3 of the members.

• The authorization must be done at a stockholder’s meeting after written notice.

1.
With another corporation
– a corporation undertake to manage all or substantially all of the business of another corporation (service contracts, operating agreements, etc.)

2.
With parent corporation
– contracts entered by a parent corporation with a subsidiary to provide more efficient operation.

3.
With a natural person

LIMITATIONS OF THE POWER:

1. Approved by majority of the BOD and ratified by the vote of stockholders/members.

2. The contract must not longer than 5 years, unless provided by pertinent laws or regulations

Ultra vires acts of corporation
Ultra vires act
– not within the express, implied and incidental powers of corporation.
Intra vires act
- within the legitimate powers of the corporation.
Concept of dividends

A dividend is that 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.

Dividends distinguished from profits or earnings

(1) Dividends come from profits, while profits are source of dividends.

(2) Profits are not dividends until so declared or set aside by the corporation

Power to declare dividends

(1)
Stock dividends
. – It shall not be issued without the approval of stockholders representing 2/3 of the capital stock.

(2)
Other dividends.
– The board of directors may declare dividends other than stock dividends without need of stockholder’s approval.

Dividends payable out of unrestricted retained earnings

(1) A corporation cannot make a valid contract to pay dividends other than from retained earnings or profits and an agreement to pay such dividends out of capital is unlawful and void.

(2) The power of a corporation to acquire its own shares is likewise subject to the condition that there be unrestricted retained earnings in its books to cover the shares to be purchased.

(3) No legal obligation exists on the part of the board to distribute all the retained earnings as dividends. So long as it acts in good faith, the board is at liberty to distribute or not at all any dividend subject only to the prohibition in the second paragraph of section 43.

Reason for the rule.

The reason for the rule that dividends shall be paid only out of the unrestricted earnings of the corporation is that the capital stock of a corporation is a trust fund for the security of creditors and cannot be distributed to their prejudice to the stockholders as dividends. Moreover, each stockholder is entitled to have the capital of the corporation unimpaired to carry out its operation. The rationale is that stockholders should only receive dividends from their investment and not their investment itself.

Rule as to no-par value stock.

The Code makes it clear that with respect to no par value shares, the entire consideration (including paid-in surplus, infra.) received from the same shall be treated as capital and shall not be available for distribution as dividends.

Unrestricted retained earnings explained

(1) Retained earnings of a corporation is “the difference between the total present value of its assets after deducting losses and liabilities and the amount of its capital stock.

(2) Such earnings or portions thereof are said to be unrestricted and, therefore available for dividend distribution, if they have not been reserved or set aside by the board of directors for some corporate purpose nor are required by law to be earmarked for some other purpose specified by such law.

Existence of actual profits or earnings

(1) Earnings of the corporation which have not yet been received even though they consist in money which is due cannot be included in the profits out of which dividends may be paid.

(2) As a rule, dividends cannot be declared out of borrowed money, for borrowed money is not profits; but money may be borrowed temporarily for the purpose of paying dividends, if the corporation has used its surplus assets to make improvements for which it might have borrowed money.

(3) A corporation may properly pay dividends from accumulated surplus out of previous years although realizing no profit from current earnings.

(4) On the other hand, it cannot pay dividends although it has realized actual profits for the year in which dividends are declared until it has eliminated a deficit resulting from its operations of preceding years. (dividends may not be declared so long as a deficit exists)



RETAINED EARNINGS DO NOT INCLUDE INCREASE IN VALUE OF FIXED ASSETS

Increase in valuation is not considerable because the appraisal is subject to market fluctuations. So it merely anticipates
FUTURE PROFIT
and may never be realized as an
ASSET
of the corporation.

The surplus used for payment must be a
BONA FIDE
one (In other words it is genuine, real, authentic, or valid). Its existence must not be dependent on an estimate of appreciation.

DECLARATION OF DIVIDENDS

CONDITIONS:
1. The EXISTENCE of unrestricted retained earnings
2. Declaration of payment by the BOARD OF DIRECTORS

ADDITIONAL REQUIREMENT FOR STOCK DIVIDENDS:

• It is issued by
RESOLUTION of BOARD OF DIRECTORS and
APPROVAL of resolution by the STOCKHOLDERS

DISCRETION OF THE BOARD OF DIRECTORS

The BOD is responsible for DECLARING THE DIVIDENDS as well as the TIMING and AMOUNT.


1. When profits or earnings have been realized, it does not necessarily mean that the directors must declare them as dividends.

If in their HONEST JUDGEMENT, they think that the profits must be kept in business, they cannot be compelled by the court to make any distribution. They have the right on choosing how and when to spend the corporate funds.

2. They CANNOT lawfully declare dividends until debts are paid or provided for.

LIMIT ON RETAINED EARNINGS

In stock corporations, only up to 100% (max) of the PAID-IN CAPITAL are they allowed in retaining their surplus profits.

PAYMENT OF SUBSCRIPTION FROM DIVIDENDS

1.
FROM DIVIDENDS TO BE DECLARED
– It stipulates that payment of subscription is from the first declaration for all or any shares until it has been fully paid. It is illegal because the subscribers are obligated not to pay for shares but dividends accrue on stock.

2. F
ROM CASH DIVIDENDS
– On stock subscription, the stockholder are still entitled to receive cash dividends due on delinquent stock (but these dividends must be used first for unpaid balance and expenses on subscription)

3.
FROM STOCK DIVIDENDS
- Stock dividends shall not be applied to unpaid subscriptions.
- A stockholder’s liability for stock subscription cannot be compensated or offset by issuance and distribution of stock dividends.

LIABILITY OF STOCKHOLDERS FOR ILLEGALLY RECEIVED DIVIDENDS

If dividends are wrongfully or illegally declared and paid, the stockholders who received them CAN BE HELD LIABLE TO REFUND THEM to the corporation or its creditors.


RIGHT OF STOCKHOLDERS AFTER DECLARATION OF DIVIDENDS

1. CASH DIVIDENDS – as soon as dividends are publicly declared, the stockholders have the right to their pro rata shares.

If there’s no record date: Dividend belongs to owner of shares at the TIME OF DECLARATION.
But if there is, it belongs to the owner at time of payment.

2. STOCK DIVIDENDS – A declaration of such dividends can be cancelled ANYTIME before the actual issuance.
The declaration of stock dividends doesn’t make it effective until it is actually issued or set apart to the stockholders.

BASIS OF SHARE IN DIVIDENDS

1.
TOTAL SUBSCRIPTION
- a stockholder participates in dividends/earnings based on HIS TOTAL SUBSCRIPTION, not on the amount he paid.

2.
REASON
– His subscription represent his holdings in the company for which he pays interest on any unpaid portion. A subscriber is considered a stockholder only from the time his subscriptions are accepted by the corporation

3.
WHERE STOCKHOLDER DELINQUENT
– He loses his privilege in the corporation but he still has the right to receive cash dividends (which must first be applied to his unpaid balance on the subscription and cost/expense)

CLASSES OF DIVIDENDS

1)
CASH DIVIDEND
- payable in cash
- dividends on par value shares are made at a stated percentage(%) or fixed amount of share

2)
PROPERTY DIVIDEND
- dividend distributed in form of real or personal property
-is actually a cash dividend (buy and sell)
- corporation may pay a cash dividend in form of a property

3)
STOCK DIVIDEND
-payable on unissued/increased/additional shares
-may be declared to the extent of maximum number of shares in the articles of incorporation

4)
OPTIONAL DIVIDEND
-stockholders have the option to receive cash or stock dividend

5)
COMPOSITE
-partly in cash, partly in stock; no option

6)
SCRIP DIVIDEND
- a writing/certificate issued to a stockholder that entitles him to pay at some future time
-in form of a promissory note

7)
BOND DIVIDEND
- distributed in bonds of the corporation to stockholders

8)
PREFERRED DIVIDEND
- dividend payable to one class of stockholder in priority to be paid to another class


9)
CUMULATIVE DIVIDEND
-payable at a certain rate and at stated times
-if not paid, dividend in arrears must be paid the next period

10)
LIQUIDATING DIVIDEND
-distribution of corporation’s assets upon dissolution or winding up

Dividends may also be participating or non-participating.

EFFECT OF DECLARATION OF CASH DIVIDEND

Assets of corporation
– decrease

Property of individual stockholders
– increase

EFFECT OF DECLARATION OF STOCK DIVIDEND

A stock dividend converts the surplus or profits of the corporation (covered by such dividends)
INTO the permanent account.

It is beyond the power of BOD to withdraw and distribute.

Capitalization and transfer of surplus has NO EFFECT on the corporation

Likewise, adds nothing to the interest of stockholders.


EFFECT OF DECLARATION OF BOND OR SCRIP DIVIDEND

It makes the stockholder a creditor of the corporation for the amount issued.
The assets of the corporation remain the same.


DISTINCTIONS BETWEEN CASH DIVIDEND AND STOCK DIVIDEND

 Cash dividend involves disbursement of accumulated earnings

 Cash dividend declared and paid becomes absolute property of stockholder;
Stock dividend is still part of corporate property making it reachable by corporate creditors

 Cash dividend is declared at discretion only by the board of directors;
Stock dividend shall be declared and issued with the approval of the stockholders representing at least 2/3 of the outstanding capital stock.

 Cash dividend doesn’t increase the corporate capital

 There is debt from the corporation in declaration of cash dividend

 Cash dividend is taxable as income to stockholder

DISTINCTION BETWEEN DISTRIBUTION IN LIQUIDATION AND ORDINARY DIVIDEND

IT IS AN ORDINARY DIVIDEND

if the distribution is in the nature of a recurring return on stock.

IT IS COMPLETE OR PARTIAL LIQUIDATIO
N
If the corporation is really winding up or decreasing its capital stock and narrowing activities

The distribution is treated as payment of the corporation to the stockholder for the stocks
or as return of capital invested.

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