35.2 Corporations: Incorporation, Articles and Bylaws, and Corporate Powers

Corporations: Incorporation, Articles and Bylaws, and Corporate Powers

This section covers how a corporation is formed and what it may do under the Revised Corporation Code: incorporators and the RA 11232 changes, the articles of incorporation and bylaws, corporate names and registration, the general and specific powers of a corporation under Title IV, and the doctrine of ultra vires acts.

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1. Modernization of Incorporators and Corporate Formation under RA 11232

The Revised Corporation Code removed several historical rigidities that previously burdened Philippine corporate formation under Batas Pambansa Blg. 68. The following comparative matrix details these critical statutory changes:

Promoters and Pre-Incorporation Contracts

A promoter is a person who undertakes to form a corporation, assemble the necessary financing, procure subscriptions, and establish the business enterprise prior to corporate registration.

• General Rule on Promoter Contracts: A corporation is not bound by contracts entered into by promoters prior to its incorporation. Because the corporation had no legal existence at the time of contract execution, it had no capacity to appoint an agent or give consent.
• Exceptions Binding Corporation: The corporation becomes bound only if, after acquiring juridical personality upon the issuance of its Certificate of Incorporation, it expressly ratifies, adopts, or knowingly accepts the benefits of the promoter's contract.
• Personal Liability of Promoter: A promoter remains personally liable on pre-incorporation contracts unless there is an express novation substituting the newly formed corporation in place of the promoter, or the contract expressly stipulates that the promoter incurs no personal liability.

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2. Articles of Incorporation (AOI) and Corporate Bylaws

Articles of Incorporation (Sections 13 and 14)

The Articles of Incorporation constitute the corporate charter—the fundamental foundational contract between the State and the corporation, between the corporation and its stockholders, and among the stockholders themselves. Mandatory contents include:

1. Corporate Name: Must be verified and reserved with the SEC. Under Section 17, no corporate name shall be allowed if it is not distinguishable from that already reserved or registered, or if it is contrary to law, rules, or public morals. If a corporation uses a confusingly similar or deceptive name, the SEC has summary authority to issue an order to cease and desist and immediately change the corporate name; failure to comply empowers the SEC to hold the corporation and its officers in administrative contempt and revoke its registration.
2. Specific Purpose Clause: Must state the primary purpose and secondary purposes. The purpose defines the scope of corporate capacity and warns investors of the business risks involved. Purpose clauses cannot combine incompatible activities (e.g., banking or insurance cannot be combined with general manufacturing).
3. Principal Office Address: Under SEC rules, the AOI must state the specific city or municipality within the Philippines where the principal office is located (e.g., "Makati City, Metro Manila"). Stating merely "Metro Manila" is insufficient. The principal office serves as the legal venue for actions, the site for maintaining books, and the address for service of summons.
4. Corporate Term: Stated as perpetual unless the articles provide for a specific fixed term.
5. Capital Stock Structure: Authorized capital stock, classes of shares, par values (or statement of no-par shares), rights, privileges, and restrictions attached to each class.

Corporate Bylaws (Sections 45 to 47)

Bylaws represent the internal private statutes of the corporation, regulating the management of corporate affairs and defining the rights, duties, and conduct of directors, officers, and stockholders.

• Adoption: Under RA 11232, bylaws may be adopted and submitted simultaneously with the Articles of Incorporation, or adopted post-incorporation by the affirmative vote of stockholders representing at least a majority of the outstanding capital stock (or a majority of members in a non-stock corporation).
• Amendment of Bylaws (Section 47): Bylaws may be amended, repealed, or new bylaws adopted by the affirmative vote of:
  • A majority of the board of directors/trustees AND stockholders representing at least a majority of the outstanding capital stock (or majority of members); OR
  • The board of directors alone, provided that the power to amend bylaws has been delegated by a two-thirds (2/3) vote of the outstanding capital stock (or members). This delegated power may be revoked at any time by a vote of a majority of the outstanding capital stock (or members).

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3. Corporate Powers under Title IV (Sections 35 to 44)

Corporate powers are divided into three broad categories:

1. Express Powers (Section 35): Those explicitly enumerated by the RCC, special statutes, and the corporate charter (e.g., power to sue and be sued, adopt bylaws, issue stock, purchase and mortgage property, enter into mergers, make reasonable donations for public welfare, hospital, charitable, cultural, scientific, or civic purposes).

   Statutory Prohibition: No foreign or domestic corporation shall give donations in aid of any political party or candidate or for purposes of partisan political activity (Section 35[i]).

2. Implied Powers: Powers that are reasonably necessary, customary, and proper to execute and carry out the corporation's express powers (e.g., borrowing money to finance authorized manufacturing operations).
3. Incidental Powers: Powers inherent in corporate existence that attach automatically upon incorporation without express grant (e.g., right of succession, power to have a corporate name and seal).

The Ultra Vires Doctrine (Section 44)

An ultra vires act is an act committed outside the express, implied, or incidental powers of the corporation as conferred by law or its articles of incorporation.

                                    Ultra Vires Acts under Section 44
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         ▼                                                                                   ▼
    Illegal / Illicit Corporate Acts                                             Mere Ultra Vires Acts
(Contrary to law, morals, public policy;                                     (Merely outside corporate charter powers;
Section 44, Civil Code Article 1409)                                         not illegal or contrary to law per se)
• VOID AB INITIO and completely non-existent                                 • UNENFORCEABLE if wholly executory
• CANNOT be ratified by stockholders                                         • CAN BE RATIFIED by unanimous/required stockholder vote
• Directors solidarily liable for damages                                    • Validated by performance or EQUITABLE ESTOPPEL

Voting Thresholds for Fundamental Corporate Acts

The Revised Corporation Code establishes rigorous voting and ratification gates for fundamental corporate transactions. The following master matrix summarizes these statutory thresholds:

Exam Distinction on Management Contracts (Section 43): Stockholder approval of a management contract normally requires a majority of the outstanding capital stock of both the managing and managed corporations. However, a two-thirds (2/3) vote of the outstanding capital stock of the managed corporation is required when: (1) stockholders representing the same interest of both corporations own or control more than one-third (1/3) of the capital stock entitled to vote of the managing company; or (2) a majority of the members of the board of the managing company also constitute a majority of the members of the board of the managed company.

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4. Worked Problem: Investment in Secondary Purpose vs Primary Purpose

Problem: Prime Milling Corp is incorporated with a primary purpose of "milling, processing, and distributing flour and wheat products." Its secondary purpose includes "investing in commercial real estate, hotels, and tourist resorts." At a regular meeting, the Board of Directors of Prime Milling, by a vote of 5 out of 7 directors, approved the appropriation of PHP 150,000,000 of corporate surplus funds to acquire and operate a luxury beach resort in Palawan. A group of minority stockholders holding 28% of the outstanding capital stock objected, demanding that the transaction be submitted to a stockholders' meeting for ratification. The board refused, arguing that because the acquisition is covered by the secondary purpose expressly stated in the Articles of Incorporation, board approval alone is legally sufficient. Is the board's position correct?

Analysis and Solution:

1. Statutory Rule under Section 41: Under Section 41 of the Revised Corporation Code, a corporation may invest its corporate funds in any other business or purpose, or for any purpose other than the primary purpose for which it was organized, only when approved by a majority of the board of directors AND ratified by the vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock at a meeting called for that purpose.
2. Secondary Purpose Distinction: The inclusion of an activity in the secondary purpose clause grants the corporation the legal capacity to engage in that business without amending its charter; however, it does not exempt the corporation from the mandatory statutory approval procedure under Section 41. Stockholder ratification is dispensed with only when the investment is reasonably necessary to accomplish the primary purpose of the corporation.
3. Conclusion: The board's position is INCORRECT. Investing corporate funds in a luxury beach resort is not necessary to execute the primary purpose of flour milling. The transaction is ultra vires unless ratified by stockholders owning at least two-thirds (2/3) of the outstanding capital stock. Furthermore, dissenting stockholders are entitled to exercise their appraisal right under Section 80.