Obligation and Ccontract Section 40 - 44

SEC. 40. Power to Acquire Own Shares.
– Provided that the corporation has

unrestricted retained earnings in its books to cover the shares to be purchased or
acquired, a stock corporation shall have the power to purchase or acquire its
own shares for a legitimate corporate purpose or purposes, including the
following cases:
(a)To eliminate fractional shares arising out of stock dividends;
(b)To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale, and to purchase delinquent shares
sold during said sale; and
(c)To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this Code.
General Rule: A corporation is not allowed to acquire its own shares.
Reason: Because it is in effect liquidating, to the damage and prejudice of its

creditors violating the Trust Fund Doctrine. Sooner or later, there will be no more
stockholders since the corporation is buying out the shares. If all the stockholders
get back all their investment – there will no longer be any investments for the
corporation to continue to operate.
Exception:
1. Prevent fractional shares arising from stock dividends
2. Satisfy delinquent shares
3. Pay dissenting stockholders – in the exercise of their appraisal right, which
means that when the stockholder does not agree with the decision of the
board, it may exercise such right and the corporation shall be compelled
to buy-back the shares.
Conditions for the exceptions to apply: There must be unrestricted retained
earnings.
Reason: Because it can only be exercised when it has unrestricted retained
earnings which simply means that that such retained earnings are not earmarked
for any purpose – surplus of profits. Thus, will not violate the Trust Fund Doctrine.
Its Advantages: If the company is expected to earn profits, then they would have
bigger dividends because of the fewer stockholders who will be dividing the
profits.
Disadvantages: If the company is expecting losses, then only a few stockholders
will be sharing the losses, which is prejudicial on their part.
SEC. 41. Power to Invest Corporate Funds in Another Corporation or Business or for
Any Other Purpose. – Subject to the provisions of this Code, a private corporation
may invest its funds in any other corporation, business, or for any purpose other
than the primary purpose for which it was organized, when approved by a
majority of the board of directors or trustees and ratified 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 the case of nonstock corporations, at a
meeting duly called for the purpose. Notice of the proposed investment and the
time and place of the meeting shall be addressed to each stockholder or
member at the place of residence as shown in the books of the corporation and
deposited to the addressee in the post office with postage prepaid, served
personally, or sent electronically in accordance with the rules and regulations of
the Commission on the use of electronic data message, when allowed by the
bylaws or done with the consent of the stockholders: Provided, That any dissenting
stockholder shall have appraisal right as provided in this Code: Provided however,
That where the investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of incorporation, the
approval of the stockholders or members shall not be necessary.
Requisites:
1. Vote of the majority of the BOD
2. Vote of the stockholders representing 2/3 of the outstanding capital stock
SEC. 42. Power to Declare Dividends. – The board of directors of a stock

corporation may declare dividends out of the unrestricted retained earnings
which shall be payable in cash, property, or in stock to all stockholders on the
basis of outstanding stock held by them: Provided, That any cash dividends due
on delinquent stock shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock dividends shall be withheld from
the delinquent stockholders until their unpaid subscription is fully paid: Provided,
further, That no stock dividend shall be issued without the approval of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock at a regular
or special meeting duly called for the purpose.
Stock corporations are prohibited from retaining surplus profits in excess of one
hundred percent (100%) of their paid-in capital stock, except: (a) when justified
by definite corporate expansion projects or programs approved by the board of
directors; or (b) when the corporation is prohibited under any loan agreement
with financial institutions or creditors, whether local or foreign, from declaring
dividends without their consent, and such consent has not yet been secured; or
(c) when it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for
special reserve for probable contingencies.
Q: What are dividends?
Ans.: These are the part of the profits distributed as shares to the stockholders. If
there are no profits, there ae no dividends.
General Rule: The BOD has the sole authority to declare dividends. The
declaration of dividends is the sole prerogative of the Board.
Exception: The board may be compelled to issue dividends when the retained
earnings of the corporation exceed 100% of their paid-in capital stock.
Exception to the exception:

1. When justified by definite corporate expansion projects or program
approved by the BOD
2. When the corporation is prohibited under any loan agreement with
financial institutions or creditors, whether local or foreign, from declaring
dividends without their consent, and such consent has not yet been
secured
3. When it can be clearly shown that such retention is necessary under special
circumstances obtaining in corporation
Q: How are dividends payable?
Ans.: There are several ways that dividends can be paid whether in cash,
property, stock, or a combination of any of the three.
Q: Can the stockholders demand for the declaration of dividend?

Ans: No. The decision to declare dividends lies with the board.
Exception: When there is improper accumulation of profits. This happens when
the corporation retains surplus profits in excess of 100% of its paid-in capital stock.
In such case, the shareholders may demand for the declaration of dividends.
Q: What are the types of dividends?
Ans.:
1. Cash dividends
Rule: If there are delinquent shares, the cash dividend shall be applied to
the unpaid subscription which is due and demandable of the shareholder
– offset
Note: Issuing cash dividends requires a vote of majority of the BOD without
need of rectification from the stockholders.
2. Stock dividends
Rule: It shall be withheld from the delinquent stockholders until their unpaid
subscription is fully paid.
Note: Issuing stock dividends requires a majority vote of the BOD and a
ratification of 2/3 of the stockholders representing the outstanding capital
stock.
3. Property dividends
4. Combination of different kinds of dividends
Notes:
1. Before the declaration date, the dividends are not a liability of the
corporation. In fact, the corporation is not obliged to declare dividends
even if it has unrestricted retained earnings. The BOD cannot be compelled
to declare dividends. Dividends only become a liability of the corporation
once they are declared.
2. The record date refers to the date when the corporation determines who
among the stockholders are entitled to receive dividends. The stockholders
on record in the stock and transfer book as of the record date are the
stockholders who will receive dividends.
Before the record date, the stocks are considered sold dividends on. This
means that before the record date, stocks are sold with the right to receive
dividends on it.
When stocks are sold after the record date, the stocks are commonly
referred to as being sold dividends off, because even if they are sold or
transferred, the one who will be receiving dividends on them is the person
who was the owner of such as of the record date.
Illustration:
Declaration Date – March 10

Record Date - March 30
A is the holder of the share on the declaration date. On March 15, A sells
the shares to B. those shares are considered sold dividends on.
If B sells the shares to C on March 25, those shares are still considered sold
dividends on.
On March 30 or the record date, if C is still the owner of those stocks, then
C is the one entitled to receive dividends on the shares.
If on April 5, C sells the shares to D, then it is still C who is entitled to receive

dividends on them. On this date, the shares are considered sold dividends
off.
3. Payment Date is one when the dividends are actually paid by the
corporation. When a corporation declares dividends, it will normally say
when the record and the payment dates are.
SEC. 43. Power to Enter into Management Contract. – No corporation shall

conclude a management contract with another corporation unless such
contract is approved by the board of directors and by stockholders owning at
least the majority of the outstanding capital stock, or by at least a majority of
the members in the case of a nonstock corporation, of both the managing
and the managed corporation, at a meeting duly called for the purpose:
Provided, That (a) where a stockholder or stockholders representing the same
interest of both the managing and the managed corporations own or control
more than one-third (1/3) of the total outstanding capital stock entitled to vote
of the managing corporation; or (b) where a majority of the members of the
board of directors of the managing corporation also constitute a majority of
the members of the board of directors of the managed corporation, then the
management contract must be approved by the stockholders of the
managed corporation owning at least two-thirds (2/3) of the total outstanding
capital stock entitled to vote, or by at least two-thirds (2/3) of the members in
the case of a non-stock corporation.
These shall apply 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: Provided however, That such service contracts or
operating agreements which relate to the exploration, development,
exploitation or utilization of natural resources may be entered into for such
periods as may be provided by the pertinent laws or regulations.
No management contract shall be entered into for a period longer than five
(5) years for any one (1) term.
Q: What is a management contract?

Ans.: It is an agreement under which a corporation delegates the
management of its affairs to another corporation for a certain period. Two
corporations are involved: 1) the management corporation and 2) the
managed corporation.
General Rule: Management contract is entered into by a majority vote of the
BOD and stockholders of both the managing and the managed corporation.
Exception: Approved by the stockholders of the managed corporation
owning at least 2/3 of the outstanding capital stock.
Q: What could this mean, what happens to the board of the managed
corporation, do they still function as a board?
Ans.: Yes, this is not an abandonment. The BOD of the managed corporation
still retains the control of how the corporation should exist. The only thing is that,
on the operational side of the managed corporation is now given to the
managing corporation. (ex. Audit managers)
SEC. 44. Ultra Vires Acts of Corporations. – No corporation shall possess or

exercise corporate powers other than those conferred by this Code or by its
articles of incorporation and except as necessary or incidental to the exercise
of the powers conferred.
Q: What is the effect of an ultra vires act?
Ans.: An ultra vires act is an unenforceable act. Since it is not enforceable, the
contract is not binding to the corporation.
Q: How do we resolve ultra vires act?
Ans.:
General Rule: It is not binding.
Exception:
1. Contract is completely performed or fulfilled by both parties – leave them
as they are.
2. Only one party has been benefited – return what has been received.
3. Contract is not yet acted upon – do not perform or proceed.
Rules on ratification of ultra vires acts:

a. Illegal ultra vires acts – cannot be ratified
b. Unauthorized ultra vires act – can be cured through ratification by a vote
of 2/3 of the stockholders representing the outstanding capital stock as
long as it does not affect third parties.

Obligation and Ccontract Section 40 - 44

Uploaded by

Copyright:

Available Formats

Obligation and Ccontract Section 40 - 44

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Obligation and Ccontract Section 40 - 44

Uploaded by

Copyright:

Available Formats

SEC. 40. Power to Acquire Own Shares.

– Provided that the corporation has

Reason: Because it is in effect liquidating, to the damage and prejudice of its

SEC. 42. Power to Declare Dividends. – The board of directors of a stock

Exception to the exception:

Q: Can the stockholders demand for the declaration of dividend?

Declaration Date – March 10

If on April 5, C sells the shares to D, then it is still C who is entitled to receive

SEC. 43. Power to Enter into Management Contract. – No corporation shall

These shall apply to any contract whereby a corporation undertakes to

Q: What is a management contract?

SEC. 44. Ultra Vires Acts of Corporations. – No corporation shall possess or

Rules on ratification of ultra vires acts:

You might also like