A. M. Sison, Jr. & Associates

December 8, 1986 A. M. Sison, Jr. & Associates 14th Floor, Pacific Bank Bldg. 6776 Ayala Ave.,Makati Metro Manila Gentlemen: This relates to your letter, dated November 26, 1986, requesting the opinion of this Commission on the query posed therein. It appears therein that the stock of a domestic corporation consists of common and preferred shares. Its amended articles of incorporation prescribed the rights of and restrictions of preferred shares, to wit: 1. Preference as to cash dividends, 2. Non-cumulative, non-participating as to dividends, 3. Preference as to asset distribution upon liquidation, 4. No voting rights, except as provided for by law . The above rights and restrictions of preferred shares are printed at the back of preferred shares certificates. Your query is: May the corporation further amend its amended articles of incorporation by adding the following providing? "Except in those areas where the Corporation Code specifically provides that all shares, voting and non-voting, are entitled to vote, all acts of the Board of Directors shall be subject to approval only by owners of shares who are entitled to vote". In connection with your query, quoted hereunder are the pertinent provisions of Section 6 of the Corporation Code. "Classification of shares. xxx xxx xxx Except as otherwise provided by the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share. Where the articles of incorporation provides for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or corporations; cdll 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation. Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights ." As presented in your letter, it is assumed that the charter of the corporation hypothetically raised in your letter has already shifted the voting power on the holders of common shares. This is deduced from your statement that the preferred shares have no voting rights, except in those instances expressly provided for by law. Such a shift in corporate control does not violate any rule of law nor public policy, but a mere matter of agreement between the two classes of stockholders which does not affect the public. In such a situation, therefore, the pertinent provisions of Section 6 of the Corporation Code, specifically the last two (2) paragraphs thereof are read into the charter of the corporation. Considering the foregoing, there appears no need to further amend the amended articles of incorporation of said domestic corporation incorporating the proposed provision earlier mentioned. Your attention is likewise invited to the provisions of Section 23 of the Corporation Law * which provides under the first paragraph thereof as follows: "The Board of Directors or Trustees. Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified." (emphasis supplied) A statute which vests the primary power of managing the affairs of the corporation in the directors will control even though the articles of incorporation and by-laws attempt to reserve such power to the stockholders. (2 Fletcher, Cyc. Corps.,1969 Rev. Vol.,sec. 505 p. 536, citing Gesell v. Tomahawk Land Co.,184 Wis. 537, 200 NW 550).The peculiar relation directors bear to the corporation and the owners of its stock grows out of the inability of the corporation to act except through such managing officers and agents. (Fletcher, p. 527).The power and authority in the directors to manage and conduct the affairs of the corporation are absolute so long as they act in accordance with their best judgment, and, in the absence of a dishonest purpose, or of fraud, bad faith, or negligence so gross as to amount to a breach of trust, their discretion will not be reviewed by the court in an action attacking their conduct. (Taft Realty Corp. v. Yorkhaven Enterprises, Inc.,146 Conn. 338, 150 A 2d 597, citing Fletcher Cyc. Corp.,permanent edition, sec. 505).Such power of the board, however, extends only to the ordinary or regular business of the corporation. (Fletcher, p. 537).Hence, the expression of corporate will and the performance of corporate functions pertaining to the management of the corporation are solely vested upon the board of directors, except in those cases where the law have expressly restricted their authority and made their action to rest for its validity upon the concurrence of the stockholders by prior action or subsequent ratification. Notwithstanding the foregoing, however, your attention is invited to the provisions of Section 97 of the Corporation Code wherein the articles of incorporation of a close corporation may so validly provide that the business of the corporation shall be managed by the stockholders rather than by the board of directors. cdlex Please be advised accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman * Copied verbatim from documents obtained directly from the Securities and Exchange Commission .