Mr. Virgilio M. Pascual

June 30, 1994 Mr. Virgilio M. Pascual Ilagan ,Isabela S i r : This refers to your letter of June 2, 1994 which was received by the Commission on June 10, 1994 requesting opinion on the following queries which we answer in the order they were presented. 1. Can the shareholders individually operate a concession area without the knowledge and consent of the corporation? A stockholder of a corporation is not prohibited to put up a business of his own, subject however to the following provision of the Corporation Code. "SECTION 34. Disloyalty of a director . Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture." 2. Can the shareholders perform functions not expressly granted by law nor incidental to corporate existence nor implied from such express or incidental powers? It is well-settled that the Board of Directors is the governing body of the corporation with whom the management of the corporate affairs is vested. The Corporation Code provides: "SECTION 23. 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) It is thus within the duty and power of the Board to administer and manage the corporate affairs. The board in the absence of express restrictions, has the discretionary power to enter into contracts or transactions which fall within what may properly be regarded as the management of the ordinary business of the corporation and which in its judgment is necessary or proper in order to carry out the objectives of the corporation without consulting with or obtaining consent of the stockholders. (2 Fletcher Ch 11 Sec. 505, citing several authorities) However, the corporate powers conferred upon the board of directors usually refer only to the ordinary business transactions of the corporation and does not extend beyond the management of ordinary corporate affairs nor beyond the limits to its authority. There are powers which are reserved to the shareholders and which cannot be exercised solely by the directors until they are approved or ratified by the stockholders. No board can usurp the power of control of the corporation vested by law in the shareholders. Thus, while the performance of the corporate functions pertaining to the management of the corporations is vested upon the Board of Directors, the Corporation Code has expressly restricted Board authority and made the following corporate actions to rest for their validity upon the concurrence of the required statutory votes of the stockholders by prior action or subsequent ratification: amendments of articles of incorporation (Section 16); adoption of new, amendment or repeal of the by-laws (Section 48); sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate assets (Section 40); incurring, creating or increasing bonded indebtedness (Section 38); increase or decrease of capital stock (Section 38); merger or consolidation of a corporation with another corporation or other corporations (Section 76); dissolution of corporation (Sections 118-120); investment of corporate funds in another corporation or business or for any purpose other than the primary purpose (Section 42); power of the corporation to enter into management contract with another corporation (Section 44); 10) power of the corporation to declare stock dividend (Section 43). prcd If your second query refers to the extent of business activities which can be undertaken by a corporation, it is well-settled that a corporation only has the powers as are expressly granted in its charter or in the statutes under which it is created or such powers as are necessary for the purpose of carrying out its express powers. (13 Am. Jur. Sec. 739) Only such powers as are reasonably necessary to enable corporations to carry out the express powers granted and the purposes of the creation are to be implied as are to be deemed incidental (Am. Jur. Sec. 740) Powers merely convenient or useful are not implied if they are not essential having in view the nature and object of incorporation. (Ibid, citing Planters Bank v. Sharp. 6 How (vs) 301, 12L, ED. 447) Thus, in the determination of what businesses may be carried on by a corporation, reference must be made to its articles of incorporation, and unless the power to carry a particular business is either expressly or impliedly conferred thereby it does not exist. (Chiwacla Line v. Disnukes, 8 Ala 344, 650, 122, 5 LRA 100, Cited in Am. Jur. Supra. sec. 743) 3. When is an officer or shareholder liable for corporate debt? 4. What are the circumstances that a stockholder can be liable to corporate creditor? It is well-settled in corporate jurisprudence that a corporation has a personality separate and distinct from that of each shareholder. This is an attribute or privilege most characteristic of a corporation. It means that the stockholders of a corporation are different from the corporation itself. Consequently, the corporate property is owned by the corporation as a distinct legal person, and the shareholders have only an indirect interest in the assets and business. For that matter, the property belonging to a corporation cannot be attached nor held answerable for the debts of the stockholders thereof. (Wise & Co., Inc vs. Man Sun Long, G.R. No. 46977, Enero 11, 1940, 69 Phil 309) Otherwise stated, the debt of a stockholder is not the debt of the corporation of which he is a stockholder, and conversely, the debt of the corporation is not the debt of any of its stockholders. However, the courts may disregard the above doctrine when it is used to defeat public convenience, justify wrong, protect or cover fraud or defend crime or work an injustice. If used in those situations, the corporation and the stockholders composing it shall be treated as one and the same, and consequently, the stockholders can be held personally liable to corporate debts. The courts will not hesitate to pierce the veil of corporate fiction when it would defeat the ends envisaged by law, as the theory of corporate entity was not meant to promote unfair objectives. 5. Can a shareholder invoke perpetuity in office as president of a corporation when the articles of incorporation fixes no term of office for corporate officers? The pertinent provision of the Corporation Code provides: "SECTION 25. Corporate officers, quorum . Immediately after their election ,the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws .Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time." (Emphasis supplied) Since the president and other corporate officers shall immediately be elected after the election of the Board of Directors, their term of office cannot extend beyond that of the members of the Board which under Section 23 of the Corporation Code is only one (1) year. 6. Can the stockholders be held liable for secret profit realized in violation of the trust reposed upon them? Any profit which may be earned by the stockholders of a corporation in other corporations is subject to the following provision of the Corporation Code: "SECTION 34. Disloyalty of a director . Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the Corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two thirds (2/3) of the outstanding capital stock. This provision shall be applicable notwithstanding the fact that the director risked his own funds in the venture." cdll 7. Can a president as chairman of the board terminate membership of a stockholder for dishonorable conduct, fraud and abandonment of duties even without the required two-thirds (2/3) vote of the Board of Directors if the delinquent stockholders are also member of the Board of Directors? 8. Does a president as chairman of the board have the power to remove or terminate membership of stockholders by reason of ultra vires act or dissolve the Board of Directors if the delinquent members are stockholders thereof? The Board of Directors or the Chairman thereof has no power to remove any of its members. The power to remove directors is vested in the stockholders. The Corporation Code provides, thus: SECTION 28. Removal of directors or trustees . Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing two-thirds (2/3) of the outstanding capital stock , or if the corporation be a non-stock corporation, by a vote of two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for that purpose, and either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as the intention to propose such removal, must be given by publication or by written notice as prescribed by this Code. The vacancy resulting from removal pursuant to this section may be filled by election at the same meeting without further notice, or at any regular or at any special meeting called for the purpose, after giving notice as prescribed in this Code. Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code." However, it has to be emphasized that while a member of the Board can be removed from office in accordance with the aforecited provision, he cannot be removed as a stockholder of the corporation. Any attempt to deprive a person of his ownership of shares of stock in a corporation should be done with due process. Article III, Section 1 of the Philippine Constitution provides, thus: "SECTION 1. No person shall be deprived of life, liberty, or property without due process nor shall any person be denied the equal protection of the laws." 9. Can the doctrine of piercing the veil of corporate entity be dispensed with if a stockholder commits fraud? Who is liable, the stockholder or corporation? Please see our answers to questions 3 and 4. 10. Can a president as chairman of the board institute judicial action against any stockholder of record by reason of a wrong done such as dissipation of corporate funds, fraudulent disposition of corporate assets or performance of ultra-vires acts? Any director, officer or stockholder who may have a cause of action against the corporation, other directors, officers or stockholders involving any intra-corporate matter or violation of the Corporation Code or other laws implemented by the SEC, may file a verified complaint with the Securities Investigation and Clearing Department of this Commission pursuant to P.D. 902-A, as amended, an the Revised Rules of Procedures in the Securities and Exchange Commission . Please be advised accordingly. Very truly yours. (SGD.) FE ELOISA C. GLORIA Associate Commissioner