Atty. Danilo M. Castro

December 26, 1996 Atty. Danilo M. Castro Castro and Reyes Law Offices Suite No. 6, Lower Penthouse, Legaspi Towers 200 107 Paseo do Roxas, Legaspi Village, Makati City S i r : This refers to your letter dated December 16, 1996 requesting opinion on the legality of the corporate transaction described hereunder: llcd As stated, your client the Philippine Medical Association, Inc.,desires to enter into an agreement with a certain company which will construct a building on a property located at Quezon City owned by your client. After the construction of the building at no cost to your client, the contractor will offer for lease to third parties some portions of the finished building. Your client will be paid a consideration which might take the form of a percentage of the rentals. One or two of the topmost floors of the building will be for the use of your client. Your client intends to use the same for its administrative offices. If there are vacant spaces in the floors assigned to it, your client intends to offer for lease said vacant spaces to third person. After a certain member of years, say twenty years, the controller will transfer all its rights over the building to your client. Your client will not distribute to its members any income realized out of the contract with the contractor or the leases to third persons. Your query is, whether or not your client can legally enter into the transaction described above. The exercise of implied powers by a corporation is expressly recognized by law, particularly under paragraphs 7 and 11 of Section 36 of the Corporation Code quoted hereunder: "SECTION 36. Corporation powers and capacity. xxx xxx xxx. 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. xxx xxx xxx. 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. " (Emphasis supplied) The rule may thus be stated that in the absence of express restrictions, a corporation has the authority to enter into contracts or transactions which may be deemed reasonably essential or necessary to carry out its corporate purposes. No uniform rule has been or can be laid down as to what is or is not incident nor any test to determine whether a particular act is " reasonably necessary " to the exercise of the corporation's express powers. Each case must depend upon its particular facts and circumstances and upon the nature of the powers granted .(Agbayani, Commercial Laws of the Phil.,citing 6 Fletcher, 195).the Court held thus: "It is a question, therefore, in each case of the logical relation of the act to the corporate purpose expressed in the charter. If that act is one which is lawful in itself and not otherwise prohibited, is done for the purpose of serving corporate ends and is reasonably tributary to the promotion of those ends in a substantial and not in a remote and fanciful sense ,it may fairly be considered within charter powers. The test to be applied is whether the act in question is in direct and immediate furtherance of the corporation's business ,fairly incident to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it. Otherwise, not." (Montelibano v. Bacolod-Murcia Milling Co.,Inc.,G.R. No. L-15092, May 18, 1962, citing 6 Fletcher, 1950 Rev. Ed.,pp. 226-268, as quoted by Agbayani) Thus, the question of whether the above transaction is necessary in the pursuit of the business of the corporation is for the management body, the Board of Directors, to determine. It has to be emphasized however that any corporate transaction must not be tainted with bad faith or fraud and must not be prejudicial to the interest of the corporation. Very truly yours, (SGD.) PERFECTO R. YASAY, JR. Chairman