De Santos, Balgos & Perez Law Offices

January 2, 1981 De Santos, Balgos & Perez Law Offices 5th Floor, Corinthian Plaza Paseo de Roxas, Makati Metro-Manila Attention : Orlando C . Paray Gentlemen : This refers to your letter-query dated 8 October 1980 relative to the authority of the Board of Directors to approve new products, expand on-going projects and issue funds therefor. cdlex As a matter of policy, this Commission refrains from rendering opinions on any hypothetical case presented before it involving any of the statutes entrusted to it for enforcement. Unless the case is an actual one and the facts thereof are fully disclosed, the Commission cannot make any pronouncement on the points raised in the query. However, purely for purposes of general discussion on the facts stated in your letter, the following information may be imported: Your first query is whether the board of directors can approve the feasibility study of a new product and expansion of on-going projects without consulting the stockholders or calling a special stockholders' meeting for that matter. A corporation is a thing or entity created by statute for a particular purpose; it can only act through its directors chosen by the stockholders and its officers chosen by the directors. And the board of directors is the central power which authorizes the executive agents of the corporation to enter into contracts and embark upon new business ventures. (2 Fletcher 505 citing Frank Gilbert Paper Co. v. Prankars, 204 App. Div. 83, 198 N.Y. Supp. 25) Feasibility studies and expansion of on-going projects being part of business management and operation, pertain to the functions of the board of directors. As long as the said activities are undertaken to carry out the corporate objectives stated in the articles of incorporation, the board of directors may approve the same without consulting the stockholders. We, therefore, answer your first query in the negative and its corollary question in the affirmative. As to the second query which refers to the board of directors' approval of budget for new products and projects, the hereinunder quoted provision of the Corporation Code of the Philippines is pertinent: "SECTION 42. 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 or 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 non-stock corporation at a stockholders' or members' meeting duly called for the purpose ...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 ." (Emphasis ours) cdlex With respect to the third query which asks whether the stockholders' vote will be necessary to increase equity by calling for the payment of unpaid subscriptions but without increasing the authorized capital stock, Fletcher has this to say: "In the absence of express provisions on the subject, calls may and must be made by the board of directors as the managing agents of the corporation, and the power to make them is often expressly conferred on the directors by the charter, articles or statute." (4 Fletcher 1803 Pac. 659; 3 Am. St. Rep. 169) Thus, a call does not need stockholders' vote unless expressly required by the articles of incorporation. Lastly, you want to know if the board of directors, at its own accord, can authorize the corporation to borrow funds for new products or expansion of on-going project. Whatever requirements there may be in the charter or statutes as to the mode and manner of effectuating a loan to the corporation should be complied with. Where so required, the borrowing should be authorized by the corporation's board of trustees or by a by-law duly sanctioned by the stockholders. As a rule, however, no action of the stockholders is required in the borrowing of money by the corporation. If the power to borrow is expressly conferred, the corporation may borrow through a trustee." (28 Fletcher 2617). In cases where the corporation will be required to execute bonds, security or other evidence of indebtedness for the loan, the following provision of Section 38 of the Corporation Code shall apply: "No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholders' meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness." (first sentence, first paragraph) Please be guided accordingly. Very truly yours, For the Chairman: (SGD.) ROSARIO N. LOPEZ Director Corporate and Legal Department