Subject : Cessation of business operations

October 26, 2004 SEC OPINION NO. 43-04 Subject : Cessation of business operations Ms. Shirly M. Malapote President Philcasa Services Training Center Corporation 340 Villamor St.,Brgy. Tibagan, San Juan, Metro Manila Dear Ms. Malapote, This refers to your letter dated August 16, 2004 which was referred to the Office of the General Counsel, requesting opinion on the following query: "Does the resolution and approval of the majority of the Board of Directors in its special meeting constituting a quorum to temporarily stop business operation of the corporation for reason beyond its control still needs a ratification by the stockholders on record? If so, does it need ratification by 2/3 of the stockholders or simply majority? If so, is the ratification in a meeting or not?" 1 It is well established in corporation law that "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." 2 However, there are limitations to this power and authority, as follows: 1. limitations or restrictions imposed by the Constitution, statutes, articles of incorporation, or by-laws of the corporation; 2. it can not perform constituent acts, that is, acts involving fundamental changes in the corporation, (such as amendment of the articles of incorporation under Sec. 16),which require the approval or ratification of the stockholders or members, and 3. it can not exercise powers not possessed by the corporation. 3 The corporate powers conferred upon the board of directors usually refer only to ordinary business transactions of the corporation and do not extend beyond the management of ordinary corporate affairs nor beyond the limits of its authority. 4 "There are some powers which are reserved to the shareholders/members and which cannot be exercised solely by the directors until they are approved or ratified by the stockholders/members. Thus, while the performance of the corporate functions pertaining to the management of the corporation is vested upon the Board of Directors, the Corporation Code has expressly restricted such Board authority and made certain corporate actions to rest for their validity upon the concurrence of the required statutory votes of the stockholders/members by prior action or subsequent ratification. 5 In your case, the issue as to the temporary stoppage of the operation of your corporation can no longer be classified as an ordinary business transaction such as to limit its approval to the board of directors. The cessation of your business, though temporary, is a fundamental concern which should be decided not only by the board but also by the stockholders themselves who stand to be primarily affected by such event. SCIacA Thus, considering the critical nature of the issue, which is not a mere exercise of management prerogative, the 2/3 vote of the outstanding capital stock is required either prior to the voting of the board or by subsequent ratification. A meeting of the stockholders must be called for this purpose. Very truly yours, (SGD.) VERNETTE G. UMALI-PACO General Counsel Footnotes 1. Letter of Ms. Shirley Malapote dated August 16, 2004, addressed to the SEC. 2. Section 23 of the Corporation Code of the Philippines. 3. De Leon, Corporation C od e of the Philippines Annotated, 2002 ed., p. 221. 4. SEC Opinion dated May 2, 1994, addressed to Mr. Nestor S. Mangio. 5. SEC Opinion dated October 16, 1995, addressed to Mr. Marcial Garcia.