Power of foundation to invest corporate funds

November 3, 2003 SEC OPINION NO. 54-03 Mr. Wilfredo U. Villanueva Partner, Tax Services Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City SUBJECT : Power of foundation to invest corporate funds S i r : This refers to your letters dated 26 September 2003 and 15 October 2003 requesting opinion on the following queries: 1. Whether or not CIGI Foundation Inc.,a non-stock, non-profit foundation, may invest its funds in or subscribe to shares of another domestic corporation; 2. Whether the term "funds" which the Foundation can use for purposes of its investment in another domestic corporation by subscribing to the latter's shares include "donation". We give a positive answer on your first query and a qualified one on the second, as elucidated in the following discussion. CIcTAE Section 42 of the Corporation Code of the Philippines provides: "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 corporations, at a stockholders' or members' meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided , That any dissenting stockholder shall have appraisal right as provided in this Code: 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. (17 1/2a) EHScCA Based on the foregoing provision, corporations like CIGI Foundation Inc. are expressly authorized to invest their corporate funds in another corporation or business as a means of obtaining the best returns of their investible funds. [C. L. Villanueva, Philippine Corporate Law (2001ed.),p. 257] Where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in its articles of incorporation, the approval only of the board of directors or trustees is necessary. [J. Campos and M.C. Campos, I The Corporation C od e (1990 ed.), p. 493, citing De La Rama -vs- Ma-ao Sugar Central, G.R.-L-17504 & L-17506, February 26, 1969] However, where the investment of funds is made in any other corporation or business or for any purpose other than the primary purpose for which the investing corporation was organized, the approval by the majority of the board of directors or trustees need the ratification 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 case on non-stock corporation. In this case, you assert that the investment of the Foundation in shares of stock of another corporation is in furtherance of its primary purpose, hence, requires only authorization from the board of trustees. EAHDac In our view, it is within the authority and business discretion of the Foundation's board of trustees to determine whether or not the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in its articles of incorporation. This is premised on the principle that one who has the power to perform an act is also vested with authority to decide whether the circumstances for the exercise of such power exists. [s. Tabios, Action Guides For Corporate Legal Management (1991 ed.) p. 200] This Commission cannot make such determination for this agency ought not to meddle in matters which clearly involve the exercise of business judgment of the board of directors or trustees of a corporation. As regards the second issue, the term " funds " under Section 42 of the Corporation Code include any corporate property to be used in the furtherance of business. [SEC Opinion dated November 9, 1994] We concur with your view that "funds" include donations received by the corporation from other entities. Nonetheless, we believe that the "funds" which the Foundation can use for purposes of subscribing to shares in another domestic corporation shall pertain only to "portion of the earnings" of the properties of the Foundation. This can be inferred from the provision of the Articles of Incorporation of the Foundation, thus: "10. To invest such other portions of the earnings of the properties of the Foundation in shares of stocks, bonds, time deposits, and/or such other projects as the Board of Trustees may determine to be advisable or proper to improve the earnings of the Foundation and make more assets available to it in the future to carry out the purpose of the Foundation." Clearly, for purposes of investing in shares of stocks, bonds, time deposits and such other similar investment activities, the Foundation can use only portions of the earnings of Foundation's properties. Undeniably, the articles of incorporation itself requires that for the aforesaid investment activities, only particular funds can be used which, in this case, refer only to "portions of earnings" of Foundation's properties. Apparently, this is a limitation imposed by the articles of incorporation on the investment authority of the board of trustees. Upon the other hand, for other investment activities such as acquisition, purchase, operation, development, lease, mortgage, pledge, exchange, sell, transfer or investment in real or personal property of every kind and character, under Section 10, Article II of the Articles of Incorporation, the corporate funds of the Foundation can be used. CSIDEc We hope we satisfactorily answered your query. (SGD.) RUSSELL I. ILDESA Officer-in-Charge Office of the General Counsel