REQUERIMIENTOS ESPECIFICOS

A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired:

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (n)

 The enumeration is by no means exclusive since other purposes, which have legitimate business objectives, are acceptable to justify a stock corporation purchasing or acquiring its own shares. (Page 253 of CLV’s Textbook)

 A corporation’s right to purchase its shares is subject to the following limitations:

(1) That its capital is not thereby impaired

(2) That it be for a legitimate and proper corporate purpose (3) That thee shall be unrestricted retained earnings to purchase

the same and its capital is not thereby impaired

(4) That the corporation acts in good faith and without prejudice to the rights of creditors and stockholders

(5) That the conditions of corporate affairs warrant it. (SEC Opinions)

Catindig Class Notes

Q: Can a corporation acquire its own share?

A: No. the general rule is that the corporation has no right to acquire its own share unless permitted by legitimate corporate purposes. Q: Is acquisition of own shares the only way to eliminate fractional shares?

A: No. The BoD may allow the SH to round-up or to pay the corporation to get 1 whole share. If the SH refuses to buy, the BoD may provide that the corporation shall buy the fractional part of the SH.

Q: Can redeemable shares once redeemed be revived?

A: No. Same is true with regard to convertible shares (e.g. preferred to common, preferred disappears)

Example: There are 5 incorporators. 1 died and survived by his widow. Can the corp buy the shares from the widow? For what good corporate purpose?

(1) The corp can exercise its right of first refusal (applies to transferors thru succession)

(2) In the Minutes, to help the widow to liquidate her shares of stock. (good reputation of the corporation). If all signed the Minutes, no one can complain afterwards.

(g) To invest corporate funds in another corporation

or business (Section 42)

Sec. 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 stockholder's or member's 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)

Jack’s Lecture

Under Section 42, the corporation can invest its funds in another corporation but it is with the same purpose, you only

need approval by the Board, you don’t need stockholder approval. This is why the Court has said SMC can buy a brewery in Hong Kong without need of getting stockholder approval because that is consistent with the primary purpose of the corporation.

In the same way that the Court has said that Mau Sugar Central could buy a company that manufactures sugar bags. It doesn’t have to get SH approval because that is related to its primary purpose. Because you need sugar bags to pack the sugar that it is selling.

 Rationale of Rule. The law presumes that when stockholders invest, or members join a corporation, it is with the primary expectation that the corporation, through its board, will only pursue the primary purpose indicated in the articles of incorporation, and if the board feels that it is propitious to pursue a secondary purpose, then it would do so only if the stockholders or members have had a chance to evaluate an decide upon such diversion of corporate funds from the primary business of the corporation. ((Page 256 of CLV’s Textbook)

 The term ―funds‖ in Section 42 includes any corporate property to be used in furtherance of the business. Thus, idle corporate property may be temporarily leased to make it productive in the absence of express restrictions in the articles of incorporation or by-laws and the leasing is not used as a scheme to prejudice corporate directors, subject to the requirements of Section 42.

 A non-stock, non-profit foundation may invest its funds in or subscribe to shares of another domestic corporation. The term ―funds‖ as used in Section 42 include ―donations‖ received by the corporation from other entities. However, its power to invest is limited by its articles of incorporation. (SEC Opinion No. 54, Nov. 3 , 2003)

 A secondary purpose. The other purposes for which funds may be invested without amending the article of incorporation must be among those enumerated in the articles of incorporation. In order to legally engage in any of its

secondary purposes, the corporation must comply with Section 42.

 Not among the secondary purposes. A corporation is not allowed to engage in a business distinct form those enumerated in the articles of incorporation without amending the purpose clause of said articles to include the desired business activity among its secondary purposes.

 Incident to primary purpose. A corporation may invest its funds in another business which is incident or auxiliary to its primary purpose as stated in its articles of incorporation without the approval of the stockholders or members as required under Section 42. Even holders of no-voting members, as the case may be, are entitled to vote on the matter. In such a case, a dissenting stockholder shall have no appraisal right. (Page 376-378 of De Leon, 2006)

 All corporations, whatever may be their primary purposes, are deemed to have the power to invest corporate funds in another corporation or business, as a means of obtaining the best returns of their investible funds. (Page 257 of CLV’s Textbook)

Catindig Class Notes

Q: Can a cement corporation with excess cash put up a power plant/generator? Build a road?

A: Yes, if there is insufficient power in the cement factory for that will further the primary business.

C: Business means your own business. (Can be your secondary purpose)

Q: A corporation is engaged in mining. It makes no much money and decides to engage in commercial fishing. What kinds of approval needed?

A: If within the secondary purpose BoD + SHs

If outside secondary purpose BoD+SHs+ SEC

(h) To declare dividends (Section 43)