Corporate Governance Within Corporate Law

Theories of Corporateness
1. Inherence Theory – this postulates the natural right to form corporations based on the
human right to freedom of association.
2. Concession Theory – holds that no association can be created and come into existence
as a corporation unless the State grants its approval.
3. Theory of Enterprise Entity – the corporate entity obtains its being from the reality of
the underlying enterprise, formed or in formation; the state’s approval of the corporate
form sets up a prima facie case that the assets, liabilities and operations of the
corporation are those of the enterprise.

Definition of Corporation
- Is an artificial being created by operation of law, having the right of succession and
the powers, attributes and properties expressly authorized by law or incident to its
existence.

Attributes of a Corporation
1. Artificial Being – came to exist by operation of law. A being with a legal personality of its
own, independent, separate and distinct of the incorporators or founding stockholders
and the shareholders who may buy in after its incorporation. It is like a natural person
because it is invested by law – Corporation Code – with attributes of an individual, with
the same capacity of a natural person to enter into contractual or legal relations, and to
possess the right to sue and be sued and to have the right of succession.
2. Man-made Creature of Law – following the Concession theory of corporateness, the
corporation comes into existence by virtue of mere registration with the Securities and
Exchange Commission.
3. Right to Succession – the stockholders may come and go, buy into the corporation and
sell out of it, but the corporation continues to exist because it is an artificial being with
personality separate and distinct from its shareholders.
4. Limited Power – since it is created by operation of law following the concession theory,
the states grants the corporation only limited powers as enumerated in the corporation
code – express powers, implied powers and incidental powers. It commits ultra vires act
the moment it exercises power outside or against these enumerated powers.

Corporate Charter
- The constitution of the corporation is the articles of incorporation and the by-laws.
They become binding on the corporation upon registration with SEC. It is the
registration with the SEC that gives birth to the corporation.

Articles of Incorporation
- Is the basic contract document which defines the charter of the corporation. The
Supreme Court in a 1929 case declared the charter of the corporation as a contract
between three parties:
 a. Between the State and the Corporation
b. Between the Stockholders and the State; and
c. Between the Corporation and the Stockholders.

- The provisions of the articles of incorporation are recognized by the Supreme Court
has having the force and effect of law among the parties. For instance, amendments
to the articles of incorporation cannot be made without the consent of the other
parties as required by Section 16 of the Corporation Code – approval by a majority
vote of the board of directors or trustees and the vote or written assent of the
stockholders representing at least two-thirds of the outstanding capital stock, or the
vote or written assent of at least 2/3 of the members if it be a non-stock
corporation.

By-Laws
- Are the rules and regulations or private law enacted by the corporation to regulate,
govern and control its own actions, affairs and concerns, and its stockholders or
members and directors/trustees and officers with relation thereto and among
themselves in their relation to it.
- In other words, by-laws are the relatively permanent and continuing rules of actions
adopted by the corporation for its own government and that of the individuals
comprising it, and having direction, management and control of its affairs, in whole
or in part, in the management and control of its affairs and activities.

Powers of the Corporation

1. Express powers
2. Necessary powers to exercise the express powers
3. Incidental powers to exercise the express powers

Statutory Corporate Powers and Capacity

- Under Section 36 of the Corporation Code, a corporation has the power:

1. To sue and be sued in its corporate name

2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation
 3.

Ultra Vires Acts

- Any exercise of power not included in the three kinds of power of a corporation is
ultra vires. In other words, any act or exercise of power not expressly provided by
the Corporation Code, including those which are necessary or incidental to the
exercise of express powers is deemed an ultra vires act and therefore null and void,
invalid and unenforceable.
- As an act that is beyond the conferred powers of a corporation or the purposes or
objects for which it is created as defined by the law of its organization. An ultra vires
act may be that of the corporation, its board of directors or its corporate officers.
Three types of Ultra Vires Acts
a. Acts done beyond the powers of the corporation provided in the Corporation Code and
its articles of incorporation.
b. Acts or contracts entered into on behalf of the corporation without any authority from
the board of directors or stockholders.
c. Acts or contracts which are per se illegal because they are contrary to law, morals, good
customs and public policy.

Example:

On June 1, 2024, A obtained a loan of P100,000.00 from B, payable not later than 20 December
2024. B required A to issue him a check for that amount to be dated 20 December 2024. Since
he does not have any checking account, A, with the knowledge of B, requested his friend, C,
President of S Bank to accommodate him. C agreed, he signed a check for the aforesaid
amount dated 20 December 2024, drawn against S Bank’s account with the ABC commercial
bank. The bylaws of S Bank require that checks it issued under the signature of the President
and the Treasurer or the Vice President. Since the Treasurer was absent, C requested the VP to
co-sign the check, which the latter reluctantly did. The check was delivered to B. The check
was dishonored upon presentment on the due date for insufficiency of funds. In this case, S
Bank is not liable for the check as an accommodation party. The act of the corporation in
accommodating a friend of its President is ultra vires.

Power of the Board of Directors

- Under section 23 of the Corporation Code, unless otherwise provided in the Code,
the powers of a corporation shall be exercised, all business conducted, and all
property of such corporation controlled and held, by the board of directors or
trustees to be elected from among the stockholders, or from members where there
are no stocks, who shall hold office for one year until their successors are elected
and qualified.

- Under the corporation code, unless otherwise provided by the said code, corporate
powers, such as the power to enter into contracts, are exercised by the board of
directors. However, the board may delegate such powers to either an executive
committee or officials or contracted managers. The delegation except for the
executive committee, must be for specific purposes. The delegation to officers
makes the latter agents of the corporation; accordingly, the general rules of agency
as to the binding effects of their acts would apply. For such officers to be deemed
fully clothed by the corporation to exercise a power of the Board, the latter must
specially authorize them to do so.
Board Must Act as a Body and Director Vote in Person

The corporation code under Section 25 requires that a majority of the quorum in a
board meeting is necessary in order that the decision or resolution of the board of directors
may become a corporate act. Thus, if there are 5 members of the BOD provided in the articles
of incorporation, 3 members must be present to constitute a quorum. To approve a resolution,
act, or contract, 2 directors of the 3 present must vote for its approval to make the act a valid
corporate act binding on the corporation.

The directors cannot bind the corporation in their individual capacity. Only when the
directors sit and act as a collective body can their act, decision or resolution bind the
corporation as a corporate act.

Except for the election of officers, which shall require the vote of a majority of all the
members of the board. As a general rule, only a plurality vote is required by the corporation
code to approve a corporate business or decision to constitute a corporate act. One instance
where absolute majority of all the members of the board is required is in the election of
corporate officers like the chairman, president, treasurer and secretary when so provided in the
articles of incorporation or by-laws.
Corporate Officers

Immediately after their election, the directors of a corporation must formally organize and
elect:

Under section 24

President – who must be a director

Treasurer - who may or may not be a director, and as a matter of sound corporate practice,
must be a resident.

Secretary – who need not be a director unless required by the by-laws and must be a resident
and citizen of the Philippines.

No one shall act as a president and secretary or as president and treasurer at the same time.