Corporate powers can be express or implied
By Gladys Jane Dela Cruz on June 23,2022
A CORPORATION is a juridical entity. It exists by virtue of law. Its powers are also conferred by law. As a general rule, no corporation should possess or exercise corporate powers other than those expressly conferred by its articles of incorporation (AOI) or the Revised Corporation Code (RCC). However, it may exercise powers necessary or incidental to its express powers (Section 44, RCC).
There are two classes of corporate powers. Express powers are those expressly authorized by the RCC or the corporation’s charter. Second is incidental or implied powers or those necessary to a corporation’s existence or to carry out express powers. If a corporation exercises an act that does not fall under these two, the act will be considered ultra vires. Ultra vires acts are voidable but may become binding and enforceable when ratified by stockholders.
A corporation’s purpose clause, found in its charter or AOI, confers and restricts the powers the corporation may exercise.
In Magallanes Watercraft Association Inc. v. Auguis and Basnig (GR 211485, May 30, 2016), the Supreme Court emphasized that corporate powers included implied or incidental ones. It ruled that while the corporate act of suspending the rights and privileges of the respondent for failure to pay membership dues was not expressly included in the RCC or petitioner’s charter, the corporation could impose sanctions because membership dues enabled it to discharge duties under its charter.
The questioned act was not ultra vires since it was reasonably necessary to further the interest and welfare of petitioner-corporation. Otherwise, the Supreme Court said, the corporation would be rendered inutile as it would have no means of ensuring that its members would promptly settle their obligations, thereby hindering operations.
In an opinion, meanwhile, the Securities and Exchange Commission (SEC) posited that a corporation registered with the primary purpose of selling fire-fighting apparel or gear could not engage in the manufacture of said products because manufacturing was not reasonably necessary or incidental to the business of selling — it is not indispensable that a trader or dealer be the manufacturer of the goods being sold. The SEC said the difference between a seller and a manufacturer could be deduced from the “Retail Trade Liberalization Act of 2000” (Republic Act 8762), which excluded from the coverage of “retail trade” sales made by a “manufacturer or processor of the products…” (SEC-OGC Opinion 07-14, July 18, 2007).
The SEC also opined that a non-stock corporation could engage in online selling if such was necessary to its primary purpose. While non-stock corporations are generally not authorized to pursue commercial business activities, they may be allowed when income from such activities are essential, incidental or reasonably necessary for the corporation to carry out its express powers in furtherance of its primary purpose.
In this case, the corporation’s primary purpose was to preserve and enhance Philippine arts and culture and to transact business as necessary for the accomplishment of its purpose. Accordingly, the SEC said that the online selling of products that featured Philippine culture and the works of Filipino artists were reasonably necessary. It also said that corporations authorized to engage in selling in general could do so online because the latter was just a mode or means of selling (SEC-OGC Opinion 19-39, September 18, 2019).
Recently, the SEC addressed a query of a Philippine branch whether the latter could engage in “after-sales support services” as such was not expressly included in the purpose for which the branch was granted a license. Since the branch’s purpose was to operate the business of wholesaling of hydraulic excavators and cranes and their attachments, parts and components, the SEC said after-sales support services were necessary and implied from the authorized activity. The branch should cater to machinery maintenance and customer queries or complaints and coordinate with local dealers for the sale and marketing of its products.
The SEC further opined that the meaning of the purpose clause could even be reasonably stretched to cover new and unexpected situations due to poor draftsmanship of incorporation papers, lack of foresight on the part of incorporators or circumstances that could not have been foreseen at the time of the incorporation (SEC-OGC Opinion 22-08, May 30, 2022).
What a corporation can or cannot legally do ultimately depends on whether the corporate act is covered by the corporation’s express powers, as stated in the RCC or its AOI, or if such act is incidental to or implied from its express powers and thus relevant to the purpose for which the corporation was established.
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Gladys Jane M. de la Cruz is an associate of Mata-Perez, Tamayo and Francisco.