Corporation Law: The Revised Corporation Code of the Philippines - Sec 41

THE REVISED CORPORATION CODE  OF THE PHILIPPINES

Republic Act No. 11232 

TITLE IV -  POWERS OF CORPORATIONS

Section 41. 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, 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 outstanding capital stock, or by at least two-thirds (2/3) of the members in the case of nonstock corporations at a meeting duly called for the purpose. Notice of the proposed investment and the time place of residence as shown in the books of the corporation and deposited to the addressee in the post office with the postage prepaid. Served personally, or sent electronically in accordance with the rules and regulations of the Commission on the use of electronic data message, when allowed by the bylaws or done with the consent of the stockholders: 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.

1. Pursuing Primary Purpose.

• Investment of a corporation in a business, which is in line with its primary purpose, requires only the approval of the Board. 
• Section 41 expressly provides 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. 
• Thus, only Board approval is necessary if an investment is directly for the accomplishment of the primary purpose or is necessary or incidental in the exercise of such primary purpose.

2. Corporation as lncorporator. 

• Section 41 of the RCCP­ does not distinguish between an:
• investment by a corporation in another existing corporation and 
• investment as an incorporator in a new corporation to be formed
• The implication is that even an investment by a corporation as an incorporator would be subject to Board approval only — that is, not subject to stockholders' or members' ratification — if the same is reasonably necessary to accomplish its primary purpose. 
  
• However, under the first paragraph of Section 5 of SEC Memorandum Circular No. 16, Series of 2019 (approved on 30 July 2019), it is provided that: 
• "In the event that an SEC-registered domestic corporation or association is made an incorporator, its investment in the new corporation must be 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 nonstock corporations, at a meeting duly called for the purpose." 
• The above requirement for stockholders'/members' ratification under the Circular does not provide for any exception. 
• Thus the implication is that even if the investment in the new corporation is reasonably necessary to accomplish the investor-incorporator's primary purpose, ratification by the stockholders/members is required. 
• This is in contrast with the provisions of Section 41 of the RCCP, specifically the last proviso therein.

3. Pursuing Secondary Purpose. 

• If the corporation will pursue its secondary purpose, it is required under Section 41 that the following must concur:

1. There must be approval by a majority of the board of directors or trustees;
2. The approval of the board must be ratified by the stockholders representing at least 2/3 of the outstanding capital stock, or by at least 2/3 of the members in the case of non-stock corporations, at a stockholders' or members' meeting duly called for the purpose; and
3. In calling the stockholders' meeting, notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his/her/ its place of residence as shown in the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally, or sent electronically in accordance with SEC rules and regulations on the use of electronic data message when allowed by the By-Laws or done with the consent of the stockholders.

4. Appraisal Right. 

• The dissenting stockholder is given the right of appraisal whenever the corporation decides to pursue its secondary corporate business. 
• Appraisal right is granted because the stockholder will be exposed to a line of business that is not being pursued when he invested in the company. 
• His investment will be exposed to additional risks which was not contemplated when he made the investment.

5. Meaning of Investment.

• Investment of funds includes not only investment of money but also investment of property of the corporation.
• If the business of a corporation is such as to render it necessary for it to own a certain kind of property, and at times such property is not necessary to its business, it may employ the property in a business or for a purpose which is not strictly within the primary purpose in order to prevent the some from remaining idle and unprofitable.
• For example, a corporation that is incorporated to engage in trading business may be allowed to lease its properties to interested parties. Lease of the property is included in the term "investment of funds.
• However, the SEC imposes the following requirements: 

1. That the property is not presently used by the company and the leasing thereof is not made on a regular basis; 
2. That by leasing the property, it will make it productive instead of allowing them to remain idle; 
3. That there are no express restrictions in the Articles of Incorporation or By-Laws; 
4. That the leasing is not used as a scheme to prejudice corporate creditors or result in the infringement of the Trust Fund Doctrine; and 
5. That there must be compliance with the requirements of Section 41. 

6. Investment in Shares. 

• It is believed that Section 41 of the RCCP does not cover passive investment. 
• The same may be justified in the exercise of general power to purchase securities in other corporations as provided for under Section 35(g) of the RCCP. 
•  Thus, a corporation with idle funds may invest in shares for the purpose of generating income. 
• It is within the authority and business discretion of the Board of Directors or Trustees of a corporation to determine whether or not the investment by the corporation through acquisition of shares in another corporation is reasonably necessary to accomplish its primary purpose as stated in the Articles of Incorporation.

7. Investment in Notes.

• A corporation can invest its idle funds in bonds. 
• A corporation can also invest in corporate notes issued by private corporations and government-owned or controlled corporations. 
• This can be justified under Section 35 of the RCCP which empowers corporations to deal with real and personal properties including securities and bonds of other corporations as the transaction of lawful business of the corporation may reasonably and necessarily require. 
• Corporations are authorized to invest corporate funds as a means of obtaining the best return of their investible funds. 
• However, the requirements of Section 41 should be complied with if the investment is not pursuant to the primary purpose of the corporation.

PROBLEMS:

X, a domestic corporation, owns and operates a sugar central. In the year 2000, the President of X invested Pl,000,000.00 of company funds in shares of A, a domestic corporation engaged in the manufacture of sugar bags out of sugarcane by-product as basic raw material. X became the biggest consumer of the bags produced by A. In 2002, A shutdown its operation due to high costs of production and huge losses already suffered. Stockholder B of X assailed the investment in A as violative of the Corporation Code. The Board of Directors of X then met and ratified the investment made by the President. What is the effect of the ratification by the Board?

The ratification by the Board of Directors makes the investment valid and binding. The action of the Board is sufficient to approve such investment because it appears that the same is in line with the primary purpose of the corporation. The investment by a sugar company in another corporation engaged in the manufacture of sacks for sugar does not require the ratification by a 2/3 vote of the outstanding capital stock, since such was done pursuant to the primary purpose of the investing corporation. It is only when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation that the 2/3 vote of stockholders is required. (See De la Rama v. Ma-ao Sugar Central Co., Inc., 27 SCRA 247 [1969]) (1971 Bar)

ABC Corporation is engaged in the business of manufacturing soft drinks. For the past 10 years, it has bought all its bottles from XYZ Corporation. Considering the volume of its production, it now finds that it will be more economical to manufacture its own bottles. The Board of Directors, after studying and discussing the matter thoroughly, decides to set aside the amount of Pl,000 ,000 .00 for this project. Most of this amount will go to the cost of equipment and materials. M is a stockholder of ABC Corporation and is against the investment in the bottling project and would like to withdraw from the corporation by exercising his appraisal right if the project goes through. He therefore demands that the project be submitted to the stockholders for approval, but the board refuses to do so on the ground that there is no need for such approval and that the calling of a special stockholder's meeting would entail too many expenses. M, thus, cannot have the opportunity to exercise his appraisal right. He wants to sue the board to compel it to submit the matter to the stockholders and to enjoin it from pursuing the project until the stockholders shall have approved it.

Before whom should M file his suit? Why?

M should bring his case before the proper Regional Trial Court because the case is in the nature of an intra-corporate controversy. The jurisdiction of the SEC to hear and decide cases involving controversies arising out of intra-corporate relations between any stockholder and the corporation has been transferred to the courts of general jurisdiction by virtue of R.A. No. 8799.

Do you think the matter needs the stockholders' approval or is the action of the Board of Directors sufficient? Explain.

No, the matter does not need the approval of the stockholders. The action of the Board is sufficient because under Section 42 of the Corporation Code (now Section 41 of the RCCP), stockholders' approval is not necessary if the investment is reasonably necessary to accomplish the corporation's primary purpose. In this case, the manufacture of bottles is reasonably necessary for the corporation's primary business of manufacturing soft drinks. (1983 Bar) 

Stikki Cement Corporation (STIKKI) was organized primarily for cement manufacturing. Anticipating substantial profits, its President proposed that STIKKI invest in (a) power plant project, (b) concrete roads project, and (c) quarry operations for limestone used in the manufacture of cement. What corporate approvals or votes are needed for the proposed investments? Explain.

All the proposed actions require only the approval of the board of directors provided that they are reasonably necessary to accomplish the primary purpose of the corporation. A power plant that is meant to cater to the needs of the cement factory is reasonably necessary to accomplish the primary purpose. Moreover, construction of concrete roads leading to the factory or the quarry may also be deemed necessary for the accomplishment of the primary purpose. With respect to the quarry operations for the limestone, the same is an indispensable ingredient in the manufacture of cement and may therefore, be considered reasonably necessary to accomplish the primary purpose of STIKKI. (1995 Bar)