Corporation Law: The Revised Corporation Code of the Philippines - Sec 44

  THE REVISED CORPORATION CODE  OF THE PHILIPPINES

Republic Act No. 11232 

TITLE IV -  POWERS OF CORPORATIONS

Section 44. Ultra Vires Acts of the Corporations.

No corporation shall possess or exercise corporate powers other than those conferred by this Code or by its articles of incorporation and except as necessary or incidental to the exercise of the powers conferred.

1. Concept. 

• It can be inferred from Section 44 of the RCCP that ultra vires acts are those powers that are:
• not conferred to the corporation by the RCCP and special laws, by its Articles of Incorporation 
• not implied or necessary or incidental to the exercise of the powers so conferred
• An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the powers conferred upon it by law.
• The language of the Code appears to confine the term ultra vires to an act outside or beyond express, implied and incidental corporate powers. 
• For example, an "educational institution, may not secure the loans of third persons. Securing loans of third persons is not among the purposes for which petitioner was established."
• On the other hand, a power that is incidental to the stated purpose of the corporation is not ultra vires. 
• Nevertheless, the concept can also include those acts that may ostensibly be within such powers but are, by general or special laws, either proscribed or declared illegal.
• Justice Vitug explained in one case that "in determining whether or not a corporation may perform an act, one considers the logical and necessary relation between the act assailed and the corporate purpose expressed by the law or in the charter. 
• For if the act were one which is lawful in itself or not otherwise prohibited and done for the purpose of serving corporate ends or reasonably contributes to the promotion of those ends in a substantial and not merely in a remote and fanciful sense, it may be fairly considered within corporate powers.

1.01. Presumption of Validity. 

• In Coleman v. Hotel De France, the Court ruled that it is presumed that corporate acts are valid if, on their face, the acts were within the corporation's powers or purposes. 
• The Court explained: 
• "Coleman involved a hotel's cancellation of an employment contract it executed with a gymnast. One of the hotel's contentions was the supposed ultra vires nature of the contract. It was executed outside its express and implied powers under the articles of incorporation. 
• In ruling in favor of the contract's validity, this court considered the incidental powers of the hotel to include the execution of employment contracts with entertainers for the purpose of providing its guests entertainment and increasing patronage. 
• This court ruled that a contract executed by a corporation shall be presumed valid if on its face its execution was not beyond the powers of the corporation to do. Thus: 
• When a contract is not on its face necessarily beyond the scope of the power of the corporation by which it was made, it will, in the absence of proof to the contrary, be presumed to be valid. Corporations are presumed to contract within their powers. The doctrine of ultra vires, when invoked for or against a corporation, should not be allowed to prevail where it would defeat the ends of justice or work a legal wrong. 
• However, this should not be interpreted to mean that such presumption applies to all cases, even when the act in question is on its face b yond the corporation's power to do or when the evidence contradicts the presumption."

2. Distinguished from Other Acts. 

• Strictly speaking, an ultra vires act is one outside the scope of the powers conferred by the legislature, and although the term has been used indiscriminately, it is properly distinguishable from acts which are:
• illegal
• in excess or abuse of power, or 
• executed in an unauthorized manner, or 
• acts within corporate powers but outside the authority of particular officers or agents.
• Corporate transactions, which are illegal because prohibited by statute or against public policy, are ordinarily void and unenforceable regardless of performance, ratification, or estoppel. 
• In other words, an act of the corporation which is either illegal or outside of express, implied or incidental powers as so provided by law or the charter would be void under Article 1409 of the Civil Code, and the act is not susceptible to ratification
• Generally, a transaction within corporate powers but executed in an irregular or unauthorized manner is voidable only, and may become enforceable by reason of ratification or express or implied assent by the stockholders or by reason of estoppel of the corporation or the other party to the transaction to raise the objection, particularly where the benefits are retained. 
• In addition, the general rule is that a corporation must act in the manner and with the formalities, if any, prescribed by its charter or by the general law. 
• However, a corporate transaction or contract which is within the corporation powers, which is neither wrong in itself nor against public policy, but which is defective from a failure to observe in its execution a requirement of law enacted for the benefit or protection of a certain class, is voidable only and is valid until avoided, not void until validated; the parties for whose benefit the requirement was enacted may ratify it or be estopped to assert its invalidity, and third persons acting in good faith are not usually affected by an irregularity on the part of the corporation in the exercise of its granted powers.
• Justice Vitug explained the rule with respect to unauthorized acts of officers that are sometimes called ultra vires acts of the officers (as opposed to ultra vires act of the corporation itself):
• "When the act of the board is within corporate powers but it is done without the concurrence of the shareholders as and when such approval is required by law or when the act is beyond its competence to do, the act has been described as void or, as unenforceable, or as ineffective and not legally binding. These holdings notwithstanding, the act cannot accurately be likened to an ultra vires act of the corporation itself defined in Section 45 of the Code. Where the act is within corporate powers but the board has acted without being competent to independently do so, the action is not necessarily and totally devoid of effects, and it may generally be ratified expressly or impliedly. Thus, an acceptance of benefits derived by the shareholders from an outside investment made by the hoard without the required concurrence of the stockholders may, nonetheless, be so considered as an effective investment. It may be said, however, that when the board resolution is yet executory, the act should aptly be deemed inoperative and specific performance cannot be validly demanded but, if for any reason, the contemplated action is carried out, such principles as ratification or prescription when applicable, normally unknown in void contracts, can serve to negate a claim for the total nullity thereof."
• It was further explained that corporate officers, in their case, may act on such matters as may be authorized either expressly by the By-laws or Board Resolutions or impliedly such as by general practice or policy or as are implied by express powers.
• When officers are allowed to act in certain particular cases, their acts conformably therewith can bind the company. 
• Hence, a corporate officer entrusted with general management and control of the business has the implied authority to act or contract for the corporation that may be necessary or appropriate to conduct the ordinary business. 
• If the act of corporate officers come within corporate powers but it is done without any express or implied authority therefor from the by-laws, board resolutions or corporate practices, such an act does not bind the corporation. 
• The Board, however, acting within its competence, may ratify the unauthorized act of the corporate officer. 
• So, too, a corporation may be held in estoppel from denying as against innocent third persons the authority of its officers or agents who have been clothed by it with ostensible or apparent authority.
• Ultra vires acts are not necessarily "patently unlawful acts" within the contemplation of Section 30 of the RCCP.
• Hence, the directors are not personally liable under Section 30 just because the contract that they signed is ultra vires.

3. Effects of Ultra Vires Acts. 

• "Third persons dealing with corporations cannot assume that corporations have powers. It is up to those persons dealing with corporations to determine their competence as expressly defined by the law and their articles of incorporation.
• However, If the act is ultra vires not because it is illegal but because it is not an express, implied or incidental power, the same may, in certain cases, be enforced.
• General prohibitions against exceeding corporate powers and prohibitions intended to protect a particular class or specifying the consequences of violation may not preclude enforcement of the transaction and an action may be had for the part unaffected by the illegality or for equitable restitution. 
• Senator Salonga summarized the rules in this wise:

1. A corporation that is engaged in ultra vires business is liable for torts committed by its agents within their authority in the course of that business.
2. If a corporation acted outside its authority in taking or holding title to property, the validity of the Torrens Certificate of Title cannot be questioned on the ground that the corporation was without authority or exceeded its authority in taking or holding the property.
3. When the contract is fully executed on both sides, the contract is effective and will stand as a foundation of rights acquired under it.
4. When the contract is executory on one side and has been fully performed on the other, the party who has received benefits from the performance is estopped in claiming that the contract is ultra vires.
5. When both contracts are wholly executory on both sides, neither party can maintain an action. The rule is justified since the only injustice that will be caused is loss of prospective profits but the protection of the stockholders may be a sufficient ground to enjoin the performance of the act. 

3.01. Voidable.

• The Supreme Court ruled that "unauthorized acts that are merely beyond the powers of the corporation under its articles of incorporation are not void ab initio."
• The contracts entered into in the exercise of ultra vires as are not within the scope of the articles of incorporation, are merely voidable and may become binding and enforceable when ratified by the stockholders.
• It was observed in both Pirovano v. De la Rama Steamship Company and Republic of the Philippines v. Acoje Mining Company that an ultra vires act can be ratified and parties may be estopped from raising such defense. 
• However, the observations in the same cases appear to be obiter dicta. 
• Nevertheless, the rule that ultra vires acts can be ratified was reiterated in University of Mindanao, Inc. v. Bangko Sentral ng Pilipinas, provided that the corporation was aware of the transaction allegedly ratified. 
•  Ratification must be knowingly and voluntarily done, hence, a corporation cannot be deemed to have ratified an ultra vires contract if the corporation lacks of knowledge about the contract executed in its name.
• It is believed that an ultra vires contract is void and cannot be ratified. 
• As the Court observed in one case, ultra vires acts or acts which are clearly beyond the scope of one's authority are null and void and cannot be given any effect.
• In Civil Law, ratification is an act of approving a contract entered into by another without authorization. However, it is required that at the time of the ratification the cause of nullity has already ceased to exist.
• In ultra vires act, the act is not within the power of the corporation, hence, the ground for being ultra vires cannot cease.
• The effect of ultra vires contracts for both partially executed and wholly executed contracts stated earlier can still be maintained on the basis of estoppel. 
• Thus, without saying that the contracts were ratified, the parties can be estopped from citing the ultra vires nature of the acts.
• However, estoppel cannot be invoked against the State. Hence, the certificate of incorporation may be revoked by the SEC if the concerned corporation performs ultra vires acts. Performance of ultra vires acts is a violation of the contract between the State and the corporation.