No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than five years for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations. (n)
Jack’s Lecture
A corporation can enter into a management contract. What the law really does here is to regulate management contracts. Mgt contracts can be necessary at times. Like here is a mining company whose directors and officers don’t know anything about mining. They can enter into a contract with a corporation which has technical expertise to manage its mines.
You have that case of Nielson & Co. vs. Lepanto where Lepanto entered into a managment contract with Nielson & Co. to manage its mines. When the war broke out, the Japs took over the mines of Lepanto. (Yamashita must have been there.) After the war, Nielson wanted to continue the contract because there was a stipulation there that if the contract is interrupted, it will be extended. Lepanto did not agree. Nielson & Co. sued. The contract provided that they would be provided a certain percentage of the gross income as their management fee. In addition, Nielson & Co. would get a certain percentage of the stock dividends that will be declared. Lepanto lost in the SC in December 1966. The award reached about 30 Million pesos. (That case was handled by Ike Bello (for Lepanto) who was devastated by the decision.) Lepanto went to our office which drafted a motion for reconsideration. One of the arguments raised was that a management contract is a contract of agency. Therefore, it can be terminated at any time. But the Court rejected that argument. The Court said that a management contract is a contract for lease of services. It does not involve a representation so you cannot terminate it at any time. The Court, however, eliminated the award for stock dividend. It said that Nielson & Co. was not a stockholder and only a stockholder can be given stock dividends.
The law tries to regulate management contracts because it has been used too often to _______ money for the corporation. When Soriano was still managing PAL, he was a minority stockholder but he had this compania which had a management contract. So Soriano & Co. was getting a percentage of the gross income of PAL. Everytime PAL would buy or sell anything, it had a commission. When Toda(?) took over PAL, he did the same thing with his Rubicon which had a management contract. That’s why when Mr. Fred Ramos of National Bookstore was questioning this/ was waging a proxy fight against Soriano III in Atlas Mines, that was an issue he raised. He said that Atlas Mining had a management contract with Soriano Compania which was charging a fee based on the gross income. This was a time when Atlas was incurring losses. In fact, later, Atlas Mining closed.
This is why the laws says that a management contract should be approved by majority of the Board, by majority of the stockholders, of both the managed and managing corporation. And if a stockholder of the managed corporation owns more than 1/3 of the managing corporation, the management contract must be approved by at least 2/3 of the stockholders of the managed corporation.
A management contract should not be valid for more than 5 years for any one term. You can just keep renewing it provided, that it is not for more than 5 years at any one time.
Management Contract is an agreement which a corporation delegates the management of its affairs to another corporation for a certain period of time. (Page 423 of De Leon, 2006)
Rationale for Ratification Requirements on Part of Managed Corporation. The rationale for the ratificatory requirement under Section 44 of the managed corporation is that such a management contract is a deviation form the principle under Section 23 that the corporate affairs shall be managed by the board of directors, and thereby a departure from such an agreement would require the approval of the stockholders under the principle that it would vary the contractual corporate arrangements, by allowing basically an outsider to involve itself in the management of corporate affairs. (Page 263 of CLV’s Textbook)
Rationale for Ratification Requirements on Part of Managing Corporation. That the management arrangement is a deviation form the principle also that the board of directors in the managing corporation assumed office with the understanding that they would devote their time and resources for the affairs of the corporation. (Page 263 of CLV’s Textbook)
The ratificatory procedure should not therefore be applicable to a corporation that is organized primarily as a management company, and its entering into a management contract is clearly within the primary purpose of the corporation and in accordance with the contractual understanding with the stockholders of such managing corporation. (Page 263 of CLV’s Textbook)
Cases not covered by Section 44. When it comes to a management contract entered into by the managed corporation under the definition of Section 44, not with another corporation but with a partnership or an
individual, the same would not be covered by and thereby need not comply with the ratificatory requirements of Section 44. (Page 263 of CLV’s Textbook)
A management contract cannot delegate entire supervision and control over the officers and business of a corporation to another as this will contravene Section 23. The board cannot surrender or abdicate its power and duty of supervision and control for otherwise, it becomes a mere instrumentality of the management company. (Ballantine, page 136)
Catindig Class Notes
Tip: Large corporation use SPA system of ExeCom for efficiency. Other modes:
(1) SPA system (2) Exe Com
(3) Combination of both (4) Management Contract
4.3 Additional material: SEC Opinion No. 51, series of
2003 addressed to Atty. Liezl Z. Paras re issuance of
stock dividends out of paid-in surplus
SEC Opinion No. 51
Q: May a corporation issue stock dividends to be paid from its paid-in
surplus?
A: Yes. As a rule in corporate practice, additional paid-in surplus has
two general uses—to wipe off deficits during re-organization and as payment for issuance of stock dividends.
Basic in corporate law is the rule that paid-in surplus cannot be issued as cash or property dividends because it would, in effect, result in a return of capital which is prohibited under Section 43 of the Corporation Code. However, in the case of issuance of stock dividends, the same may be sourced from the corporation’s paid-in surplus because that would only involve a reclassification of one
capital account to another.
(The declaration of stock dividends from paid-in surplus was allowed taking into consideration that when a corporation converts the premium or contributed surplus into capital by issuing to its stockholders shares of stock representing their respective participation, it actually parts with nothing but merely transfers the
surplus capital account and issues shares of stock to represent the same.
It would be different when the property dividend is declared out of additional paid-in capital. Under this situation, the capital of the corporation represented by the additional paid-in capital is reduced to the extent of the property dividend declared. This is not allowable since this will involve return of capital to stockholders.)
Rule: The capital surplus or additional paid-in capital can only be
declared as stock dividends but not as cash or property dividends.
4.4 Implied Powers
Section 45 recognizes also implied powers of every corporate entity emanating from its express powers.7
Implied powers are those powers which are reasonably necessary to execute the express powers and to accomplish or carry our the purposes for which the corporation was formed. [These implied powers are expressly recognized by Section 36(11).] (Nakakalito na ba? Hahaha)
The purpose or purposes for which for which the corporation was created, as stated in its articles of incorporation, by defining the scope of corporate business or enterprise, in effect, delimit its implied powers. (De Leon 2006 at 313)
Classification of implied powers: (6) Acts in the usual course of business8 (7) Acts to protect dents owing to a corporation9
7 No corporation…shall possess or exercise any corporate powers except those conferred by this Code or by its Articles of Incorporation and except such as necessary or incidental to the exercise of the powers so conferred.”
8
Examples: Borrowing money, making ordinary contracts, executing promissory notes, acquiring personal property for use in connection with the business etc. Key: All acts necessary to run a business under ordinary circumstances.
(8) Embarking in different business
(9) Acts in part or wholly to protect or aid employees10 (10) Acts to increase business11
Express v. Implied Powers
Expressed Implied
Have to do largely with the main business, objects and purposes of the corporation.
Have to do largely with the means and methods of attaining those objects and purposes. Determined by the language of
the corporate charter and the applicable law.
May change according to time, place, and surrounding circumstances.
The test is whether the powers are found in the words of the charter of the law
The test is whether they are fairly incidental to the (former) and reasonably necessary to carry them out in the furtherance of the corporation’s business.
When the articles expressly provide that the purpose of the corporation was to ―engage in the transportation of person by water,‖ such corporation cannot engage in the business of land transportation, which is an entirely different line of business, and, for which reason, may not acquire any certificate of public convenience to operate a taxicab service. Luneta Motor Co. v. A.D. Santos, Inc., 5 SCRA 809 (1962).
A corporation whose primary purpose is to generate electric power has no authority to undertake stevedoring services to unload coal into its pier since it is not reasonably necessary for the operation of its power plant. NPC v. Vera, 170 SCRA 721 (1989).