SEC vis-à-vis a corporation’s ultra vires acts
Credit to Author: KELVIN LESTER LEE | Date: Tue, 10 Dec 2019 18:05:30 +0000
The Securities and Exchange Commission (SEC), as the registrar and overseer of the corporate sector, is tasked to monitor and supervise corporations to ensure that the corporate vehicle is not used to defraud the investing public.
In this light, our corporate law provides a framework for what powers a corporation may exercise. The legislature retained the provisions of the old Corporation Code regarding ultra vires acts of corporations in Republic Act 11232, otherwise known as the “Revised Corporation Code” (RCC).
Section 44 of the RCC states: “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.”
The Supreme Court has also defined ultra vires in its roster of cases. In the case of Twin Towers Condominium vs. CA (G.R. 123552), the Supreme Court, citing Jose C. Vitug’s “Pandect of Commercial Law and Jurisprudences Law Book,” held that the term ultra vires pertains to an act done beyond the powers of the Corporation: “The term ultra vires refers to an act outside or beyond corporate powers, including those that may ostensibly be within such powers but are, by general or special laws, prohibited or declared illegal.”
Aside from the above definition, the Supreme Court has differentiated the types of ultra vires acts. In the case of Land Bank of the Philippines vs. Eduardo M. Cacayuran (G.R. No. 1911667), the Supreme Court mentioned that there are two types of ultra vires acts. The first type involves acts that are committed outside a corporation’s jurisdiction while the second type involves acts that only involve irregularities:
“There are two types of ultra vires acts. As held in Middletown Policemen’s Benevolent Association v. Township of Middletown: There is a distinction between an act utterly beyond the jurisdiction of a municipal corporation and the irregular exercise of a basic power under the legislative grant in matters not in themselves jurisdictional. The former are ultra vires in the primary sense and void; the latter, ultra vires only in a secondary sense which does not preclude ratification or the application of the doctrine of estoppel in the interest of equity and essential justice.”
On the other hand, the Supreme Court also distinguished between ultra vires acts that are void and ultra vires acts that are not considered void, as held in the case of University of Mindanao, Inc. vs. Bangko Sentral ng Pilipinas (GR No. 194694-65):
“In Pirovano, et al., this court explained that corpor ate acts may be ultra vires but not void. Corporate acts may be capable of ratification: [A] distinction should be made between corporate acts or contracts which are illegal and those which are merely ultra vires. The former contemplates the doing of an act which is contrary to law, morals, or public order, or contravene some rules of public policy or public duty, and are, like similar transactions between individuals, void. They cannot serve as basis of a court action, nor acquire validity by performance, ratification, or estoppel. Mere ultra vires acts, on the other hand, or those which are not illegal and void ab initio, but are not merely within the scope of the articles of incorporation, are merely voidable and may become binding and enforceable when ratified by the stockholders.”
In summary, the provision on ultra vires acts operates as a safeguard for the public, preventing directors from doing acts which are not provided in the company’s express, implied or incidental powers. It also ensures that the company will abide by and execute actions based on what the law, the company’s articles of incorporation and bylaws allow.
Kelvin Lester K. Lee is a commissioner of the Securities and Exchange Commission (SEC). He is the co-chairman of the SEC Committee on Memorandum Circulars To Operationalize Revised Corporation Code Provisions. The views and opinions stated herein are his own. You may email your comments and questions to oclee@sec.gov.ph.