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PARTNERSHIP Art. 1768.

The partnership has a juridical


personality separate and distinct from that of
Art. 1767. By the contract of partnership two or each of the partners even in case of failure to
more persons bind themselves to contribute comply with the requirements of Article 1772,
money, property, or industry to a common first paragraph.
fund with the intention of dividing the profits
among themselves. Partnership, a juridical person
As an independent juridical person, a
Definition partnership may enter into contracts, acquire
Partnership is a contract whereby two or more and possess property of all kinds in its name, as
persons bind themselves to contribute money, well as incur obligations and bring civil or
property or industry to a common fund with criminal actions. Thus, a partnership may be
the intention of dividing profits among declared insolvent even if the partners are not.
themselves. It may enter into contracts and may sue and be
sued in its firm name or by its duly authorized
Elements representative. It is sufficient that service of
1. Intention to form a summons be served on any partner.
contract of partnership
Partners cannot be held liable for the
2. Participation in both profits and losses
obligations of the partnership unless it is
3. Community of interests
shown that the legal fiction of a different
juridical personality is being used for a
Basic Features
fraudulent, unfair or illegal purpose.
1. Voluntary agreement
2. Association for profit Effect of failure to comply with statutory
3. Mutual contribution to a common fund requirements Under
4. Lawful purpose or object Art 1772
5. Mutual agency of partners Partnership still acquires personality despite
6. Articles must not be kept secret failure to comply with the requirements of
7. Separate juridical personality execution of public instrument and registration
of name in SEC.
Characteristics
1. Consensual – perfected by Under Arts 1773 and 1775
mere consent. Partnership with immovable property
2. Bilateral – formed by two or more persons contributed, if without requisite inventory,
creating reciprocal rights and obligations. signed and attached to public instrument, shall
not acquire any juridical personality because
3. Preparatory - entered into as a means to
the contract itself is void. This is also true for
an end.
secret associations or societies.
4. Nominate – has a special name or
designation. To organize a partnership not an absolute right
5. Onerous – contributions in the form of It is but a privilege which may be enjoyed only
either money, property and/or industry under such terms as the State may deem
must be made. necessary to impose.
6. Commutative – the undertaking of each
partner is considered as the equivalent of Art. 1769. In determining whether a
that of the others. partnership exists, these rules shall apply:
7. Principal – its existence or validity does not
depend on some other contract. 1. Except as provided by Article 1825,
persons who are not partners as to each
Principle of Delectus Personae (choice of other are not partners as to third persons.
persons) – a person has the right to select
persons with whom he wants to be associated 2. Co-ownership or co-possession does not of
with in partnership. itself establish a partnership, whether such
co-ownership or copossessors do or do not

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share any profits made by the use of the partners in a non-existent partnership, they
property. become subject to liabilities of partners
(doctrine of estoppel).Whether or not the
3. The sharing of gross returns does not of parties call their relationship or believe it to be
itself establish a partnership, whether or a partnership is immaterial. Thus, with the
not the persons sharing them have a joint exception of partnership by estoppel, a
or common right or interest in any partnership cannot exist as to third persons if
property from which the returns are no contract of partnership has been entered
derived. into between the parties themselves.

4. The receipt by a person of a share of the Co-ownership or co-possession


profits of a business is prima facie evidence There is co-ownership whenever the
that he is a partner in the business, but no ownership of an undivided thing or right
such inference shall be drawn if such belongs to different persons.
profits were received in payment:
Clear intent to derive profits from operation of
a. As a debt by business
installments or otherwise. Co-ownership does not of itself establish the
existence of a partnership, although it is one of
its essential elements. This is true even if
b. As wages of an employee or rent to
profits are derived from the joint ownership.
a landlord.
The profits must be derived from the operation
of business by the members of the association
c. As an annuity to a widow or and not merely from property ownership. The
representative of a deceased partner. law does not imply a partnership between co-
owners because of the fact that they develop
d. As interest on a loan, though the or operate a common property, since they may
amount of payment vary with the rightfully do this by virtue of their respective
profits of the business. titles. There must be a clear intent to form a
partnership.
e. As the consideration for the sale of a
goodwill of a business or other Existence of fiduciary relationship
property by installments or otherwise.
Partners have a well-defined fiduciary
In general, to establish the existence of a relationship between them. Co-owners do not.
partnership, all of its essential features or Should there be dispute; the remedy of
characteristics must be shown as being partners is an action for dissolution,
present. In case of doubt, art.1769 shall apply. termination and accounting. For co-owners it
This article seeks to exclude from the category would be one, for instance, for
of partnership certain features enumerated nonperformance of contract. People can
herein which, by themselves, are not indicative become co-owners without a contract but they
of the existence of a partnership. cannot become partners without one.

Persons not partners as to each other Persons Persons living together without benefit of
who are partners as between themselves are marriage
partners as to third persons. Generally, the Property acquired governed by rules on
converse is true: if they are not partners coownership.
between themselves, they cannot be partners
as to third persons. Partnership is a matter of Sharing of gross returns not even presumptive
intention, each partner giving his consent to evidence of partnership The mere sharing of
become a partner. However, whether a gross returns alone does not even constitute
partnership exists between the parties is a prima facie evidence of partnership, since in a
factual matter. Where parties declare they are partnership, the partners share profits after
not partners, this, as a rule, settles the question satisfying all of the partnership’s liabilities.
between them. But where a person misleads
third persons into believing that they are

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Reason for the rule cannot prove it merely by evidence of an
Partner interested in both failures and agreement using the term “partner”. Non-use
successes; it is the chance of loss or gain that of the term, however, is entitled to weight. The
characterizes a business. Where the contract question of whether a partnership exists is not
requires a given portion of gross returns to be always dependent upon the personal
paid over, the portion is paid over as arrangement or understanding of the parties.
commission, wages, rent, etc. Parties intending to do a thing which in law
constitutes partnership are partners.
Where there is evidence of
mutual management Legal intention is the crux of partnership.
Where there is further evidence of mutual Parties may call themselves partners but their
management and control, partnership may contract may be adjudged something quite
result. different. Conversely, parties may expressly
state that theirs in not a partnership yet the law
Receipt of share in the profits strong may determine otherwise on the basis of legal
presumptive evidence of partnership An intent. However, courts will be influenced to
agreement to share both profits and losses some extent by what the parties call their
tends strongly to establish the existence of a contract.
partnership. It is not conclusive, however, just
prima facie and may be rebutted by other Tests and incidents of partnership
circumstances. In determining whether a partnership exists, it
is important to distinguish between tests or
When no such inference will be drawn indicia and incidents of partnership. Only those
Under par. 4 of art. 1769, sharing of profits is terms of a contract upon which the parties
not prima facie evidence of partnership in the have reached an actual understanding, either
cases enumerated under subsections (a) – (e). expressly or impliedly, may afford a test by
In these cases, the profits are not shared as which to ascertain the legal nature of the
partner but in some other respects or purpose. contract. Some of the typical incidents of a
The basic test of partnership is whether the partnership are:
business is carried on in behalf of the person 1. The partners share in profits and losses.
sought to be held liable. 2. They have equal rights in the mgt and
conduct of the partnership business.
Sharing of profits as owner It is not merely the 3. Every partner is an agent of the
sharing of profits, but the sharing of them as partnership, and entitled to bind the
co-owner of the business or undertaking that others by his acts. He may also be liable for
makes one partner. Test: Does the recipient the entire partnership obligations.
have an equal voice as proprietor in the 4. All partners are personally liable for the
conduct and control of the business? Does he debts of the partnership with their
own a share of the profits as proprietor of the separate property except that limited
business producing them? One must have an partners are not bound beyond the
interest with another in the profits of a amount of their investment.
business as profits.
5. A fiduciary relation exists between the
partners.
Burden of proof and presumption The burden
of proving the existence of a partnership rests
6. On dissolution, the partnership is not
terminated, but continues until the
on the party having the affirmative of that
winding up of partnership is completed.
issue. The existence of a partnership must be
Such incidents may be modified by
proved and will not be presumed. The law
stipulation of the partners.
presumes that those acting as partners have
entered into a contract of partnership. Where
the law presumes the existence of partnership, Similarities between a partnership and a
the burden of proof is on the party denying its corporation
existence. When a partnership is shown to 1. Both have juridical personality separate
exist, the presumption is that it continues and and distinct from that of the individuals
the burden of proof is on the person asserting composing it;
its termination. One who alleges partnership 2. Both can only act through its agents;

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3. Both are organizations composed of an amount contributed by him need not resort to
aggregate of individuals; the partnership contract on which to base his
4. Both distribute profits to those who claim or action. Since the purpose for which the
contribute capital to the business; contribution was made has not come into
5. Both can only be organized where there is existence, the manager or administrator must
a law authorizing is organization; return it, and he who has paid his share is
entitled to recover it.
6. Partnerships are taxable as corporations.
Right to receive profits where partnership is
Art. 1770. A partnership must have a lawful
unlawful
object or purpose, and must be established for
Law does not permit action for obtaining
the common benefit or interest of the partners.
earnings from an unlawful partnership because
When an unlawful partnership is dissolved by a
for that purpose, the partner will have to base
judicial decree, the profits shall be confiscated
his action upon the partnership contract, which
in favor of the State, without prejudice to the
is null and without legal existence by reason of
provisions of the Penal Code governing the
its unlawful object; and it is self-evident that
confiscation of the instruments and effects of a
what does not exist cannot be a cause of
crime. Object or purpose of partnership
action. Profits earned do not constitute or
represent the partner’s contribution. He must
The provision of the 1st paragraph reiterates 2
base his claim on the contract which is void. It
essential elements of a contract of
would be immoral and unjust for the law to
partnership: 1. Legality of the object; and
permit a profit from an industry prohibited by
2. Community of benefit or interest of the
it. T he courts will refuse to recognize its
partners. The parties possess absolute
existence, and will not lend their aid to assist
freedom to choose the transaction or
either of the parties thereto in an action
transactions they must engage in. The only
against each other. Therefore, there cannot be
limitation is that the object must be lawful
no accounting demanded of a partner for the
and for the common benefit of the
profits which may be in his hands, nor can
members. The illegality of the object will
recovery be had.
not be presumed; it must appear to be of
the essence of the relationship.
Effect of partial illegality of partnership
business
Effects of an unlawful partnership
Where a part of the business is legal and part
1. The contract is void and the partnership illegal, a n account of that which is legal may be
never existed in the eyes of the law;
had. Where, w/o the knowledge or
2. The profits shall be confiscated in favor of participation of the partners, the firm’s profits
the government; in a lawful business has been increased by
3. The instruments or tools and proceeds of wrongful acts, the innocent partners are not
the crime shall also be forfeited in favor of precluded as against the guilty partners from
the government; recovering their share of the profits.
4. The contributions of the partners shall not
be confiscated unless they fall under #3. Effect of subsequent illegality
of partnership business
A partnership is dissolved by operation of law Contract will not be nullified. Where the
upon the happening of an event which makes business for which the partnership is formed is
it unlawful. A judicial decree is not necessary to legal when the partnership is entered into, but
dissolve an unlawful partnership. However, afterward becomes illegal, an accounting may
advisable that judicial decree be secured. 3rd be had as to the business transacted prior to
persons who deal w/ partnership w/o such time.
knowledge of illegal purpose are protected.
Community of interest between
Right to return of contribution where the partners for business purposes
partnership is unlawful The salient features of an ordinary partnership
Partners must be reimbursed the amount of are a community of interest in profits and
their respective contributions. The partner losses, a community of interest in the capital
who limits himself to demanding only the employed, and a community of power in

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administration. This community of interest is from other declarations, and such implied
the basis of the partnership relation. However, contract would be as binding as a written and
although every partnership is founded on a express contract.
community of interest, e very community of
interest does not necessarily constitute a Ascertainment of intention of parties In
partnership. Property used in the business may determining whether a particular transaction
belong to one or more partners, so that there constitutes a partnership, as between the
is no joint property, other than joint earnings. parties, the intention as disclosed by the entire
To state that partners are co-owners of a transaction, and as gathered from the facts and
business is to state that they have the power if from the language employed by the parties as
ultimate control. But partners may agree upon well as their conduct, should be ascertained.
concentration of management, leaving some of
their members entirely inactive or dormant. Conflict between intention and terms of
Only one of these features, profit-sharing, contract
seems to be absolutely essential. But a mere If the parties intend a general partnership, they
sharing of profits of itself does not of necessity are general partners although their purpose is
constitute a partnership. The court must to avoid the creation of such a relation.
consider all the essential elements in light of
the facts of the particular case before deciding Art. 1772. Every contract of partnership having
whether a partnership exists. a capital of three thousand pesos or more, in
money or property, shall appear in a public
Art. 1771. A partnership may be constituted in instrument, which must be recorded in the
any form, except where immovable property or Office of the Securities and Exchange
real rights are contributed thereto, in which Commission. Failure to comply with the
case a public instrument shall be necessary requirements of the preceding paragraph shall
.Form of partnership not affect the liability of the partnership and
contract the members thereof to
third persons. Registration of partnership
General rule
No special form required for validity or Partnership with capital of P3, 000 or more
existence of the contract of partnership. Requirements:
Contract maybe made orally or in writing 1. The contract must appear in a public
regardless of the value of the contributions. instrument;
2. It must be recorded or registered w/ the
Where immovable property or real rights are SEC. However, failure to comply w/ the
contributed above requirements does not prevent the
Execution of public instrument necessary for formation of the partnership or affect its
validity of contract of partnership. To affect 3rd liability and that of the partners to 3rd
persons, the transfer of real property to the persons. But any partner is granted the
partnership must be duly registered in the right bylaw to compel each other to
Registry of Property. execute the contract in a public
instrument.
When partnership agreement covered by the
Statute of Frauds Purpose of registration Registration is
An agreement to enter in a partnership at a necessary as a condition for the issuance of
future time, which by its terms is not to be licenses to engage in business and trade. In this
performed w/in a year from the making way, the tax liabilities of big partnerships
thereof is covered by the Statute of Frauds. cannot be evaded and the public can
Such agreement is unenforceable unless it is in determine more accurately their membership
writing or at least evidenced by some note or and capital before dealing with them.
memorandum.
When partnership considered registered The
Partnership implied from conduct objective of the law is to make the recorded
Binding effect instrument open to all and to give notice
Existence of partnership may be implied from thereof to interested parties. This objective is
the acts or conduct of the parties, as well as achieved from the date the partnership papers

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are presented to and left for record in the Acquisition or conveyance of property by
Commission. This is the effective date of partnership
registration. If the certificate of recording is
issued on a subsequent date, its effectively Since partnership has juridical personality of its
retroacts to date of presentation. own, it may acquire immovable property in its
own name. Title so acquired can be conveyed
Art. 1773. A contract of partnership is void, only in the partnership name.
whenever immovable property is contributed
thereto, if an inventory of said property is not Art. 1775. Associations and societies, whose
made, signed by the parties, and attached to articles are kept secret among the members,
the public instrument. Partnership with and wherein any one of the members may
contribution of immovable property contract in his own name with third persons,
shall have no juridical personality, and shall be
Where immovable property contributed, governed by the provisions relating to co-
failure to comply w/ the following requisites ownership. Secret partnerships without
will render the partnership contract void: juridical personality
1. The contract must be in a public
instrument; Partnership relation is created only by the
voluntary agreement of the partners. It is
2. An inventory of the property contributed
essential that the partners are fully informed
must be made, signed by the parties, and
not only of the agreement but of all matters
attached to the public instrument. Art.
affecting the partnership. Secret partnerships
1773 is intended primarily to protect 3rd
are not by nature partnerships. Secret
persons. W/ regard to 3rdpersons, a de
partnerships shall be governed by the
facto partnership or partnership by
provisions relating to coownership.
estoppel may exist. There is nothing to
prevent the court from considering the
partnership agreement an ordinary Importance of giving publicity to articles of
contract from which the parties’ rights and partnership
obligations to each other may be inferred It is essential that the arts of partnership be
and enforced. given publicity for the protection not only of
the members themselves but also 3rd persons
When inventory is not required from fraud and deceit. A member who
transacts business for the secret partnership in
An inventory is required only whenever
his own name becomes personally bound to 3rd
immovable property is contributed. If not
persons unaware of the existence of such
contributed or if personal property, no
association. Partnership liability may still
inventory required.
result, however, in cases of estoppel.
Importance of making inventory of real
Art. 1776. As to its object, a partnership is
property in a p a r t n e r s h i p An inventory is
either universal or particular. As regards the
very important in a partnership to how much is
liability of the partners, a partnership may be
due from each partner to complete his share in
general or limited. Classifications of
the common fund and how much is due to each
partnership
of them in case of liquidation. The execution of
a public instrument of partnership would be
useless if there is no inventory of immovable As to extent of its subject matter
property contributed because w/o its 1. Universal partnership. (Art. 1777)
description and designation, the instrument a. Universal partnership of all present
cannot be subject to inscription in the Registry property. (Art. 1778)
of Property, and the contribution cannot b. Universal partnership of profits.
prejudice 3rd persons. (Art. 1780)
2. Particular partnership. (Art. 1783)
Art. 1774. Any immovable property or an
interest therein may be acquired in the As to liability of the partners
partnership name. Title so acquired can be General partnership: one consisting of general
conveyed only in the partnership name. partners who are liable pro rata and subsidiary

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and sometimes solidarily w/ their separate
property for partnership debts. Kinds of partners
Under the Civil Code
Limited partnership: one formed by two or 1. Capitalist partner: one who contributes
more persons having as members one or more money or property to the common fund.
general partners and one or more limited 2. Industrial partner: one who contributes
partners, the latter not being personally liable only his industry or personal service.
for the obligations of the partnership.
3. General partner: one whose liability to 3rd
persons extends to his separate property.
As to duration
4. Limited partner: one whose liability to 3rd
Partnership at will: one in w/c no time is
persons is limited to his capital
specified and is not formed for a particular
contribution.
undertaking or venture and w/c may be
5. Managing partner: one who manages the
terminated at any time by mutual agreement
entity.
of the partners, or by the will of any one
partner alone; or one for a fixed term or 6. Liquidating partner: one who takes charge
particular undertaking w/c is continued after of the winding up of partnership affairs
the end of the term or undertaking w/o express upon dissolution.
agreement. 7. Partner by estoppel: one who is not really
Partnership with a fixed term: one w/c the term a partner but is liable as a partner for the
for w/c the partnership is to exist is fixed or protection of innocent 3rd persons. He is
agreed upon or one formed for a particular one represented as being a partner but
undertaking. who is not so between the partners
themselves.
As to the legality of its existence De jure 8. Continuing partner: one who continues
partnership: one w/c has complied w/ all the the business of a partnership after it has
legal requirements for its establishment. been dissolved by reason of the admission
De facto partnership: one w/c has failed to of a new partner, or the retirement, death
comply w/ all the legal requirements for its or expulsion of one or more partners.
establishment. 9. Surviving partner: one who remains after a
partnership has been dissolved by the
As to representation to others Ordinary or real death of any partner.
partnership: one w/c actually exists among the 10. Subpartner: one who, not being a member
partners and also as to 3rd persons. of the partnership, contracts w/ a partner
Ostensible partnership or partnership or w/reference to the latter’s share in the
partnership by estoppel: one w/c in reality is partnership.
not a partnership, but is considered a
partnership only in relation to those who, by Other classifications
their conduct or admission, are precluded to
1. Ostensible partner: one who takes active
deny or disprove its existence.
part and known to the public as a partner.

As to publicity
2. Secret partner: one who takes active part
in the business but is not known to be a
Secret partnership: one wherein the existence
partner by outside parties nor held
of certain persons as partners is not avowed or
out as a partner by the other partners. He
made known to the public by any of the
is an actual partner.
partners.
Open or notorious partnership: one whose 3. Silent partner: one who does not take any
existence is avowed or made known to the active part in the business although he may
public by the members of the firm. be known to be a partner.
4. Dormant partner: one who does not take
As to purpose active part in the business and is not
Commercial or trading partnership: one formed known or held out as a partner. He would
or the transaction of business. be both a silent and a secret partner.
5. Original partner: one who is a member of
Professional or non-trading partnership: one the partnership from the time of its
formed for the exercise of a profession. organization.

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6. Incoming partner: a person lately, or about Donation cannot be included by stipulation
to be, taken into an existing partnership as except the fruits thereof. Hence, any
a member. stipulation including property so acquired is
7. Retiring partner: one withdrawn from the void. Profits from other sources (not from
partnership; a withdrawing partner. Art. properties contributed) will become common
1777. A universal partnership may refer to property only is there’s a stipulation.
all the present property or to all the
profits. Art. 1780. A universal partnership of profits
comprises all that the partners may acquire by
Art. 1778. A partnership of all present property their industry or work during the existence of
is that in which the partners contribute all the the partnership. Movable or immovable
property which actually belongs to them to a property which each of the partners may
common fund, with the intention of dividing possess at the time of the celebration of the
the same among themselves, as well as all the contract shall continue to pertain exclusively to
profits they may acquire therewith. each, only the usufruct passing to the
partnership.
Art. 1779. In a universal partnership of all
present property, the property which belongs Universal partnership of profits explained A
to each of the partners at the time of the universal partnership of profits is one w/c
constitution of the partnership becomes the comprises all that the partners may acquire by
common property of all the partners, as well as their industry or work during the existence of
all the profits which they may acquire there the partnership and the usufruct of movable or
with. A stipulation for the common enjoyment immovable property w/c each of the partners
of any other profits may also be made; but the may possess at the time of the celebration of
property which the partners may acquire the contract.
subsequently by inheritance, legacy or
donation cannot be included in such Ownership of present and future property
stipulation, except the fruits thereof. The partners retain their ownership over their
present and future property. What passes to
Universal partnership of all present property the partnership are the profits or income and
explained the use or usufruct of the same. Consequently,
A universal partnership of profits is one w/c upon dissolution, such property is returned to
comprises all that the partners may acquire by the partners who own it.
their industry or work during the existence of
the partnership and the usufruct of movable or Profits acquired through chance
immovable property w/c each of the partners Since the law only speaks of profits w/c the
may possess at the time of the celebration of partners may acquire by their industry or work,
the contract. In this kind of partnership, the profits acquired purely by chance are not
following become the common property of all included.
the partners:
Fruits of property subsequently acquired
Property w/c belonged to each of them at the Fruits of property subsequently acquired by
time of the constitution of the partnership; the partners do not belong to the partnership.
Profits w/c they may acquire from the property Such profits, however, may be included by
contributed. express stipulation.

Contribution of future property Art. 1781. Articles of universal partnership,


General rule: future properties cannot be entered into without specification of its nature,
contributed. The very essence of the contract only constitute a universal partnership of
of partnership that the properties contributed profits.
be included in the partnership requires the
contribution of things determinate. The Presumption in favor of universal
position of a partner is like that of a donor, and partnership of profits
donations cannot comprehend future Reason for presumption: universal partnership
property. Thus, property subsequently of profits imposes less obligations on the
acquired by 1.inheritance; 2. Legacy; or 3.

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partners, since they preserve the ownership of an undertaking of a single,
their separate property. temporary, or ad hoc nature.

Art. 1782. Persons who are prohibited from Business of partnership need not be
giving each other any donation or advantage continuing in nature
cannot enter into a universal partnership. The carrying on of a business of a continuing
Limitations upon the right to form a nature is not essential to constitute a
partnership partnership. An agreement to undertake a
particular piece of work or a single transaction
Persons who are prohibited by law to give or a limited number of transactions and
donations cannot enter into a universal immediately divide the resulting profits would
partnership for the reason that each of the seemt o fall w/in the meaning of the term
partners virtually makes a donation. To allow it “partnership” as used in the law.
would be permitting them to do indirectly what
the law expressly prohibits. A partnership Rule under American law
formed in violation of this article is null and The above is not true under the Uniform
void. Consequently, no legal personality is Partnership Act w/c does not include joint
acquired. A husband and wife, however, may ventures w/c exists for a single transaction or a
enter into a particular partnership or be limited number of transactions.
members thereof.
Relevant provisions: Joint venture
While a joint venture is not a formal
Art. 87: Donations between spouses during partnership in the legal or technical sense,
marriage void, except moderate gifts on both are governed, subject to certain
occasion of family rejoicing. Also applies to qualifications, practically by the same rules or
those living together as husband and wife w/o principles of partnership. This is logical since
valid marriage. Art. 739: The following in a joint venture,
donations are void: Those made between like in a partnership, there is a community
persons who are guilty of adultery or of interest in the business and a mutual right
concubinage at the time of the donation (no of control and an agreement to share jointly in
need for conviction; preponderance of profits and losses.
evidence only required);
Those made between persons found guilty of Corporation as a partner
the same criminal offense, While under the Philippine Civil Code, a joint
inconsideration thereof; venture is a form of partnership w/ a legal
c.)Those made to a public officer or his wife, personality separate and distinct from the
descendants and ascendants, by reason of his parties composing it, and should thus be
office. governed by the law of partnership, the
Supreme Court has recognized the distinction
Art. 1783. A particular partnership has for its between these two business forms, and has
object determinate things, their use or fruits, held that although a corporation cannot enter
or a specific undertaking, or the exercise of a into a partnership contract, it may, however,
profession or vocation. engage in a joint venture if the nature of the
venture is authorized by its charter.
Particular partnership explained A particular
partnership is one w/c is neither a universal Art. 1784. A partnership begins from the
partnership of present property nor a moment of the execution of the contract,
universal partnership of profits. The unless it is otherwise stipulated. (1679)
fundamental difference between a
universal partnership and a particular Art. 1785. When a contract for a fixed term or
partnership lies in the scope of their subject particular undertaking is continued after the
matter or object. In the former, the termination of such term or particular
object is vague and indefinite, undertaking without any express agreement,
contemplating a general business w/ some the rights and duties of the partners remains
degree of continuity, while in the latter, it is the same as they were at such termination, so
limited and well-defined, being confined to far as is consistent with a partnership at will.

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partners, and according to current prices, the
A continuation of the business by the partners subsequent changes thereof being for the
or such of them as habitually acted therein account of the partnership.
during the term, without any settlement or
liquidation of the partnership affairs, is prima Art. 1788. A partner who has undertaken to
facie evidence of a continuation of the contribute a sum of money and fails to do so
partnership. becomes a debtor for the interest and damages
from the time he should have complied with his
Partnership at will is one in which no term of obligation.
existence has been fixed and which may be
terminated at the will of any partners. The same rule applies to any amount he may
have taken from the partnership coffers, and
Art. 1786. Every partner is a debtor of the his liability shall begin from the time he
partnership for whatever he may have converted the amount to is own use.
promised to contribute thereto.
Liability of partner for estafa
He shall also be bound for warranty in case of Failure to return the money taken, there is the
eviction with regard to specific and element of fraudulent appropriation of the
determinate things which he may have money delivered to a partner with specific
contributed to the partnership, in the same instructions for the use of the partnership, then
cases and in the same manner as the vendor is estafa is committed under the Revised Penal
bound with respect to the vendee. He shall also Code.
be liable for the fruits thereof from the time
they should have been delivered, without the Art. 1789. An industrial partner cannot engage
need of any demand. in any business for himself, UNLESS the
partnership expressly permits him to do so; and
Obligations of partners to contribute: if he should do so, the capitalist partners may
1. Shall deliver at the beginning of the either exclude him from the firm or avail
partnership or, if a different date has been themselves of the benefits which he may have
agreed upon, at the stipulated time the obtained in violation of this provision, with a
properties he agreed to right to damages in either case.
contribute;
2. Shall answer for eviction, in case the Industrial partner is one who contributes his
partnership is deprived of the ownership industry or labor in the partnership.
of any specific property he contributed;
3. Shall answer to the partnership for the Industrial partner barred from engaging in
fruits of the properties whose delivery he business
delayed from the date he should have To prevent any conflict of interest between the
contributed it up to actual delivery without industrial and the partnership, and to insure
necessity of any demand; faithful compliance by said partner with his
4. Shall preserve said properties with the prestation.
diligence of a good father of a family
pending their delivery to the Art. 1790. Unless there is a stipulation to the
partnership; contrary, the partners shall contribute equal
5. And shall indemnify the partnership for shares to the capital of the partnership.
any damage caused it by the retention of
said properties or by the delay in their Art. 1791. If there is no agreement to the
contribution. contrary, in case of an imminent loss of the
business of the partnership, any partner who
Art. 1787. When the capital or part thereof refuses to contribute an additional share to the
which a partner is bound to contribute consists capital, except an industrial partner, to save
of goods, their appraisal must be made in the the venture, shall be obliged to sell his interest
manner prescribed in the contract of to the other partners.
partnership, and in the absence of stipulation,
it shall be made by experts chosen by the Art. 1792. If a partner authorized to manage
collects a demandable sum, which was owed to

10
him in his own name, from a person who Liquidation necessary to
owned the partnership another sum also ascertain damages
demandable, the sum thus collected shall be It is first necessary that a liquidation of the
applied to the two credits in proportion to their business thereof be made to the end that the
amounts, even though he may have given a profits and losses may be known and the
receipt for his own credit only; but should he causes of the latter and the responsibility of the
have given it for the account of the partnership defendant as well as the damages which each
credit, the amount shall be fully applied to the partner may have suffered, may be
latter. determined.

The provisions of this article are understood to Art. 1795. The risk of specific and determinate
be without prejudice to the right granted to the things, which are not fungible, contributed to
debtor by Art. 1252, but only if the personal the partnership so that only their use and fruits
credit of the partner should be more onerous may be for the common benefit, shall be borne
to him. by the partner who owns them.

Requisites: If the things contributed are fungible, or cannot


1. Two existing debts be kept without deteriorating, or if they were
2. Both debts must be demandable contributed to be sold, the risk shall be borne
3. The one who collected the debt is a by the partnership. In the absence of
partner who is authorized to manage and stipulation, the risk of things brought and
is actually managing the partnership appraised in the inventory, shall also be borne
by the partnership, and in such case the claim
Art. 1793. A partner who has received, in whole shall be limited to the value at which they were
or in part, his share of a partnership credit, appraised.
when the other partners have not collected
theirs, shall be obliged, if the debtor should Risk of Specific and determinate things
thereafter become insolvent, to bring to the The risk of specific and determinate things
partnership capital what he received even which are not fungible, like a boat, only the use
though he may have given receipt for his share of which is contributed, shall be borne by the
only. partner as the ownership thereof is not
transferred to the partnership. This follows the
Art. 1794. Every partner is responsible to the general rule that the thing perished with the
partnership for damages suffered by it through owner.
his fault, and he cannot compensate them with
the profits and benefits which he may have Things fungible or perishable
earned for the partnership by his industry. If the things contributed are fungible or cannot
However, the courts may equitably lessen this be kept without deteriorating (perishable) like
responsibility if through the partner’s wine, oil, etc., even if they are contributed only
extraordinary efforts in other activities of the for the use of the partnership, the risk of loss
partnership, unusual profits have been shall be for the account of the partnership for
realized. the latter cannot make use of them without
their getting consumed or presumed.
Partner liable for damages caused the
partnership Things contributed to be sold
Art. 1794 follows the general rule of contracts If the things contributed are to be sold, the
that where a person is at fault in the fulfillment partnership bears the risk of loss, for obviously
of his obligations he shall be liable for the the partnership is the intended owner;
payment of damages. The partner’s fault, otherwise, the firm cannot make the sale.
however, must be determined in accordance
with the circumstances of person, time and Things brought and appraised in inventory The
place. partnership bears the risk of loss of things
brought and appraised in the inventory as this
has the effect of an implied sale thus making
the partnership the owner of said things.

11
Art. 1796. The partnership shall be responsible capital contribution to be determined
to every partner for the amounts he may have as in (b), above.
disbursed on behalf of the partnership and for
the corresponding interest, from the time the Rules in loss sharing:
expenses are made; it shall also answer to each 1. The stipulation in the partnership
partner for the obligations he may have agreement regarding loss sharing must be
contracted in good faith in the interest of the followed.
partnership business, and for the risk 2. If there is no such agreement, but the
inconsequence of its management. contract provides for a profit sharing
ration, the profit sharing ratio shall also be
Responsibility of the partnership to a partner the loss sharing ration.
If a partner has advanced funds for the
3. In the absence of loss sharing and profit
partnership, he is entitled to recover the
sharing stipulations in the contract, then
amounts advanced by him with interest. This
the loss shall be borne by the partners in
must be so for the reason that a partner is a
proportion to their capital contributions;
mere agent of the partnership and under the
but a purely industrial partner is exempted
rules of agency, an agent who advances funds
from participation in the loss.
for his principal may recover the same interest.
Share of industrial partner in profits and losses
Art. 1797. The profits and losses shall be
Unless agreed upon, the industrial partner shall
distributed in conformity with the agreement.
receive such share in the profits as may be just
If only the share of each partner in the profits
and equitable under the circumstances. As for
has been agreed upon, the share of each in the
the losses, the industrial partner is not liable.
losses shall be in the same proportion.
However, under Art. 1816, if the partnership
In the absence of stipulation, the share of each
has a contractual debt and it cannot pay, the
partner in the profits and losses shall be in
industrial partner equally with the capitalist
proportion to what he may have contributed,
partners, can be compelled by the creditor to
but the industrial partner shall not be liable for
pay his pro rata share out of his own property
the losses. As for the profits, the industrial
or assets.
partner shall receive such share as may be just
and equitable under the circumstances. If
Art. 1798. If the partners have agreed to
besides his services he has contributed capital,
entrust to a third person the designation of the
he shall also receive a share in the profits in
share of each one in the profits and losses, such
proportion to his capital.
designation may be impugned only when it is
manifestly inequitable. In no case may a
Rules in profit sharing:
partner who has begun to execute the decision
1. The partners share the profits in of the third person, or who has not impugned
accordance with the ratio established by the same within a period of three months from
their contract. the time he had knowledge thereof, complain
2. If there is no such stipulation in the of such decision.
partnership contract, then:
1. If all are capitalist partners they have The designation of profits and losses cannot be
the profits in proportion to their entrusted to one of the partners.
capital contributions;
2. If there are capitalist as well as Reason for the provision
industrial partners, the industrial Admittedly, the designation of profits and
partner get a share each that is just losses cannot be entrusted to one of the
and equitable while the capitalist partners as the fulfillment of a contract cannot
partners divide the remainder in be left to one of the contracting parties. It may,
proportion to their capital however, be entrusted to a third person by
contributions; and common interest.
3. If there is a capitalist-industrial
partner, he gets a share in the profits Art. 1799. A stipulation which excludes one or
as an industrial partner and an more partners from any share in the profits or
additional share in proportion to his losses is void.

12
contract of agency, which may be revoking at
Stipulation to exclude a partner from profits any time. It is believe that the vote for
and losses is void revocation must also represent the controlling
The law does not allow a provision in the interest.
contract of partnership excluding one or more
partners from sharing in the profits and losses. Scope of the power of the managing partner
The reason is that a partnership is organized for General rule: partner appointed as manager
the common benefit or interest of the partners. has all the powers of a general agent as well as
all the incidental powers necessary to carry out
Reason for exclusion of industrial partner An the object of the partnership in the transaction
industrial partner is not liable for losses of its business.
because if the partnership fails to realize any Exception: When powers of manager is
profits, the industrial partner would have specifically restricted. A managing partner may
contributed his labor in vain. Furthermore, the not bind the partnership by contract foreign to
industrial partner cannot withdraw the work its business.
already done by him for the partnership.
Compensation for service rendered Partner
Art. 1800. The partner who has been appointed Generally not entitle to compensation, In the
manager in the articles of the partnership may absence of an agreement to the contrary, each
execute all acts of the administration despite member of the partnership assumes the duty
the opposition of his partners, unless he should to give his time, attention, and skill to the
act in Bad faith., and his powers is irrevocable management of its affairs, as may be
without the just or lawful cause. The vote of reasonably necessary to the success of the
the partners representing the controlling common enterprise; and for this service a share
interest shall be necessary for such revocation of the profits is his only compensation. In
of power. A power granted after the managing partnership affairs, a partner is
partnership has constituted may revoked at practically taking care of his own interest or
any time. Each partner has a right to an equal managing his own business. In the absence of
voice in the conduct of the partnership any prohibition in the arts. Of partnership for
business. This right is not dependent on the the payment of salaries to general partners,
amount or size of the partner’s capital there is nothing to prevent the partners to
contribution. enter into a collateral verbal agreement to that
effect.
Appointed as manager EXCEPTIONS: In proper cases, the law may
after the constitution of the imply a contract for compensation;
partnership 1. A partner engaged by his co-partners to
Partner appointed in arts of partnership may perform services not required of him in
execute all acts of administration fulfilment of the duties and in capacity
notwithstanding the opposition of the other other than that of a partner.
partners, unless he should act in bad faith. His 2. When there is extraordinary neglect on the
power is revocable only upon just and lawful part of one partner to perform his duties,
cause and upon the vote of the partners imposing entire burden on remaining
representing the controlling interest. partner.
Reason: revocation represents change in terms 3. One partner may employ the other to do
of contract. work for him outside of and independent
In case of mismanagement: Usual remedies of the co-partnership.
allowed by law including dissolution. 4. Partners exempted by terms of
partnership from rendering services may
Appointment as manager after the demand pay for services rendered.
constitution of the partnership Appointment 5. Where one partner is entrusted with
may be revoked at any time for any cause what management and devotes his whole time
so ever. and devotion at the instance of the other
partners who are attending to their
Reason: revocation not founded on a change of individual business and giving no time or
will on the part of the partners. Appointment attention to the partnership business.
not condition of contract. It is merely a simple

13
Art. 1801. If two or more partners have been them may allege as excuse to dispense with
intrusted with the management of the requirement. Exception: When there is
partnership without the specification of their imminent danger of grave or irreparable injury
respective duties or without the stipulation to the partnership then a partner may act alone
that one of them shall not act without the without consent of partner who is absent or
consent of all others, each one separately under disability.
execute all acts of administration, but if anyone
of them should oppose the act of each other, Consent of managing partners not necessary
the decision of the majority shall prevail. In the in routine transactions
case of tie the partners owning the controlling The requirement of written authority refers
interest shall decide the matter. Where evidently to formal and unusual written
respective duties of two or more managing contracts.
partners not specifies.
Art. 1803. When the manner of management
Each one may separately perform acts of has not agreed upon, the following rules shall
administration observed:
1. If one or more of the managing partners
shall oppose the acts of the others, then 1. All partners shall be considered agents and
the decision of the majority of the whatever any one of them may do alone
shall bind the partnership without
managing partners shall prevail. Right to prejudice to the provision of article 1801
oppose can be exercise only by those
entrusted with mgt. 2. None of the partners may, without the
2. In case of tie, matter shall be decided by consent of others, make any important
the vote of the partners owning the alteration in the immovable property of
controlling interest. the partnership, even if it may be useful to
the partnership, but if there ids refusal of
REQUISITES FOR APPLICATION OF RULE the consent by the other partners is
manifestly prejudicial to the interest of the
1. Two or more partners have been
partnership, the court’s intervention may
appointed as managers;
be sought.
2. There is no
specification of their respective
Rules when manner of the management that
duties;
has not agreed upon all partners considered
3. There is no stipulation that one of them as managers and agents All partners shall have
shall not act without the consent of all the equal rights in the mgmt. and conduct of
others. partnership affairs. All of them shall considered
mgrs. and agents and whatever any one of
ART. 1802 In case it should have been them may do alone shall bind the partnership.
stipulated that none of the managing partner If there is timely opposition, however, the
shall act without the consent of the others, the matter shall decided by majority vote. In case
concurrence of all shall be necessary for of tie, vote of partners representing controlling
validity of the acts, and the absence or interest.
disability of any one of them cannot alleged,
unless there is imminent danger of grave or Unanimous consent required for alteration of
irreparable injury to the partnership. immovable property
The consent need not be express. It may
When unanimity of action stipulated presume from the fact of knowledge of the
concurrence necessary for validity of acts The alteration without interposing any objection.
partners may stipulate that none of the Prohibition only applies to immovable property
managing partners shall act without the because of the greater importance of this kind
consent of the others. In such a case, the of property, and the alteration thereof must be
unanimous consent of all the managing important. This would be an act of strict
partners shall be necessary for the validity of dominion. If refusal to give consent is
their acts. This consent is so indispensable that manifestly prejudicial to the interest of the
neither absence nor disability of any one of partnership, court intervention maybe sought.

14
Consent may presume from silence (lack of Keeping of partnership books Partner with
opposition despite knowledge).If alteration is duty to keep partnership books
necessary for preservation of the property, The duty to keep true and correct books
consent of the other partners not required. showing the firm’s accounts, such books being
at all times open to inspection of all members
Art. 1804. Every partner may associate another of the firm, primarily rests on the managing or
person with him in his share, but the associates active partner. It is presume that the partners
shall not admitted into the partnership without have knowledge of the contents of the
the consent of all other partners, even of the partnership books and that said books state
partner having an associate should be a accurately the state of accounts, but errors can
manager of subpartnership nature corrected.

The partnership formed between a member of Rights with the respect to partnership books
a partnership and a third Person for a division Books should kept at the principal place of
of the profits coming to him from the business as each partner has the right to free
partnership enterprise is termed access to them and to inspect or copy any of
subpartnership. them at any reasonable time, even after
It is a partnership within a partnership and is dissolution. Inspection rights not absolute can
distinct and separate from the main or restrained from using info for other than
principal partnership. partnership purpose.

Right of the person associated with the Access to partnership books


partnership’s share Rights can exercise at any reasonable hour. This
Subpartnership agreements do not affect the means reasonable hours on business days
composition, existence, or operations of the throughout the year and not merely during
firm. The subpartners are some arbitrary period of a few days chosen by
partners interest, the managing partners.

However, in the absence of the mutual assent Art. 1806. Partners shall render on demand
of all the parties, a subpartner does not true and full information of all things affecting
become a member of the partnership, even if the partnership to any partner or the legal
the other partners know about the agreement. representative of any deceased partner or of
Not being a member of the partnership, he any partner under legal disability. Duty to
does not acquire the rights of a partner nor is render information, there must be no
he liable for its debts. concealment between partners in all matters
affecting the partnership. Information must
use only for partnership purpose. Not just on
Reason for the rule
demand but partner also has duty of voluntary
Partnership is based on mutual trust and
disclosure. However, duty to render info does
confidence among the partners. Inclusion of
notarise with respect to matters appearing in
new partner would be a modification of the
partnership books since each partner has the
original contract of partnership requiring
right to inspect those. Good faith not only
unanimous consent of all the partners.
requires that a partner should not make a false
Prohibition applies even if person associated is
statement but also that he should abstain from
already a partner.
any false concealment.
Art. 1805. The partnership books shall be kept,
Art. 1807. Every partner must account the
subject to any agreement between the
partnership for any benefit, and hold as trustee
partners, at the principal place of the business
for it any profits derived from him without the
of the partnership, and every partner shall at
consent of the partners from any transaction
any reasonable hour have access to and may
connected with the formation, conduct, or
inspect and copy any of them.
liquidation of the partnership or from any use
by him of his property.

The relation between the partners is essentially


fiduciary involving trust and confidence, each

15
partner considered in law, as he is, in fact, the
confidential agent of the others. The duties of Duty not to acquire interest or right adverse to
a partner are analogous to those of a trustee. partnership
If partner does, he holds it in trust for the
Duty to act for common benefit benefit of the partnership and must account to
Cannot use and apply exclusively to own the firm for the profits of the transaction,
individual benefit partnership assets or results unless it appears that the others consented
of knowledge and info gained in character of
partner. Managing partners particularly owe a Art. 1808. The Capitalist partners cannot
fiduciary duty to inactive partners. engage for their own account in any operation,
which is of the kind of business in which the
Duty begins during the formation of partnership is engaged, unless there is a
partnership stipulation to the contrary. Any capitalist
Principle of good faith applies not only during partner violating this prohibition shall bring to
partnership but during the negotiations leading the common funds any profit accruing to him
to the formation of the partnership. Also, a from his transactions, and shall personally bear
person who agreed w/ another to form a all the losses.
partnership has the obligation to account for
commissions and discounts received in Prohibition against partner engaging the
acquiring property for the future partnership. business
Prohibition relative – Prohibition against
Duty continues even after the dissolution of capitalist partner to engage in business is
the partnership relative, unlike the industrial partner who is
Duty of partner to act w/ utmost good faith absolutely prohibited from engaging in any
towards his co-partners continues throughout business for himself. Capitalist partner is only
the entire life of the partnership even after prohibited from engaging for his own account
dissolution for whatever reason or whatever in any operation which is the same as or similar
means, until the relationship is terminated, to the business in which the partnership is
i.e. the winding up of partnership affairs is engaged and which is competitive w/ said
completed. business
VIOLATION – Obligation to bring to common
Duty to account for secret and similar profits fund any profits derived and in case of losses,
The duty of a partner to account as a fiduciary he shall bear them alone. Partners, however,
operates to prevent from making a secret by stipulation may permit it. The law permits
profit out of the operation of the partnership him to carry on a business not connected or
and from carrying on the business for his competing with that of the partnership. Law is
private advantage or a business in competition silent on whether he can engage in same line of
w/ the firm w/o consent of other partners. business for the account of another.
Violation may be ground for dissolution. Prohibition still applies because of fiduciary
position imposing duties of utmost good faith.
Duty to account for earnings accruing even He may not carry on any other business in
after termination of partnership If a partner rivalry w/ the partnership.
uses info obtained by him from the partnership
for his own account w/o the consent of the Reason for prohibition
other partners, he is liable to account for any Fiduciary nature of relationship imposes
benefit he might obtain. obligation of utmost good faith. Rule prevents
use of info obtained in course of transaction of
Duty to make full disclosure of information partnership business or because of connection
belonging to partnership w/ firm regarding business secrets and
A partner is also subject to the fiduciary duty of clientele of firm to its prejudice.
undivided loyalty and complete disclosure of
info of all things affecting the partnership. By Art. 1809. Any partner shall have the right to a
Information is meant information, which can formal account as partnership affairs:
be used for the purposes of the partnership.
Info cannot use for a partner’s private gain – 1. If he is wrongfully excluded from the
even if after termination. partnership business or possession of

16
its property by his co-partner; Partnership property and partnership capital
distinguished
2. If the right exists under the terms of any Partnership Partnership
agreement; property capital
Changes Variable: its Constant: it
3. Provided by article 1807; value value may vary remains
from day today unchanged
4. Whenever other circumstances render it w/ changes in as the
just and reasonable, Right of the partner to market value amount is fix
a formal account. by agreement
of the
General rule: During existence of partnership, partners,
a partner is not entitled to a formal account of and is not
partnership affairs. Reason: rights of partner affected by
amply protected in arts1805 and 1806. In fluctuations
addition, it would cause much inconvenience in the value of
and unnecessary waste of time. the
partnership
Exception: In the special and unusual situations property,
enumerated under art. 1809. Right of partner although
to demand an accounting w/o bringing about it may
dissolution is a necessary corollary to right to be
share in profits. A formal account is a necessary increased and
incident to the dissolution of the partnership. decreased by

Art. 1810. The property rights of a partner are:


1. His rights in specific
unanimous
partnership property;
consent of the
partners.
2. His interest in the partnership;
Assets Includes not The aggregate
Included only the of the
3. His right to participate in the management,
original capital individual
extent of property rights of a partner.
contributions, contributions
but also all made by the
Principal Rights property
partners in
1. Rights in specific partner property; subsequently
establishing or
2. Interest in partnership; 3. Right to acquired
continuing the
participate in management. because of
partnership.
the partnership
RELATED RIGHTS or w/
1. Right to reimbursement for amounts partnership
advanced to partnership and to funds, including
indemnification for risks inconsequence of partnership
management (art. 1796). name and
2. Right of access and inspection of goodwill.
partnership books (art. 1805).
3. Right to true and full information of all
things affecting partnership (art. 1806).
4. Right to formal account of partnership
affairs under certain circumstances (art.
1809). Ownership of certain property
5. Right to have partnership dissolved also Property use by the partnership – Where there
under certain conditions (arts. 18301831). is no express agreement that property used by
a partnership constitutes partnership property,

17
such use does not make it partnership Equal rights of possession - Ordinarily, a
property, and whether it is so depends on the partner has an equal right to possess specific
intention of the parties, w/c may be shown by partnership property for partnership purposes.
proving an express agreement or acts of None of the partner scan possesses and uses
particular conduct. The intent of the parties is the specific partnership property other than for
the controlling factor. partnership purposes w/o the consent of the
Property acquired by a partner with other partners. Should any of them use the
partnership funds – Unless a contrary property for his own benefit, he must account,
intention appears, property acquired by a like a stranger, to the others for the profits
partner in his own name w/ partnership funds derived there from or the value of his wrongful
is partnership property. However, if the possession or occupation. A partner wrongfully
property was acquired after dissolution but excluded from possession of partnership
before the winding up of the partnership property by a co-partner has a right to formal
affairs, it would be his separate property but he account and may even apply for a judicial
would be liable to account to the partnership decree of dissolution. On the death of a
for the funds used in its acquisition. partner, his right in specific partnership
property vests in the surviving partners. By
Art. 1811. A partner is co-owner with his agreement, the right to possess specific
partners of specific partnership property. The partnership property may surrender. In the
incidents of this co-ownership are such absence of special agreement, however,
that; neither partner separately owns, or has the
exclusive right of possession of any partnership
1. A partner, subject to the provision of property or any proportional part thereof. Each
this title and any agreement between the has dominion over the entire partnership
partner, has an equal right with his partners to property. The possession of partnership
possess specific partnership property for property by one partner is the possession of all
partnership purposes; but he has no right to until his possession becomes adverse. A
possess such property for any other purpose partner cannot initiate title by adverse
without the consent of his partners; possession until and unless he makes an
adverse claim.
2. A partner’s right in specific
partnership property is not assignable except in Right not assignable - A partner cannot
connection with the assignment of rights of all separately assign his right to specific
the partners in the same property; partnership property but all of them can assign
their rights in the same property.
3. A partner’s right in specific
partnership property is not subject to Reasons for non-assignability:
attachment or execution, except on a claim 1. It prevents interference by outsiders in
against the partnership affairs;
partnership; 2. It protects the right of other partners and
partnership creditors to have partnership
4. A partner’s right in specific assets applied to firm debts;
partnership property is not subject to legal 3. It is often impossible to determine the
support under art. 291 nature of a partner’s extent of a partner’s beneficial interest in
right in a particular partnership asset. Reason for
specific partnership property impossibility: Each partner, having a
beneficial interest in the partnership
Art. 1811 contemplates tangible property but property considered as a whole, has a
not intangible things. A partner is a coowner w/ beneficial interest in each part. Where,
his partners of specific partnership property, however, none of the above reasons apply,
but the rules on coownership do not an authorized assignment by a partner of
necessarily apply. The legal incidents of this his right in specific partnership property is
tenancy in partnership are distinctively void, but it may be regarded as a valid
characteristic of the partnership relation. They assignment of the partner’s interest in the
are as follows: partnership. The law allows a retiring
partner to assign his rights in partnership

18
property to the partner(s) continuing the than the assets, the difference represents the
business. extent of the loss.

Right limited to share of what remains after Art.1813. A conveyance by a partner by his
partnership debts has been paid whole interest in the partnership does not of
Strictly speaking, no particular partnership itself dissolve the partnership, or, against the
property or any specific or an aliquot part other partners in the absence of agreement,
thereof can be considered the separate or entitle the assignee, during the continuance of
individual property of any partner. The whole the partnership, to interfere in the
of partnership property belongs to the management or administration of the
partnership considered as a juridical person, partnership business or affairs, or to require
and a partner has no interest in it but his share any information or account of the partnership
of what remains after all partnership debts are transactions, or to inspect the partnership
paid. Consequently, specific partnership books; however it merely entitles the assignee
property is not subject to attachment, to receive the accordance with his contract, the
execution, garnishment, or injunction, w/o the profits to which the assigning partner would
consent of all the partners except on a claim otherwise be entitled.
against the partnership. For the same reason
that the property belongs to the partnership, In case of fraud in the management of the
the partners cannot claim any right under the partnership, the assignee may avail himself of
homestead or exemption laws when it is the usual remedies. In case of dissolution of the
attached for partnership debts. However, a partnership, the assignee is entitle to receive
judgment creditor may levy upon a partner’s his assignor’s interest and may require an
interest in the partnership itself because it is account from the date only of the last account
actually his property, by means of a “charging agreed to by all partners. Effect of assignment
order.” The right of the partners to specific of partner’s whole interest in partnership.
partnership property is not subject to legal
support since the property belongs to the A partner’s right in specific partnership
partnership and not to the partners. However, property is not assignable but he may assign his
their interest in the partnership is. The method interest in the partnership to any of his co-
of reaching a judgment debtor’s interest in partners or to a third Person irrespective of the
partnership property is specifically set forth in consent of the other partners, in the absence
art.1814. of agreement to the contrary.

Art. 1812. A partner’s interest in the Rights withheld from assignee


partnership is his share of the profits and 1. To interfere in the management.
surplus. 2. To require any information or account.
3. To inspect any of the partnership books.
Share of profits and surplus – The partner’s
interest in the partnership consists of his share No one can be compelled to be partners w/
in the undistributed profits during the life of someone else. The assignment does not divest
the partnership as a going concern and his the assignor of his status and rights as a partner
share in the undistributed surplus after its nor operate as dissolution. The law, however,
dissolution. provides the nonassigning collaborates w/ a
ground for dissolving the partnership if they so
Profits: the excess of returns over expenditure desire.
in a transaction or series of transactions; or the
net income of the partnership for a given Remedy of other partners
period.
Dissolution of partnership not intended –
Many partnership agreements are made
Surplus: the assets of the partnership after merely as security for loans, the assigning
partnership debts and liabilities are paid and partner never intending to destroy the
settled and the rights of the partners among partnership relation. If the assigning partner
themselves are adjusted. It is the excess of neglects his duties after assignment, the other
assets over liabilities. If the liabilities are more partners may dissolve the partnership under
art. 1830.

19
Dissolution of partnership intended – A be held to deprive a partner of his right, if
partner’s conveyance of his interest in the any, under the exemption laws, as regards
partnership operates as dissolution of the his interest in the partnership.
partnership only when it is clear that the
parties contemplated and intended the entire Application for a charging order after securing
withdrawal from the partnership of such judgement on his credit While a separate
partner and the termination of the partnership creditor of a partner cannot attach or levy upon
as between the partners. specific partnership property for the
satisfaction of his credit because partnership
Rights of assignee of partner’s interest assets are reserved for partnership creditors,
1. To receive in accordance w/ his contract he can secure a judgment on his credit and
the profits accruing to the assigning then apply to the proper court for a “charging
partner; order”, subjecting the interest of the debtor
2. To avail himself of the usual remedies partner in the partnership w/ the payment of
provided by law in the event of fraud in the the unsatisfied amount of such judgment w/
management; interest thereon w/ the least interference w/
the partnership business and the rights of the
3. To receive the assignor’s interest in case of
other partners. By virtue of the charging order,
dissolution;
any amount or portion thereof w/c the
4. To require an account of partnership partnership would otherwise pay to the
affairs, but only in case the partnership is debtor-partner should instead be given to the
dissolved, and such account shall cover the judgment creditor. This remedy, however, is
period from the date only of the last w/o prejudice to the preferred rights of
account agreed to by all partners. The partnership creditors whose claims should be
purchaser of a partner’s interest may apply satisfied first.
to the court for dissolution after the
termination of the specified term or Availability of other remedies
undertaking or at any time if the
Art. 1814 have made this an exclusive remedy
partnership is one at will.
so that a writ of execution will not be proper.
However, if the judgment debt remains
Art. 1814. Without prejudice to the preferred unsatisfied, the court may resort to other
rights of the partnership creditors on due
courses of action notwithstanding the issuance
application to a competent court by any
of the charging order.
judgement creditor of the partner, the court
which entered the interest of the debtor
Redemption or purchase of
partner with payment of the unsatisfied
interest charged
amount of such judgement debt with the
Redemptioner – The interest of the
interest thereon; and may then or later appoint
debtorpartner so charged may be redeemed or
a receiver of his share of the profits, and of any
purchased w/ the separate property of any one
other money due or to fall due to him in respect
or more of the partners, or w/ partnership
of the partnership, and make all other orders,
property but w/ the consent of all the partners
directions and accounts and inquiries which
whose interests are not so charged or sold.
the debtor partner might have made, or which
circumstances of the case may require. The
Redemption Price – The value of the partner’s
interest charged may redeem at any time
interest in the partnership has no bearing on
before foreclosure, or in any case of a sale
the redemption price w/c is likely to be lower
being directed by the court, may be purchase
since it will be dependent on the amount of the
without thereby causing dissolution:
unsatisfied judgment debt.

1. With separate property, by any one or


Right of redeeming non-debtor partner –
more of the partners;
There deeming non-debtor partner does not
acquire absolute ownership over the debtor-
2. With partnership property, by any one or partner’s interest but holds it in trust for him
more of the partners with the consent of consistent w/ principles of fiduciary
all the partners a whose interest are not so relationship.
charged or sold, nothing in this title shall

20
Rights of partner under exemption laws A names in the firm name do not acquire the
partner cannot claim any right under the rights of a partner but shall be subject to the
homestead laws or exemption laws when liability of a partner insofar as 3rd Persons
specific partnership property is attached for without notice are concerned. Such persons
partnership debt. W/ respect, however, to the become partners by estoppel. Art. 1815 does
partner’s interest in the partnership as not cover the case of a limited partner who
distinguished from his interest in specific allows his name to be included in the firm
partnership property, the partner may avail name, orof a person continuing the business of
himself of the exemption laws after a partnership after dissolution, who uses the
partnership debts have been paid. A partner’s name of the dissolved partnership or the name
interest or share in the partnership property is of a deceased partner as part thereof.
really his property.
Art. 1816. All partners, including industrial
Art. 1815. Every partnership shall operate ones, shall be liable pro rata with all their
under a firm name, which may or may not property and after all the partnership assets
include the name of one or more of the have been exhausted, for the contracts which
partners, those who, not being members of the may be entered into in the name and for the
partnership, include their names in the firm account of the partnership, under its signature
name, shall be subject to liability of a partner and by a person authorized to act for the
partnership. However, any partner may enter
Requirement of the firm name into a separate obligation to perform a
Meaning of word “firm” – The name, title, or partnership contract.
style under which a company transacts
business; a partnership of two or more Article 1816 distinguished from article
persons; a commercial house. In its common 1787
acceptation, the term implies a partnership. Article 1816 applies in cases where third party
The term is also used as synonymous with creditors are concerned as it falls under the
“company,” “house,” and heading of section 3. “Obligations of the
“concern.” Partners with Regard to Third Persons.” Article
1797 applies only where the issue is among the
Importance of having a firm name A partners as it falls under the heading of Section
partnership must have a firm name under 1, Chapter 2, which states: “Obligations of the
which it will operate. A firm name is necessary Partners Among Themselves.” The pro rata
to distinguish the partnership, which has a liability of partners to third persons under
distinct and separate juridical personality from Article 1816 being a clear mandate of the law,
the individuals composing the partnership and any stipulation changing or modifying such
from other partnerships and entities. liability is void except as among the partners.

Right of the partners to choose firm name The Refers to partnership obligations Article 1816
partners enjoy the utmost freedom in the which refers to the payment of partnership
selection of the partnership name. As a general obligations arising from contracts clearly
rule, they may adopt any firm name desired. imposes subsidiary and joint (pro rata) liability
for contractual debts owing to third persons
Use of misleading name – The partners cannot upon all the partners, including industrial
use a name that is identical or deceptively partners who ordinarily are not liable for
confusingly similar to that of any existing losses. The liability is subsidiary because the
partnership or corporation or to any other partners cannot be made answerable with
name already protected by law or is patently their separate property unless the partnership
deceptive, confusing or contrary to existing property has first been exhausted.
laws, as to mislead the public by passing itself
off as another partnership or corporation, or its Pro rata liability – Literally, pro rata liability
goods or services as those of such other means proportionate distribution of liability. In
company. the law of obligations, the concurrence of two
or more debtors in one and the same obligation
Liability inclusion of name in the firm name – makes it prima facie a joint (pro rata)
Persons who, not being partners, include their obligation, and the debts is presumed divided

21
into as many equal shares as there are debtors 4. Confess a judgment.
and each one of them is bound to pay only his
share.
5. Enter into a compromise concerning a
partnership claim or liability.
Art. 1817. Any stipulation against the liability
laid down in the preceding article shall be void,
except as among the partners. 6. Submit a partnership claim or liability to
arbitration.
Industrial partner cannot exempt himself from
liability to third persons 7. Renounce a claim of the partnership.
Each one of the industrial partners is liable to
third persons for the debts of the firm and if he No act of a partner in contravention of a
has paid such debts out of his private property restriction on authority shall bind the
during the life of the partnership, when its
affairs are settled he is entitled to credit for the partnership to persons having knowledge of
amount so paid, and if its results that there is the restriction.
not enough property in the partnership to pay
him, then the capitalist partners must pay him.
Our conclusion is that neither on principle nor
on authority can the industrial partner be
relieved from liability to third persons for the first paragraph of article 1818, or unless
debts of the partnership.
such property has been conveyed by the
Art. 1818. Every partner is an agent of the
partnership for the purpose of its business, and grantee or a person claiming through such
the act of every partner, including the grantee to a holder for value without
execution in the partnership name of any knowledge that the partner, in making the
instrument, for apparently carrying on in the
conveyance, has exceeded his authority.
usual way the business of the partnership of
which he is a member binds the partnership, Art. 1819. Where title to real property is in
unless the partner so acting has in fact no the partnership name, any partner may
authority to act for the partnership in the convey title to such property by a
particular matter, and the person with whom
conveyance executed in the partnership
he is dealing has knowledge of the fact that he
has no such liability. name; but the partnership may recover
such property unless the partner's act binds
An act of a partner which is not apparently for the partnership under the provisions of the
the carrying on of business of the partnership
in the usual way does not bind the partnership
Where title to real property is in the name
unless authorized by the other partners.
of the partnership, a conveyance executed
Except when authorized by the other partners by a partner, in his own name, passes the
or unless they have abandoned the business, equitable interest of the partnership,
one or more but less than all the partners have provided the act is one within the authority
no authority to:
of the partner under the provisions of the

1. Assign the partnership property in trust for first paragraph of Article 1818.
creditors or on the assignee’s promise to
pay the debts of the partnership. Where title to real property is in the name of
one or more but not all the partners, and the
record does not disclose the right of the
2. Dispose of the goodwill of the business.
partnership, the partners in whose name the
title stands may convey title to such property,
3. Do any other act which would make it but the partnership may recover such property
impossible to carry on the ordinary
if the partners’ act does not bind the
business of a partnership.
partnership under the provisions of the first
paragraph of Article 1818, unless the purchaser

22
or his assignee, is a holder for value, without Art. 1822. Where, by any wrongful act or
knowledge. omission of any partner acting in the ordinary
course of the business of the partnership or
Where the title to real property is in the with the authority of copartners, loss or injury
is caused to any person, not being a partner in
name of one or more or all the partners, or
the partnership, or any penalty is incurred, the
in a third person in trust for the partnership is liable therefor to the same
partnership, a conveyance executed by a extent as the partner so acting or omitting to
partner in the partnership name, or in his act.
own name, passes the equitable interest of
Partner liable for wrongful act of a partner The
the partnership, provided the act is one
partners are liable for the negligent operation
within the authority of the partner under of a vehicle by a partner, acting in the course of
the provisions of the first paragraph of business, which results in a traffic accident.
Article 1818.
If he is driving a partnership-owned vehicle for
purposes of his own, the acting partner alone is
Where the title to real property is in the
liable it is not a partnership tort.
name of all the partners a conveyance
executed by all the partners passes all their Partnership may proceed against negligent
rights in such property. partner
Where a partnership is liable to a third person,
Art. 1820. An admission or representation there is a right of indemnity against the partner
made by any partner concerning partnership whose negligence caused the injuries.
affairs within the scope of his authority in
accordance with this Title is evidence against Art. 1823. The partnership is bound to make
the partnership. good the loss:

Art. 1821. Notice to any partner of any matter Where one partner acting within the
relating to partnership affairs, and the scope of his apparent authority receives
knowledge of the partner acting in the money or property of a third person
particular matter, acquired while a partner or
and misapplies it.
then present to his mind, and the knowledge of
any other partner who reasonably could and
should have communicated it to the acting 1.
partner, operate as notice to or knowledge of
the partnership, except in the case of fraud on
the partnership, committed by or with the
consent of that partner.
Where the partnership in the course of
Notice to partner is notice to partnership its business receives money or property
Clearly a third person desiring to give notice to of a third person and the money or
a partnership of some matter pertaining to the
property so received is misapplied by
partnership business need not communicate
with all of the partners. If notice is delivered to any partner while it is in the custody of
a partner, that is an effective communication the partnership.
to the partnership.
2.
Knowledge before becoming partner Where
the knowledge or notice had been received by
the partner before he became a partner, and
his partners are ignorant of this, and he is not
the partner acting in the particular matter,
there is no doubt that there has been neither
knowledge of nor notice to the partnership.
Partnership bound by partner’s breach of

23
trust the representation has or has not been
The partnership is liable for the conversion made or communicated to such person so
(misappropriation) of money or property giving credit by or with the knowledge of
entrusted to the partnership by a third the apparent partner making the
person. The effect under Article 1824 is the representation or consenting to its being
same whether by the partnership and made:
subsequently misappropriated by a partner.
When a partnership liability results, he
Art. 1824. All partners are liable solidarily is liable as though he were an actual
with the partnership for everything member of the partnership.
chargeable to the partnership under
1.
Articles 1822 and 1823.

Law imposes solidary liability


The law imposes solidary liability upon the
When no partnership liability results, he
partners and the partnership in cases of torts
and acts of conversion by a partner as provided is liable pro rata with the other persons,
in Art. 1824. It may be stated that the liability if any, so consenting to the contract or
of a partner for a debt of the partnership representation as to incur liability,
depends upon whether the debts is contractual
otherwise separately.
or it arises from tort or conversion. If it arises
from contract, the liability is subsidiary and pro
2.
rata; if it arises from tort or conversion, the
liability is solidary.

Business partners solidarily liable Arts. 1711


and 1712 of the New Civil Code and Sec. 2 of
the Workmen’s Compensation Act reasonably
indicate that in compensation cases, the When a person has been thus represented
liability of business partners should be merely to be a partner in an existing partnership, or
joint and not solidary, and one of them
with one or more persons not actual
happens to be insolvent, the amount awarded
to the dependents of the deceased employee partners, he is an agent of the persons
would only be partially satisfied, which is consenting to such representation to bind
evidently contrary to the intent and purpose of them to the same extent and in the same
the law to give full protection to the employee. manner as though he were a partner in fact,
with respect to persons who rely upon the
Art. 1825. When a person, by words spoken
representation. When all the members of
or written or by conduct, represents
the existing partnership consent to the
himself, or consents to another
representation, a partnership act or
representing him to anyone, as a partner in
obligation results; but in all other cases it is
an existing partnership or with one or more
the joint act or obligation of the person
persons not actual partners, he is liable to
acting and the persons consenting to the
any such persons to whom such
representation.
representation has been made, who has, on
the faith of such representation, given Estoppel – A preclusion, in law, which prevents
credit to the actual or apparent partnership, a man from alleging or denying a fact, in
and if he has made such representation or consequence of his own previous act,
allegation, or denial of a contrary tenor.
consented to its being made in a public
manner he is liable to such person, whether

24
Person bound by his representation A person “Dissolution,” “Winding up,” and
who hold himself out as a partner in a business,
“Termination” explained
or consents to his being so held out, is liable on
contracts made with third persons who deal Dissolution, winding up, and termination
with the persons carrying on the business on should not be confused because they are
the faith of the representation. He is stopped distinct terms in law. Dissolution
to deny the apparent agency. “designates the point in time when the
partners cease to carry on the business
Art. 1826. A person admitted as a partner into
an existing partnership is liable for all the together: termination is the point in time
obligations of the partnership arising before his when all partnership affairs are wound up;
admission as though he had been a partner winding up is the process of settling
when such obligations were incurred, except
partnership affairs after dissolution.”
that this liability shall be satisfied only out of
partnership property, unless there is a
Art. 1830. Dissolution is caused:
stipulation to the contrary.
Incoming partner liable for
existing obligations Without violation of the agreement
A newly admitted partner is liable for between the partners:
obligations of the partnership at the time of his
admission. The obligation of the incoming 1.
partner shall be satisfied only out of
partnership property. This is not a harsh rule
because the incoming partner a. By the termination of the definite
“partakes of the benefit of the partnership term or particular undertaking
property, and an established business. He has
specified in the agreement.
every means of obtaining full knowledge of
protecting himself, because he may insist on b. By the express will of any partner,
the liquidation or settlement of existing
who must act in good faith, when
partnership debts. On the other hand, the
creditors have no means of protecting no definite term or particular is
themselves. specified.

c. By the express will of all the


Art. 1827. The creditors of the partnership shall
be preferred to those of each partner as partners who have not assigned
regards the partnership property. Without their interests or suffered them to
prejudice to this right, the private creditors of be charged for their separate debts,
each partner may ask the attachment and
either before or after the
public sale of the share of the latter in the
partnership assets. termination of any specified term or
particular undertaking.
Art. 1828. The dissolution of a partnership d. By the expulsion of any partner
is the change in the relation of the partners from the business bona fide in
caused by any partner ceasing to be accordance with such a power
associated in the carrying on as conferred by the agreement
distinguished from the winding up of the between the partners
business. In contravention of the agreement
between the partners, where the
Art. 1829. On dissolution the partnership is circumstances do not permit a
not terminated, but continues until the dissolution under any other provision of
winding up of partnership affairs is this article, by the express will of any
completed. partner at any time.

25
2.
By decree of court under the following
article.
8.

Causes of dissolution in general


By any event which makes it unlawful
Generally, a partnership may be dissolved
for the business of the partnership to
by causes: (1) without violation of the
be carried on or for the members to
carry it on in partnership.

3.

When a specific thing which a partner


had promised to contribute to the
partnership, perishes before the
delivery; in any case by the loss of the
thing, when the partner who
contributed it having reserved the
ownership thereof, has only transferred
to the partnership the use or enjoyment
of the same; but the partnership shall
not be dissolved by the loss of the thing
when it occurs after the partnership has
acquired the ownership thereof.
4.

5. By the death of any partner.

By the insolvency of any partner or of


the partnership.
6.

7. By the civil interdiction of any partner.

26
agreement between the partners; or (2) in agreement, or otherwise so conducts
contravention of the agreement. Other himself in matters relating to the
specific causes are; (3) an event which partnership business that it is not
makes the business of the partnership reasonably practicable to carry on the
unlawful; (4) loss of a specific thing which a business in partnership with him.
partner had promised to contribute to the 5. The business of the partnership can
partnership; (5) the death of a partner; (6) only be carried on at a loss.
the insolvency of any partner or of the
6. Other circumstances render a dissolution equitable.
partnership itself; (7) civil interdiction of
any partner; and lastly (8) by judicial Partnership ceased upon expiration of
decree. term; no more juridical personality
A partnership having ceased to exist since
1959, the partnership has no more juridical
After the termination of the specified 1.
personality nor capacity to sue and be sued.
term or particular undertaking .
(Reynolds Philippine Corporation vs. Court
At any time if the partnership was a of appeals, G.R. No. 36187, Jan. 17, 1989) 2.
partnership at will when the interest On the application of the purchaser of a
was assigned or when the charging partner's interest under Article 1813 or
order was issued. 1814:
Effect of Withdrawal before expiration of
Who may petition for dissolution the term
Dissolution of a partnership may be decreed by the
Under Article 1830, even if there is a
court on application either (1) by a partner or, in case he
has assigned his interest, (2) by his assignee. specified term, one partners cause its
dissolution by expressly withdrawing eve n
Art. 1832. Except so far as may be necessary to before the expiration of the period, with or wind up
partnership affairs or to complete transactions begun
without justifiable cause. Of course, if the
but not then finished, dissolution terminates all
authority of any partner to act for the cause is not justified or no cause was given,
partnership: the withdrawing partner is liable for
damages but in no case can he be
1. With respect to the partners compelled to remain in the firm. With his
withdrawal, the number of members is
decreased, hence, the dissolution. And in
Art. 1831. On application by or for a partner
whatever way we view the situation, the
the court shall decree a dissolution
conclusion is inevitable that the partners
whenever:
a. When the dissolution is not by the were to be guided in the liquidation of the
act, insolvency or death of a partner. partnership by the provisions of its duly
registered articles of partnership. (Roxas vs.
Maglana, G.R. L-30616, Dec. 10, 1990)
A partner has been declared insane in b. When the dissolution is by such act,
any judicial proceeding or is shown to 1. insolvency or death of a partner, in
be of unsound mind. cases where article 1833 so requires.

A partner becomes in any other way 2. 2. With respect to persons not partners,
incapable of performing his part of the as declared in article
partnership contract. 1834.

General Rule
A partner has been guilty of such 3. If the cause of dissolution is not by act,
conduct as tends to affect prejudicially death, or insolvency of a partner, the authority ceases
immediately.
the carrying on of the business.
Exception
A partner willfully or persistently 4. For the purposes of winding-up partnership
commits a breach of the partnership affairs.

27
dissolution, the fact of dissolution had
Art. 1833. Where the dissolution is caused by not been advertised in a newspaper of
the act, death or insolvency of a partner, each general circulation in the place (or in
partner is liable to his co-partners for his share each place if more than one) at which
of any liability created by any partner acting for the partnership business was regularly
the partnership as if the partnership had not carried on.
been dissolved unless:
The liability of a partner under the first
1. The dissolution being by act of any partner, paragraph, No. 2, shall be satisfied out of
the partner acting for the partnership had partnership assets alone when such partner
knowledge of the dissolution. had been prior to dissolution:

2. The dissolution being by the death or 1. Unknown as a partner to the person with
insolvency of a partner, the partner acting whom the contract is made.
for the partnership had knowledge or
notice of the death or insolvency. 2. So far unknown and inactive in partnership
affairs that the business reputation of the
General Rule partnership could not be said to have been
If the cause of dissolution is the death, act, or in any degree due to his connection with it.
insolvency of a partner, authority of a partner
to bind ceases upon the knowledge of the The partnership is in no case bound by any act
dissolution. of a partner after dissolution:

If dissolution is caused by act of one of parties, 1. Where the partnership is dissolved


co-partners are also liable to contribute because it is unlawful to carry on the
towards a liability as if no dissolution has business, unless the act is appropriate for
happened, provided that there is no notice or winding up partnership affairs.
the partner does not have knowledge of the
dissolution. 2. Where the partner has
become insolvent.
Art. 1834. After dissolution, a partner can bind
the partnership, except as provided in the third 3. Where the partner has no authority to
paragraph of this article: wind up partnership affairs; except by a
transaction with one who —
1. By any act appropriate for winding up
partnership affairs or completing a. Had extended credit to the
transactions unfinished at dissolution. partnership prior to dissolution and
had no knowledge or notice of his
2. By any transaction which would bind the want of authority.
partnership if dissolution had not taken
place, provided the other party to the b. Had not extended credit to the
transaction: partnership prior to dissolution, and,
having no knowledge or notice of his
a. Had extended credit to the want of authority, the fact of his want
partnership prior to dissolution and of authority has not been advertised
had no knowledge or notice of the in the manner provided for
dissolution. advertising the fact of dissolution in
the first paragraph, No. 2 (b).
b. Though he had not so extended credit,
had nevertheless known of the Nothing in this article shall affect the liability
partnership prior to dissolution, and, under article 1825 of any person who after
having no knowledge or notice of dissolution represents himself or consents to

28
another representing him as a partner in a Art. 1836. Unless otherwise agreed, the
partnership engaged in carrying on business. partners who have not wrongfully dissolved
the partnership or the legal representative of
General Rule the last surviving partner, not insolvent, has
Dissolution terminates the authority of the the right to wind up the partnership affairs,
partners to bind partnership. provided, however, that any partner, his legal
Exceptions representative or his assignee, upon cause
Any act appropriate for winding-up partnership shown, may obtain winding up by the court.
affairs or completing
transactions unfinished at dissolution Who may wind up Partnership Affairs?
Partner designated in the agreement. In
If third persons that transacted had no actual absence of agreement, the part that did no
knowledge of the dissolution. *Persons wrongfully dissolved the partnership.
extending credit prior to dissolution are
entitled to notice of dissolution. If they had no If all partners died, the legal representative of
notice or knowledge of dissolution, they may the last surviving partner provided that the
hold the retired partner for obligations made partner is not insolvent.
by continuing partners after dissolution.
Winding up of a dissolved partnership may be
Art. 1835. The dissolution of the partnership done
does not of itself discharge the existing liability Extrajudicially by the partners themselves.
of any partner. Judicially under the control of a competent
court.
A partner is discharged from any existing *Managing partner or winding-up partner has
liability upon dissolution of the partnership by the right to sell firm property even after the life
an agreement to that effect between himself, of the partnership has expired.
the partnership creditor and the person or
partnership continuing the business; and such Art. 1837. When dissolution is caused in any
agreement may be inferred from the course of way, except in contravention of the
dealing between the creditor having partnership agreement, each partner, as
knowledge of the dissolution and the person or against his co-partners and all persons claiming
partnership continuing the business. through them in respect of their interests in the
partnership, unless otherwise agreed, may
The individual property of a deceased partner have the partnership property applied to
shall be liable for all obligations of the discharge its liabilities, and the surplus applied
partnership incurred while he was a partner, to pay in cash the net amount owing to the
but subject to the prior payment of his respective partners. But if dissolution is caused
separate debts. by expulsion of a partner, bona fide under the
partnership agreement and if the expelled
General Rule partner is discharged from all partnership
Dissolution of a partnership does not itself liabilities, either by payment or agreement
discharge the existing liability of any partner. under the second paragraph of article 1835, he
Exception shall receive in cash only the net amount due
A partner can be discharged from any existing him from the partnership.
liability upon dissolution of the partnership
provided that there is an agreement between When dissolution is caused in contravention of
the partnership creditor and the person or the partnership agreement the rights of the
partners continuing the business. *Individual partners shall be as follows:
properties of the deceased partner shall be
liable to all obligations of the partnership made 1. Each partner who has not caused
while he was a partner. dissolution wrongfully shall have:

a. All the rights specified in the first

29
paragraph of this article. Rights of partners upon dissolution
1. Dissolution is caused without violation of
b. The right, as against each partner who the agreement.
has caused the dissolution wrongfully, 2. In contravention of the agreement.
to damages breach of the agreement.
If partnership is dissolved without violation of
2. The partners who have not caused the the agreement
dissolution wrongfully, if they all desire 1. All partners may have the property sold for
to continue the business in the same name payment of partnership liabilities.
either by themselves or jointly with others, 2. If there is surplus, after paying the
may do so, during the agreed term for the liabilities of the firm, it shall be given in
partnership and for that purpose may cash to the partners.
possess the partnership property,
provided they secure the payment by If the partnership was dissolved in
bond approved by the court, or pay any contravention of the agreement
partner who has caused the dissolution
1. The remaining partners have the right to
wrongfully, the value of his interest in the
sell partnership property to pay the
partnership at the dissolution, less any
partnership’s liabilities and the surplus is
damages recoverable under the second
distributed to the remaining partners as
paragraph, No. 1 (b) of this article, and in
well.
like manner indemnify him against all
present or future partnership liabilities. 2. As against the guilty partner for the
dissolution of the partnership, the
remaining partners have the right to
3. A partner who has caused the dissolution
recover damages for breach.
wrongfully shall have:
3. The remaining partners may also continue
the business up to end of the stipulated
a. If the business is not continued under
term of the partnership.
the provisions of the second
paragraph, No. 2, all the rights of a
Art. 1838. Where a partnership contract is
partner under the first paragraph,
rescinded on the ground of the fraud or
subject to liability for damages in the
misrepresentation of one of the parties
second paragraph, No. 1 (b), of this
thereto, the party entitled to rescind is,
article.
without prejudice to any other right, entitled:

b. If the business is continued under the


second paragraph, No. 2, of this
1. To a lien on, or right of retention of, the
surplus of the partnership property after
article, the right as against his
satisfying the partnership liabilities to third
copartners and all claiming through
persons for any sum of money paid by him
them in respect of their interests in
for the purchase of an interest in the
the partnership, to have the value of
partnership and for any capital or
his interest in the partnership, less any
advances contributed by him.
damage caused to his copartners by
the dissolution, ascertained and paid
to him in cash, or the payment 2. To stand, after all liabilities to third
secured by a bond approved by the persons have been satisfied, in the place of
court, and to be released from all the creditors of the partnership for any
existing liabilities of the partnership; payments made by him in respect of the
but in ascertaining the value of the partnership liabilities.
partner's interest the value of the
good-will of the business shall not be 3. To be indemnified by the person guilty of
considered. the fraud or making the representation
against all debts and liabilities of the
partnership.

30
3. The assets shall be applied in the order of
Right of partner to rescind contract of their declaration in No. 1 of this article to
partnership the satisfaction of the liabilities.
If one is induced by fraud or misrepresentation
to become a partner, the contract is voidable. 4. The partners shall contribute, as provided
If the contract is annulled, the injured party is by article 1797, the amount necessary to
entitled to restitution. Here, the fraud or satisfy the liabilities.
misrepresentation vitiates consent. However,
until the partnership contract is annulled by a 5. An assignee for the benefit of creditors or
proper action in court, the partnership any person appointed by the court shall
relations exist and the defrauded partner is have the right to enforce the contributions
liable for all obligations to third persons. specified in the preceding number.
1. Right of injured partner where partnership
contract rescinded 6. Any partner or his legal representative
2. Right of retention of shall have the right to enforce the
partnership property contributions specified in No. 4, to the
3. Right to be subrogated in place of creditors extent of the amount which he has paid in
of partnership excess of his share of the liability.
4. Right to be indemnified by the guilty
partner against all liabilities of the 7. The individual property of a deceased
partnership. partner shall be liable for the contributions
specified in No. 4.
Art. 1839. In settling accounts between the
partners after dissolution, the following rules 8. When partnership property and the
shall be observed, subject to any agreement to individual properties of the partners are in
the contrary: possession of a court for distribution,
partnership creditors shall have priority on
1. The assets of the partnership are: partnership property and separate
creditors on individual property, saving the
a. The partnership property. rights of lien or secured creditors.

b. The contributions of the partners 9. Where a partner has become insolvent or


necessary for the payment of all the his estate is insolvent, the claims against
liabilities specified in No. 2. his separate property shall rank in the
following order:
2. The liabilities of the partnership shall rank
in order of payment, as follows: a. Those owing to separate creditors.

a. Those owing to creditors other than b. Those owing to


partners. partnership creditors.

b. Those owing to partners other than c. Those owing to partners by way of


for capital and profits. contribution.

c. Those owing to partners in respect of Rules for settling accounts between the
capital. partners
1. The assets of the partnership
d. Those owing to partners in respect of 2. Liabilities of the partnership
profits. 3. Application of assets
4. Contribution by the partners

31
Assets of the partnership liquidation of partnership affairs, either
1. Partnership property alone or with others.
2. The contributions of the partners
necessary for the payment of all liabilities 3. When any partner retires or dies and the
business of the dissolved partnership is
Order of application of the assets continued as set forth in Nos. 1 and 2 of
1. Those owing to partnership creditors this article, with the consent of the retired
2. Those owing to partners other than for partners or the representative of the
capital and profits such as loans given by deceased partner, but without any
the partners or advances for business assignment of his right in partnership
expenses property.
3. Those owing for the return of the capital
contributed by the partners 4. When all the partners or their
representatives assign their rights in
4. The share of the profits, if any, due to each
partnership property to one or more third
partner
persons who promise to pay the debts and
who continue the business of the
Order of application of partner who become
dissolved partnership.
insolvent or his estate his insolvent, the claims
against his separate property
5. When any partner wrongfully causes a
1. Those owing to separate creditors
dissolution and the remaining partners
2. Those owing to partnership creditors continue the business under the
3. Those owing to partners by way of provisions of article 1837, second
contribution paragraph, No. 2, either alone or with
others, and without liquidation of the
Liability of deceased partner’s partnership affairs.
individual property
The individual property of a deceased partner 6. When a partner is expelled and the
shall be liable for his share of the contributions remaining partners continue the business
necessary to satisfy the liabilities of the either alone or with others without
partnership incurred while he was a partner. liquidation of the partnership affairs.

Art. 1840. In the following cases creditors of The liability of a third person becoming a
the dissolved partnership are also creditors of partner in the partnership continuing the
the person or partnership continuing the business, under this article, to the creditors of
business: the dissolved partnership shall be satisfied out
of the partnership property only, unless there
1. When any new partner is admitted into an is a stipulation to the contrary.
existing partnership, or when any partner
retires and assigns (or the representative When the business of a partnership after
of the deceased partner assigns) his rights dissolution is continued under any conditions
in partnership property to two or more of set forth in this article the creditors of the
the partners, or to one or more of the dissolved partnership, as against the separate
partners and one or more third persons, if creditors of the retiring or deceased partner or
the business is continued without the representative of the deceased partner,
liquidation of the partnership affairs. have a prior right to any claim of the retired
partner or the representative of the deceased
2. When all but one partner retire and assign partner against the person or partnership
(or the representative of a deceased continuing the business, on account of the
partner assigns) their rights in partnership retired or deceased partner's interest in the
property to the remaining partner, who dissolved partnership or on account of any
continues the business without consideration promised for such interest or for
his right in partnership property.

32
deceased partner, shall have priority on any
Nothing in this article shall be held to modify claim arising under this article, as provided
any right of creditors to set aside any article 1840, third paragraph.
assignment on the ground of fraud.
Rights of retiring of properties of deceased,
The use by the person or partnership partner when business continued
continuing the business of the partnership To have the value of the interest of the retiring
name, or the name of a deceased partner as partner or deceased partner in the partnership
part thereof, shall not of itself make the determined as of the date of dissolution.
individual property of the deceased partner
liable for any debts contracted by such person To receive thereafter, as an ordinary creditor,
or partnership. an amount equal to the value of his share in the
dissolved partnership with interest, or, at his
Dissolution of a partnership by change of option, in place of interest, the profits
members attributable to the use of his right.
Causes
1. New partner is admitted General Rule
2. Partner retires When partner retires from the partnership, he
3. Partner dies is entitled to the payment of what may be due
4. Partner withdraws to him after liquidation.
5. Partner is expelled from partnership Exception
6. Other partners assign their rights to sole No liquidation needed when there is
remaining partner settlement as to what retiring partner shall
receive.
7. All the partners assign their rights in
partnership property to third persons.
Art. 1842. The right to an account of his
*Any change in membership dissolves a
interest shall accrue to any partner, or his legal
partnership and creates a new one
representative as against the winding up
*When a business of a dissolved partnership is
partners or the surviving partners or the
continued by former or without new partners,
person or partnership continuing the business,
the old creditors are creditors of the person or
at the date of dissolution, in the absence of any
partnership that is continuing the business.
agreement to the contrary.
Art. 1841. When any partner retires or dies,
Right to demand an accounting of partnership
and the business is continued under any of the
affairs must be directed against 1. Winding-up
conditions set forth in the preceding article, or
partners
in article 1837, second paragraph, No. 2,
without any settlement of accounts as 2. Surviving partners
between him or his estate and the person or 3. The person the partnership continuing the
partnership continuing the business, unless business
otherwise agreed, he or his legal
representative as against such person or Art. 1843. A limited partnership is one formed
partnership may have the value of his interest by two or more persons under the provisions
at the date of dissolution ascertained, and shall of the following article, having as members one
receive as an ordinary creditor an amount or more general partners and one or more
equal to the value of his interest in the limited partners. The limited partners as such
dissolved partnership with interest, or, at his shall not be bound by the obligations of the
option or at the option of his legal partnership.
representative, in lieu of interest, the profits
attributable to the use of his right in the General partner Limited partner
property of the dissolved partnership; Personally liable for Liability extends only
Provided, That the creditors of the dissolved partnership obligations to his capital
partnership as against the separate creditors,
contribution.
or the representative of the retired or

33
Have equal right in No share in b. The character of the business.
management of management of
partnership partnership. c. The location of the principal place
of business.
May contribute May contribute
money, property or money and property
industry d. The name and place of residence of
each member, general and limited
Proper party to Not proper party to partners being respectively
proceedings proceedings designated.
Interest cannot be Interest is assignable
assigned to with assignee e. The term for which the partnership is
make new acquiring all rights of to exist.
partner the limited partner f. The amount of cash and a description
His name may appear Name not included in of and the agreed value of the other
in the firm name firm name property contributed by each limited
partner.

Prohibited from No prohibition


g. The additional contributions, if any, to
engaging in a business
be made by each limited partner and
like
the times at which or events on the
partnership’s
happening of which they shall be
His retirement, His retirement, made.
insolvency and insolvency and death
death dissolves the does not dissolve the h. The time, if agreed upon, when the
partnership partnership contribution of each limited partner is
to be returned.

Characteristics of limited partnership i. The share of the profits or the other


1. Must be formed in accordance with the compensation by way of income
requirements of the law. which each limited partner shall
receive by reason of his contribution.
2. There must be one or more general
partners who control the management of
the business. j. The right, if given, of a limited partner
to substitute an assignee as
3. There must be one or more limited
contributor in his place, and the terms
partners contributing to the capital and
and conditions of the substitution.
sharing in the profits but have nothing to
do with the management.
k. The right, if given, of the partners to
4. Obligations of the partnership must be
admit additional limited partners.
paid out of common fund and in the
separate properties of the general
partners. l. The right, if given, of one or more of
the limited partners to priority over
Art. 1844. Two or more persons desiring to other limited partners, as to
form a limited partnership shall: contributions or as to compensation
by way of income, and the nature of
such priority.
1. Sign and swear to a certificate, which shall
state —
m. The right, if given, of the remaining
general partner or partners to
a. The name of the partnership, adding
continue the business on the death,
thereto the word "Limited".
retirement, civil interdiction, insanity
or insolvency of a general partner.

34
2. If the limited partner’s surname was
n. The right, if given, of a limited partner included and was carried on the new
to demand and receive property other partnership
than cash in return for his *If the limited partner’s surname was included
contribution. in the firm name, he is liable as a general
partner.
2. File for record the certificate in the Office
of the Securities and Exchange Art. 1847. If the certificate contains a false
Commission. statement, one who suffers loss by reliance on
such statement may hold liable any party to the
A limited partnership is formed if there has certificate who knew the statement to be false:
been substantial compliance in good faith with
the foregoing requirements. 1. At the time he signed the certificate.

Qualifications of limited partnership 2. Subsequently, but within a sufficient time


1. The partners must sign and swear to a before the statement was relied upon to
certificate of limited partnership enable him to cancel or amend the
2. Must file for record the certificate in the certificate, or to file a petition for its
office of the Securities and cancellation or amendment as provided in
Exchange Commission article 1865.

Art. 1845. The contributions of a limited Liability for false statement in certificate
partner may be cash or property, but not Under this provision, any partner to the
services. certificate containing a false statement is liable
provided the following requisites are present:
Limited partners can only contribute money 1. He knew the statement to be false at the
and property and cannot contribute services to time he signed the certificate, or
the partnership to protect persons dealing with subsequently, but having sufficient time to
the firms with frauds. cancel or amend it or file a petition for its
cancellation or amendment, he failed to
Art. 1846. The surname of a limited partner do so.
shall not appear in the partnership name 2. The person seeking to enforce liability has
unless: relied upon the false statement in
transacting business with the partnership.
1. It is also the surname of a general partner. 3. The person suffered loss as a result of
reliance upon such false statement.
2. Prior to the time when the limited partner
became such, the business has been ART. 1848. A limited partner shall become
carried on under a name in which his liable as a general partner unless, in addition to
surname appeared. the exercise of his rights and powers as a
limited partner, he takes part in the control of
A limited partner whose surname appears in a the business. Limited partner has no control in
partnership name contrary to the provisions of business
the first paragraph is liable as a general partner A limited partner is excluded from any active
to partnership creditors who extend credit to voice in the control of the affairs of the firm.
the partnership without actual knowledge that Limited partner cannot perform acts of
he is not a general partner. administration
Limited partners may not perform any act of
Limited partner’s surname is not included in administration with respect to the interests of
the firm name provided these circumstances the partnership, not even in the capacity of
1. If the surname of general partner is the agents of the managing partners.
same with limited partner’s

35
ART. 1849. After the formation of a limited and liabilities of a partner in a partnership
partnership, additional limited partners may be without limited partners.
admitted upon filling an amendment to the
original certificate in accordance with the ART. 1851. A limited partner shall have the
requirements of Article 1865. same rights as a general partner to:

The writing to amend a certificate 1. Have the partnership books kept at the
1. Shall conform to the requirements of principal place of business of the
Article 1844 as far as necessary to set forth partnership, and at a reasonable hour to
clearly the change in the certificate which inspect and copy any of them.
it is desired to make.
2. Be signed and sworn to by all members, 2. Have on demand true and full information
and an amendment substituting a limited of all things affecting the partnership, and
partner. a formal account of partnership affairs
ART. 1850. A general partner shall all have the whenever circumstances render it just and
rights and powers and be subject to all the reasonable.
restrictions and liabilities of a partner in a
partnership without limited partners. 3. Have dissolution and winding up by decree
However, without the written consent or of court.
ratification of the specific act by all the limited
partners, a general partner or all of the general A limited partner shall have the right to receive
partners have no authority to: a share of the profit or other compensation by
way of income and to the return of his
1. Do any act in contravention of the contribution as provided in Articles 1856 and
certificate. 1857.
2. Do any act which would make it impossible
to carry on the ordinary business of the Rights of limited partner
partnership. It has lesser rights than a general partner. It
may exercise rights similar to a general partner.
3. Confess a judgement
against the partnership. ART. 1852. Without prejudice to the provisions
of Article 1848, a person who has contributed
4. Possess partnership property, or assign to the capital of a business conducted by a
their rights in specific partnership person or partnership erroneously believing
property, for other than a partnership that he has become a limited partner in a
purpose. limited partnership, is not, by reason of his
exercise of the rights of a limited partner, a
5. Admit a person as a general partner. general partner with the person or in the
partnership carrying on the business, or bound
by the obligations of such person or
6. Admit a person as a limited partner, unless
partnership; provided that on ascertaining the
the right so to do is given in the certificate.
mistake he promptly renounces his interest in
the profits of the business, or other
7. Continue the business with partnership compensation by way of income.
property on the death, retirement,
insanity, civil interdiction or insolvency of Conditions for exemption from liability
a general partner, unless the right so to do
1. Prompt renunciation of interest and/ or
is given in the certificate.
income upon ascertaining the mistake.
Powers of general partner in limited
2. Non-inclusion of limited partner’s name in
the firm name.
partnership
The general partner shall have all the right and 3. Non-participation in the management of
powers and be subject to all the restrictions the business.

36
ART. 1853. A person may be a general partner
and a limited partner in the same partnership
at the same time, provided that this fact shall
be stated in the certificate provided for in
Article 1844.

A person who is a general, and also at the same


time a limited partner, shall have all the rights
and powers and be subject to all restrictions of
a general partner; except that, in respect to his
contribution, shall have the rights against the
other members which he would have had if he
were not also a general partner.

ART. 1854. A limited partner also may loan


money to and transact other business with the
partnership and unless he is also a general
partner, receive on account of resulting claims
against the partnership, with general creditors,
a pro rata share of the assets. No limited
partner shall in respect to any such claim:

1. Receive or hold as collateral security any


partnership property.

2. Receive from a general partner or the


partnership any payment, conveyance, or
release from liability, if at the time the
assets of the partnership are not sufficient
to discharge partnership liabilities to
persons not claiming as general or limited
partners.

The receiving of collateral security, or a


payment, conveyance, or release in violation of
the foregoing provisions is a fraud on the
creditors of the partnership.

Loans and business transactions with limited


partners
A limited partner is allowed to loan money to
the firm; transact other business with the
partnership, and receive a pro rata share in the
assets with general creditors.

Limited partner not allowed to hold collateral


security
A limited partner may not receive partnership
property as collateral security.

37
ART. 1855. Where there are several limited 3. After he has given six months’ notice in
partners the members may agree that one or writing to all other members, if no time is
more of the limited partners shall have a specified in the certificate, either for
priority over other limited partners as to the the return of the contribution or for the
return of their contributions, as to their dissolution of the partnership.
compensation by way of income, or as to any
other matter. If such an agreement is made it In the absence of any statement in the
shall be states in the certificate, and in the certificate to the contrary or the consent of all
absence of such a statement all the limited members, a limited partner, irrespective of the
partners shall stand upon equal footing. nature of his contribution, has only the right to
demand and receive cash in return for his
ART. 1856. A limited partner may receive from contribution.
the partnership the share of the profits or the
compensation by way of income stipulated for A limited partner may have the partnership
in the certificate; provided, that after such dissolved and its affairs wound up when:
payment is made, whether from the property
of the partnership or that of a general partner, 1. He rightfully but unsuccessfully demands
the partnership assets are in excess of all the return of his contribution.
liabilities of the partnership except liabilities to
limited partners on account of their
2. The other liabilities of the partnership
contributions and to general partners.
have not been paid, or the partnership
property is insufficient for their payment
ART. 1857. A limited partner shall not receive
as required by the first paragraph, No. 1,
from a general partner or out of partnership
and the limited partner would otherwise
property any part of his contributions until:
be entitled to the return of his
contribution.
1. All liabilities of the partnership, except
liabilities to general partners and to limited Conditions of a limited partner entitled to
partners on account of their contributions, return of his contribution
have been paid or there remains property
1. All liabilities of the partnership have been
of the partnership sufficient to pay them.
paid or there are assets sufficient to pay
partnership liabilities.
2. The consent of all members is had, unless
2. The consent of all the partners is obtained.
the return of the contribution may be
rightfully demanded under the provisions 3. The certificate is cancelled or so amended
of the second paragraph. as to set forth the withdrawal or reduction
of the contribution.
3. The certificate is cancelled or so amended
When limited partner may demand return
as to set forth the withdrawal or reduction.
1. The partnership is dissolved
Subject to the provisions of the first paragraph, 2. The date specified for its return has arrived
a limited partner may rightfully demand the 3. If no term is specified, after six months’
return of his contribution: notice in writing to all other partners.

1. On the dissolution of a partnership. Limited partner to receive cash


It will be noted that the limited partner has a
2. When the date specified in the certificate right to demand and receive cash only in return
for its return has arrived. for his contribution even when he contributed
property.

2.

38
ART. 1858. A limited partner is liable to the who has died or has assigned his interest in a
partnership: partnership.

1. For the difference between his contribution An assignee, who does not become a
as actually made and that stated in the substituted limited partner, has no right to
certificate as having been made. require any information or account of the
partnership transactions or to inspect the
For any unpaid contribution which he partnership books; he is only entitled to receive
agreed in the certificate to make in the the share of the profits or other compensation
future at the time and on the conditions by way of income, or the return of his
stated in the certificate. contribution, to which his assignor would
otherwise be entitled.
A limited partner holds a trustee for the
partnership: An assignee shall have the right to become a
1. Specific property stated in the certificate substituted partner if all the members consent
as contributed by him, but which was not thereto or if the assignor, being thereunto
contributed or which has been wrongfully empowered by the certificate, gives the
returned. assignee that right.

2. Money or other property wrongfully paid An assignee becomes a substituted limited


or conveyed to him on account of his partner when the certificate is appropriately
contribution. amended in accordance with Article 1865.

The liabilities of a limited partners as set forth The substituted limited partner has all the
in this article can be waived or compromised rights and powers, and is subject to all the
only by the consent of all members; but a restrictions and liabilities of his assignor,
waiver or compromise shall not affect the right except those liabilities of which he was
of a creditor of a partnership who extended ignorant at the time he became a limited
credit or whose claim arose after the filling and partner and which could not be ascertained for
before a cancellation or amendment of the the certificate.
certificate, to enforce such liabilities.
The substitution of the assignee as a limited
When a contributor has rightfully received the partner does not release the assignor from
return in whole or in part of the capital of his liability to the partnership, under article 1847
contribution, he is nevertheless liable to the and 1858.
partnership for any sum, not in excess of such
return with interest, necessary to discharge its Limited partner’s interest assignable A limited
liabilities to all creditors who extended credit partner’s interest in the partnership is
or whose claims arose before such return. assignable. The assignee, however, of a limited
partner’s interest does not necessarily become
Limited partner liable to partnership for sum a substituted limited partner.
returned
A limited partner whose contribution has been ART. 1860. The retirement, death, insolvency,
rightfully returned is still liable to the insanity or civil interdiction of a general partner
partnership for an amount not in excess of the dissolves the partnership, unless the business
sum returned plus interest as may be necessary is continued by the remaining general partners:
to pay the claims of persons who extended
credit or whose claims arose before the return. 1. Under a right so to do stated in the
certificate.
ART. 1859. A limited partner’s interest is
assignable. 2. With the consent of all members.

A substitute limited partner is a person


admitted to all the rights of a limited partner

39
It must be observed that the death, etc., of a
general partner dissolves the partnership while 4. Those to general partners other than for
the death of a limited partner does not cause capital and profits.
the dissolution of the firm, unless there is only
one limited partner. 5. Those to general partners in respect to
profits.
ART. 1861. On the death of a limited partner
his executor or administrator shall have all the
6. Those to general partners in respect to
rights of a limited partner for the purpose of
capital.
settling his estate, and such power as the
deceased had to constitute his assignee a
Subject to any statement in the certificate or to
substituted limited partner.
subsequent agreement, limited partners share
in the partnership assets in respect to their
The estate of a deceased limited partner shall
claims for capital, and in respect to their claims
be liable for all his liabilities as a limited
for profit or for compensation by way of
partner.
income on their contribution respectively, in
proportion to the respective amounts of such
ART. 1862. On due application to a court of claims.
competent jurisdiction by any creditor of a
limited partner, the court may charge the
Art. 1864. The certificate shall be cancelled
interest of the indebted limited partner with
when the partnership is dissolved or all limited
payment of the unsatisfied amount of such
partners cease to be such. A certificate shall be
claim, and may appoint a receiver, and make all
amended when:
other orders, directions, and inquiries which
the circumstances of the case may require.
1. There is a change in the name of the
partnership or in the amount or character
The interest may be redeemed with the
of the contribution of any limited partner.
separate property of any general partner, but
may not be redeemed with partnership
property. 2. A person is substituted as a limited
partner.
The remedies conferred by the first paragraph
shall not be deemed exclusive of others which 3. An additional limited partner is
may exist. admitted.

ART. 1863. In settling accounts after 4. A person is admitted as a general partner.


dissolution the liabilities of the partnership
shall be entitled to payment in the following 5. A general partner retires, dies, becomes
order: insolvent or insane, or is sentenced to civil
1. Those to creditors, in the order of priority interdiction and the business is continued
as provided by law, except those to limited under article 1860.
partners on account of their contributions,
and to general partners. 6. There is a change in the character of the
business of the partnership.
2. Those to limited partners in respect to
their share of the profits and other 7. There is a false or erroneous statement in
compensation by way of income on their the certificate.
contributions.
8. There is a change in the time as stated in
3. Those to limited partners in respect to the the certificate for the dissolution of the
capital of their contributions.
2.

40
partnership or for the return of a Securities and Exchange Commission, where
contribution. the certificate is recorded:

9. A time is fixed for the dissolution of the 1. A writing in accordance with the provisions
partnership, or the return of a of the first or second paragraph.
contribution, no time having been
specified in the certificate. 2. A certified copy of the order of the court in
accordance with the provisions of the
10. The members desire to make a change in fourth paragraph.
any other statement in the certificate in
order that it shall accurately represent the 3. After the certificate is duly amended in
agreement among them. accordance with this article, the amended
certified shall thereafter be for all
Art. 1865. The writing to amend a certificate purposes the certificate provided for in
shall: this Chapter.

1. Conform to the requirements of article 1844 A certificate is considered cancelled or


as far as necessary to set forth clearly the amended when there is filed for record 1.
change in the certificate which it is desired A writing to amend the certificate; or
to make. 2. A certified copy of the order of the court in
the event of an unjustified refusal of a
Be signed and sworn to by all members, partner to sign the writing.
and an amendment substituting a limited
partner or adding a limited or general Art. 1866. A contributor, unless he is a general
partner shall be signed also by the partner, is not a proper party to proceedings by
member to be substituted or added, and or against a partnership, except where the
when a limited partner is to be object is to enforce a limited partner's right
substituted, the amendment shall also be against or liability to the partnership.
signed by the assigning limited partner.
Art. 1867. A limited partnership formed under
The writing to cancel a certificate shall be the law prior to the effectivity of this Code, may
signed by all members. become a limited partnership under this
Chapter by complying with the provisions of
A person desiring the cancellation or article 1844, provided the certificate sets forth:
amendment of a certificate, if any person
designated in the first and second paragraphs 1. The amount of the original contribution of
as a person who must execute the writing each limited partner, and the time when
refuses to do so, may petition the court to the contribution was made.
order a cancellation or amendment thereof.
2. That the property of the partnership
If the court finds that the petitioner has a right
exceeds the amount sufficient to discharge
to have the writing executed by a person who
its liabilities to persons not claiming as
refuses to do so, it shall order the Office of the
general or limited partners by an amount
Securities and Exchange Commission where
greater than the sum of the contributions
the certificate is recorded, to record the
of its limited partners. A limited
cancellation or amendment of the certificate;
partnership formed under the law prior to
and when the certificate is to be amended, the
the effectivity of this Code, until or unless
court shall also cause to be filed for record in
it becomes a limited partnership under this
said office a certified copy of its decree setting
Chapter, shall continue to be governed by
forth the amendment.
the provisions of the old law.

A certificate is amended or cancelled when


there is filed for record in the Office of the

41
CORPORATIONS
TITLE I - GENERAL
PROVISIONS DEFINITIONS AND
CLASSIFICATIONS

Sec. 1. Title of the Code. – This Code shall be


known as “The Corporation Coder of the
Philippines”.

2.

42
partnership.

Right of No right of Possesses


Succession succession right of
succession
Extent of Partners Stockholders
Liability to (except are liable only
Third Persons limited to the extent
partners) are of their
liabl investments
e personally as
and represented
subsidiarily by the shares
for subscribed by
partnership them.
debts to
third persons.

Transferability A A stockholder
of interest partn has the right
er cannot to transfer his
transfer shares
interest so as without the
to make a prior consent
partner of the other
without the stockholders.
consent of all
other
existing
partners.
Term of May be May not be
existence established formed for a
for any period term in excess
of of 50 years
time extendible to
stipulated not more
by the than 50 years.
partners.
Firm name A limited A corporation
partnership is may adopt a
required to firm name
add the word provided it is
‘Ltd.’ to its not identical
name. or deceptively
similar to any
registered
firm name or
contrary to
existing laws.
Dissolution May be May only be
dissolved at dissolved
any time by with the
the will of any consent of
or all the state.
partners. 43
Governing Civil Code Corporation
Laws Code
4. It has only the powers, attributes and
Sec. 2. Corporation defined. - A corporation is properties expressly authorized by law or
an artificial being created by operation of law incident to its existence.
having the right of succession and the powers,
attributes and properties expressly authorized Similarities between a partnership and a
by law or incident to its existence. corporation
1. Juridical personality separate and distinct
Definition from the individuals composing it.
A corporation is an artificial being created by 2. Act only through its agents.
operation of law having the right of succession 3. Composed of an aggregate
and the powers, attributes and properties of individuals.
expressly authorized by law or incident to its
4. Distribute profits to those who contribute
existence.
to capital.
Attributes 5. May be organized only when there is a law
authorizing it.
1. It is an artificial being.
2. It is created by operation of law.
3. It has the right of succession. Point of
Partnership Corporation
Comparison
Manner of By mere By law or
Creation agreement operation of
of the law
parties
Number of By a Requires at
Parties minimum of least five (5)
two (2) incorporators
persons
Commence- Generally From the date
ment of from the of the
Juridical moment of issuance
Personality execution of of the
the contract certificate of
incorporation
of the
Securities and
Exchange
Commission
(SEC)
Powers May Can
exercise exerci
powers se only the
authorized powers
by partners expressly
provided the granted by
same are law or
not contrary incident to its
to law, existence.
morals,
good
customs,
public policy
2. or
publ
ic order.
Management When it is It is vested44in
not agreed the board of
upon, each directors
partner is an or
agent of the trustees.
6. Subject to income tax.

Distinctions between a partnership and a


corporation

45
2.

46
Advantages of a corporate form of business
organizations
1. The capacity to hold property, to contract, to
sue and be sued as a legal unit or distinct
entity.
Exemption of shareholders from individual
liability.
3. Continuity of existence in spite of death or 4. Transferability of shares.
changes of members.
47
5. Centralized management under a board of 3. Government-owned or controlled – are
directors. entities organized by the government or
6. Standardized methods of organization, corporations of which the government is a
management and finance for the protection majority stockholder. Eg. Philippine Air Lines
of shareholders and creditors under 4. Domestic – one incorporated under
statutory regulations. Philippine laws.
5. Foreign – one formed, organized, or existing
Disadvantages of a corporate form of business under any laws other than those of the
organizations Philippines.
1. The limited liability of the stockholders 6. Corporation aggregate – one composed of
serves to limit the credit available to the more than one member or corporator.
corporation. 7. Corporation sole – consists of one member
2. The transferability of shares permits the or corporator and his successors.
uniting of incompatible and conflicting
8. Religious corporations, sole or aggregate –
interests in one enterprise.
organized, either as sole or aggregate, to
3. The minority stockholders are usually administer properties of the church.
subservient to the wishes of the majority.
9. Ecclesiastical – organized for religious
4. In big corporations, the stockholders’ voting purposes.
rights have become largely theoretical
10. Lay – organized for a purpose other than
because of widespread ownership,
religious
lukewarmness and disinterest in
management, inertia, and inaccessible 11. Eleemosynary – organized for charitable
purposes.
meeting places.
5. In large corporations, management and 12. Civil – are those than ecclesiastical and
eleemosynary, whether public or private.
control has been separated from ownership.
13. Close – one wherein all the outstanding stock
6. By and large corporations are subject to
is owned by the persons who are active in
governmental restrictions, controls, and
management and conduct of the business.
report requirements not imposed on other
forms of business organizations. 14. Open – one in which all the members or
corporations have a vote in the election of
7. Corporate sphere of activity is limited in the
the directors and other officers.
transaction of its business to the state of the
organization. 15. Multi-national – one having been created or
organized in one state conducts business or
8. The corporate form involves “double
activities across national boundaries and but
taxation” on corporation income.
subject to the legal sanctions of the countries
in which they operate.
Sec. 3. Classes of corporations. – Corporations
formed or organized under this Code may be 16. Non-profit – organized without
stock or non-stock corporations. Corporations contemplation of gains, profits or dividends
which have capital stock divided into shares and to their members on invested capital.
are authorized to distribute to the holders of 17. De Jure – one created in strict or substantial
such shares dividends or allotments of the conformity with the statutory requirements
surplus profits on the basis of shares held are for incorporation and whose right to exist as
stock corporations. All other corporations are a corporation cannot be successfully
non-stock corporations.

Other kinds of corporations


1. Quasi-corporations – from the word “quasi”,
meaning “as if”, are entities that are not
absolutely corporations but are considered
as if they were. Eg. Public boards created by
law
2. Quasi-public – are entities engaged in
rendering basic services of such public
importance as to entitle them to certain
privileges like eminent domain or use of
public property. Eg. Electric, gas, water and
telephone companies.

2.

48
Law on Business Organizations Reviewer

attacked even in a direct proceeding for that 4. The making of arrangements for financing
purpose by the State. the enterprise and the floatation of
securities.
Sec. 4. Corporations created by special laws or 5. Arrange tactful and painless methods for
charters. – Corporations created by special laws getting his own reward for the task of
or charters shall be governed primarily by the promotion out of the prospective investors
provisions of the special law or charter creating and for reimbursement for his expenses,
them or applicable to them, supplemented by contracts, and services without frightening
the provisions of this Code, insofar as they are away those who are expected to provide the
applicable. funds.

Sec. 5. Corporators and incorporators, General rule: A corporation is not bound by any
stockholders, and members. – Corporators are agreement made by a promoter. Exception to
those who compose a corporation, whether as the rule: Unless and until the corporation
stockholders or members. Incorporators are approves the agreement.
those stockholders or members mentioned in the
articles of incorporation as originally forming and Sec. 6. Classification of shares. – The shares of
composing the corporation and who are stock of stock corporations may be divided into
signatories thereof. classes or series of shares, or both, any of which
classes or series of shares may have such rights,
Corporators in a stock corporation are called privileges or restrictions as may be stated in the
stock-holders or shareholders. Corporators in a articles of incorporation: Provided, That no share
non-stock corporation are called members. may be deprived of voting rights except those
classified and issued as “preferred” or
Components of a Corporation “redeemable” shares, unless otherwise provided
1. Corporators – are those who composed a in this Code: Provided, further, That there shall
corporation, whether as stockholders of always be a class or series of shares which have
members. The term includes incorporators, complete voting rights. Any or all of the shares or
stockholders or members. series of shares may have a par value or have no
2. Incorporators – are those stockholders or par value as may be provided for in the articles of
members mentioned in the articles of incorporation: Provided, however, That banks,
incorporation as originally forming and trust companies, insurance companies, public
composing the corporation and who are utilities, and building and loan associations shall
signatories thereof. not be permitted to issue no-par value shares of
3. Stockholders or shareholders – are those stock.
corporators in a stock corporation.
Preferred shares of stock issued by any
4. Members – are those corporators in a non-
corporation may be given preference in the
stock corporation.
distribution of the assets of the corporation in
5. Promoters – is a self-constituted organizer case of liquidation and in the distribution of
who finds an enterprise or venture and helps dividends, or such other preferences as may be
to attract investors, form a corporation and stated in the articles of incorporation which are
launch it in business, all with a view to not violative of the provisions of this Code:
promotion profits. Provided, That preferred shares of stock may be
issued only with a stated par value. The board of
Promotion – is the act of procuring the initial directors, where authorized in the articles of
finances and the making of all preparations incorporation, may fix the terms and conditions
necessary to launch a corporation. of preferred shares of stock or any series thereof:
Provided, That such terms and conditions shall be
Activities of a promoter effective upon the filing of a certificate thereof
1. The discovery and investigation of a with the Securities and Exchange Commission.
promising business opportunity.
2. The formulation of business and financial Shares of capital stock issued without par value
plans. shall be deemed fully paid and nonassessable and
3. Assembling the enterprise by negotiations the holder of such shares shall not be liable to the
and obtaining some control over the subject corporation or to its creditors in respect thereto:
matter by option or contracts made on Provided; That shares without par value may not
behalf of the proposed corporation or on his be issued for a consideration less than the value
own credit. of five (P5.00) pesos per share: Provided, further,
That the entire consideration received by the
corporation for its no-par value shares shall be

49
Law on Business Organizations Reviewer

treated as capital and shall not be available for Classes or series of shares of stock subject to
distribution as dividends. restrictions
1. Shares shall not be deprived of voting rights
A corporation may, furthermore, classify its except preferred or redeemable shares but
shares for the purpose of insuring compliance non-voting shares must still be entitles to
with constitutional or legal requirements. vote on matters specified in the last
paragraph of Section 6 like matters relating
Except as otherwise provided in the articles of to amendment of the articles of
incorporation and stated in the certificate of incorporation and dissolution of the
stock, each share shall be equal in all respects to corporation.
every other share. Where the articles of 2. Where non-voting shares are provided for
incorporation provide for non-voting shares in there must always be a class or series of
the cases allowed by this Code, the holders of shares with complete voting rights.
such shares shall nevertheless be entitled to vote 3. Banks, trust companies, insurance
on the following matters: companies, public utilities, and building and
loan associations shall not be permitted to
1. Amendment of the articles of issue no-par value shares of stock.
incorporation.
4. Preferred shares of stock which may be given
preference in the distribution of assets in
2. Adoption and amendment of by-laws. case of liquidation and distribution of
dividends or other preferences may be
3. Sale, lease, exchange, mortgage, pledge or issued only with stated par value.
other disposition of all or substantially all of 5. The terms and conditions of preferred shares
the corporate property. or series thereof may be fixed by the board
of directors only when authorized by the
4. Incurring, creating or increasing bonded articles of incorporation the effectivity
indebtedness. thereof shall be reckoned from the filing of
certificate with the SEC.
5. Increase or decrease of capital stock. 6. Shares without par value may not be issued
for a consideration less than the value of five
6. Merger or consolidation of the corporation (P5.00) pesos per share.
with another corporation or other 7. Unless otherwise provided by law the rights,
corporations. privileges or restrictions on classes or series
of shares must be stated in the articles of
7. Investment of corporate funds in another incorporation and in the stock certificates.
corporation or business in accordance with
this Code. Classes or series of shares
1. Voting and Non-Voting Shares; General rule:
8. Dissolution of the corporation. Every member of a nonstock corporation and
every legal owner of shares in a stock
Except as provided in the immediately preceding corporation, has a right to be present and
paragraph, the vote necessary to approve a vote at all corporate meetings. Exception to
particular corporate act as provided in this Code the rule: Unless there is a stipulation in
shall be deemed to refer only to stocks with contrary.
voting rights. 2. Par Value and No-Par Value Shares Par value
is the given fixed or definite value of a share
Definition in the articles of incorporation.
A “stock” or share of stock is one of the units into 3. Common and Preferred
which the capital stock has been divided. It Shares.
represents the interest or right that the holder of Preferred shares of stock may be: (a)
the stock or stockholder has in the corporation. preferred as to assets; (b) preferred as to
dividends. Preferred as to dividends may
A stock certificate certifies that one is a holder or either be cumulative or noncumulative, or
owner of a certain number of shares of stock in participating or nonparticipating
the corporation. It is a mere documentary 4. Promotion Shares – are such stocks issued to
evidence of the holder’s ownership of shares and those who may originally own the mining
a convenient instrument for the transfer of title. ground or valuable rights connected
therewith, in consideration of their deeding
the same to the mining company when the

50
Law on Business Organizations Reviewer

company is incorporated, or it may mean the articles of incorporation, which terms and
such stock as is issued to promoters. conditions must also be stated in the certificate
5. Shares of Escrow – are shares subject to an of stock representing said shares.
escrow agreement, that is, an agreement
under which the shares are deposited by the Definition
grantor or his agent with a third person, to Redeemable (“Callable”) shares of stock which
be delivered by the depositary to the vendee are usually preferred are frequently issued
or subscriber only upon the happening of subject to redemption at the option of either the
certain conditions. corporation, the stockholder, or both, at a
6. Founder’s Shares; definite price representing premium above the
7. Redeemable “Callable” Shares; amount originally paid.
8. Treasury Shares;
Sinking fund refers to a fund set-up by the
9. Other shares classified to comply with
corporation where cash is gradually set aside in
constitutional or legal requirements.
order to accumulate the amount necessary to
meet the redemption price of redeemable shares
Instances when non-voting shares may vote
of specified dates in the future.
1. Amendment of the articles of
incorporation;
Sec. 9. Treasury shares. - Treasury shares are
2. Adoption and amendment of by-laws; shares of stock which have been issued and fully
3. Sale, lease, exchange, mortgage, pledge or paid for, but subsequently reacquired by the
other disposition of all or substantially all of issuing corporation by purchase, redemption,
the corporate property; donation or through some other lawful means.
4. Incurring, creating or increasing bonded Such shares may again be disposed of for a
indebtedness; reasonable price
5. Increase or decrease of capital stock; fixed by the board of directors. (n)
6. Merger or consolidation of the corporation
with another corporation or other Definition
corporations; Treasury shares are owned by the corporation
7. Investment of corporate funds in another having been reacquired by the issuing
corporation of business in accordance with corporation by “purchase, redemption, donation
the Corporation Code; and or through some other lawful means.” It has no
voting rights or rights as to dividends or
8. Dissolution of the corporation.
distributions.
Sec. 7. Founders’ shares. – Founders' shares
TITLE II - INCORPORATION AND ORGANIZATION
classified as such in the articles of incorporation
OF PRIVATE CORPORATIONS Definition
may be given certain rights and privileges not
enjoyed by the owners of other stocks, provided Incorporation is the act of creating a corporation.
that where the exclusive right to vote and be
voted for in the election of directors is granted, it Sec. 10. Number and qualifications of
must be for a limited period not to exceed five (5) incorporators. – Any number of natural persons
years subject to the approval of the Securities not less than five (5) but not more than fifteen
and Exchange Commission. The five-year period (15), all of legal age and a majority of whom are
shall commence from the date of the aforesaid residents of the Philippines, may form a private
approval by the Securities and Exchange corporation for any lawful purpose or purposes.
Commission. Each of the incorporators of s stock corporation
must own or be a subscriber to at least one (1)
Definition share of the capital stock of the corporation.
Founders’ shares, generally common stock, are
given to the founders or promoters of a Qualifications of incorporators 1.
corporation in payment of money expended or Must be a natural person.
services rendered in the promotion of it. 2. Must be of legal age.

Sec. 8. Redeemable shares. – Redeemable shares Sec. 11. Corporate term. – A corporation shall
may be issued by the corporation when expressly exist for a period not exceeding fifty (50) years
so provided in the articles of incorporation. They from the date of incorporation unless sooner
may be purchased or taken up by the corporation dissolved or unless said period is extended. The
upon the expiration of a fixed period, regardless corporate term as originally stated in the articles
of the existence of unrestricted retained earnings of incorporation may be extended for periods not
in the books of the corporation, and upon such exceeding fifty (50) years in any single instance
other terms and conditions as may be stated in by an amendment of the articles of

51
Law on Business Organizations Reviewer

incorporation, in accordance with this Code; Capital stock requirements under the special
Provided, That no extension can be made earlier laws
than five (5) years prior to the original or 1. In case of mining and agricultural
subsequent expiry date(s) unless there are incorporation, or corporation organized for
justifiable reasons for an earlier extension as may the purpose of the disposition ,
be determined by the Securities and Exchange exploitation, development or utilization of
Commission. natural resources of the Philippines, as well
as corporation organized for the operations
Sec. 12. Minimum capital stock required of stock of public utilities, the Constitution provides
corporations. – Stock corporations incorporated that at least 60 % of the capital stock of
under this Code shall not be required to have any such corporation must be owned by citizens
minimum authorized capital stock except as of the
otherwise specifically provided for by special law, Philippines.
and subject to the provisions of the following
section. 2. The Insurance Code provide that “no
domestic insurance company shall, if a stock
Sec.13. Amount of capital stock to be subscribed corporation, engage in business in the
and paid for purpose of incorporation. – At least Philippines unless posses of a paid up
twenty-five percent (25%) of the authorized capital stock equal to at least two million
capital stock as stated in the articles of pesos”. Where the insurance company is to
incorporation must be subscribed at the time of engage in insurance business it must have a
incorporation, and at least twentyfive percent “paid-up capital stock of at least five million
(25%) of the total subscription must be paid upon pesos” to be invested in securities specified
subscription, the balance to be payable on a date by law, which securities are to be deposited
or dates fixed in the contract of subscription with the Insurance
without need of call, or in the absence of fixed Commissioner.
date or dates, upon call for payment by the board
of directors: Provided, however, that in no case
3. The Financing Company Act requires that
shall the paid-up capital be less than five
“at least sixty per centum of the capital of
thousand (P5,0000) pesos.
financing companies must be owned by
citizens of the Philippines and shall have a
Amount to be subscribed and paid Illustration: paid-up capital of not less than five hundred
If X, Inc. has authorized capital stock of thousand pesos”.
P100, 000 divided into 1,000 shares with par
value of P100.00 per share, it must be shown that
4. Commercial banks are required to have a
at least P25, 000 or 250 shares of the authorized
paid-up capital of 100 million pesos. When
capital stock must be subscribed. Of the total
a commercial bank having licence to
subscription of P25, 000, at least P6, 250.00 or
operate an expanded foreign currency
25% of total subscription must be paid. It is not
deposit system it must have a paid-up
necessary that each subscriber pay Twentyfive
capital of at least 150 million pesos and
percent (25%) on his subscription. On the other
when a commercial bank is authorized to
hand, where the authorized capital stock is stated
engage in universal banking it must have a
at 2,000 no par value shares , it must be shown
paid up capital of at least 500 million pesos.
that at least 500- no par value share have been
subscribed. The basis of computation is on the
number of shares. 5. The New Constitution provides that: “The
ownership and management of mass media
shall be limited to citizens of the Philippines
Securities and Exchange
or to corporations or association wholly-
Commission (SEC) may conduct compliance with
owned and manage by such citizen”.
paid-up capital requirements because it has
come to the knowledge of the Commission that
some corporation have been organized merely as 6. Under the Retail Trade Nationalization law
fronts for some hidden objectives with no real “no person who is not a citizen of
intention of carrying out the purported purposes the Philippines, and no association,
in their articles of incorporation. If a bigger partnership, or corporation the capital of
capital stock is required, the abuse of the which is not wholly owned by citizens of the
privileges of a corporation would be minimized. Philippines, shall engage directly or
indirectly in the retail trade business.

7. Only vessels of domestic ownership are


authorized to engage in coastwise shipping
in the Philippines. Vessels are considered of

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Law on Business Organizations Reviewer

domestic ownership when such ownership subscription, and if some or all of the shares
is vested in some one or more of the are without par value, such fact must be
following: (1) Citizens of the Philippines; (2) stated.
any corporation or any company composed
wholly of the citizens of the Philippines; (3) 9. If it be a non-stock corporation, the amount
any corporation or company created under of its capital, the names, nationalities and
the laws of the Philippines, provided at least residences of the contributors and the
75% of the capital stock thereof or of any amount, contributed by each.
interested in said capital is wholly owned by
the citizens of the Philippines. 10. Such other matters are not inconsistent with
law and which the incorporators may deem
Sec.14. Contents of articles of the necessary and convenient.
incorporations. – All corporation organized
under this Code shall file with the Securities and The Securities and Exchange Commission shall
Exchange Commission articles of incorporation in not accept the articles of incorporation of any
any of the official languages, duly signed and stock corporation unless accompanied by a
acknowledged by all of the incorporators sworn statement of the Treasurer elected by the
containing substantially the following matters, subscriber showing that at least 25% of the
except as otherwise prescribed by this Code or by authorized capital stock of the corporation has
special laws: been subscribed, and at least 25% of the total
subscription has been fully paid to him in actual
1. The name of the corporation. cash and/or in property the fair valuation of
which are equal to at least 25% of the said
2. The specific purpose or purposes for which subscription , such paid up capital being not less
the corporation is being incorporated. than five-thousand pesos (P5,000).
Where the corporation have more than one
stated purpose, the article of incorporation Sec.15. Forms of Articles of Incorporation. –
shall state which the primary is and which Unless otherwise prescribed by special law,
is/are the secondary purpose or purposes: articles of incorporation of all domestic
Provided, That a non-stock corporation may corporations shall supply substantially the
not include a purpose which would change following requirements in the form as provided
or contradict its nature as such. for by the SEC:

3. The place where the principal office of the 1. The name of the corporation.
corporation is to be located, which must be Incorporators may choose any name they see fit
within the Philippines. , however strange, uneuphonious, or
unrhetorical it may be , provided it is one not
4. The term for which the corporation is to identical with or prejudicially similar to a name
exist. which has previously been adopted by and is
being use by another corporation as its corporate
5. The names, nationalities and residences of name
the incorporators.
Change of Corporate name
6. The number of directors or trustees which The change of the corporate name doesn’t
shall not be less than five (5) nor more than mean a new corporation, nor the successor of the
fifteen (15). original corporation. It is the same corporation
with a different name having its character with
no respect change. The corporation continues, as
7. The names, nationalities and residences of
before, responsible in its new name for all debts
the person who shall act as directors or
or other liabilities it had previously contracted or
trustees until the first regular directors or
incurred.
trustees are duly elected and qualified
accordance with this Code.
2. Specific purpose or purposes.
The statement of the purpose has its principal
8. If it be a stock corporation, the amount of its
function the affirmative authorization of the
authorized capital stock in lawful money of
management to enter into those contracts and
the Philippines, the number of shares which
business transactions which may be considered
it is divided, and in case the shares are par
as incidental to its attainment of the purposes. It
value shares, the par value of each, the
also imposes implied limitations of their
names, nationalities and residences of the
authority by the exclusion of lines of activity
original subscriber, and the amount
which are not covered.
subscribed and paid by each on his

53
Law on Business Organizations Reviewer

incorporators may deem necessary and


3. Principal office of the Corporation. The convenient”.
principal office of the corporation must be
within the Philippines. It is where the books Sworn Statement of the Treasurer The
of the corporation are kept and its officers Securities and Exchange Commission shall not
usually and ordinarily meet for the purpose accept the articles of incorporation of any stock
of managing the affairs and transactions of corporation unless accompanied by a sworn
the business of the corporation. statement of the Treasurer elected by the
subscribers showing that at least:
4. Terms of Existence of the Corporation. The
corporation shall exist for a period not 1. 25% of the authorized capital stock has been
exceeding fifty (50) years from the date of subscribed.
incorporation unless sooner dissolved or
unless said period is extended. 2. 25% of the subscription has been fully paid in
actual cash or property.
5. Names, Nationalities and residences of
incorporators. 3. The paid-up capital being not less than
The names, nationalities and residences of the P5,000.00.
incorporators must be stated in the articles of the
corporation for the purpose of complying with SEC Policy
legal requirement that majority of the Property as subscription payment –
incorporators must be residents of the Generally, all forms of tangible properties are
Philippines and complying with the statutory acceptable for purposes of payment to
requirement on share ownership and in other subscription provided that the three test of paid-
instances where Filipino Citizens are required. up capital determination are complied with, i.e.,
ownership, existence and valuable, subject to
6. Number of directors and trustees. certain restrictions as may be imposed by law.
The number of the director and trustees must
not be less than five (5) nor more than fifteen SEC adopted the policy that
(15). discourages the inclusion of intangible assets as
goodwill, lease-hold rights, or timber concession
7. Names, nationalities and residences of rights, payment of such properties Motor vehicle,
directors. real estate properties and navigable vessels in
A majority of the directors or trustees of all payment of pre-incorporation subscription,
corporation organized under this Code must be increases of capital stock or in exchange for
a residents citizens of the Philippines. additional issuance of shares are allowed only by
the SEC provided that:
8. Amount of authorized capital stock. A 1. There has been a proof of valid transfer;
stock corporation must state the “amount of its 2. All taxes due from the properties has
authorized capital stock in lawful money of the been paid; and
Philippines, the number of shares into which it 3. Such properties have been reasonably
is divided, and in case the shares are par value valued.
shares, the par value of each, the names,
nationalities, and residences of the original Papers to accompany articles with SEC
subscribers, and the amount subscribed and The SEC requires the following papers to be
paid by each on his subscription, and if some or submitted to it with the articles of incorporation:
all the shares are without par value, such fact
1. A verification slip executed by the Chief
must be stated”.
of the Record Section states that the
proposed name of the corporation has
9. Non-stock Corporation. The been verified and found to be distinct/
Corporation Code requires the articles of the not similar to the names of already
non-stock corporation to states: the amount of existing corporation or those pending
its capital, the names, nationalities and registration.
residences of its contributors and the amount
2. Written undertaking to change
contributed by each. A non-stock corporation
corporate name in case there is a
may have capital but it has no authorized
person, firm or entity with a prior right
capital stock.
to the use of said name or one similar to
it.
10. Inclusion of other matters. The articles
3. Sworn statement of assets and
of incorporation “may include other matters
liabilities, duly executed under oath by
that is not inconsistent with law and which the

54
Law on Business Organizations Reviewer

the corporate treasurer together with months from the date of filing for a cause not
the amount P50.00 to defray publication attributable to the corporation.
expenses.
4. Bank certificate of deposit, issued under Law reserves the rights to modify the charter
oath by the bank manager or any The constitution and the Corporation Code
authorized bank officer, that there is a reserved the right to amend the charter of a
deposit of the stated amount private corporation. The constitution provides
representing the paid-up capital of the that “no franchise or right be granted except
corporation either in the name of the under the condition that it shall be subject to
treasurer in trust for the corporation or amendment, alteration, or repeal by the National
in the name of the corporation itself. Assembly when public interest so requires.
5. Written authority to verify bank deposit
signed by the corporate treasurer Amendment of Articles of Incorporation The
empowering the SEC and /or the Central articles of incorporation may be amended for
bank to check and inspect the existence legitimate purposes that refer to any matter
of the bank deposit of the corporate stated in the articles of incorporation. It may
paid-up capital. refer to: 1. Change of corporate name;
6. Taxpayer account number of the 2. Extension of term of corporation;
incorporators pursuant to Executive 3. Change in classes or series of shares;
order No. 213. 4. Change in rights, privileges or restrictions in
7. Registration Data Sheet, a statement in share ownership;
statistical data form, signed by an 5. Increase or decrease in the number of
authorized representative of the directors; and
corporation regarding important 6. Change in purpose or purposes and other
information about the corporate seal, necessary changes.
corporate name, principal office,
capital structure, their subscription and Vote or recent assent required in amendment of
TAN (SEC Bulletin, Oct. 1982). the articles of incorporation shall be as follows:
Stock Corporation – A majority vote of the
Sec. 16. Amendment of Articles of directors or trustees and the vote or written
Incorporation. – Unless otherwise prescribed by assent of the stockholders representing at least
this Code or by special law, and for legitimate two- thirds (2/3) of the outstanding capital stock.
purposes, any provision or matter stated in the Under section 81 of the Code, a dissenting
articles of incorporation may be amended by a stockholder may exercise his appraisal right if he
majority vote of the board of directors or is against the amendment to be made and
trustees and the vote or written assent of the demand payment of the fair value of his shares.
stockholders representing at least twothirds
(2/3) of the outstanding capital stock, without Non-stock Corporation – A majority vote of board
prejudice to the appraisal rights of dissenting of directors and the vote or written assent of 2/3
stockholders in accordance with the provision of of the members.
this Code, or the vote or written assent of two-
thirds (2/3) of the members if it be a non-stock The amendments to the articles of incorporation
corporation. shall take effect upon its approval by the
Securities and Exchange Commission or from the
The original and amended articles altogether filing with the said Commission if not acted upon
shall contain all provision required by law to be within six months from the date of filing for a
set out in the articles of incorporation. Such cause not attributable to the corporation.
articles, as amended shall be indicated by
underscoring the change or changes made, and Sec. 17. Grounds when articles of incorporation
the copy thereof duly certified under oath by or amendment may be rejected or disapproved.
the corporate secretary and the majority of the – The Securities and Exchange Commission may
directors or trustees stating the fact that said reject the articles of incorporation or
amendments have been duly approved by the disapproved any amendment thereto if the same
required vote of the stockholders or members, is not in compliance with the requirements of this
shall be submitted to the Securities and Code: Provided, That the Commission shall give
Exchange Commission. the incorporators a reasonable time within which
to correct or modify the objectionable portions
The amendment shall take effect upon its of the articles or amendment. The following are
approval by the Securities and Exchange grounds for such amendment or disapproval:
Commission or from the date of filing with the
said Commission if not acted upon within six (6)

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Law on Business Organizations Reviewer

1. That the articles of incorporation or any General Banking Act, no person or entity not
amendment thereto is not substantially in conducting the business of commercial banking
accordance with the form prescribed herein. shall use the words “bank”, “banking”, “banker”,
“building and loan association”, “trust
2. That the purpose or purposes of the corporation”, etc. or words of similar import. The
corporation are patently unconstitutional, word “National” under Act 2612 may not be use
illegal, immoral, or contrary to government by those doing business as bankers, brokers, or
rules and regulation. savings institutions. “United Nations” both in its
full and abbreviated forms, for commercial and
business purposes. There are other names or
3. That the Treasurer’s Affidavit concerning the
words which pursuant to other special laws may
amount of capital stock subscribed and/or
not be used.
paid is false.

Sec. 19. Commencement of Corporate


4. That the required percentage of ownership
Existence. – A private corporation formed or
of the capital stock to be owned by citizens
organized under this Code commences to have
of the Philippines has not been complied
corporate existence and juridical personality and
with as required by existing laws of the
is deemed incorporated from the date the
constitution.
Securities and Exchange Commission issues a
certificate of incorporation under its official seal;
No articles of incorporation or amendment to
and thereupon the incorporators,
articles of incorporation of banks, banking and
stockholders/members, and their successors
quasi-banking institutions, building and loan
shall constitute a body politic and corporate
association, trust companies, public utilities,
under the name stated in the articles of
educational institution, and other corporations
incorporation for the period of time mentioned
governed by special laws shall be accepted or
therein, unless said period is extended or the
approved by the Commission unless
corporation is sooner dissolved in accordance
accompanied by a favourable recommendation
with law.
of the appropriate government agency to the
effect that such articles or amendment is in
Sec. 20. De Facto corporation. – The due
accordance with law.
incorporation any corporation claiming in good
faith to be a corporation under this Code, and its
Sec. 18. Corporate name. – No corporate name
right to exercise corporate powers, shall not be
may be allowed by the Securities and Exchange
inquired into collaterally in any private suit to
Commission if the proposed name is identical or
which such corporation may be a party. Such
deceptively or confusingly similar to that of any
inquiry may be made by the Solicitor General in a
existing corporation or to any other name
quo warranto proceeding.
already protected by law or its patently
deceptive, confusing or contrary to existing laws.
De facto corporation – generally refer to
When the change in a corporate name is
organizations exercising corporate power under
approved, the commission shall issue an
colour of a more or less legally constituted
amended certificate of incorporation under the
corporation.
amended name.
Elements of De facto corporation
Necessity of Corporate name It is necessary that
a corporation should have a name because that 1. Existence of a valid law under which a
is the only way by which the corporation can be corporation can be organized.
identified and distinguished from other 2. An attempt in good faith to incorporate.
corporation, firms or entities. 3. Actual exercise of incorporate powers.

Change of corporate name Quo warranto – an inquiry made into the right of
A corporation may change its name by merely a corporation to conduct business.
amending its charter in the manner prescribed by
law. The change of name of the corporation does Illustration
not result in dissolution. The changing of the Seven competent individual organized a
name of a corporation is no more the creation of corporation by filing the articles of incorporation
a corporation than the changing of the name of a and securing a certificate of incorporation with
natural person. the SEC. However, the addresses of two of the
original subscribers were omitted in the articles
Restriction in use in certain names of words of incorporation. In suit filed by X, a creditor,
There are special laws prohibiting the use of against the corporation he alleged that the
certain names and/or words. Thus, under the corporation has no valid existence and sought to

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Law on Business Organizations Reviewer

hold the seven incorporators (also directors)


liable personally on the obligation. X’s allegation The Grant of corporate existence, conferred by
that the corporation had no valid existence the issuance of certificate of incorporation, is
would constitute a collateral (side) attack in a subject to two subsequent conditions, to wit:
private suit. Only the Solicitor General as 1. The corporation must “formally
government lawyer may raise the question by organize”.
quo warranto proceeding. (Literally by “what 2. The corporation must actually begin the
right”). “transaction of its business”.

Sec. 21. Corporation by estoppel. – All persons Failure to comply with either or both of these
who assume to act as a corporation knowing it to conditions within two (2) years from the date of
be without authority to do so shall be liable as its incorporation, its corporate power cease and
general partners for all debts, liabilities and the corporation must be deemed dissolved.
damages incurred or arising as a result thereof:
Provided, however, That when any such Sec. 23. The board of directors or trustees. –
ostensible corporation is sued on any transaction Unless otherwise provided in this Code, the
entered by it as a corporation or on any tort corporate powers of all corporation formed
committed by it as such, it shall not be allowed to under this Code shall be exercised , all business
use as a defense its lack of corporate personality. conducted and all property of such corporations
controlled and held by the board of directors or
One who assumes an obligation to an ostensible trustees to be elected from among the holders of
corporation as such cannot resist performance stock, or where there is no stock, from among
thereof on the ground that there was in fact no the members of the corporation, who shall hold
corporation. office for one (1) year and until their successors
are elected and qualified.
Estoppel – It is preclusion, which prevent a man
from denying a fact in consequences of his own Every director must own at least one (1) share of
previous act, allegations, or denial of a contrary the capital stock of the corporation of which he
tenor. The object of the principle of estoppel is to is a director, which share shall stand in his name
prevent injustice to an otherwise innocent on the books of the corporation. Any director
person. who ceases to be the owner of at least one (1)
share of the capital stock of the corporation of
Sec. 22. Effect of non-use of corporate charter which he is the director shall thereby cease to
and continuous in operation of a corporation. – be a director. Trustees of non-stock
If a corporation does not formally organize and corporations must be members thereof. A
commence the transaction of its business or the majority of the directors or trustees of all
construction of its works within two (2) years corporations organized under this Code must be
from the date of its incorporation, its corporate residents of the Philippines.
powers cease and the corporation shall be
deemed dissolved. However, if a corporation has Qualifications of directors
commenced the transaction of its business but
1. He must own at least one (1) share of the
subsequently becomes continuously inoperative
capital stock of the corporation in his name.
for a period of at least five (5) years, the same
shall be ground for the suspension or revocation 2. Majority of the directors must be a resident
of its corporate franchise or certificate of citizen of the Philippines.
incorporation. 3. A director must not have been convicted by
final judgement of an offense punishable by
This provision shall not apply if the failure to imprisonment exceeding six (6) years or a
organize, commence the transactions of its violation of the provisions of the
businesses or the construction of its works, or to Corporation Code committed within five (5)
continuously operate is due to causes beyond the years prior to the date of election or
control of the corporation as may be determined appointment.
by the Securities and Exchange Commission.
The directors, once elected, become the
Organization representatives of the corporation itself, not its
The idea of organization in reference to stockholders. The directors of a nonstock
corporations means executive structure, election corporation are required to be members thereof
of officers, providing for subscription and and like stock corporations “majority of the
payment of capital, adoption of by-laws, and directors and trustees of all corporations
other steps necessary to endow the legal entity organized under the Corporation Code must be
with capacity to transact business for which it residents citizen of the Philippines”. There are
was created. some special corporation not organized with the

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Law on Business Organizations Reviewer

Corporation Code where directors are required for any reason, no election is held, or if there are
to be citizens of the Philippines. They are as not present or represented by proxy, at the
follows: meeting, the owners of the majority of the
1. Bank and banking institution, at least 2/3 of outstanding capital stock, or if there be no capital
the members of the board of directors shall stock, a majority of the members entitled to vote.
be citizen of the
Philippines. Methods of voting
2. Rural banks, every member of the board of The voting methods which may be resorted to by
directors shall be citizens of the Philippines. a voting stockholder are as follows:
3. Domestic air carrier, the directing head or 1. Straight voting.
2/3 of the board of directors and other 2. Cumulative voting for one candidate.
managing officers shall be citizens of the 3. Cumulative voting by distribution.
Philippines.
4. Registered investments companies, the Example of Straight Voting
directors thereof must be Filipino citizen. A owns 100 shares of stock in X corporation.
5. Private development banks, all the members During the meeting for the purpose of electing
of the board of directors shall be citizen of five directors, he may cast his vote by giving each
the Philippines. of the five candidates 100 votes, hence, he
distribute equally his vote without preference or
6. In case of financing corporation, at least 2/3
discrimination.
of all members of the board of directors shall
be citizen of the
Philippines. Example of Cumulative voting for one candidate
In the preceding illustration, if A owns 100 voting
Sec. 24. Election of directors or trustees. – At all shares and there are five directors to be elected,
elections of directors or trustees, there must be A is entitled to 500 votes which he may
present, either in person or by representative “cumulate” by giving it to candidate Z alone.
authorized to act by written proxy, the owners of Example of Cumulative
the majority of the outstanding capital stock, or voting by distribution
if there be no capital stock, a majority of the As in the same example above, if A owns 100
members entitled to vote. The election must be voting shares, and there are five directors to be
by ballot if requested by any voting stockholder elected, A is entitled to 500 votes which he may
or member. In stock corporations, every distribute to candidate Y and Z giving the former
stockholder entitled to vote shall have the right 300 and the latter 200 provided that the total
to vote in person or by proxy the number of number of votes cast by him does not exceed
shares of stock standing, at the time fixed in the 500 votes.
by-laws, in his own name on the stock books of
the corporation, or where the by-laws are silent, Voting of sequestered shares of stock
at the time of the election; and said shareholder It has been held that the “Presidential
may vote such number of shares for as many Commission on Good Government may properly
persons as there are directors to be elected or he exercise the prerogative to vote sequestered
may cumulate said shares and give one candidate stock of corporation, granted to it by the
as many votes as the number of directors to be President of the Philippines xxx pending the
elected multiplied by the number of his shares outcome of proceeding to determine the
shall equal, or he may distribute them on the ownership of sequestered shares of stock. xxx
same principle among as many candidate as he Substitution of directors is not be done without
shall see fit; Provided, That the total number of reason or rhyme, and undertaken only when
votes cast by him shall not exceed the numbers essential to prevent disappearance or wastage of
of shares owned by him as shown in the books of corporate property, and always under such
the corporation multiplied by the whole number circumstance as assure that replacements are
of directors to be elected: Provided, however, truly processed of competence, experience and
that no delinquent stocks shall be voted. Unless probity.
otherwise provided in the articles of
incorporation, or in the by- laws, members of Sec. 25. Corporate officers, quorum. –
corporation which have no capital stock may cast Immediately after their election, the directors of
as many votes as there are trustees to be elected a corporation must formally organized by the
but may not cast more than one vote for one election of a president, who shall be a director, a
candidate. Candidates receiving the highest treasurer who may or may not be a director, a
number of votes shall be declared elected. Any secretary who shall be a resident citizen of the
meeting of the stockholders or members called Philippines, and such other officers as may be
for an election may adjourn from day to day or provided for in the by-laws. Any two (2) or more
from time to time but not sine die or definitely if, positions may be held concurrently by the same

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Law on Business Organizations Reviewer

person, except that no one shall act as president Authority of corporate officers
and secretary or as president and treasurer at the The corporation transact its business through its
same time. officers or agents. An officer’s power as an agent
of the corporation must be sought from the
The directors or trustees and officers to be statute, charter, and the by-laws or in a
elected shall perform the duties enjoined on delegation of authority to such officers, from the
them by law and by the by-laws of the acts of board of directors, formally expressed or
corporation. Unless the articles of incorporation implied from a habit or custom of doing business.
or the by-laws provide form a greater majority, a
majority of the number of directors or trustees as Chairman of the Board A chairman of the board
fixed in the articles of incorporation shall of directors must himself director be a director of
constitute a quorum for the transaction of the corporation. His duty as presiding officer is
corporate business, and every decision of at least not an executive one. It has been suggested that
a majority of the directors or trustees present at he well be given advisory duties in determining
a meeting at which there is a quorum shall be executive salaries, bonus plans and pensions,
valid as a corporate act , except for the election determining dividend policy, selecting auditors,
of the officers which shall require the vote of a and dealing questions with labor and company
majority of all the members of the board. policy.
Qualification of corporate officer 1.
President. He must be a director. President
2. Treasurer. He may or may not be a director. The president must be a director of the
3. Secretary. He must be a resident and citizen corporation. The powers of the president of a
of the Philippines corporation are vested in him by law or the by-
4. Other officers provided for in the bylaws. laws; otherwise, he has no power over the
corporate property and business than has any
Three levels of corporate control other director. However, he may be given actual
authority to make particular contracts, or to
1. The board of director which is responsible
execute conveyances, borrow money, execute
for the corporate policies and the general
mortgages, and do other acts, by the charter, the
management of the business affairs of the
by-laws, resolutions of directors or their informal
corporation.
acquiescence.
2. The officers, who in theory execute the
policies lay down by the board , but in Vice- President
practice often have wide latitude in
In the absence of the president, or if the office of
determining the course of business
the president becomes vacant, as a rule, the vice
operations.
president elected and appointed by the
3. Stockholders who like amendments of the shareholders or directors has authority to act in
articles of incorporation. his stead, and to perform the duties of the office.

Teleconferencing of Board Members In the Secretary


Philippines, teleconferencing and A secretary must be a resident citizen of the
videoconferencing of members of board of Philippines. It is generally its duty to make and
directors of private corporation is a reality, in keep corporate records; to make proper entries
light of the Republic Act No. 8792.The Securities of the votes, resolution and proceedings of the
and Exchange Commission issued SEC shareholders and directors in the management of
Memorandum Circular No. 15, on November 30, the corporation, and of all other matters required
2001, providing the guidelines to be complied to be entered in the records. The secretary is the
with related to such conferences. Thus, the court ministerial officer who cannot bind the
agrees with the RTC that persons in the corporation unless he is authorized to do so.
Philippines may have a teleconference with a
group of persons in South Korea relating to Treasurer
business transactions or corporate governance.
The treasurer of the corporation “may or may not
be a director”. He is the proper officer and the
Directors and officers distinguished The officers only proper officer in the absence of express
of a corporation, unlike the directors, are true provision to the contrary, to receive and keep the
agent of the corporation. Each officer may bind money of the corporation and to disburse them
the corporation by his individual acts within the as he may be authorized.
actual or apparent scope of authority. On the
other hand, a director has no authority to act for
Other officers
the corporation.
The by-laws of the corporation may provide for
such other officers and agent as may be

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Law on Business Organizations Reviewer

necessary and convenient considering the nature auditor, secretary, etc. of said companies.
and needs of the business. Their compensation is However, they can be elected directors in
provided for by the by-laws and the board of preparation to their allowable participation or
directors in a suitable manner. share in the capital of such activities, in
accordance with the Commonwealth Act No.
Quorum – signifies the number of persons 108, as amended by PD 715, otherwise known as
belonging to a corporation required to transact the Anti- Dummy Law.
business.
Sec. 28. Removal of director or trustees. – Any
Section 25 of the Corporation Code requires director or trustee of the corporation may be
more people than a simple majority to form a removed from office by a vote of the
quorum. If no such defining number is stockholders holding or representing at least
determined, a quorum is a simple majority. two- thirds (2/3) of the outstanding capital stock,
or if the corporation be a nonstock corporation ,
Directors cannot vote by proxy by a vote of at least two- thirds (2/3) of the
The directors cannot vote by proxy but must members entitled to vote: Provided, That such
personally present, and act by themselves. removal shall take place either at a regular
meeting of the corporation or at the special
Sec. 26. Report of election of directors, trustees meeting called for the purpose, and in either
and officers. – Within thirty (30) days after the case, after previous notice to stockholders or
election of the officers, trustees and directors of members of the corporation of the intention to
the corporation, the secretary, or any other propose such removal at the meeting. A special
officer of the corporation shall submit to the meeting of the stockholders or members of the
Securities and Exchange Commission, the names, corporation for the purpose of removal of
nationalities and residences of the directors, directors or trustees, or any of them, must be
trustees and officers elected. called by the secretary on order of the president
Should a director, trustee or officer die, resign or or on the written demand of the stockholders
in any manner cease to hold office, his heirs in representing or holding at least a majority of the
case of his death, the secretary or any other outstanding capital stock, or, if it be a non-stock
officer of the corporation, or the director, trustee corporation, on the written demand of a majority
or officer himself, shall immediately report such of the members entitled to vote. Should the
fact to the Securities and Exchange Commission. secretary failed to refuse to call the special
meeting upon such demand, or fail or refuse to
Sec. 27. Disqualification of directors, trustees or give the notice, or if there is no secretary, the call
officers. – No person convicted by final for the meeting may be addressed directly to the
judgement of an offense punishable by stockholders or members of any by any
imprisonment for a period exceeding six (6) stockholder or member of the corporation
years, or a violation of this Code, committed signing the demand. Notice of the time and place
within five (5) years prior to the date of his of such meeting, as well as the intention to
election or appointment, shall qualify as a propose such removal, must be given by
director, trustee or officer of any corporation. publication or by written notice as prescribed in
this Code. The vacancy resulting from removal
Sec. 27 of the Corporation Code is an additional pursuant to this section may be filled by election
safeguard that only upright and honest at the same meeting without further notice, or at
individuals be entrusted with management of the any regular or at any special meeting called for
corporate affairs. the purpose after giving notice as prescribed in
this Code. Removal may be with or without
cause: Provided, That removal without cause may
A director of a cooperative who is subsequently
not be used to deprived minority stockholders or
elected as member of the Sangguniang
members of the right of representation to which
Panglungsod (City Council) becomes
they may be entitled under Section 24 of this
automatically disqualified from continuing as
Code.
such director by virtue of the clear mandate of PD
No. 269 providing that except for “barrio
captains and councillors” elective officials are Directors or trustee may be removed even
ineligible to become officers and/or directors of without cause
any cooperative. The legislative policy is that the shareholders
shall be the ultimate masters, not the directors.
The SEC ruled that firms engage in wholly or The shareholders should be clothed with the
partially nationalized activities, aliens are banned power of judging the competency and fitness of
from being appointed to management position the directors and of choosing a board that will
such as president, vice-president, treasurer, carry out of their business policy.

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Law on Business Organizations Reviewer

Directors representing minority may not be stockholders’ meeting. In no case shall the total
removed without cause. The power to removed yearly compensation of directors, as such
director or trustee even without cause given to directors, exceed ten percent (10%) of the net
shareholders or members may not be used to income before income tax of the corporation
deprived minority shareholders or members of during the preceding year.
the right of representation to which they may be
entitled under Section 24 of the Corporation Sec. 31. Liability of directors, trustees or officers.
Code. Cumulative voting of directors in a stock – Directors or trustees who willfully and
corporation is mandatory and cannot be knowingly vote for or assent to patently unlawful
dispensed with in the by-laws. Being a statutory acts of the corporation or who are guilty of gross
right, the stockholders cannot be deprived of the negligence or bad faith in directing the affairs of
use of cumulative voting. the corporation or acquire any personal or
pecuniary interest in conflict with their duty as
May the result of the duly held election of such directors, or trustees shall be liable jointly
directors be altered by mere agreement of the and severally for all damages resulting therefrom
directors? suffered by the corporation, its stockholders or
The Securities and Exchange Commission ruled members and other persons.
that: “An agreement by which director is reposed
in any body except majority of stockholders is in When a director, trustee or officer attempts to
violation of ‘public policy’ and ‘enforceable’ ”. acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of
The Securities and Exchange Commission has any matter which has been reposed in him in
jurisdiction or authority to “hear and decide confidence, as to which equity imposes a
cases” involving controversies in the election or disability upon him to deal in his own behalf, he
appointments of directors, trustees, officers or shall be liable as a trustee for the corporation and
managers of such corporations, partnerships or must account for the profits which otherwise
associations. Controversy concerning removal of would have accrued to the corporation.
directors or trustees may also be heard by the
SEC. Directors are trustees
It is well-stated rule in corporate law that
Sec. 29. Vacancies in the office of director or directors of corporations are trustees and are
trustee. – Any vacancy occurring in the board of required to act in the utmost good faith.
directors or trustees other than by removal by
the stockholders or members or by expiration of Liability of corporate directors and officers for
term, may be filled by the vote of at least a illegal dismissal of employees In cases of illegal
majority of the remaining directors or trustees, if dismissal, corporate directors and officers are
still constituting a quorum; otherwise, said solidarily liable with the corporation, where
vacancies must be filled by the stockholders in a terminations of employment are done with
regular or special meeting called for that malice or in bad faith. (Acesite Corp. vs. NLRC,
purpose. A director or trustee so elected to fill G.R. No.
the vacancy shall be elected only for the 152308, January 26, 2005, 449 SCRA 360)
unexpired term of his predecessor in office.
Sec. 32. Dealings of directors, trustees or officers
Any directorship or trusteeship to be filled by with the corporation. – A contract of the
reason of an increase in the number of directors corporation with one or more of its directors or
or trustees shall be filled only by an election at a trustees or officers is voidable, at the option of
regular or at a special meeting of stockholders or such corporation, unless all the conditions are
members duly called for the purpose, or in the present:
same meeting authorizing the increase of
directors or trustees if so stated in the notice of 1. That the presence of such director or trustee
the meeting. in the board meeting in which the contract
was approved was not necessary to
Sec. 30. Compensation of directors. – In the constitute a quorum for such meeting.
absence of any provision in the by-laws fixing
their compensation, the directors shall not
2. That the vote of such director or trustee was
receive any compensation, as such directors,
not necessary for the approval of the
except for reasonable per diems:
contract.
Provided, however, That any such compensation
(other than pier diems) may be granted to
directors by the vote of the stockholders 3. That the contract is fair and reasonable
representing at least a majority of the under the circumstances.
outstanding capital stock at a regular or special

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4. That in the case of an officer, the contract Oct. 7, 1998)


with the officer has been previously
authorized by the Board of Directors. Sec. 33. Contracts between corporations with
interlocking directors. – Except in cases of fraud,
Where any of the first two conditions set forth and provided the contract is fair and reasonable
in the preceding paragraph is absent, in the case under the circumstances, a contract between
of a contract with a director or trustee, such two or more corporations having interlocking
contract may be ratified by the vote of the directors shall not be invalidated on that ground
stockholders representing at least two-thirds alone; Provided, That if the interest of the
(2/3) of the outstanding capital stock or of two- interlocking director in one corporation or
thirds (2/3) of the members in a meeting called corporations is merely nominal, he shall be
for the purpose: Provided, That full disclosure of subject to the provisions of the preceding section
the adverse interest of the directors or trustees insofar as the latter corporation or corporations
involved is made at such meeting: Provided, are concerned.
however, That the contract is fair and reasonable Stockholdings exceeding
under the circumstances. twenty percent (20%) of the outstanding capital
stock shall be considered substantial for
Director disqualified to vote if he has personal purposes of interlocking directors.
interest
A director is disqualified to vote at a meeting of Interlocking directors – Interlocking directors are
the board if he has any personal interest in a persons who serve as member of the board of
matter before the board; in such case, his vote directors of two or more competing corporations
cannot be counted in making up a quorum. or corporations engaged in practically the same
kind of business.
Disclosure of adverse interest by director It has
been held that in dealing with their corporation Effect of Corporate contracts with interlocking
the directors must make full disclosure of all directors
relevant facts or the transaction is voidable. The Interlocking directors of corporations does not
failure of a director to inform his fellow directors make a contract between or among the
of his adverse bargaining position and other corporations void and of no effect provided there
material circumstances should be seriously in no fraud and reasonable under the
considered and inspected by the courts as circumstances.
manner on the fairness and good faith of the
transaction and whether it is just and reasonable Sec. 34. Disloyalty of a director. – Where a
as to the corporation. director, by virtue of his office, acquires for
himself a business opportunity which should
Exceptions in Signing contract without authority belong to the corporation, thereby obtaining
of Board of Directors is void If a private profits to the prejudice of such corporation, he
corporation intentionally or negligently clothed must account to the latter for all such profits by
its officers or agents with apparent power to refunding the same, unless his act has been
perform acts of it, the corporation will be ratified by a vote of the stockholders owning or
estopped to deny that such apparent authority is representing at least two-thirds (2/3) of the
real, as to innocent third persons dealing in good outstanding capital stock. This provision shall be
faith with such officers or agents. (Yao Ka Sin applicable notwithstanding the fact that the
Trading vs. Court of Appeals, G.R. No. 53820, June director risked his own funds in the venture.
15, 1992, citing Francisco vs.
GSIS, 7 SCRA 577) Duties of directors
Directors owe a three-fold duty to the
Corporate president presumed to have corporation. First, they must be obedient; they
authority owe a duty to keep within the powers of the
As a strict rule, the corporate president has no corporation as well as within those of the board
inherent power to act for the corporation, slowly of directors. Second, they must be diligent; they
giving way to realization that such officer has owe a duty to exercise reasonable care and
certain limited powers in the transaction of the prudence. The third duty owing by directors is
usual and ordinary business of the corporation. In that of individual loyalty.
the absence of agreement or by law provision to
the contrary, the president is presumed to have Concept of “corporate or
the authority to act within the domain of the business opportunity.”
general of his or her usual duties. (People’s The doctrine of “corporate opportunity” is but
Aircargo, and Warehousing Co., Inc. vs. Court of one phase of the cardinal rule of undivided
Appeals, G.R. No. 117847, loyalty on the part of the fiduciaries. If there is a

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presented to a corporate officer or director a


business opportunity which the corporation is 7. To purchase, receive, take or grant, hold,
financially able to undertake, is from its nature, convey, sell, lease, pledge, mortgage and
in the line of the corporation’s business and is of otherwise deal with such real and personal
practical advantage to it, is one in which the property, including securities and bonds of
corporation will be brought into conflict with that other corporations, as the transaction of the
of his corporation, the law will not permit him to lawful business of the corporation may be
seize the opportunity for himself. reasonably and necessarily require, subject
to the limitations prescribed by law and the
Director is a fiduciary. Constitution.
He who is in such fiduciary position cannot serve
himself first and his cestuis (beneficiary) second. 8. To enter into with other corporations merger
He cannot manipulate the affairs of his or consolidation as provided in this code.
corporation to their disadvantage and in
disregard of the standards of common decency.
9. To make reasonable donations, including
He cannot by the intervention of a corporate
those for the public welfare or
entity violate the ancient principle against
for hospital, charitable,
serving two masters.
cultural, scientific, civic, or similar
purposes: Provided, That no corporation,
Sec. 35. Executive Committee. – The bylaws of a domestic or foreign, shall give donations in aid
corporation may create an executive committee, of any political party or candidate or for
composed of not less than three members of the purposes of partisan political activity.
board, to be appointed by the board. Said
committee may act, by majority vote of all its
10. To establish pension, retirement, and other
members, on such specific matters within the
plans for the benefit of its directors, trustees,
competence of the board, as may be delegated
officers and employees.
to it in the by-laws or on a majority vote of the
board, except with respect to: (1) approval of any
action for which shareholders’ approval is also 11. To exercise such other powers as may be
required; (2) the filling of vacancies in the board; essential or necessary to carry out its
(3) the amendment or repeal of bylaws or the purpose or purposes as stated in its articles
adoption of new by-laws; (4) the amendment or of incorporation.
repeal of any resolution of the board which by it
express terms is not so amenable or repealable; Powers of a corporation
and (5) a distribution of cash dividends to the A corporation has such powers, and such powers
shareholders. only, as are conferred upon it by law or by its
Sec. 36. Corporate powers and capacity. – Every agreement. Powers may be conferred upon a
corporation incorporated under this Code has corporation:
the power and capacity: 1. Expressly.
2. Impliedly, because they are incidental to
1. To sue and be sued in its corporation name. corporate existence.
3. Impliedly, because they are necessary or
2. Of succession by its corporate name for the proper in order to exercise the powers
period of time stated in the articles of expressly conferred.
incorporation and the certificate of
incorporation. General express powers
Section 36 of the Corporation Code enumerates
3. To adopt and use a corporate seal. the general and express powers of corporations.

Other corporate powers The Corporation Code


4. To amend its articles of incorporation in
enumerates other express powers of
accordance with the provisions of this code.
corporations as follows:
5. To adopt by-laws, not contrary to law,
1. Power to extend or shorten corporate term
morals, or public policy, and to amend or
(Sec. 37).
repeal the same in accordance with this
Code. 2. Power to increase or decrease capital stock;
incur, create or increase bonded
indebtedness (Sec. 38).
6. In case of stock corporations, to issue or sell
stocks to subscribers and to sell treasury 3. Power to deny pre-emptive right (Sec. 39).
stocks in accordance with the provisions of 4. Power to sell or dispose assets (Sec. 40).
this code; and to admit members to the 5. Power to acquire own shares (Sec. 41).
corporation if it be a non-stock corporation.

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6. Power to invest corporate funds in another addressed to each stockholder at his place of
corporation or business or for any other residence as shown on the books of the
purpose (Sec. 42). corporation and deposited to the addressee in
7. Power to declare dividends (Sec. 43). the post office with postage prepaid, or served
8. Power to enter into management contracts personally.
(Sec. 44).
A certificate in duplicate must be signed by a
Sec. 37. Power to extend or shorten corporate majority of the directors of the corporation and
term. – A private corporation may extend or countersigned by the chairman and secretary of
shorten its terms as stated in the articles of the stockholders’ meeting, setting forth:
incorporation when improved by a majority vote
of the board of directors or trustees and ratified 1. That the requirements of this section have
at a meeting by the stockholders representing at been complied with.
least twothirds (2/3) of the outstanding capital
stock or by at least two-thirds (2/3) of the 2. The amount of the increase or diminution of
members in case of non-stock corporations. the capital stock.
Written notice of proposed action and of the
time and place of the meeting shall be addressed 3. If an increase of the capital stock, the
to each stockholder or member at his place of amount of capital stock or number of shares
residence as shown on the books of the of no-par stock thereof actually subscribed,
corporation and deposited to the addressee in the names, nationalities and residences of
the post office with postage prepaid, or served the persons subscribing, the amount of
personally: Provided, That in case of extension of capital stock or number of shares of no-par
corporate term, any dissenting stockholder may stock subscribed by each, and the amount
exercise his appraisal right under the conditions paid by each on his subscription in cash or
provided in this Code. property, or the amount of capital stock or
number of shares of no-par stock allotted to
Extension of corporate term limited to 50 years each stockholder if such increase is for the
The corporate term may be extended for periods purpose of making effective stock dividend
not exceeding 50 years in any single instance as therefor authorized.
provided by section 11 of the Corporation Code.
No extension can be made earlier than 5 years 4. Any bonded indebtedness to be incurred,
prior to the original or subsequent expiry date(s) created, or increased.
unless there are justifiable reasons for an earlier
extension as determined by the SEC.
5. The actual indebtedness of the corporation
on the day of the meeting.
Corporation cannot extend expired term. A
corporation cannot extend its life by amendment
6. The amount of the stock represented at the
of its articles of incorporation effected during the
meeting.
three-year statutory period for liquidation when
its original term of existence had already expired.
7. The vote authorizing the increase or
Sec. 38. Power to increase or decrease capital diminution of the capital stock, or the
stock; incur, create or increase bonded incurring, creating or increasing of any
indebtedness. – No corporation shall increase or bonded indebtedness.
decrease its capital stock or incur, create or
increase any bonded indebtedness unless Any increase or decrease in the capital stock or
approved by a majority vote of the board of the incurring, creating or increasing of any
directors and, at a stockholders’ meeting duly bonded indebtedness shall require prior approval
called for the purpose, two-thirds (2/3) of the of the Securities and Exchange Commission.
outstanding capital stock shall favor the increase
or diminution of the capital stock, or the One of the duplicate certificate shall be kept on
incurring, creating or increasing of and bonded file in the office of the corporation and the other
indebtedness. Written notice of the proposed shall be filed with the Securities and Exchange
increase or diminution of the capital stock or of Commission and attached to the original articles
the incurring, creating, or increasing of any of incorporation. From and after approval by the
bonded indebtedness and of the time and place Securities and Exchange Commission and the
of the stockholders’ meeting at which the issuance by the Commission of its certificate of
proposed increase or diminution of the capital filing, the capital stock shall stand increased or
stock or the incurring or increasing of any bonded decreased and the incurring, creating or
indebtedness is to be considered, must be increasing of any bonded indebtedness

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authorized, as the certificate of filing may Debenture bonds


declare: Provided, Debenture bonds are not secured by specific
That the Securities and Exchange corporate property but rather solely on the
Commission shall not accept for filing any issuer’s ability to pay the indebtedness.
certificate of increase of capital stock unless
accompanied by the sworn statement of the Convertible bonds
Treasurer of the corporation lawfully holding Convertible bonds are those which includes a
office at the time of the filing of the certificate, provision which permits the holder of the bond
showing that at least twenty-five percent (25%) to convert the bond into a specified number of
of such increased capital stock has been shares of stock of the corporation at his option
subscribed and that at least twenty-five percent within a period fixed therein.
(25%) of the amount subscribed has been paid
either in actual cash to the corporation or that Participating bonds
there has been transferred to the The owners or holders of participating bonds
corporation property the valuation of which is entitle them to participate in earnings of the
equal to twenty-five percent (25%) of corporation above the specified rates of interest
the subscription: Provided, further, That no fixed.
decrease of the capital stock shall be approved
by the Commission, if its effect shall Collateral trust bonds
prejudice the rise of Collateral trust bonds are secured by a lien on
corporate creditors. securities deposited with a named trustee
Non-stock corporations may incur or create constituting the collateral.
bonded indebtedness, or increase the same,
with the approval by a majority vote of the Guaranteed bonds
board of trustees and of at least twothirds (2/3)
Guaranteed bonds are guaranteed or secured by
of the members in a meeting duly called for the
another corporation other than the issuing
purpose.
corporation.

Bonds issued by a corporation shall be registered Sec. 39. Power to deny pre-emptive right. – All
with the Securities and Exchange Commission, stockholders of a stock corporation shall enjoy
which shall have the authority to determine the pre-emptive right to subscribe to all issues or
sufficiency of the terms thereof. disposition of shares of any class, in proportion to
their respective shareholdings, unless such right
Bonds – Bonds are in form and effect similar to is denied by the articles of incorporation or an
promissory notes, secured by mortgage or trust amendment thereto: Provided, That such pre-
deed upon specified property of the debtor emptive right shall not extend to shares to be
corporation. issued in compliance with laws requiring stock
offerings or minimum stock ownership by the
Properties to a bond public; or to shares to be issued in good faith with
Every bond issue usually involve three parties: the approval of the stockholders representing
(1) the debtor – corporation; (2) the creditor – two-thirds (2/3) of the outstanding capital stock,
bondholder; and (3) the trustee. in exchange for property needed for corporate
purposes or in payment of a previously
Bonds classified contracted debt.
Bonds are classified into:
coupon or registered bonds, mortgage Pre-emptive right – It means literally to establish
bonds, debentures, convertible a prior right. A stockholder’s preemptive right is
bonds, participating bonds, collateral trust his right to subscribe to new shares of stock in
bands, and guaranteed bonds. proportion to his existing stockholdings, before
the new shares are issued to others.
Coupon or registered bonds
Coupon bonds are payable to bearer or to the Sec. 40. Sale or other disposition of assets. –
order of a person, and have attached to them Subject to the provisions of existing laws on
coupon notes for each instalment of interest as it illegal combinations and monopolies, a
falls due. corporation may, by a majority vote of its board
of directors or trustees, sell, lease, exchange,
Mortgage bond mortgage, pledge or otherwise dispose of all or
A mortgage bond is one secured by a mortgage substantially all of its property and assets,
on corporate property. including its goodwill, upon such terms and
conditions and for such consideration, which may
be money, stocks, bonds or other instruments for

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the payment of money or other property or 1. To eliminate fractional shares arising out of
consideration, as its board of directors or stock dividends.
trustees may deem expedient, when authorized
by the vote of the stockholders representing at 2. To collect or compromise an indebtedness to
least two-thirds (2/3) of the outstanding capital the corporation, arising out of unpaid
stock; or in case of nonstock corporation, by the subscription, in a delinquency sale, and to
vote of at least two-thirds (2/3) of the members, purchase delinquent shares sold during said
in a stockholders’ or members’ meeting duly sale.
called for the purpose. Written notice of the
proposed action and of the time and place of the
3. To pay dissenting or withdrawing
meeting shall be addressed to each stockholder
stockholders entitled to payment for their
or member at his place of residence as shown on
shares under the provisions of this Code.
the books of the corporation and deposited to
the addressee in the post office with the postage
Sec. 42. Power to invest corporate funds in
prepaid, or served personally: Provided, That any
another corporation or business or for any other
dissenting stockholder may exercise his appraisal
purpose. – Subject to the provisions of this code,
right under the conditions provided in this Code.
a private corporation may invest its funds in any
other corporation or business or for any purpose
A sale or other disposition shall be
other than the primary purpose for which it was
deemed to cover substantially all the corporate
organized when approved by a majority of the
property and assets if thereby the corporation
board of directors or trustees and ratified by the
would be rendered incapable of
stockholders representing at least twothirds
continuing the business or accomplishing the
(2/3) of the outstanding capital stock, or by at
purpose for which it was incorporated.
least two-thirds (2/3) of the members in the case
of non-stock corporations, at a stockholders’ or
After such authorization or approval by the members’ meeting duly called for the purpose.
stockholders or members, the board of directors Written notice of the proposed investment and
or trustees may, nevertheless, in its discretion, the time and place of the meeting shall be
abandon such sale, lease, exchange, mortgage, addressed to each stockholder or member at his
pledge or other disposition of property and place of residence as shown on the books of the
assets, subject to the rights of third parties under corporation and deposited to the addressee in
any contract relating thereto, without further the post office with postage prepaid, or served
action or approval by the stockholders or personally; Provided, That any dissenting
members. stockholder shall have appraisal right as provided
in this Code: Provided, however, That were the
Nothing in this section is intended to restrict the investment by the corporation is reasonably
power of any corporation, without the necessary to accomplish its primary purpose as
authorization by the stockholders or members, stated in the articles of incorporation, the
to sell, lease, exchange, mortgage, pledge or approval of the stockholders or members shall
otherwise dispose of any of its property and not be necessary.
assets if the same is necessary in the usual and
regular course of business of said corporation or Sec. 43. Power to declare dividends. – The board
if the proceeds of the sale or other disposition of of directors of a stock corporation may declare
such property and assets be appropriated for the dividends out of the unrestricted retained
conduct of its remaining business. earnings which shall be payable in cash, in
property, or in stock to all stockholders on the
In non-stock corporations, where there are no basis of outstanding stock held by them:
members with voting rights, the vote of at least a Provided, That any cash dividends due on
majority of the trustees in office will be sufficient delinquent stock shall first be applied to the
authorization for the corporation to enter into unpaid balance on the subscription plus costs and
any transaction authorized by this section. expenses, while stock dividends shall be withheld
from the delinquent stockholder until his unpaid
Sec. 41. Power to acquire own shares. – A stock subscription is fully paid: Provided, further, That
corporation shall have the power to purchase or no stock dividend shall be issued without the
acquire its own shares for a legitimate corporate approval of stockholders representing not less
purpose or purposes, including but not limited to than two-thirds (2/3) of the outstanding capital
the following cases: Provided, That the stock at a regular or special meeting duly called
corporation has unrestricted retained earnings in for the purposes.
its books to cover the shares to be purchased or
acquired: Stock corporation are prohibited from retaining
surplus profits in excess of one hundred percent

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(100%) of their paid-in capital stock, except: (1)


when justified approved by the Board of Property dividend
Directors; or (2) when the corporation is The directors in their discretion may authorize
prohibited under any loan agreement with any distributions in bonds or in property, such as
financial institution or creditor, whether local or warehouse receipts for whiskey or shares of
foreign, from declaring dividends without its/his stock of a subsidiary corporation.
consent, and such consent has not yet been
secured; or (3) when it can be clearly shown that Scrip dividend
such retention is necessary under special Scrip dividend is a writing or a certificate issued
circumstance obtaining in the corporation, such to a stockholder entitling him to the payment of
as when there is a need for special reserve for money or the like at some future time inasmuch
probable contingencies. as the company, at the time the scrip dividends
are declared, has profits not in cash.
Concept of dividends
A dividend is a corporate profit set aside, Liquidating dividend
declared and ordered by the directors to be paid Liquidating dividend involves the distribution of
to the stockholders on demand or at a fixed time. assets by a corporation to its stockholders upon
dissolution.
Dividends distinguished from profits
“Dividends” means the profits or that portion of Sec. 44. Power to enter into a management
the profits of the corporation which its board of contract. – No corporation shall conclude a
directors, by proper resolution, sets apart for management contract with another corporation
rotable distribution among the stockholders. It is unless such contract shall have been approved by
distinguished from “profits” for the profits in the the Board of Directors and by stockholders
hands of a corporation do not become dividends owning at least the majority of the outstanding
until they have been set apart, or at least capital stock, or by at least majority of the
declared, as dividends and transferred to the members in the case of a non-stock corporation,
separate property of the individual stockholders. of both the managing and the managed
corporation, at a meeting duly called for the
Surplus profits – Surplus or net profits of a purpose: Provided, That (a) where a stockholder
corporation is the difference between the total or stockholders representing the same interest of
present value of its assets, after deducting losses both the managing and the managed
and liabilities, and the amount of its capital stock. corporations own and control more than one-
(11 Fletcher, third (1/3) of the total outstanding capital stock
Sec. 5335) entitled to vote of the managing corporation; or
(b) where the majority of the members of the
Basis of dividend declaration Board of Directors of the managing corporation
The board of directors of a stock corporation may also constitute a majority of the members of the
declare dividends on the basis of outstanding Board of Directors of the managed corporation,
stock held by the stockholders. The basis then the management contract must be
therefore is the stockholder’s total subscription approved by the stockholders of the managed
and not on the amount paid by him on the corporation owning of at least two-thirds (2/3) of
subscription. This is for the reason that his entire the total outstanding capital stock entitled to
subscription represents his holding in the vote, or by at least two-thirds (2/3) of the
corporation for which he pays interests on any members in case of a non-stock corporation. No
unpaid portion. (SEC Opinion, Dec. management contract shall be entered into for a
17, 1973) period longer than five years for any one term.

Classes of dividends The provisions of the next preceding paragraph


Dividends which a corporation may declare and shall apply to any contract whereby a corporation
distribute to its stockholders may be classified undertakes to manage or operate all or
into: cash dividend, stock dividend, property substantially all of the business of the other
dividend, scrip dividend, and liquidating corporation, whether such contracts are called
dividend. service contracts, operating agreements or
otherwise: Provided, however, That such service
Cash dividend contracts or operating agreements which relate
Cash dividend is one payable in money. to the exploration, development, exploitation or
utilization of natural resources may be entered
Stock dividend into for such periods as may be provided by the
Stock dividend is a dividend payable in stock pertinent laws or regulations.
instead of cash or property.

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Concept of management contract A 3. Where the contract is executor on side only,


management contract is an agreement under and has been fully performed on the other,
which the board of directors of a corporation the courts differ as whether an action will lie
delegates the powers of management to another on the contract against the party who has
person or corporation for a period of time received benefits of performance under it.
provided for in the agreement. Majority of the courts hold that the party
who has received benefits from the
Effects of Management contracts Contracts by performance is stopped” to set up that the
which the board of directors delegates the power contract us ultra vires to defeat an action on
of supervision and management to another the contract. There is, however, a rule which
person or corporation for a specified period are is widely recognized by the courts that ultra
invalid if they involve a surrender by the board of vires. “Should not be allowed to prevail,
its power and duty of supervision and control. when involved for or against the
corporation, where it will defeat the ends of
Management prerogatives justice or work a legal wrong.
An owner of a business enterprise is given
considerable margin in managing his business Acts which are ultra vires are voidable but may
because it is deemed important to society as a be ratified. In order that such ultra vires may be
whole that he should succeed. ratified it must be shown that 1. The act was
consummated or executed.
Sec. 45. Ultra vires acts of corporations. – No 2. No creditors are prejudiced or they have
corporation under this Code shall possess or given their consent thereto.
exercise any corporate powers except those
conferred by this Code or by its articles of 3. The right of the public or the state are not
incorporation and except such as are necessary involved.
or incidental to the exercise of the powers so 4. All of the stockholders consent thereto.
conferred.
A corporation, like an individual, may ratify and
Intra vires – The acts of a corporation within its thereby render binding upon it the originally
express or implied powers. Ultra vires – The acts authorized acts of its officers or other agents.
of a corporation outside its express or implied This is true because the questioned investment is
powers. neither contrary to law, morals, public order or
public policy. It is a corporate transaction or
It denotes some act or transaction on the part of contract which is within the corporate powers
a corporation which, although not unlawful or but which is defective from a purported failure to
contrary to public policy of executed by an observe in its execution the requirement of the
individual, is yet beyond the legitimate powers of law that the investment must be authorized by
the corporation as they are defined by the the affirmative vote of the stockholders holding
statute under which it is formed, or which are 2/3 of the voting power.
applicable to it, or by its charter or incorporation
papers. Sec. 46. by-laws Adoption. – Every corporation
formed under this code, must, within one month
Admittedly, if the contract is executed on both after receipt of official notice of the issuance of
sides neither party can maintain an action to set its certificate of incorporation by the Securities
aside the transaction or to recover what has been and Exchange Commission, adopt a new code of
parted with. The courts will not interfere in such by-laws for its government not inconsistent with
a case to deprive either the corporation or the this code. For the adoption of by-laws by the
other part of money or property acquired under corporation the affirmative vote of the
the contract. On the other hand, the great weight stockholders representing at least a majority of
of authority is to consider executor contracts as the outstanding capital stock, or of at least a
unenforceable. majority of the outstanding capital stock, or of at
least a majority of the members, in the case of
Ultra vires contracts accepted doctrines non-stick corporations, shall be necessary. The
bylaws shall be signed by the stockholders or
1. If the contract is fully executed on both sides, members voting for them and shall be kept in the
the contract is effective and the courts will principal office of the corporation, subject to the
not interfere to deprive either part of what inspection of the stockholders or members
has been acquired under it. during office hours; and a copy thereof, duly
2. If the contract is executor on both sides, as a certified to by a majority of the directors or
rule either party can maintain an action for trustees and countersigned by the secretary of
its non-performance. the corporation, shall be filed with the Securities

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and Exchange Commission which shall be 3. Must be general in application and not
attached to the original articles of incorporation. directed against particular individuals.
4. Must not be inconsistent with the articles of
Notwithstanding the provisions of the preceding incorporation.
paragraph, by-laws may be adopted and filed 5. Must not impair obligations
prior to incorporation; in such case, such by-laws and contracts.
shall be approved and signed by all the
6. Must not be in restraint of trade.
incorporators and submitted to the Securities
and Exchange Commission, together with the 7. Must not restrict religious freedom.
articles of incorporation.
By-laws validity
In all cases, by-laws shall be effective only upon As a rule, the by-laws of a corporation are valid if
the issuance by the Securities and Exchange they are reasonable and calculated to carry into
Commission of a certification that the by-laws are effect the objects of the corporation, and are not
not inconsistent with the Code. contradictory to the general policy of the laws of
the land.
The Securities and Exchange Commission shall
not accept for filing the by-laws or any Binding effect of by-laws
amendment thereto of any bank, banking By-laws when valid, substantially the same force
institution, building and loan association, trust and effect as laws of the corporation as have the
company, insurance company, public utility, provisions of its charter in so far as the
educational institution or other special corporation, the persons within it is concerned.
corporations governed by special laws, unless They are in effect written into the charter and in
accompanied by a certificate of the appropriate this sense; they become part of the fundamental
government agency to the effect that such by- law of the corporation. And the corporation, and
laws or amendments are in accordance with law. its directors and officers are bound by and must
comply with them. Strangers, however, are not
Necessity of by-laws The corporation must adopt bound to know by-laws which are merely
the code of bylaws for its internal government. provisions for the government of a corporation
and notice of them will not be presumed.
Corporation has inherent power to adopt by-
laws Sec 47. Contents of by-laws. – Subject to the
One of its legal incidents and is usually expressly provisions of the Constitution, this Code, other
granted by law of the charter subject to such special laws, and the articles of incorporation, a
limitations as may be contained in the statute or private corporation may provide in its by-laws
the charter, subject to such limitations as may be for:
contained in the statute or charter, and the
general requirements of validity. If a corporation 1. The time, place and manner of calling and
fails to file its by-laws within the period required conducting regular or special meetings of the
by law its certificate of incorporation may be directors or trustees.
suspended or even revoked.
2. The time and manner of calling and
Section 46 allows the adoption and filing of the conducting regular or special meetings of the
by-laws before incorporation provided the same stockholders or members.
is approved by all the incorporators and
submitted to the Securities and Exchange 3. The required quorum in meetings of
Commission together with the articles of stockholders or members and the manner of
incorporation. voting therein.

By-laws cannot provide for unreasonable 4. The form for proxies of stockholders and
restriction members and the manner of voting them.
Restriction upon the traffic in stock must have
their source in legislative enactment, as the 5. The qualifications, duties and compensation
corporation itself cannot create such of directors or trustees, officer and
impediments. By-laws are created for protection employees.
and not for restriction.
6. The time for holding the annual election of
Elements of valid by-laws
directors or trustees and the mode or
1. Must not be inconsistent with the general manner of giving notice thereof.
law and the Corporation Code.
2. Must not be inconsistent with public policy.

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7. The manner of election or appointment and The authority to make or adopt the original by-
the term of office of all offices other than laws of a corporation cannot be given to the
directors or trustees. board of directors or trustees. The stockholders
of a stock corporation or the members of the
8. The penalties for violation of the bylaws. non-stick corporation adopt or make the original
by-laws.
9. In the case of stick corporations, the manner
of issuing stock certificates. An amendment of by-law renders
stockholder ineligible as director It is well-
settled xxx that corporations have the power to
10. Such other matter as may be necessary for
make by-laws declaring a person employed in the
the proper or convenient transaction of its
service of a rival company to be ineligible for the
corporate business and affairs.
corporation’s Board of Directors. An
amendment which renders ineligible, or if
The enumerations of contents of by-laws are not
elected, subjects to removal, a director if he be
exclusive and neither does the provision require
also a director in a corporation whose business is
all the matters mentioned to appear in the by-
in competition with or is antagonistic to the other
laws.
corporation is valid. This is based upon the
principle that where the director is so employed
The By-laws must not violate the
in the service of a rival company, he cannot serve
Constitution, the Corporation Code, other special both, but must betray one or the other. Such an
laws and the articles of incorporation. amendment advances the benefit of the
corporation and is good.
A corporation which has failed to file its bylaws
within the prescribed period does not ipso facto Meetings Necessity
lost its powers as such.
A majority of the stockholders or members can
bind the corporation only at a meeting regularly
Sec. 48. Amendments to by-laws. – The board of held and conducted. To constitute a legal
directors or trustees, by a majority vote thereof, meeting, so as to render the acts and vote of the
and the owners of at least a majority of the
majority binding the meeting must be regularly
outstanding capital stock, or at least a majority of
called by one having authority. In the absence of
the members of a nonstock corporation, at a
provision to the contrary such authority exists in
regular or special meeting duly called for the the directors or managing agents.
purpose, may amend or repeal any by-laws or
adopt new by-laws. The owners of 2/3 of the
Sec. 49. Kinds of Meeting. – Meetings of
outstanding capital stock or 2/3 of the members
directors, trustees, stockholders, or members
in a non-stick corporation may delegate to the
may be regular or special.
repeal any by-laws or adopt new by-laws:
provided, that any power delegated to the board
Sec. 50. Regular and special meetings of stock
of directors or trustees shall be considered as
holders or members. – Regular meetings of
revoked whenever stockholders owning or
stockholders or members shall be held annually
representing a majority of the outstanding
on a date fixed in the bylaws, or if not so fixed, on
capital stock or a majority of the members in non-
any date in April of every year as determined by
stock corporations, shall so vote at a regular or
the board of directors or trustees: Provided, that
special meeting.
written notice of regular meetings shall be sent
to all stockholders or members of record at least
Whenever any amendment or new by-laws are
2 weeks prior to the meeting, unless a different
adopted, such amendment or new bylaws shall
period is required by the by-laws.
be attached to the original bylaws in the office of
the corporation, and a copy thereof, duly
Special meetings of stockholders or members
certified under oath by the corporate secretary
shall be held at any time deemed necessary or as
and a majority of the directors or trustees, shall
provided in the by-laws: Provided, however, that
be filed with the Securities and Exchange
at least 1 week written notice shall be sent to all
Commission, the same to be attached to the
stock holders or members, unless otherwise
original articles of incorporation and original
provided in the by-laws.
bylaws.
Notice of any meeting may be waived, expressly
Amender or new by-laws shall only be effective
or impliedly, by any stockholder or member.
upon the issuance by the SEC of a certification
that the same are not inconsistent with this code.
Whenever, for any cause, there is no person
authorized to call a meeting, the SEC, upon

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petition of a stockholder or member, and on the 1. The act done was within the powers of the
showing of good cause there for, may issue an corporation.
order to the petitioning stockholder or member 2. All the stockholders or members were
directing him to call a meeting of the corporation present or duly represented.
by giving proper notice required by this Code or
by the by-laws. The petitioning stockholder or Sec 52. Quorum in meetings. – Unless otherwise
member shall preside thereat until at least a provided for in this Code or in the by-laws, a
majority of the stockholders or members present quorum shall consist of the stockholders
have chosen one of their numbers as presiding representing a majority of the outstanding
officer. capital stock or a majority of the members in the
case of non-stock corporations.
Corporate decisions; rationale of meetings As a
rule, a majority of the shareholders or members Quorum – Signifies the number of persons
have no power to vote or act for the corporation belonging to a corporation required to transact
as to matters on which shareholders have business. Within the meaning of section 52
authority, except at a meeting called and above, a quorum shall consist of the stockholders
conducted according to law. Written or oral representing a majority of the outstanding
consent to a corporate act by the shareholders or capital stock or a majority of the members in the
members individually, even though a majority case of non-stock corporations.
may agree, is not binding on the corporation.
Sec. 53. Regular of special meetings of directors
When there is no person authorized to call a or trustees. – The meetings shall be held
meeting monthly, unless the by-laws provide otherwise.
A stockholder or member may petition the SEC
upon showing of good cause, to call a meeting Special meetings of the board of directors or
and directing the petitioner (stockholder or trustees may be held at any time upon the call of
member) to give notice required by the Code and the president or as provided in the by-laws
the by-laws. The petitioning stockholder or
member shall preside at such meeting until at Meetings of directors or trustees of corporations
least a majority of the stockholders or members may be held anywhere in or outside of the
present have chosen one of their numbers as Philippines, unless the bylaws provide otherwise.
presiding officer. Notice of regular or special meetings stating the
date, time and place of the meeting must be sent
Sec. 51. Place and time of meetings of to every director or trustee at least 1 day prior to
stockholders or members. – Stockholders’ or the scheduled meeting, unless otherwise
members’ meetings, whether regular or special, provided in the by-laws. A director or trustee may
shall be held in the city or municipality where the waive this requirement, either expressly or
principal office of the corporation is located, and impliedly.
if practicable in the principal office of the
corporation: Provided, that Metro Manila shall, Sec. 54. Who shall preside at meetings. – The
for the purposes of his section, be considered a president shall preside at all meeting of the
city or municipality directors or trustees as well as of the
stockholders or members, unless the bylaws
Notice of meetings shall be in writing, and the provide otherwise.
time and place thereof stated therein. All
proceedings had and any business transacted at The meetings of directors or trustees may be held
any meeting of the stockholders or members, if anywhere in the by-laws. Notice of regular or
within the powers or authority of the special meetings of directors or trustees must be
corporation, shall be valid even of the meeting be sent to them at least 1 day prior to the scheduled
improperly held or called, provided all the meeting, unless the by-laws provided otherwise.
stockholders or members of the corporation are
present or duly represented at the meeting.
Sec. 55. Right to vote of pledgors, mortgagors
and administrators. – In case of pledged or
Place of meetings mortgaged share in stock corporations, the
(Regular or special) meetings shall be held in the pledgor or mortgagor shall have the right to
city or municipality where the principal office of attend and vote at meetings of stockholders,
the corp. is located. unless the pledge or mortgagee is expressly given
such right in writing which is recorded on the
If the meeting be improperly held or called (as appropriate corporate books by the pledgor or
when there was a defective notice) the same mortgagor.
shall still be valid provided that

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Executors, administrators, receivers and other Proxy – In corporate law, is a person who votes
legal representatives duly appointed by the court for and this represents the stockholders or
may attend and vote in behalf of the stockholders members.
or members without need of any written proxy.
Voting by proxy
The pledgor or mortgagor of shatem in the Ordinarily the right to vote shall be exercised by
absence of agreement to the contrary, if the the stockholders themselves or by their duly
shate remain in his name on the books of the authorized representatives.
corporation has the right to attend and vote at Proxy to be valid must be:
meetings of stockholders. 1. In writing, signed by the stockholder or
member giving it.
A person who appears on the books of a 2. Filed with the corporate secretary before
corporation or otherwise as the absolute owner the scheduled meeting.
of stock clearly has the right to vote, although in
3. It is valid only for the meeting for which it is
face he may hold it as trustee.
intended unless otherwise stipulated.
4. Even if the proxy is a continuing one it shall
Executor and administrator has the right, to vote
not be longer than 5 year at any one time.
shares belonging to the estate of his decedent,
and it can make no difference that the share
Sec 59. Voting trusts. – One or more stockholders
stand on the books of the corporation in the
of a stock corporation may be create a voting
name of the decedent.
trust for the purpose of conferring upon a trustee
or trustees the right to vote and other rights
Sec. 56. Voting in case of joint ownership of
pertaining to the share for a period not exceeding
stock. – In case of share of stock owned jointly by
5 years at any one time: Provided, that in the case
2 or more persons, in order to vote the same, the
of a voting trust specifically required as a
consent of all the coowners shall be necessary,
condition in a loan agreement, said voting trust
unless there is a written proxy, signed by all the
may be for a period exceeding 5 years but shall
co-owners. Authorizing one or some of them or
automatically expire upon full payment of the
any other person to vote such share or shares:
loan. A voting trust agreement must be in writing
provided, that when the shares are owned in an
and notarized, and shall specify the terms and
capacity by the holders therof, any one of the
conditions thereof. A certified copy of such
joint owner can vote said shares or appoint a
agreement shall be filed with the corporation and
proxy therfor.
with the SEC: otherwise, said agreement is
ineffective and unenforceable. The certificate or
If share are owned by 2 or more persons jointly,
of stock covered by the voting trust agreement
the right to vote is in them jointly, and , in order
shall be cancelled and new one shall be issued in
that the shares may be voted, they must agree
the name of the trustee or trustees stating that
upon the vote. This rule of joint action applies to
they are issued pursuant to said agreement. In
shares held by several executors or trustees, in
the books of the corporation, it shall be noted
the absence of provision for a majority vote if the
that the transfer in the name of the trustee or
fiduciaries disagree.
trustees is made pursuant to said voting trust
agreement.
Sec. 57. Voting right for treasury share. –
Treasury shares shall have no voting right as long
The Trustee or trustees shall be execute and
as such stock remains in the treasury.
deliver to the transferors voting trust certificates,
which shall be transferable in the same manner
Treasury shares have no voting rights.
and with the same effect as certificates of stock.

Sec. 58. Proxies. – Stockholders and members The voting trust agreement filed with the
may vote in person or by proxy in all meetings of corporation shall be subject to examination by
stock holders or members. Proxies shall be in any stockholder of the corporation in the same
writing, signed by the stock holder or member manner as any other corporate book or record:
and filed before the scheduled meeting with the Provided, That both the transferor and the
corporate secretary. Unless otherwise provided trustee or trustees may exercise the right of
in the proxy, it shall be valid only for the meeting inspection of all corporate books and records in
for which it is intended. No proxy shall be valid accordance with the provisions of this code.
and effective for a period longer than five years
at any one time.
Any other stock holder may transfer his shares to
the same trustee or trustees upon the terms and
conditions stated in the voting trust agreement,

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and there upon shall be bound by all the 1. By subscription contract with an existing
provisions of said agreement. corporation for the acquisition of unissued
shares.
No voting trust agreement shall be entered into 2. By purchase from the corporation of treasury
for the purpose of circumventing the law against shares.
monopolies and illegal combinations in restraint 3. By transfer from a previous stockholder of
of trade or used for purposes of fraud. the outstanding shares or existing
subscription to shares.
Unless expressly renewed, all rights granted in a
voting trust agreement shall automatically expire Binding effect of subscription
at the end of the agreed period, and the voting
No person can become a stockholder in a
trust certificates as well as the certificates of stick
corporation by virtue of a subscription for stock
in the name of the trustee or trustees shall
unless there is a valid contract between him and
thereby be deemed cancelled and new
the corporation. When a contract of subscription
certificates of stock shall be reissued in the name
for stock in a corporation is binding it is a contract
of the transferors.
between the subscriber or subscribers and the
corporation, and its formation and validity are
The voting trustee or trustees may vote by proxy governed by the same principles substantially as
unless the agreement provides otherswise. any other contract except in so far as such
principles may be rendered inapplicable by
Concept of voting trusts particular charter or statutory provisions. No
A voting trust is an agreement by which express promise to pay is necessary to make the
stockholders surrender their voting power and subscriber liable.
place it irrevocably in the hands of others for a
definite period of time. In exchange for the No form required of subscription contracts
certificates of stock the trustee delivers to the Unless otherwise required by law. Thus, a person
stockholder voting trust certificates. who accepts a certificate of stock from a
corporation, or who acts as a stockholder by
Limitations on voting trust agreement participating in stockholders’ meeting, making
1. It shall be for a period not exceeding 5 years payments, or otherwise, thereby becomes a
but if required under a loan agreement, the stockholder and liable as such, not only to
period may be for more than 5 years but shall creditors, but also to the corporation, although
automatically cease upon full payment of the there may have no express contract of
loan. subscription.
2. It must be in writing and notarized.
3. It shall not be entered into to circumvent Sale of Shares of Stock Needs SEC Approval The
laws on monopolies and restraint of trade, Securities Act requires that before a corporation,
nor shall it be entered into purposes of fraud. except a public utility, bank, corporation
4. It shall be filed with the corporation and with association and a few others, sells, or offers for
SEC otherwise it shall be ineffective and sale in the Philippines any of its securities, like
unenforceable. shares of stocks or bonds, it must register the
same and/or secure a permit from the SEC for the
5. It shall be subject to examinations by any
purpose. The authorization is in the form of an
stockholder in the same manner as any other
exemption from the requirements of registration
corporate book or record.
and licensing, and is issued by the way of
6. Parties to the voting trust agreement shall be resolution of the SEC.
bound by all the provisions of said
agreement.
Power to issue shares is lodged in the board of
directors and no stockholders’ meeting is
Sec. 60. Subscription contract. – Any contract for necessary to consider it because additional
the acquisition of unissued stock in an existing issuance of shares of stock does not need
corporation or a corporation still to be formed approval of the stockholders. The “Board of
shall be deemed a subscription within the Trustees shall, in of stock of the corporation and
meaning of this Title, notwithstanding the fact shall prescribe the form of
that the parties refer to it as a purchase or some
the certificate of stock of corporation.”
other contract.
Kinds of Subscription:
How can a person become a shareholder in a
1.1. Pre-incorporation – is one agreed upon
stock corporation?
before the incorporation of the proposed
corporation.

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1.2. Post-incorporation Subscription – entered


into after the incorporation or formation of 2. Property, tangible or intangible, actually
the corporation. received by the corporation and necessary or
2. Absolute Subscription – one not subject to convenient for its use and lawful purposes at
any condition or happening of certain a fair valuation equal to the par or issued
unknown events. value of the stock issued.
3. Conditional Subscription – its fulfillment
depends upon the happening of uncertain 3. Labor performed for or services actually
events of contingencies. It does not make the rendered to the corporation.
subscriber a stockholder or render him liable
to pay the amount of the subscription, until 4. Previously incurred indebtedness of the
performance or fulfillment of the condition. corporation.
4. Subscription upon special terms – where
“the corporation agreed, as an independent 5. Amounts transferred from unrestricted
element, to do a certain thing or things, but retained earnings to stated capital.
not as condition to the accrual of liability of
the subscriber or the acquisition of the rights
6. Outstanding shares exchanged for stocks in
of a stockholder.
the event of reclassification or conversion.

Sec. 61. Pre-incorporation subscription. – A


Where the consideration is other than actual
subscription for shares of stock of a corporation
cash, or consists of intangible property such as
still to be formed shall be irrevocable for a period
patents of copyrights, the valuation thereof shall
of at least six (6) months from the date of
initially be determined by the incorporators or
subscription, unless all of the other subscribers
the board of directors, subject to approval by the
consent to the revocation, or unless the
Securities and Exchange Commission.
incorporation of said corporation fails to
materialize within said period or within a longer
Shares of stock shall not be issued in exchange for
period as may be stipulated in the contract of
promissory notes or future service. The same
subscription: Provided, That no pre-
considerations provided for in this section,
incorporation subscription may be revoked after
insofar as they may be applicable, may be used
the submission of the articles of incorporation to
for the issuance of bonds by the corporation. The
the Securities and Exchange Commission.
issued price of no-par value shares may be fixed
in the articles of incorporation or by the board of
SEC. 61 Pre-incorporation subscription is
directors pursuant to authority conferred upon it
mandatory (Sec. 13 & 14) at least 25% of the
by the articles of incorporation or the by-laws, or
authorized capital stock has been subscribed and
in the absence thereof, by the stockholders
at least 25% of the total subscription has been
representing at least a majority of the
fully paid.
outstanding capital stock at a meeting duly called
for the purpose.
Subscription for shares of stock of a corporation
still to be formed shall be irrevocable for a period
Consideration for issuance of stock may be any
of at least 6 months from the date of
or any combination of any two or more of the ff:
subscription, unless:
1. Cash
1. All subscribers consent to its
revocation.
2. Property – tangible or intangible
3. Labor performed or services actually
2. The incorporation fails to materialize within
rendered
6 months or a longer period as agreed upon.
4. Previously incurred indebtedness by the
corporation
The irrevocability of pre-incorporation prevents a
subscriber from speculating on the stocks of the 5. Amounts transferred from unrestricted
proposed corporation and protects the retained earnings to stated capital
corporation from financially irresponsible 6. Outstanding shares exchanged for stock in
subscribers. the event of reclassification or
conversion
Sec. 62. Considering for stocks. – Stocks shall not
be issued for a consideration less than the par or Sources of corporate capital
issued price thereof. Consideration for the 1. Funds furnished by shareholders
issuance of stock may be any or a combination of 2. Borrowings
any two or more of the following: 3. Profits and stock dividends

1. Actual cash paid to the corporation.

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Different modes by which a corporation may therein is the owner of a designated number
issue shares of stock of shares of stock.
1. By subscription before and after 2. It indicates the name of the holder, the
incorporation, to original, unissued stocks. number, kind and class of shares
2. By sale of treasury stock after incorporation represented, and the date of issuance.
for money property, or service. 3. It i merely the evidence of the holder's
3. By subscription to new stocks, when all the interest in the corporation, his ownership of
original stocks have been issued and the the share represented thereby.
amount of the capital stock increased. 4. It is not essential to make one a stockholder
4. By making a stock dividend. in a corporation.

Limitations in the issuance of stocks • Every stockholder has a right to have


1. Shall not be issued for a consideration less proper certificate issued to him as soon
than the par or issued price thereof except as he has complied with the conditions
treasury shares so long as the price is which entitle him to one.
reasonable. • A corporation cannot issue shares in
2. Shall not be issued in exchange of promissory excess of the maximum authorized in its
notes or future services. AOI.
3. When the consideration is other than actual • An over issued stock is absolutely void
cash or consists of intangible property, the even if possessor is in good faith.
value thereof shall be initially determined by • Shares can be transferred represented
the incorporators or the board of directors, by the certificate by its endorsement by
subject to the approval of the SEC. the owner or his agent and delivery to
4. The issued price of no par value shares must the transferee.
be fixed as provided in Sec. 62.
issued price may vary from time to time but Restrictions on transfer of stock
value may not be less than P5. 1. A by-law prohibits a transfer of stock without
the consent or approval of all stockholders or
Sec. 63. Certificate of stock and transfer of of the president or board of directors is
shares. – The capital stock of stock corporations ILLEGAL.
shall be divided into shares for which certificates 2. A provision in the certificate that is
signed by the president or vice president, transferable only to some person first
countersigned by the secretary or assistant approved by the board of directors
secretary, and sealed with the seal of the unlawfully restricts the right of the
corporation shall be issued in accordance with stockholder.
the by-laws. Shares of stock so issued are 3. The condition “non-transferable” appearing
personal property and may be transferred by on certificates of stock is VOID.
delivery of the certificate or certificates endorsed
4. corporations which will engage in any
by the owner or his attorney-infact or other
business reserved for Filipino citizens are
person legally authorized to make the transfer.
required to indicate in AOI and all
No transfer, however, shall be valid, except as
certificates.
between the parties, until the transfer is
recorded in the books of the corporation showing
Two requirements to effect transfer of stocks
the names of the parties to the transaction, the
Endorsement and delivery of stock
date of the transfer, the number of the certificate
or certificates and the number of shares certificate
transferred. -the usual practice is for the stockholder to sign
the form on the back of the stock certificate.
-if the holder of the certificate desires to assume
No shares of stock against which the corporation
the legal right of the stockholder he fills up the
holds any unpaid claim shall be transferable in
blank in the form inserting his name as
the books of the corporation.
transferee.
-then he delivers the certificate to the secretary
SEC. 63 The capital stock of stock corporation
of the corporation so that the transfer may be
shall be divided into shares Certificate of stock
entered in the books.
shall be issued for said shares.

Other modes of transfer


Nature of a certificate of stock
1. Assignment thru a separate instrument.
1. It is a written instrument signed by the
proper officer of a corporation stating or 2. Judicial or extra-judicial settlement of the
acknowledging that the person named estate.

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Validity of stock transfer Individual suit – one brought by a stockholder in


1. As between parties -merely the delivery of the his own name against the corporation for direct
certificate indorsed by the owner or his violation of his contractual rights such as right to
attorneyin-fact or other person legally vote, to dividends etc.
authorized to make the transfer. 2. As against
third persons -the transfer of shares must be Representative suit – a group of stockholders
entered and noted upon the books of the may bring a direct suit against the corporation.
corporation This is when a wrong is committed against a
-only absolute transfer are recorded group of stockholders.

Effects of unregistered shares Certificate of Stock – a written instrument signed


by the proper corporate officers, and evidencing
1. It is valid and binding as between the
the fact that the person therein named is the
transferor and transferee.
registered owner of the share or shares therein
2. It is invalid insofar as the corporation is described.
concerned except when notice is given Nature and Functions of Certificates It
to the corporation for purposes of represents the number of shares which the
registration. corporation acknowledges that the holder of the
a) the transferor has the right to vote certificate is entitled to and is a solemn and
and to be voted for, and has the continuing affirmation by the corporation that
right to participate in any meeting the person to whom it was issued is entitled to all
b) the transferor has the right to the rights and subject to all the liabilities of a
dividends as against the stockholder in the company in respect of the
corporation but the transferor, as number of shares named, and that the company
the nominal owner of the share, is will respect his rights and the rights of anyone to
the trustee for the benefit of the whim he may transfer such shares, by refusing to
real owner. admit any new transferee to the rights of a
3. It is invalid as against corporate stockholder except upon the surrender of the
creditors, and the transferor is still liable certificate.
to the corporation. The transfer of stock
by a shareholder does not relieve him Issuance of Stock Certificate. It requires:
from the liability to creditors of the 1. sign by the president or vice-president,
corporation for unpaid subscription countersigned by the secretary or assistant
until the transfer is consummated by secretary, and sealed with the seal of the
being registered in the books. corporation, and issued in accordance with
4. It is invalid as against creditors of the the law.
transferor without notice of the 2. The certificate must be delivered or mailed
transfer. to the subscriber, with the documentary
stamps required by law affirmed thereon.
Shares of stock against which the corporation 3. The par value with respect to shares with par
holds any unpaid claim shall not be transferable value, or the full subscriptions, as to no-par
in the books – no unpaid claims against the stock. value shares must be fully paid.
no unpaid subscriptions due and payable. 4. Where it involves transfer of outstanding
shares, the original certificate must be
Sec. 64. Issuance of stock certificates. – No retained.
certificate of stock shall be issued to a subscriber
until the full amount of his subscription together Purpose of Registration of Transfer
with interest and expenses (in case of delinquent 1. To enable the corporation to know at all
shares), if any is due, has been paid. times who its actual shareholders are,
because mutual rights and obligations exist
SEC. 64 It is prohibited to issue certificates of between the corporation and its
stock to a subscriber who has not paid the full stockholders.
amount of his subscription together with interest 2. To afford to the corporation an opportunity
and expenses. to object or refuse its consent to the transfer
in case it has any claim against the stock
Derivative suit – one brought by one or more
sought to be transferred or for any other
stockholders or members in the name and in
behalf of the corporation to redress wrongs valid reason.
committed against it or to protect or vindicate 3. To avoid fraudulent or
corporate rights. fictitious transfer.
4. It is intended also for the benefit and
protection of persons who may deal with the

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corporation and become creditors, so that Trust Fund Theory – involves an implied promise
they know who are the stockholders, and as to the corporation to pay the par value of the
such liable to its creditors. shares in money or its equivalent, supplementing
it by a legal restriction against release or fictitious
Right to Transfer shares of stock payment of this obligation to the prejudice of
1. By delivering the certificate, duly indorsed creditors.
on the back.
2. By delivering the certificate accompanied by Sec. 66. Interest on unpaid subscriptions. –
a separate assignment. Subscribers for stock shall pay to the corporation
3. Where stock is levied on in execution of interest on all unpaid subscriptions from the date
judgment, by delivering the certificate of subscription, if so required by, and at the rate
coupled with an assignment by the sheriff of interest fixed in the by-laws. If no rate of
who conducted the levy. interest is fixed in the by-laws, such rate shall be
deemed to be the legal rate.
4. Transfer by sale of delinquent shares.
Sec. 67. Payment of balance of subscription. –
Liabilities of a stockholders
Subject to the provisions of the contract of
1. Liability to the corporation for unpaid subscription, the board of directors of any stock
subscription corporation may at any time declare due and
2. Liability to the corporation for interest on payable to the corporation unpaid subscriptions
unpaid subscription to the capital stock and may collect the same or
3. Liability to creditors of the corporation on such percentage thereof, in either case with
unpaid subscription accrued interest, if any, as it may deem
4. Liability for watered stock necessary.
5. Liability for dividends unlawfully paid
6. Liability for failure to Payment of any unpaid subscription or any
create a corporation percentage thereof, together with the interest
accrued, if any, shall be made on the date
Sec. 65. Liability of directors for watered stocks. specified in the contract of subscription or on the
– Any director or officer of a corporation date stated in the call made by the board. Failure
consenting to the issuance of stocks for a to pay on such date shall render the entire
consideration less than its par or issued value or balance due and payable and shall make the
for a consideration in any form other than cash, stockholder liable for interest at the legal rate on
valued in excess of its fair value, or who, having such balance, unless a different rate of interest is
knowledge thereof, does not forthwith express provided in the by-laws, computed from such
his objection in writing and file the same with the date until full payment. If within thirty (30) days
corporate secretary, shall be solidarily, liable with from the said date no payment is made, all stocks
the stockholder concerned to the corporation covered by said subscription shall thereupon
and its creditors for the difference between the become delinquent and shall be subject to sale as
fair value received at the time of issuance of the hereinafter provided, unless the board of
stock and the par or issued value of the same. directors orders otherwise.

SEC. 65 watered stocks – stock issued for no value Remedies to enforce payment of stock
at all or for a value less than its equivalent either subscription
in cash, property, shares, stock dividends, or 1. Extra-judicial sale at public auction – Permits
services the law prohibits the issuance of the corporation to put up unpaid stock for
watered stocks (only refers to original issue) sale and dispose of it for the account of the
1. To protect persons who may acquire stock delinquent subscribers (governed by
and those who may become the creditors of sections 67-69 of the Corporation Code of
the corporation on the faith of its the
outstanding capital stock being fully paid. Philippines).
2. To secure equality among subscribers and 2. Judicial action by court action (provided
under Section 70)
prevents discrimination against those who
have paid in full the par or issued value. 3. Denying a stockholder delinquent for unpaid
subscription the right to vote (under section
Who are liable for watered stocks? Both 71)
consenting director or officer and the 4. Collection from cash dividends and
stockholder concerned for the whole amount of withholding stock dividends (under Section
difference. 43)

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Sanctions on stock delinquent or city where the principal office of the


1. Rights denied to stockholder shall not be corporation is located.
voted or be entitled to vote or
representation at any stockholders' meeting, Unless the delinquent stockholder pays to the
nor entitled the holder thereof to any of the corporation, on or before the date specified for
rights of a stockholder except the right to the sale of the delinquent stock, the balance due
dividends. on his subscription, plus accrued interest, costs
2. Right given to the corporation. of advertisement and expenses of sale, or unless
3. The corporation has the right to apply cash the board of directors otherwise orders, said
dividends due on delinquent stock to the delinquent stock shall be sold at public auction
unpaid balance on the subscription plus cost to such bidder who shall offer to pay the full
and expenses. amount of the balance on the subscription
together with accrued interest, costs of
advertisement and expenses of sale, for the
While stock dividends, corporation to withhold
smallest number of shares or fraction of a share.
the same from the delinquent stockholder until
his unpaid subscription is fully paid. The stock so purchased shall be transferred to
such purchaser in the books of the corporation
and a certificate for such stock shall be issued in
When is the balance of subscription payable?
his favor. The remaining shares, if any, shall be
1. On the date specified in the contract of credited in favor of the delinquent stockholder
subscription.
who shall likewise be entitled to the issuance of
2. In the absence of any specified date in the a certificate of stock covering such shares.
contract of subscription, on the date stated
in the call made by the board of directors. Should there be no bidder at the public auction
who offers to pay the full amount of the balance
When does the stock become delinquent? A on the subscription together with accrued
stock becomes delinquent upon failure of the interest, costs of advertisement and expenses of
holder to pay the unpaid subscription or balance sale, for the smallest number of shares or
thereof within 30 days from the date specified in fraction of a share, the corporation may, subject
the contract of subscription or on the date stated to the provisions of this Code, bid for the same,
in the call. and the total amount due shall be credited as
paid in full in the books of the corporation. Title
Call – a declaration officially made by a to all the shares of stock covered by the
corporation usually expressed in the form of a subscription shall be vested in the corporation
resolution of the board of directors requiring as treasury shares and may be disposed of by
payment of all or a certain prescribed portion of said corporation in accordance with the
a subscriber's stock subscription. provisions of this Code.

Requisites for a valid call Procedure:


1. It must be made in the manner prescribed by 1. The board of directors passes a resolution
law. declaring payable the whole or certain
2. It must be made by the board of directors. percentage of the unpaid subscription
3. It must operate uniformly upon all shares. stating the date fixed for payment. If the
date of payment is specified in the contract
of subscription, no call is necessary.
Sec. 68. Delinquency sale. – The board of 2. The stockholders are given notice of the
directors may, by resolution, order the sale of resolution by the secretary of the
delinquent stock and shall specifically state the corporation. If the stockholders fails to pay
amount due on each subscription plus all within 30 days from date specified, the
accrued interest, and the date, time and place of stocks becomes delinquent.
the sale which shall not be less than thirty (30) 3. the board of directors, by resolution, orders
days nor more than sixty (60) days from the date the sale of delinquent stocks, stating the
the stocks become delinquent. amount due and the date, time, and place of
sale with notice to the delinquent
Notice of said sale, with a copy of the resolution, stockholders which notice shall be
shall be sent to every delinquent stockholder published.
either personally or by registered mail. The 4. On the date of sale, will be sold at public
same shall furthermore be published once a auction to higher bidder for cash.
week for two (2) consecutive weeks in a
newspaper of general circulation in the province Highest bidder – the person offering at the sale
to pay the full amount of the balance on the

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subscription together with accrued interest, cost 1. Cannot be voted for or be entitled to vote in
of advertisement and expenses of sale, for the corporate meetings or be represented by
smallest number of shares. proxy at any stockholders’ meeting.
2. The holder of delinquent stock is not entitled
In the absence of bidders or highest bidder, the to exercise the rights of a stockholder (i.e. to
corporation may purchase for itself the inspect books and records, etc.).
delinquent stock. 3. The holder of delinquent stocks is entitled to
dividends. Section 43 provides however, that
Sec. 69. When sale may be questioned. – No “ any cash dividends due on delinquent stock
action to recover delinquent stock sold can be shall first be applied to the unpaid balance
sustained upon the ground of irregularity or on the subscription plus costs and expense,
defect in the notice of sale, or in the sale itself of while stock dividends shall be withheld from
the delinquent stock, unless the party seeking to the delinquent stockholder until his unpaid
maintain such action first pays or tenders to the subscription is fully paid”.
party holding the stock the sum for which the
same was sold, with interest from the date of sale Sec. 72. Rights of unpaid shares. – Holders of
at the legal rate; and no such action shall be subscribed shares not fully paid which are not
maintained unless it is commenced by the filing delinquent shall have all the rights of a
of a complaint within six (6) months from the stockholder.
date of sale.
SEC. 72 Before unpaid shares become delinquent,
Grounds for the recovery of stock unlawfully sold the holder thereof is not considered to have
for delinquency are: violated any contract with the corporation, and,
1. Irregularity or defect in the notice of sale therefore, he has all the rights of a stockholder
2. Irregularity or defect in the sale itself of the which rights include the right to vote.
delinquent stock
Sec. 73. Lost or destroyed certificates. – The
Sec. 70. Court action to recover unpaid following procedure shall be followed for the
subscription. – Nothing in this Code shall prevent issuance by a corporation of new certificates of
the corporation from collecting by action in a stock in lieu of those which have been lost, stolen
court of proper jurisdiction the amount due on or destroyed:
any unpaid subscription, with accrued interest,
costs and expenses. 1. The registered owner of a certificate of stock
in a corporation or his legal representative
As a general rule, a corporation may not maintain shall file with the corporation an affidavit in
a suit for the enforcement of unpaid subscription triplicate setting forth, if possible, the
without first making a call. circumstances as to how the certificate was
lost, stolen or destroyed, the number of
Judicial remedy is limited to the amount due on shares represented by such certificate, the
any unpaid subscription with accrued interest, serial number of the certificate and the name
costs and expenses of the corporation which issued the same. He
shall also submit such other information and
Sec. 71. Effect of delinquency. – No delinquent evidence which he may deem necessary.
stock shall be voted for be entitled to vote or to
representation at any stockholder's meeting, nor 2. After verifying the affidavit and other
shall the holder thereof be entitled to any of the information and evidence with the books of
rights of a stockholder except the right to the corporation, said corporation shall
dividends in accordance with the provisions of publish a notice in a newspaper of general
this Code, until and unless he pays the amount circulation published in the place where the
due on his subscription with accrued interest, corporation has its principal office, once a
and the costs and expenses of advertisement, if week for three (3) consecutive weeks at the
any. expense of the registered owner of the
certificate of stock which has been lost,
SEC. 71 Stock delinquency does not deprive the stolen or destroyed. The notice shall state
holder of all his rights as a stockholder except the the name of said corporation, the name of
right to be voted for or be entitled to the registered owner and the serial number
representation at any stockholders' meeting. He of said certificate, and the number of shares
shall still receive dividends. But delinquent represented by such certificate, and that
stocks shall be subject to delinquency sale. after the expiration of one (1) year from the
date of the last publication, if no contest has
Effects of Stocks declared delinquent: been presented to said corporation

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regarding said certificate of stock, the right Upon the demand of any director, trustee,
to make such contest shall be barred and stockholder or member, the time when any
said corporation shall cancel in its books the director, trustee, stockholder or member
certificate of stock which has been lost, entered or left the meeting must be noted in the
stolen or destroyed and issue in lieu thereof minutes; and on a similar demand, the yeas and
new certificate of stock, unless the nays must be taken on any motion or
registered owner files a bond or other proposition, and a record thereof carefully made.
security in lieu thereof as may be required, The protest of any director, trustee, stockholder
effective for a period of one or member on any action or proposed action
(1) year, for such amount and in such form and must be recorded in full on his demand. The
with such sureties as may be satisfactory to records of all business transactions of the
the board of directors, in which case a new corporation and the minutes of any meetings
certificate may be issued even before the shall be open to inspection by any director,
expiration of the one (1) year period provided trustee, stockholder or member of the
herein: Provided, That if a contest has been corporation at reasonable hours on business days
presented to said corporation or if an action is and he may demand, writing, for a copy of
pending in court regarding the ownership of excerpts from said records or minutes, at his
said certificate of stock which has been lost, expense.
stolen or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be Any officer or agent of the corporation who shall
suspended until the final decision by the court refuse to allow any director, trustees,
regarding the ownership of said certificate of stockholder or member of the corporation to
stock which has been lost, stolen or destroyed. examine and copy excerpts from its records or
minutes, in accordance with the provisions of this
Except in case of fraud, bad faith, or negligence Code, shall be liable to such director, trustee,
on the part of the corporation and its officers, no stockholder or member for damages, and in
action may be brought against any corporation addition, shall be guilty of an offense which shall
which shall have issued certificate of stock in lieu be punishable under Section 144 of this Code:
of those lost, stolen or destroyed pursuant to the Provided, That if such refusal is made pursuant to
procedure above-described. a resolution or order of the board of directors or
trustees, the liability under this section for such
SEC. 73 The registered owner of certificates of action shall be imposed upon the directors or
stock in a corporation or his legal representative trustees who voted for such refusal: and
shall file with the corporation an affidavit setting Provided, further, That it shall be a defense to
forth how certificate were lost, stolen or any action under this section that the person
destroyed, the number of shares represented by demanding to examine and copy excerpts from
each certificate, the serial numbers of the the corporation's records and minutes has
certificate and name of the corporation which improperly used any information secured
issued the same. through any prior examination of the records or
minutes of such corporation or of any other
The affidavit shall be verified Corporation shall corporation, or was not acting in good faith or for
publish a notice in a newspaper in general a legitimate purpose in making his demand.
circulation published in the place where the
corporation has its principal office for 3 Stock corporations must also keep a book to be
consecutive weeks. known as the "stock and transfer book", in which
must be kept a record of all stocks in the names
After 1 year from the date of the last publication, of the stockholders alphabetically arranged; the
if no contest presented to the corporation, installments paid and unpaid on all stock for
corporation shall cancel in the books the lost which subscription has been made, and the date
certificates and issue new certificates. of payment of any installment; a statement of
every alienation, sale or transfer of stock made,
Sec. 74. Books to be kept; stock transfer agent. – the date thereof, and by and to whom made; and
Every corporation shall keep and carefully such other entries as the by-laws may prescribe.
preserve at its principal office a record of all The stock and transfer book shall be kept in the
business transactions and minutes of all principal office of the corporation or in the office
meetings of stockholders or members, or of the of its stock transfer agent and shall be open for
board of directors or trustees, in which shall be inspection by any director or stockholder of the
set forth in detail the time and place of holding corporation at reasonable hours on business
the meeting, how authorized, the notice given, days.
whether the meeting was regular or special, if
special its object, those present and absent, and No stock transfer agent or one engaged
every act done or ordered done at the meeting. principally in the business of registering transfers

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of stocks in behalf of a stock corporation shall be reasonable detail its assets and liabilities and the
allowed to operate in the Philippines unless he result of its operations.
secures a license from the Securities and
Exchange At the regular meeting of stockholders or
Commission and pays a fee as may be fixed by the members, the board of directors or trustees shall
Commission, which shall be renewable annually: present to such stockholders or members a
Provided, That a stock corporation is not financial report of the operations of the
precluded from performing or making transfer of corporation for the preceding year, which shall
its own stocks, in which case all the rules and include financial statements, duly signed and
regulations imposed on stock transfer agents, certified by an independent certified public
except the payment of a license fee herein accountant.
provided, shall be applicable.
However, if the paid-up capital of the corporation
Books and records to be kept is less than P50,000.00, the financial statements
by Corporation may be certified under oath by the treasurer or
1. Record of all business transactions any responsible officer of the corporation.
2. Minutes of all meetings of stockholders or
members, or of board of directors or trustees Stockholder’s rights to financial statements and
3. Stock and transfer books reports
4. Optional records and supplementary books 1. Balance sheet as of the end of the last
as many be necessary or required taxable year.
by special laws 2. A profit and loss statement for said taxable
year.
SEC Rules requiring filing of documents. The SEC 3. The board of directors or trustees shall
requires all corporations whose securities are present “a financial report” to stockholders
listed in any stock exchange or with permits to or members.
sell shares to the public or with twenty or more
stockholders shall hereafter submit to this SEC REPORTORIAL REQUIREMENTS Period
Commission within thirty (30) days after approval Requirements
of the corporate action, certified true copies of
the following documents evidencing the same, to
wit: Within 30 days from a) Set up books
registration of articles of accounts duly
a. Minute of meetings onaf registered with the BIR
1. Calling for payment of unpaid incorporation wherein receipts and
subscriptions disbursements made
2. Increasing or decreasing the capital are
stock immediately recorded.
3. Changing the nomenclature of shares of
stock or certificates of indebtedness b) Set up
4. Authorizing the borrowing of material and
sums of money
b. Other documents, such as: register with the SEC its
stock and transfer
1. Certificated changing the composition
book.
of the board of
directors and officers
c) File its by-laws with
2. Certificates changing the ownership of
the
the controlling interest in the
Commission.
corporation
Within 15 days from Submit a statement of
end of 3 months sources and
Management contracts duly approved by the
from registration application of funds
stockholders.
certified by an
Sec. 75. Right to financial statements. – Within independent CPA.
ten (10) days from receipt of a written request of
any stockholder or member, the corporation
shall furnish to him its most recent financial
statement, which shall include a balance sheet as
of the end of the last taxable year and a profit or
loss statement for said taxable year, showing in

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a) Within 105 days i) If paid-up Within 5 days Submit list of


after the end of its capital > P50,000, file before the date of stockholders/memb
fiscal year a copy of BS and P&L annual meeting ers entitled to vote as
statement. of a date prior to the
meeting.
ii) If paid-up
capital < P50,000, The SEC must be notified of any:
same as (i) and
1. Change or transfer of address.
certified under oath
2. Any investment of corporate funds in any of
by the Treasurer or
the secondary purposes of the corporation
any responsible by filing a copy of the resolution approved by
officer. 2/3 of the subscribed capital stock entitled to
b) Within 45 days Certified under oath by vote authorizing the BoD to invest in any of
the Treasurer or any the secondary purposes.
responsible officer.
Within 30 days from Submit: Sec. 76. Plan of merger or consolidation. – Two
the date of annual 1) General or more corporations may merge into a single
meeting information sheet for corporation which shall be one constituent
the fiscal year. corporations or may consolidate into a new
single corporation which shall be consolidated
2) Minutes of corporation.
meeting of
stockholders/memb The board of directors or trustees of each
ers electing the BoD corporation, party to the merger or
certified by the consolidation, shall approve a plan of merger or
Secretary and consolidation setting forth the following:
subscribed and sworn
to before a notary
1. The names of the corporations proposing to
public.
merge or consolidate, hereinafter referred
to as the constituent corporations.
3) Minutes of
meeting of BoD
2. The terms of the merger or consolidation
electing the officers,
and the mode of carrying the same into
certified by the
effect.
secretary and
subscribed and sworn
3. A statement of the changes. If any, in the
to before a notary
articles of incorporation of the surviving
public
corporation in case of merger; and, with
respect to the consolidated corporation in
Within 5 days from Submit list of case of consolidation, all the statements
stockholders/memb stockholders/memb required to be set forth in the articles of
ers meeting ers as of the date of annual incorporation for corporations organized
or special stockholders/memb ers’ under this Code.
meeting, showing: Name of the
4. Such other provisions with respect to the
stockholder proposed merger or consolidation as are
• Address deemed necessary or desirable.
• Nationality
• No. of Sec. 77. Stockholders’ or members’ approval. –
shares Upon approval by majority vote of each of the
subscribed board of directors or trustees of the constituent
• Amt. subscribed corporations of the plan of merger or
by each consolidation, the same shall be submitted for
Shall be made for approval by the stockholders or members of each
inspection. of such corporations at separate corporate
meetings duly called for stockholders or
members of the respective corporations, at least
two (2) weeks prior to the date of meeting, either
personally or by registered mail. Said notice shall
state the purpose of the meeting and shall

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include a copy or a summary of the plan of Commission’s approval and effictivity of merger
merger or consolidation as the case may be. The or consolidation. – The articles of merger or of
affirmative vote of stockholders representing at consolidation signed and certified as
least two-thirds (2/3) of the outstanding capital hereinabove required, shall be submitted to the
stock of each corporations in case of stock Securities and Exchange Commission in
corporations or at least two-thirds of the quadruplicate for its approval: Provided, That in
members in case of non-stock corporations, shall the case of merger or consolidation of banks or
be necessary for the approval of such plan. Any banking institutions, building and loan
dissenting stockholder in stock corporations may associations, trust companies, insurance
exercise his appraisal right in accordance with companies, public utilities, educational
this Code; Provided, That if after the approval by institutions and other special corporations
the stockholders of such plan, the board of governed by special laws, the favorable
directors should decide to abandon the plan, the recommendation of the appropriate government
appraisal right shall be extinguished. agency shall first be obtained. Where the
Commission is satisfied that the merger or
Any amendment to the plan of merger or consolidation of the corporations concerned is
consolidation may be made, provided such not inconsistent with the provisions of this Code
amendment is approved by majority vote of the and existing laws, it shall issue a certificate of
respective boards of directors or trustees of all merger or consolidation, as the case may be, at
the constituent corporations and ratified by the which time the merger or consolidation shall be
affirmative vote of stockholders representing at effective.
least twothirds (2/3) of the members of each of
the constituent corporations. Such plan, together If, upon investigation, the Securities and
with any amendment, shall be considered as the Exchange Commission has reason to believe that
agreement of merger or consolidation. the proposed merger or consolidation is contrary
to or inconsistent with the provisions of this Code
Definition or existing laws, it shall set a hearing to give the
Consolidation – the uniting or amalgamation of corporations concerned the opportunity to be
two or more existing corporations to form a new heard. Written notice of the date, time and place
corporation. The united concern resulting from of said hearing shall be given to each constituent
the union is called the consolidated corporation. corporation at least two (2) weeks before said
Merger – a union effected by the absorbing of hearing. The Commission shall thereafter
one or more existing corporations by another proceed as provided in this Code.
which survives and continues the combined
business. The parties to a combination by Sec. 80. Effects of merger or consolidation. – The
consolidation or merger are called the merger or consolidation, as provided in the
“constituent” corporations. preceding sections shall have the following
effects:
Sec. 78. Articles of merger or consolidation. –
After the approval by the stockholders or 1. The constituent corporations shall become a
members as required by the preceding section, single corporation which, in case of merger,
articles of merger or articles of consolidation shall be the surviving corporation designated
shall be executed by each of the constituent in the plan of merger; and, in case of
corporations, to be signed by the president or consolidation, shall be the consolidated
vice-president and certified by the secretary or corporation designated in the plan of
assistant secretary of each corporation setting consolidation.
forth:
2. The separate existence of the constituent
1. The plan of the merger or the plan of the corporations shall cease, except that of the
consolidation. surviving or the consolidated corporation.

2. As to stock corporations, the number of 3. The surviving or the consolidated


shares outstanding, or in case of nonstock corporation shall possess all the rights,
corporations, the number of members. privileges, immunities and powers and shall
be subject to all the duties and liabilities of a
3. As to each corporation, the number of shares corporation organized under this Code.
or members voting for and against such plan,
respectively. 4. The surviving or the consolidated
corporation shall thereupon and thereafter
Sec. 79. Securities and Exchange possess all the rights, privileges, immunities
and franchises of each of the constituent

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corporations; and all property, real or restricting the rights of any stockholders or
personal, and all receivables due on class of shares, or of authorizing preferences
whatever account, including subscriptions to in any respect superior to those of
shares and other chooses in action, and all outstanding shares of any class, or of
and every other interest of, or belonging to, extending or shortening the term of
or due to each constituent corporation, shall corporate existence.
be taken and deemed to be transferred to
and vested in such surviving or consolidated 2. In case of sale, lease, exchange, transfer,
corporation without further act or dead. mortgage, pledge or other disposition of all
or substantially all of the corporate property
5. The surviving or consolidated corporation and assets as provided in this Code.
shall be responsible and liable for all the
liabilities and obligations of each of the 3. In case of merger or consolidation.
constituent corporations in the same
manner as if such surviving or consolidated Sec. 81, not exclusive.
corporation had itself incurred such liabilities
or obligations; and any claim, action or Such appraisal right may also be exercised when
proceeding pending by or against any of such a stockholder dissents when a corporation or
constituent corporations may be prosecuted business or for a purpose
by or against the surviving or consolidated other than its main purpose. (Sec. 42)
corporation, as the case may be. Neither the
rights of creditors nor any lien upon the When a stockholder of a close corporation may
property of any of such constituent for any reason compel the corporation to
corporations shall be impaired by such purchase his shares from the par or issued value,
merger or consolidation. when the corporation has sufficient assets in its
books to cover its debts and liabilities, exclusive
Steps to achieve merger or consolidation of capital
1. The BoD of each corporation must draw up a stock. (Sec. 105)
plan of merger or consolidation.
2. A plan must be submitted to the S/M of each Sec. 82. How right is exercised. – The appraisal
corporation for approval. The vote or two- right may be exercised by any stockholder who
thirds (members) or two-thirds of the shall have voted against the proposed corporate
outstanding capital stock (stockholders) action, by making a written demand on the
would be required. corporation within thirty (30) days after the date
3. There has to be a formal agreement known on which the vote was taken for payment of the
as the articles of M/C by the officers of each fair value of his shares: Provided, That failure to
of the constituent corporations. make the demand within such period shall be
4. The articles of M/C must be submitted to the deemed a waiver of the appraisal right. If the
SEC for approval. proposed corporate action is implemented or
effected, the corporation shall pay to such
5. The SEC shall if it deems necessary set a
stockholder, upon surrender of the certificate(s)
hearing giving notice to all corporations
concerned. of stock representing his shares, the fair value
thereof as of the day prior to the date on which
6. The SEC issues the certificate of M/C. The the vote was taken, excluding any appreciation or
M/C becomes effective upon the issuance of
depreciation in anticipation of such corporate
the corresponding certificate.
action.

Remedy of creditors of
If within a period of sixty (60) days from the date
constituent corporations
the corporate action was approved by the
The only remedy is either against the united stockholders, the withdrawing stockholder and
corporation, or to pursue the assets of the the corporation cannot agree on the fair value of
constituents into its hands on the ground of the shares, it shall be determined and appraised
fraudulent conveyance. by three (3) disinterested persons, one of whom
shall be named by the stockholder, another by
Sec. 81. Instances of appraisal right. – Any the corporate and the third by the two (2) thus
stockholder of a corporation shall have the right chosen. The findings of the majority of the
to dissent and demand payment of the fair value appraisers shall be final, and their award shall be
of his shares in the following instances: paid by the corporation within thirty (30) days
after such award is made: Provided, That no
1. In case any amendment to the articles of payment shall be made to any dissenting
incorporation has the effect of changing or stockholder unless the corporation has

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unrestricted retain earnings in its books to cover Rescinded; effects as


such payment: and Provided, further, That upon Unsecured approval of
payment by the corporation of the agreed or the SEC;
awarded price, the stockholder shall forthwith Stockholder is not Same
transfer his shares to the corporation. entitled; Withdrawal above.
(dissenting
Exercising the appraisal right stockholder with
By one who has voted against the proposed consent of the corp)
corporate action, by making a written demand on
the corporation within thirty (30) days after the
date on which the vote was taken for payment of
the fair value of his shares. Those who are absent Sec. 85. Who bears costs of appraisal. – The costs
and present abstained their vote cannot exercise and expenses of appraisal shall be borne by the
the appraisal right. corporation, unless the fair value ascertained by
the appraisers is approximately the same as the
Sec. 83. Effect of demand and termination of price which the corporation may have offered to
right. – From the time of demand for payment of pay the stockholder, in which case they shall be
the fair value of a stockholder’s shares until borne by the latter. In case of an action to recover
either the abandonment of the corporate action such fair value, all costs and expenses shall be
involved or the purchase of the said shares by the assessed against the corporation, unless the
corporation, all rights accruing to such shares, refusal of the stockholder to receive payment
including voting and dividend rights, shall be was unjustified.
suspended in accordance with the provisions of
this Code, except the right of such stockholder to Consideration of the costs of appraisal Expenses
receive payment of the fair value thereof: of appraisal:
Provided, That if the dissenting stockholder is not • Appraisers’ fees
paid the value of his shares within 30 days after • Attorneys’ fees
the award, his voting and dividend rights shall be • Expert accountants’ fees
immediately be restored. • Witnesses before the appraisers’ fees
Thus, clarifies an otherwise delicate aspect of
Sec. 84. When right to payment ceases. – No appraisal proceeding.
demand for payment under this Title may be
withdrawn unless the corporation consents Sec. 86. Notation on certificate(s); right of
thereto. If, however, such demand for payment transferee. – Within ten (10) days after
is withdrawn with the consent of the demanding payment for his shares, a dissenting
corporation, or if the proposed corporate action stockholder shall submit the certificate(s) of
is abandoned or rescinded by the corporation or stock representing his shares to the corporation
disapproved by the Securities and Exchange for notation thereon that such shares are
Commission where such approval is necessary, or dissenting shares. His failure to do so shall, at the
if the Securities and Exchange Commission option of the corporation, terminate his rights
determines that such stockholder is not entitled under this Title. If shares represented by the
to the appraisal right, then the right of said certificate(s) bearing such notation are
stockholder to be paid the fair value of his shares transferred, and the certificate(s) consequently
shall cease, his status as a stockholder shall cancelled, the rights of the transferor as a
thereupon be restored, and all dividend dissenting stockholder under this Title shall cease
distributions which would have accrued on his and the transferee shall have all the rights of a
shares shall be paid to him. regular stockholder; and all dividend
distributions which would have accrued on such
Effect of refusal of corporation to pay shares shall be paid to the transferee.
If... Then...
FV of the shares within Restore all his rights Valuation of shares of
thirty (30) days from automatically. dissenting shareholders
the award Appraisers should consider the elements that
tend to affect market quotations:
Insufficiency of the Restore by reacquiring • The rate of dividends
unrestricted RE his former • The regularity with which they have
status as a stockholder. been paid
• The management and reputation of the
Abandoned; company
• Its prospects for the future

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• All other circumstances which will aid Definition


them in estimating the future Non-stock corporation – one where no part of its
course of the stock in the market income is distributable as dividends to its
members, trustees, or officers.
The important thing to consider in arriving at the
appraisal value is whether the valuation arrived Sec. 88. Purposes. – Non-stock corporations may
at is fair, just and reasonable to all parties be formed or organized for charitable, religious,
concerned. educational, professional, cultural, fraternal,
literary, scientific, social, civic service, or similar
Other instances when appraisal right may be purposes, like trade, industry, agricultural and
granted like chambers, or any combination thereof,
1. Amendment of “any provision or matter subject to the special provisions of this Title
stated in the articles of incorporation.” governing particular classes of non-stock
2. When the corporate term is extended. corporations.
3. Any purpose other than the primary
purpose. Distinction between a stock corporation and a
non-stock corporation
4. Close corporation – a stockholder may
compel the corporation to purchase FV “for Point of Stock Non-Stock
any reasons.” Comparison Corporation Corporation
Exercise of appraisal right provided Membership Ownership of Consent of
compensatory alternative to investor Appraisal stock the associates
statutes extending to corporate purpose or
duration amendments would seem to be of
limited value.
Solicitation of gifts, donations
or contributions by non-stock corporations A
Appraisal rights cannot challenge this power but
certificate of registration must be secured from
they can provide a compensatory alternative to the Insurance Commissioner
an investor faced with a loss of existing stock
otherwise the articles of incorporation cannot be
rights and should be so employed.
filed.

When right of stockholder to payment ceases


Sec. 89. Right to vote. – The right of the
1. The demand for payment is withdrawn with members of any class or classes to vote may be
the consent of the corporation. limited, broadened or denied to the extent
2. The proposed corporate action is abandoned specified in the articles of
or rescinded by the corporation. incorporation or the by-laws. Unless so limited,
3. Proposed action is disapproved by the SEC broadened or denied, each
where such approval is necessary. member, regardless of class, shall be entitled to
4. Such stockholder is not entitled to exercise one vote.
his appraisal right.
Unless otherwise provided by the articles of
Sec. 87. Definition. – For the purposes of this incorporation or the by-laws, a member may vote
Code, a non-stock corporation is one where no by proxy in accordance with the provisions of this
part of its income is distributable as dividends to Code.
its members, trustees, or officers, subject to the
provisions of this Code on dissolution: Provided, Voting by mail or other similar means by
That, any profit which a non-stock corporation members of non-stock corporations may be
may obtain as an incident to its operation shall, authorized by the by-laws of non-stock
whenever necessary or proper, be used for the corporations with the approval of, and under
furtherance of the purpose or purposes for which such conditions which may be, prescribed by, the
the corporation was organized, subject to the Securities and Exchange Commission.
provisions of this Title.
Voting by proxy may be denied in articles or by-
The provisions governing laws
stock corporations, when pertinent, shall be The law makes voting by proxy merely directory
applicable to non-stock in the case of non-stock corporations and even
corporations, except as may be covered by allows the articles of incorporation or by-laws
specific provisions of this Title. thereof to deny proxy voting.

If proxy voting may be denied outrightly in the


articles or by-laws of non-stock corporations, it

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necessarily follows that the qualifications or Sec.93. Place of meetings. – The by-laws may
limitations on who should be appointed proxies provide that the members of a nonstock
may also be made therein. corporation may hold their regular or special
meetings at any place even outside the place
Sec.90. Non-transferability of membership. – where the principal office of the corporation is
Membership in a non-stock corporation and all located: Provided, That proper notice is sent to all
rights arising therefrom are personal and non- members indicating the date, time and place of
transferable, unless the articles of incorporation the meeting: and Provided, further, That the
or the by-laws otherwise provide. place of meeting shall be within the
Philippines.
Sec.91. Termination of membership. –
Membership shall be terminated in the manner Supporting papers required to be submitted to
and for the causes provided in the articles of the Securities and Exchange Commission:
incorporation or the by-laws. Termination of 1. LETTER OF UNDERTAKING addressed to the
membership shall have the effect of Commission signed by at least a majority of
extinguishing all rights of a member in the the incorporators or by a duly authorized
corporation or in its property, unless otherwise representative, to the effect that the
provided in the articles of incorporation or the association will change its corporate name in
by-laws. the event another person, firm or entity has
acquired a prior right to use the same name
Sec.92. Election and term of trustees. – Unless or similar to it. (3 copies)
otherwise provided in the articles of 2. MODUS OPERANDI or a detailed explanation
incorporation or the by-laws, the board of as to how the association shall carry out its
trustees of non-stock corporations, which may be objectives signed by atleast a majority of the
more than fifteen (15) in number as may be fixed incorporators or by a duly authorized
in their articles of incorporation or by-laws, shall, representative. (3 Copies)
as soon as organized, so classify themselves that 3. RESOLUTION of the Board signed by atleast a
the term of office of one-third (1/3) of their majority of the Directors or certified under
number shall expire every year; and subsequent oath by the Secretary in the following tenor
elections of trustees comprising one-third (1/3) to wit: (3 Copies) “RESOLVED, that the
of the board of trustees shall be held annually corporation or associatin will comply with
and trustees so elected shall have a term of three the S.E.C.
(3) years. Trustees thereafter elected to fill
REQUIREMENTS FOR NON-STOCK
vacancies occurring before the expiration of a
CORPORATION dated May 24, 1963 , in the
particular term shall hold office only for the
course of its operation.”
unexpired period.
4. LIST OF MEMBERS of the association
containing their manual signature and
No person shall be elected as trustee unless he is
attested by the Acting Secretary, if the
a member of the corporation.
incorporators are the present members so
Unless otherwise provided in the articles of
far, state such fact in writing and further
incorporation or the by-laws, officers of a non-
state that the list of additional members who
stock corporation may be directly elected by the
will be admitted in accordance with the by-
members.
laws of the association shall e submitted to
the Commission from time to time. (3
Three-year term for trustees in non-stock
Copies)
corporation
The term of trustees in non-stock corporation is
Sec. 94. Rules of distribution. – In case
three (3) years except educational corporations
dissolution of a non-stock corporation in
where the term is five (5) years.
accordance with the provisions of this Code, its
assets shall be applied and distributed as follows:
Elections of directors by regions in nonstock
corporations not allowed
1. All liabilities and obligations of the
The Securities and Exchange Commission in an
corporation shall be paid, satisfied and
opinion stated that the “Election of members of
discharged, or adequate provision shall be
the Board of Directors of a non stock corporation
made therefore.
by zones or regions would violate the law which
requires that at all elections of directors, there
must be present a majority of the members 2. Assets held by the corporation upon a
entitled condition requiring return, transfer or
to vote. ” conveyance, and which condition occurs by
reason of the dissolution, shall be returned,

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transferred or conveyed in accordance with successors may have to be considered. A non-


such requirements. stock (non-profit) corporation may not ordinarily
organize as a stock corporation, authorized to
3. Assets received and held by the corporation issue shares of stock, but may issue membership
subject to limitations permitting their use certificates which do not entitle to the holder to
only for charitable, religious, benevolent, dividends.
educational or similar purposes, but not held
upon a condition requiring return, transfer Sec. 96. Definition and applicability of Title. – A
or conveyance by reason of the dissolution, close corporation, within the meaning of this
shall be transferred or conveyed to one or Code, is one whose articles of incorporation
more corporations, societies or provide that:
organizations engaged in activities in the
Philippines substantially similar to those of 1. All the corporation's issued stock of all
the dissolving corporation according to a classes, exclusive of treasury shares, shall be
plan of distribution adopted pursuant to this held of record by not more than a specified
Chapter. number of persons, not exceeding twenty
(20).
4. Assets other than those mentioned in the
preceding paragraphs, if any, shall be 2. All the issued stock of all classes shall be
distributed in accordance with the provisions subject to one or more specified restrictions
of the articles of incorporation or the by- on transfer permitted by this Title.
laws, to the extent that the articles of
incorporation 3. The corporation shall not list in any stock
or the by-laws, determine the distributive exchange or make any public offering of any
rights of members, or any class or classes of of its stock of any class. Notwithstanding the
members, or provide for distribution. foregoing, a corporation shall not be deemed
a close corporation when at least two-thirds
5. In any other case, assets may be distributed (2/3) of its voting stock or voting rights is
to such persons, societies, organizations or owned or controlled by another corporation
corporations, whether or not organized for which is not a close corporation within the
profit, as may be specified in a plan of meaning of this Code.
distribution adopted pursuant to this
Chapter. Any corporation may be incorporated as a close
corporation, except mining or oil companies,
Sec. 95. Plan of distribution of assets. – A plan stock exchanges, banks, insurance companies,
providing for the distribution of assets, not public utilities, educational institutions and
inconsistent with the provisions of this Title, may corporations declared to be vested with public
be adopted by a non-stock corporation in the interest in accordance with the provisions of this
process of dissolution in the following manner: Code. The provisions of this Title shall primarily
govern close corporations: Provided, That the
The board of trustees shall, by majority vote, provisions of other Titles of this Code shall apply
adopt a resolution recommending a plan of suppletorily except insofar as this Title otherwise
distribution and directing the submission thereof provides.
to a vote at a regular or special meeting of
members having voting rights. Written notice Sec. 97. Articles of incorporation. – The articles
setting forth the proposed plan of distribution or of incorporation of a close corporation may
a summary thereof and the date, time and place provide:
of such meeting shall be given to each member
entitled to vote, within the time and in the 1. For a classification of shares or rights and the
manner provided in this Code for the giving of qualifications for owning or holding the same
notice of meetings to members. Such plan of and restrictions on their transfers as may be
distribution shall be adopted upon approval of at stated therein, subject to the provisions of
least twothirds (2/3) of the members having the following section.
voting rights present or represented by proxy at
such meeting. 2. For a classification of directors into one or
more classes, each of whom may be voted
Distribution of assets of non-stock corporations for and elected solely by a particular class of
to the members on dissolution is not forbidden, stock.
unless it holds its assets upon some trust, public
or private, in which case the claims of the state,
the beneficiaries, or of the founder and his

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3. For a greater quorum or voting requirements corporate organization, like that of limited
in meetings of stockholders or directors than liability. However, the identity and personality of
those provided in this Code. each shareholder are important to his associates,
so that although they may consider their business
The articles of incorporation of a close as corporation in their dealings with third
corporation may provide that the business of the persons, among themselves the
corporation shall be managed by the stockholders act and feel as partners.”
stockholders of the corporation rather than by a
board of directors. So long as this provision Entities which may not be organized as close
continues in effect: corporations
• Mining or oil companies
1. No meeting of stockholders need be called to • Stock exchanges
elect directors. • Banks
• Insurance companies
2. Unless the context clearly requires • Public utilities
otherwise, the stockholders of the • Educational institutions
corporation shall be deemed to be directors • Corporations declared to be vested with
for the purpose of applying the provisions of public interest
this Code.
Stockholders authorized to manage close
3. The stockholders of the corporation shall be corporations
subject to all liabilities of directors. As a rule, management of stock corporation is
normally given to board of directors or trustees.
The articles of incorporation may likewise However, the Corporation Code provides: “The
provide that all officers or employees or that articles of incorporation of a close corporation
specified officers or employees shall be elected may provide that the business of the corporation
or appointed by the stockholders, instead of by shall be managed by the stockholders of the
the board of directors. corporation rather than by a board of directors.”
Also, “The articles of incorporation may likewise
Requisites of Close Corporation provide that all officers or employees or that
Within the meaning of a close corporation under specified officers or employees shall be elected or
the Corporation Code the following are its appointed by the stockholders, instead of by the
attributes: board of directors.”
1. Its stockholders are limited not exceeding 20
persons. Sec. 98. Validity of restrictions on transfer of
2. Its shares of stock are subject to one or more shares. – Restrictions on the right to transfer
restrictions on transfer. shares must appear in the articles of
incorporation and in the by-laws as well as in the
3. Its shares of stock are not listed in any stock
certificate of stock; otherwise, the same shall not
exchange.
be binding on any purchaser thereof in good
faith. Said restrictions shall not be more onerous
Salient Feature of Close Corporations
than granting the existing stockholders or the
1. It has only a few stockholders, who if not corporation the option to purchase the shares of
related by blood or marriage, know each
the transferring stockholder with such
other well and are aware of each other’s
reasonable terms, conditions or period stated
business skills.
therein. If upon the expiration of said period, the
2. All or more of them are active in the existing stockholders or the corporation fails to
corporate business, either as directors, exercise the option to purchase, the transferring
officers or as key men in management. stockholder may sell his shares to any third
3. The stocks of the corporation are not listed person.
on the exchange nor is there trading in them
outside the stock market. Sec. 99. Effects of issuance or transfer of stock
*It would seem that base on these features in breach of qualifying conditions. –
many corporations in the Philippines would 1. If stock of a close corporation is issued or
be close corporations. transferred to any person who is not entitled
under any provision of the articles of
Reasons for formation of incorporation to be a holder of record of its
close corporations stock, and if the certificate for such stock
“The existence of close corporations can be conspicuously shows the qualifications of
attributed to the desire of intimate groups of the persons entitled to be holders of record
business associates to obtain the advantages of a thereof, such person is conclusively

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presumed to have notice of the fact of his be binding on any purchaser thereof in good
ineligibility to be a stockholder. faith.” Charter restrictions on the transfer of
shares are binding on all who become
2. If the articles of incorporation of a close shareholders, as they become parties to the
corporation states the number of persons, charter contract and take their shares subject to
not exceeding twenty (20), who are entitled it. Considerable latitude allowed incorporators
to be holders of record of its stock, and if the and shareholders in imposing transfer
certificate for such stock conspicuously restrictions in the articles of incorporation and
states such number, and if the issuance or they will not usually be declared against public
transfer of stock to any person would cause policy unless palpably unreasonable under the
the stock to be held by more than such circumstances.
number of persons, the person to whom
such stock is issued or transferred is “Stock in the corporation is not merely property.
conclusively presumed to have notice of this It also creates a personal relation analogous
fact. otherwise than technically to a partnership.
There seems to be no greater objection to
3. If a stock certificate of any close corporation retaining the right of choosing one’s associates in
conspicuously shows a restriction on transfer a corporation than in a
of stock of the corporation, the transferee of firm.”
the stock is conclusively presumed to have
notice of the fact that he has acquired stock Reasons for restriction on shares of stock In a
in violation of the restriction, if such close corporation, the identity of the other
acquisition violates the restriction. stockholders is important to each; the
incorporators have confidence in one another
which they may not have in an outsider.
4. Whenever any person to whom stock of a
Furthermore, the incorporators may feel that the
close corporation has been issued or
success of the enterprise depends upon the
transferred has, or is conclusively presumed
retention of the personnel who formed it, or they
under this section to have, notice either (a)
may be manufacturing under secret processes
that he is a person not eligible to be a holder
which they do not want outsiders to learn. In the
of stock of the corporation, or (b) that
family corporation it is often the desire of he
transfer of stock to him would cause the
father to pass the corporation to his son without
stock of the corporation to be held by more
interference from other outside the family. Any
than the number of persons permitted by its
one of these factors may induce the
articles of incorporation to hold stock of the
incorporators to attempt to restrict the transfer
corporation, or (c) that the transfer of stock
of stock.
is in violation of a restriction on transfer of
stock, the corporation may, at its option,
refuse to register the transfer of stock in the Effect of the transfer of stock in breach of
name of the transferee. qualifying conditions
Unless “consented to by all the stockholders or if
the close corporation has amended its articles of
5. The provisions of subsection (4) shall not
incorporation,” a transfer of shares of stock in
applicable if the transfer of stock, though
breach of qualifying conditions would justify the
contrary to subsections (1), (2) of (3), has
corporation through the corporate secretary to
been consented to by all the stockholders of
refuse to register the transfer of stock. Such
the close corporation, or if the close
transfer need not be for value, hence it may be
corporation has amended its articles of
the result of a donation.
incorporation in accordance with this Title.
6. The term "transfer", as used in this section,
Sec. 100. Agreements by stockholders. –
is not limited to a transfer for value.
1. Agreements by and among stockholders
executed before the formation and
7. The provisions of this section shall not impair
organization of a close corporation, signed
any right which the transferee may have to
by all stockholders, shall survive the
rescind the transfer or to recover under any
incorporation of such corporation and shall
applicable warranty, express or implied.
continue to be valid and binding between
and among such stockholders, if such be
Restrictions on transfer of shares of stock The
their intent, to the extent that such
corporation may provide in its articles of agreements are not inconsistent with the
incorporation, in its by-laws as well as in the articles of incorporation, irrespective of
certificate of stock restrictions on the right of where the provisions of such agreements are
stockholders to transfer their shares of stocks. If contained, except those required by this Title
not so provided as aforesaid the same “shall not

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to be embodied in said articles of 1. Before or after such action is taken, written


incorporation. consent thereto is signed by all the directors.

2. An agreement between two or more 2. All the stockholders have actual or implied
stockholders, if in writing and signed by the knowledge of the action and make no
parties thereto, may provide that in prompt objection thereto in writing.
exercising any voting rights, the shares held
by them shall be voted as therein provided, 3. The directors are accustomed to take
or as they may agree, or as determined in informal action with the express or implied
accordance with a procedure agreed upon by acquiescence of all the stockholders.
them.
3. No provision in any written agreement 4. All the directors have express or implied
signed by the stockholders, relating to any knowledge of the action in question and
phase of the corporate affairs, shall be none of them makes prompt objection
invalidated as between the parties on the thereto in writing.
ground that its effect is to make them
partners among themselves. If a director's meeting is held without proper call
or notice, an action taken therein within the
4. A written agreement among some or all of corporate powers is deemed ratified by a director
the stockholders in a close corporation shall who failed to attend, unless he promptly files his
not be invalidated on the ground that it so written objection with the secretary of the
relates to the conduct of the business and corporation after having knowledge thereof.
affairs of the corporation as to restrict or Sec. 102. Pre-emptive right in close
interfere with the discretion or powers of the corporations. - The pre-emptive right of
board of directors: Provided, That such stockholders in close corporations shall extend to
agreement shall impose on the stockholders all stock to be issued, including reissuance of
who are parties thereto the liabilities for treasury shares, whether for money, property or
managerial acts imposed by this Code on personal services, or in payment of corporate
directors. debts, unless the articles of incorporation
provide otherwise.
5. To the extent that the stockholders are
actively engaged in the management or Exceptions in Section 39, not applicable It is
operation of the business and affairs of a submitted that in a close corporation, the
close corporation, the stockholders shall be exceptions provided in Sec 39 are not applicable.
held to strict fiduciary duties to each other The first exception mentioned therein regarding
and among themselves. Said stockholders the shares issued in compliance with laws
shall be personally liable for corporate torts requiring stock offerings or minimum stock
unless the corporation has obtained ownership by the public cannot by its very nature
reasonably adequate liability insurance. refer to a close corporation. The pre-emptive
right of shareholders in close corporation is thus
Effect of the Stockholders’ agreement before broadened to include all issues without any
and after formation of corporation exception, unless of course, restricted by the
Stockholders’ agreements before and after articles of incorporation and printed in the stock
formation and organization of the corporation certificates. It may be mentioned however, that
survive incorporation and shall be valid and any prior waiver of preemptive right must be
binding for as long as they are not inconsistent expressly provided for in the articles of
with the articles of incorporation. Agreements incorporation and not in an ordinary agreement
made prior to incorporation require fairly literal executed by the parties. This rule however,
performance. There must be an actual would not militate against the unanimous
contractual relation. Given such relation, the pre- agreement of all the stockholders.
incorporators are promoters and may arrange
agreements to form and manage the Sec. 103. Amendment of articles of
corporation. incorporation. – Any amendment to the articles
of incorporation which seeks to delete or remove
Sec. 101. When board meeting is unnecessary or any provision required by this Title to be
improperly held. – Unless the by-laws provide contained in the articles of incorporation or to
otherwise, any action by the directors of a close reduce a quorum or voting requirement stated in
corporation without a meeting shall nevertheless said articles of incorporation shall not be valid or
be deemed valid if: effective unless approved by the affirmative vote
of at least two-thirds (2/3) of the outstanding
capital stock, whether with or without voting

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rights, or of such greater proportion of shares as 3. Directing or prohibiting any act of the
may be specifically provided in the articles of corporation or its board of directors,
incorporation for amending, deleting or stockholders, officers, or other persons party
removing any of the aforesaid provisions, at a to the action.
meeting duly called for the purpose. 4. Requiring the purchase at their fair value of
shares of any stockholder, either by the
Rule and Exceptions when board meeting corporation regardless of the availability of
unnecessary unrestricted retained earnings in its books,
General Rule: the directors of a corporation or by the other stockholders.
cannot act individually or separately in order to
bind the corporation. They must act as a board at 5. Appointing a provisional director.
a meeting duly called for the purpose.
Exception: Section 101. It enumerates the 6. Dissolving the corporation.
instances when a board at a meeting is
unnecessary or even if improperly held would be
valid. The by-laws, however, may provided
7. Granting such other relief as the
circumstances may warrant.
otherwise or a stockholder may file his written
objection in writing after having knowledge of
the action taken by the directors. A provisional director shall be an impartial person
who is neither a stockholder nor a creditor of the
corporation or of any subsidiary or affiliate of the
Pre-emptive right in close corporations;
corporation, and whose further qualifications, if
Issuance of new Stock A stockholder in a close
any, may be determined by the Commission. A
corporation has a right to purchase his pro rata
provisional director is not a receiver of the
share of the new stock. If the pre-emptive right is
corporation and does not have the title and
violated he can sue the corporation for damages,
powers of a custodian or receiver. A provisional
enjoin the stock issue, obtain an order permitting
director shall have all the rights and powers of a
him to subscribe, or obtain cancellation of the
duly elected director of the corporation,
issue. But even where the stockholder’s pre-
including the right to notice of and to vote at
emptive right is preserved. The right may be
meetings of directors, until such time as he shall
inadequate as a protective devise for the
be removed by order of the Commission or by all
stockholder in a close corporation because the
the stockholders. His compensation shall be
lack of a market for his stock leaves him with the
determined by agreement between him and the
alternatives of investing more capital or having
corporation subject to approval of the
the value of his stock diluted.
Commission, which may fix his compensation in
the absence of agreement or in the event of
Sec. 104. Deadlocks. - Notwithstanding any
disagreement between the provisional director
contrary provision in the articles of incorporation
and the corporation.
or by-laws or agreement of stockholders of a
close corporation, if the directors or stockholders
Deadlock – Deadlock signifies a standstill in the
are so divided respecting the management of the
management of the corporate affairs resulting
corporation's business and affairs that the votes
from the evenly divide action of directors or
required for any corporate action cannot be
stockholders in a close corporation.
obtained, with the consequence that the
business and affairs of the corporation can no
longer be conducted to the advantage of the In the event of deadlocks SEC may arbitrate
stockholders generally, the Securities and In the event of a deadlock in a close corporation,
Exchange Commission, upon written petition by the SEC has the power to arbitrate the deadlock
any stockholder, shall have the power to “upon written petition of any stockholder.” In
arbitrate the dispute. In the exercise of such close corporations that are subject to a checks
power, the Commission shall have authority to and balances system because of control devices
make such order as it deems appropriate, there are bound to be deadlocks, and some steps
including an order: must be taken to cope with them. Many of the
problems that arise can be settled by arbitration,
Arbitration (the determination of a matter of
1. Canceling or altering any provision contained
difference between contending parties) may be
in the articles of incorporation, by-laws, or
provided either for directorial disputes or for
any stockholder's agreement.
stockholder disputes. Although there are some
disadvantages of arbitration proceedings,
2. Canceling, altering or enjoining any nevertheless, the advantages of arbitration, in
resolution or act of the corporation or its saving both money and hard feelings, would
board of directors, stockholders, or officers. seem to outweigh the disadvantages in most
cases.

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• The corporation is not a close


Provisional director and SEC supervised corporation even if the shares belong to less than
management twenty if not all the requisites are present. San
In accordance with Section 104, the SEC may in Juan Structural and Steel Fabricators v.
case of deadlocks in the close corporation CA (1998)
appoint a provisional director. “A provisional
director shall be an impartial person who is EDUCATIONAL CORPORATIONS
neither a stock-holder nor a creditor of the For Educational corporations, where the trustees
corporation and whose other qualifications, may should be divided into multiples of five. So you
be determined by the should have five, ten or fifteen trustees if they
SEC.” are organized as non-stock corporation. And
unless otherwise provided in the articles of
Under Section 2 (Pres Decree No. 1653), the SEC incorporation or by-laws, the terms of the
has the power “to create and appoint a trustees should be five years, and every year only
management committee, board, or body to one fifth (1/5) is elected, again to provide for
undertake the management of corporations, continuity in policies. But you can provide that
partnership or other associations in appropriate they will be all elected instead for a term of one
cases wherein there is imminent danger or year, everybody has to be elected.
dissipation, loss or wastage or destruction of
assets or other properties or paralization of Sec. 106. Incorporation. – Educational
business operations of such corporations or corporations shall be governed by special laws
entities prejudicial to the interest of the minority, and by the general provisions of this Code.
party-litigants or the general public.”
Sec. 107. Pre-requisites to incorporation. –
Sec. 105. Withdrawal of stockholder or Except upon favourable recommendation of the
dissolution of corporation. – In addition and Ministry of Education and Culture, the Securities
without prejudice to other rights and remedies and Exchange Commission shall not accept or
available to a stockholder under this Title, any approve the articles of incorporation and by-laws
stockholder of a close corporation may, for any of any educational institution.
reason, compel the said corporation to purchase
his shares at their fair value, which shall not be Sec. 108. Board of trustees. – Trustees of
less than their par or issued value, when the educational institutions organized as nonstock
corporation has sufficient assets in its books to corporations shall not be less than five (5) nor
cover its debts and liabilities exclusive of capital more than fifteen (15): Provided, however, That
stock: Provided, That any stockholder of a close the number of trustees shall be in multiples of
corporation may, by written petition to the five (5).
Securities and Exchange Commission, compel the
dissolution of such corporation whenever any of Unless otherwise provided in the articles of
acts of the directors, officers or those in control incorporation on the by-laws, the board of
of the corporation is illegal, or fraudulent, or trustees of incorporated schools, colleges, or
dishonest, or oppressive or unfairly prejudicial to other institutions of learning shall, as soon as
the corporation or any stockholder, or whenever organized, so classify themselves that the term of
corporate assets are being misapplied or wasted. office of one-fifth (1/5) of their number shall
expire every year. Trustees thereafter elected to
• Appraisal rights in regular corporations fill vacancies, occurring before the expiration of a
can be opted by the dissenting stockholder only particular term, shall hold office only for the
in cases where the fundamental change in the unexpired period. Trustees elected thereafter to
corporate structure or operations is involved, fill vacancies caused by expiration of term shall
whereas a stockholder of a close corporation hold office for five (5) years. A majority of the
may, for any reason, compel the said coporation trustees shall constitute a quorum for the
to purchase his shares at their par value, when transaction of business. The powers and
the corporation has sufficient assets in its books authority of trustees shall be defined in the by-
to cover his debts and liabilities exclusive of laws.
capital stock. ( In Appraisal right, fair value of
shares is given but in Withdrawal Right, the fair For institutions organized as stock corporations,
value cannot be less than the par or issued value the number and term of directors shall be
of the shares; In Appraisal right, there must be governed by the provisions on stock
present unrestricted retained earnings in corporations.
the books of the corporation)
**

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There are three (3) ways by which a religious societies. Religious corporations shall be
organization can provide for the administration of governed by this Chapter and by the general
its properties: 1. by forming a non-stock provisions on non-stock corporations insofar as
corporation they may be applicable.
2. by corporation sole
3. by religious aggregate or society a) Corporation Sole
• Corporation sole is a special form of
Corporation sole may constitute of one person corporation usually associated with the
only so the head of a religious sect would clergy and consists of one person only and
incorporate himself for the purpose of his successors, who are incorporated by law
administering the properties of a religious sect. to give some legal capacities and
To incorporate what you will file with the SEC is advantages.
an affidavit. The affidavit will state that the affiant • Nationality. A corporation sole does not
is the head of a religious denomination or sect have any nationality but for purposes of
and would want to become a corporation sole. applying our nationalization laws, nationality
and the rules of his religion allow him to is determined not by the nationality of its
incorporate as a corporation sole and that he is head but by the nationality of the members
charged with the administration of its properties constituting the sect in the Philippines even
and in fact he will be required to submit an if it is headed by the Pope. (Roman Catholic
inventory and the manner in which the successor Apostolic Church v. LRC, 1957)
will be chosen and the place where he will hold • Effect of Separation of Members. Members
his office. of the sect who left and who formed a
The Roman Catholic Archbishop of Manila is a separate religious group are not entitled to
corporation sole so if Cardinal Sin dies the new any right to vote over the properties of their
archbishop will simply submit his appointment former sect. (Canete v. CA, 1989)
and he need not incorporate again because the
• Dissolution. By filing a verified declaration of
corporation is different from the occupant of the
dissolution. (JRS at 323)
position. The Iglesia ni Kristo is incorporated as a
corporation sole.
Who may form and for what purpose?
The court has held in Roman Catholic Apostolic
Sec. 110. Corporation sole. – For the purpose of
Adm. of Davao, Inc. v. Land Registration
administering and managing, as trustee, the
Commission that although the Bishop was a
affairs, property and temporalities of any
foreigner, he could register a parcel of land in his
religious denomination, sect or church, a
name because he is a mere administrator the
corporation sole may be formed by the chief
property really belongs to the faithful and since
archbishop, bishop, priest, minister, rabbi or
they are Filipinos they could register the land in
other presiding elder of such religious
the administrator’s name.
denomination, sect or church. (154a)
Under the law if a corporation sole wants to
dispose of or mortgage real property, he has to
How formed?
get authorization from the Regional Trial Court
Sec. 111. Articles of incorporation. – In order to
unless the rules of the religious sect allow him to
become a corporation sole, the chief archbishop,
dispose of or mortgage real property and that is
bishop, priest, minister, rabbi or presiding elder
usually the case. The last is the religious
of any religious denomination, sect or church
aggregate or religious society. It can incorporate
must file with the Securities and Exchange
for the purpose of managing its properties and
Commission articles of incorporation setting
the articles would indicate that the members
forth the following:
constitute a religious order or society and that at
least 2/3 of the members have agreed to
incorporate, that the rules allow them to 1. That he is the chief archbishop, bishop,
incorporate they desire to incorporate to priest, minister, rabbi or presiding elder of
manage their properties in the place where his religious denomination, sect or church
located. The recollects are incorporated to and that he desires to become a corporation
manage their properties, they are the single sole.
biggest bloc of stockholder of San Miguel
Corporation. 2. That the rules, regulations and discipline of
his religious denomination, sect or church
RELIGIOUS CORPORATIONS are not inconsistent with his becoming a
corporation sole and do not forbid it.
Sec. 109. Classes of religious corporations.
– Religious corporations may be incorporated by
one or more persons. Such corporations may be 3. That as such chief archbishop, bishop, priest,
classified into corporations sole and religious minister, rabbi or presiding elder, he is

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charged with the administration of the charitable, benevolent or educational purposes,


temporalities and the management of the and may receive bequests or gifts for such
affairs, estate and properties of his religious purposes. Such corporation may sell or mortgage
denomination, sect or church within his real property held by it by obtaining an order for
territorial jurisdiction, describing such that purpose from the Court of First Instance of
territorial jurisdiction. the province where the property is situated upon
proof made to the satisfaction of the court that
4. The manner in which any vacancy occurring notice of the application for leave to sell or
in the office of chief archbishop, bishop, mortgage has been given by publication or
priest, minister, rabbi of presiding elder is otherwise in such manner and for such time as
required to be filled, according to the rules, said court may have directed, and that it is to the
regulations or discipline of the religious interest of the corporation that leave to sell or
denomination, sect or church to which he mortgage should be granted. The application for
belongs. leave to sell or mortgage must be made by
petition, duly verified, by the chief archbishop,
5. The place where the principal office of the bishop, priest, minister, rabbi or presiding elder
corporation sole is to be established and acting as corporation sole, and may be opposed
located, which place must be within the by any member of the religious denomination,
Philippines. sect or church represented by the corporation
sole: Provided, That in cases where the rules,
regulations and discipline of the religious
The articles of incorporation may include any
denomination, sect or church, religious society or
other provision not contrary to law for the
order concerned represented by such
regulation of the affairs of the corporation.
corporation sole regulate the method of
acquiring, holding, selling and mortgaging real
Sec. 112. Submission of the articles of
estate and personal property, such rules,
incorporation. – The articles of incorporation
regulations and discipline shall control, and the
must be verified, before filing, by affidavit or
intervention of the courts shall not be necessary.
affirmation of the chief archbishop, bishop,
priest, minister, rabbi or presiding elder, as the
Filling of vacancies
case may be, and accompanied by a copy of the
commission, certificate of election or letter of Sec. 114. Filling of vacancies. – The successors in
appointment of such chief archbishop, bishop, office of any chief archbishop, bishop, priest,
priest, minister, rabbi or presiding elder, duly minister, rabbi or presiding elder in a corporation
certified to be correct by any notary public. sole shall become the corporation sole on their
accession to office and shall be permitted to
transact business as such on the filing with the
From and after the filing with the Securities and
Securities and Exchange Commission of a copy of
Exchange Commission of the said articles of
their commission, certificate of election, or
incorporation, verified by affidavit or affirmation,
letters of appointment, duly certified by any
and accompanied by the documents mentioned
notary public.
in the preceding paragraph, such chief
archbishop, bishop, priest, minister, rabbi or
presiding elder shall become a corporation sole During any vacancy in the office of chief
and all temporalities, estate and properties of the archbishop, bishop, priest, minister, rabbi or
religious denomination, sect or church presiding elder of any religious denomination,
theretofore administered or managed by him as sect or church incorporated as a corporation sole,
such chief archbishop, bishop, priest, minister, the person or persons authorized and
rabbi or presiding elder shall be held in trust by empowered by the rules, regulations or discipline
him as a corporation sole, for the use, purpose, of the religious denomination, sect or church
behalf and sole benefit of his religious represented by the corporation sole to
denomination, sect or church, including administer the temporalities and manage the
hospitals, schools, colleges, orphan asylums, affairs, estate and properties of the corporation
parsonages and cemeteries thereof. sole during the vacancy shall exercise all the
powers and authority of the corporation sole
during such vacancy.
Need for by-laws
No need for by-laws since the business is
Dissolution
conducted by only one man.
Sec. 115. Dissolution. – A corporation sole may
be dissolved and its affairs settled voluntarily by
Power to acquire and alienate property Sec. 113.
submitting to the Securities and Exchange
Acquisition and alienation of property. – Any
Commission a verified declaration of dissolution.
corporation sole may purchase and hold real
estate and personal property for its church,
The declaration of dissolution shall set forth:

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4. That the religious society or religious order,


1. The name of the corporation. or diocese, synod, or district organization
desires to incorporate for the administration
2. The reason for dissolution and winding up. of its affairs, properties and estate.

3. The authorization for the dissolution of the 5. The place where the principal office of the
corporation by the particular religious corporation is to be established and located,
denomination, sect or church. which place must be within the Philippines.

4. The names and addresses of the persons 6. The names, nationalities, and residences of
who are to supervise the winding up of the the trustees elected by the religious society
affairs of the corporation. or religious order, or the diocese, synod, or
district organization to serve for the first year
Upon approval of such declaration of dissolution or such other period as may be prescribed by
by the Securities and Exchange Commission, the the laws of the religious society or religious
corporation shall cease to carry on its operations order, or of the diocese, synod, or district
except for the purpose of winding up its affairs. organization, the board of trustees to be not
less than five (5) nor more than fifteen (15).
Religious societies or
corporations aggregate Case
Sec. 116. Religious societies. – Any religious Long v. Basa (2001)
society or religious order, or any diocese, synod, • Since in matters purely ecclesiastical the
or district organization of any religious decisions of the proper church tribunals are
denomination, sect or church, unless forbidden conclusive upon the civil tribunals, then a church
by the constitution, rules, regulations, or member who is expelled from the membership by
the church authorities, or a priest or minister who
discipline of the religious denomination, sect or
is by them deprived of his sacred office, is without
church of which it is a part, or by competent
remedy in the civil courts. Long v. Basa, 366 SCRA
authority, may, upon written consent and/or by
113 (2001).
an affirmative vote at a meeting called for the
Additional Material: SEC Opinion No. 04-45,
purpose of at least two-thirds (2/3) of its
Nov.28, 2004 to Ferrer and Ferrer Law Office re
membership, incorporate for the administration term of existence of religious corporation.
of its temporalities or for the management of its
affairs, properties and estate by filing with the
Securities and Exchange Commission, articles of SEC Opinion No. 04-45, (Nov. 28, 2004)
incorporation verified by the affidavit of the Re: Term of Existence of
presiding elder, secretary, or clerk or other Religious Corporations
member of such religious society or religious Section 116 (as well as Sec. 160 of the former
order, or diocese, synod, or district organization Corporation Law) does not provide for a term of
of the religious denomination, sect or church, existence of religious corporations, whether
setting forth the following: classified as a corporation sole or a corporation
aggregate. As such, the law intends that religious
organizations may exist perpetually (SEC Opinion
1. That the religious society or religious order,
dated Dec. 10, 1981). Moreover, where the
or diocese, synod, or district organization is
Articles of Incorporation does not provide for a
a religious organization of a religious
term of existence, it shall be understood that the
denomination, sect or church.
intention is for the corporation to exist for an
indefinite period (SEC Opinion dated Oct.
2. That at least two-thirds (2/3) of its 23, 1995)
membership have given their written
consent or have voted to incorporate,
DISSOLUTION
at a duly convened meeting of the body.
Dissolution of a corporation is the
extinguishment of the franchise of a corporation
3. That the incorporation of the religious and termination of its corporate existence.
society or religious order, or diocese, synod,
or district organization desiring to
Modes of Dissolution:
incorporate is not forbidden by competent
authority or by the constitution, rules,
1. Voluntary Dissolution
regulations or discipline of the religious 2. Involuntary Dissolution
denomination, sect, or church of which it 3. Shortening of term
forms a part. 4. Expiration of term (JRS at 311)

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5. Failure to organize and commence business DISSOLUTION **


within two years from the date of issuance of There are different ways to dissolve a
certificate of corporation one is voluntarily and the other
incorporation involuntarily, under the law there are three
6. Legislative Dissolution (CLV’s CLR at provisions governing voluntary dissolution. The
936) first one is if no creditors are affected. In all the
methods of voluntary dissolution, you need a
Effects of Dissolution: resolution approved by a majority of directors
1. Transfer of Legal title to corporate property. and a resolution approved by at least 2/3 of the
stockholders In Section 118, where no creditors
2. The corporation ceases as a body corporate
are affected the directors and the stockholders
to continue the business for which it was
pass the resolution dissolving the corporation
established.
and that will be filed in the SEC for approval. In a
3. Continuation of a body corporation (the case where a suit was filed and the corporation
corporation continues as a body corporate said, we have already been dissolved and they
for 3 years for purposes of winding up or submitted a board resolution, the SC held that it
liquidation). is not enough to dissolve a corporation.
4. After the expiration of the 3 year winding up The Second one, is under Section 119 where
period, the corporation ceases to exist for all creditors are affected. Here the board and the
purposes. (JRS at 314). stockholders will approve the dissolution but a
petition will be filed signed by the majority of the
• The termination of the life of a juridical entity directors and verified by the president, secretary
does not by itself cause the extinction or or one of the directors which will indicate the
diminution of the rights and liability of such claims of creditors. That will be set for hearing
entity, since it is allowed to continue as a and not less than thirty (30) days nor more than
juridical entity for 3 years for the purpose of sixty (60) days after the entry of the issuance of
prosecuting and defending suits by or the order and a copy of the order will be
against it and enabling it to settle and close published once a week for three consecutive
its affairs, to dispose of and convey its weeks in a newspaper of general circulation and
property, and to distribute its assets. that will also be posted for three weeks in three
Republic v. Tancinco, 394 SCRA 386 (2002). public
• A board resolution to dissolve the
corporation does not operate to so dissolve
the juridical entity. For dissolution to be
effective “[t]he requirements mandated by
the Corporation Code should have been
strictly complied with.” Vesagas v. Court of
Appeals, 371 SCRA 509, 516 (2002).
• A corporation cannot extend its life by
amendment of its articles of
incorporation effected during the threeyear
statutory period for liquidation when its
original term of existence had already
expired, as the same would constitute new
business. Alhambra Cigar & Cigarette
Manufacturing Company, Inc. v. SEC, 24
SCRA 269
(1968).
• When the period of corporate life expires,
the corporation ceases to be a body
corporate for the purpose of continuing the
business for which it was organized. PNB v.
Court of First Instance of Rizal, Pasig, Br. XXI,
209 SCRA 294 (1992).

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places like the bulletin board of a municipal hall,


post office, the plaza and then the SEC will set corporation for every infraction, the infraction
that for hearing and determine w/n the must be serious, because dissolution is imposing
corporation should be dissolved. The third one the death penalty upon the corporation.
you will just shorten the corporate life and this The Court said the employees of a railroad are
is the simplest and fastest way of dissolving the required to wear uniform indicating their
corporation voluntarily like when Ford positions in their nameplate, now tell me if one
Philippines decided to close its subsidiary they employee did not have such a nameplate you are
simply amended the articles of corporation that going to dissolve a corporation because that is a
the corporation will exist until December 31, legal requirement?
1978. It has to be a serious violation! But in one case,
The SEC will require getting a tax clearance from the SC dissolved a corporation which was
the BIR and the stockholders will be required to engaging in banking without authorization from
the monetary board, it was accepting deposits
sign an undertaking that they will answer for the
from the public, the court considered that as a
claim of the creditors to the extent of the
serious violation. When a minority stockholder
liquidating dividends they will receive.
files a case and asks to dissolve the corporation,
Then you can have an involuntary dissolution.
the court said that that is a harsh remedy unless
This could be done by filing a quo warranto case
the situation is really beyond redemption you
under rule 66 of the ROC on the ground should not impose that remedy.
mentioned there or a corporation can be The corporation has three years after it should
dissolved for certain violation of the corporation have been dissolved for the purpose of winding
code as mentioned in the Corporation Code or up its affairs. The SEC has said the three year
PD 902-A and also a minority stockholder may period should be counted from the time the
file a petition to dissolve the corporation where dissolution was approved by the SEC even if the
the majority is mismanaging the assets of the directors and stockholders pass a resolution
corporation, dissipating its assets, and dissolving the corporation that is not effective
fraudulently disposing of its properties and a until it has been approved by the SEC.
receiver may be appointed in an action for For three years, the corporation will continue to
involuntary dissolution. The SC held in the exist it will no longer be a going concern but only
leading case of El Hogar Filipino, 50 Phil. for the purpose of winding up that is why the SC
399(1927) the first corporation organized under has said that the corporation cannot for example
the renew its contract of lease because it is no longer
Corporation Act, the government filed a case to a going concern.
dissolve that corporation and invoked 17 During the three year period, it should devote its
grounds, the SC denied the petition. time prosecuting and defending law suits,
Building and loans association like banks are winding up its affairs disposing its properties so
required to dispose of within 5 years of any they can be used to pay off its creditors and to
properties they foreclosed they disposed of the distribute balance to the stockholders.
properties after 6 years but they exerted their There are two ways of providing for the winding
best efforts, they hired real estate brokers, they up of its affairs under the law. This is voluntary
advertised in newspapers but they just could not either the directors themselves may take care of
find buyers, they acquired this land and building, winding up the affairs of the corporation or they
the SC held that it is not illegal, that they leased may appoint a trustee like when Ford Philippines
the space that they did not need for their office, decided to close its subsidiary here one of the last
that is not illegal they are maximizing their acts of the BOD was to pass a resolution
property, that they provide a provision in the by- appointing Ricardo Romulo as trustee vesting
laws that stockholders can be compelled to upon him legal title to all the assets of Ford
surrender their shares, to be bought out well the Philippines to be used to pay off its creditors and
court said that that is void but that is not to dispose of its properties of Ford Philippines. to
sufficient ground to dissolve the corporation. In distribute the balance as liquidating dividends.
other words the court is saying that you do not
dissolve a

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Supposed to be, this was the rule before if any or by personal delivery at least thirty (30) days
case is not finished within the three year period, prior to said meeting. A copy of the resolution
the case will be abated whether the corporation authorizing the dissolution shall be certified by a
is plaintiff or whether it is majority of the board of directors or trustees and
defendant but recent jurisprudence countersigned by the secretary of the
has rendered that obsolete. That rule is corporation. The Securities and Exchange
applicable if it is the directors winding up Commission shall thereupon issue the certificate
the corporation. if the of dissolution.
corporation is under receivership, it is the
receiver who may wind up the affair of the When a corporation is contemplating
corporation. But if it is the trustee that will not dissolution, it must submit tax return on the
apply, the trust will subsist until the affairs of the income earned by it from the beginning of
corporation are wound up and until any creditor the year up to the date of its dissolution and
can sue the trustee provided that the applicable pay the corresponding tax due. BPI v. Court
prescriptive period has not yet lapsed. So if his of Appeals, 363 SCRA 840 (2001).
cause of action is based on a written contract he
has ten (10) years to sue the trustee. Requirements where creditors are affected Sec.
The Court has said that the remedy there if the 119. Voluntary dissolution where creditors are
three years will end and there are still pending affected. – Where the dissolution of a
cases, is for the board to appoint a trustee but corporation may prejudice the rights of any
more recent jurisprudence has fashioned a creditor, the petition for dissolution shall be filed
practicable solution to that the lawyer with the Securities and Exchange Commission.
handling the cases may be The petition shall be signed by a majority of its
considered as trustee of the corporation and board of directors or trustees or other officers
therefore the cases will not be abated but having the management of its affairs, verified by
should continue. its president or secretary or one of its directors
In one case, the SC held that the directors may or trustees, and shall set forth all claims and
be considered as trustees after three years so demands against it, and that its dissolution was
that they can continue to wind up the affairs of resolved upon by the affirmative vote of the
the corporation and in effect the three year stockholders representing at least two-thirds
period has become ineffectual. (2/3) of the outstanding capital stock or by at
least two-thirds (2/3) of the members at a
What are the various methods meeting of its stockholders or members called for
of dissolving corporations? Sec. 117. Methods that purpose.
of dissolution. – A corporation formed or
organized under the provisions of this Code may If the petition is sufficient in form and substance,
be dissolved voluntarily or involuntarily. the Commission shall, by an order reciting the
purpose of the petition, fix a date on or before
Voluntary which objections thereto may be filed by any
Requirements where no creditors person, which date shall not be less than thirty
are affected. (30) days nor more than sixty (60) days after the
entry of the order. Before such date, a copy of the
Sec. 118. Voluntary dissolution where no order shall be published at least once a week for
creditors are affected. – If dissolution of a three (3) consecutive weeks in a newspaper of
corporation does not prejudice the rights of any general circulation published in the municipality
creditor having a claim against it, the dissolution or city where the principal office of the
may be effected by majority vote of the board of corporation is situated, or if there be no such
directors or trustees, and by a resolution duly newspaper, then in a newspaper of general
adopted by the affirmative vote of the circulation in the Philippines, and a similar copy
stockholders owning at least two-thirds (2/3) of shall be posted for three (3) consecutive weeks in
the outstanding capital stock or of at least two- three (3) public places in such municipality or
thirds (2/3) of the members of a meeting to be city.
held upon call of the directors or trustees after
publication of the notice of time, place and object Upon five (5) days’ notice, given after the date on
of the meeting for three (3) consecutive weeks in which the right to file objections as fixed in the
a newspaper published in the place where the order has expired, the Commission shall proceed
principal office of said corporation is located; and to hear the petition and try any issue made by the
if no newspaper is published in such place, then objections filed; and if no such objection is
in a newspaper of general circulation in the sufficient, and the material allegations of the
Philippines, after sending such notice to each petition are true, it shall render judgment
stockholder or member either by registered mail dissolving the corporation and directing such

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disposition of its assets as justice requires, and


may appoint a receiver to collect such assets and Section 121. Involuntary dissolution. – A
pay the debts of the corporation. corporation may be dissolved by the Securities
and Exchange Commission upon filing of a
Sec. 120. Dissolution by shortening corporate verified complaint and after proper notice and
term. – A voluntary dissolution may be effected hearing on the grounds provided by existing laws,
by amending the articles of incorporation to rules and regulations.
shorten the corporate term pursuant to the
provisions of this Code. A copy of the amended Rules of Court provides that a quo warranto
articles of incorporation shall be submitted to the proceedings may be brought against a
Securities and Exchange Commission in corporation:
accordance with this Code. Upon approval of the 1. When it has offended against a provision of
amended articles of incorporation of the an Act for its creation or renewal.
expiration of the shortened term, as the case 2. When it has forfeited its privileges and
may be, the corporation shall be deemed franchises by non-user.
dissolved without any further proceedings,
3. When it has committed or omitted an act
subject to the provisions of this Code on
which amounts to a surrender of its
liquidation.
corporate rights, privileges, or franchises.
SEC requirements on shortening corporate term 4. When it has misused a right, privilege, or
franchise conferred upon it by law, or when
1. Amended article of incorporation shortening
it has exercised a right, privilege or franchise
its corporate term in accordance with
in contravention of law.
Section 16 of the Code.
2. A director’s certificate signed by at least a Section 122. Corporate liquidation. – Every
majority of the directors/trustees and
corporation whose charter expires by its own
attested by the secretary, certified under limitation or is annulled by forfeiture or
oath, stating that the amended articles of otherwise, or whose corporate existence for
incorporation is a true and correct copy as
other purposes is terminated in any other
amended by the stockholders representing
manner, shall nevertheless be continued as a
at least 2/3 of the outstanding capital stock
body corporate for three (3) years after the time
or at least 2/3 of the members in case of non-
when it would have been so dissolved, for the
stock corporations.
purpose of prosecuting and defending suits by or
3. A certification that no creditor shall be against it and enabling it to settle and close its
prejudiced by the dissolution. affairs, to dispose of and convey its property and
4. A list of creditors, if any. to distribute its assets, but not for the purpose of
5. Consent of the creditors with regard to the continuing the business for which it was
dissolution. established.
6. Affidavit of stockholders/directors/
officers/members regarding any valid claim At any time during said three (3) years, the
against the corporation. corporation is authorized and empowered to
7. Latest balance sheet which must be earlier convey all of its property to trustees for the
than the date of the meeting of the benefit of stockholders, members, creditors, and
stockholders approving the amendment of other persons in interest. From and after any
the articles of incorporation. such conveyance by the corporation of its
property in trust for the benefit of its
8. Notice of dissolution.
stockholders, members, creditors and others in
9. Tax clearance from the BIR.
interest, all interest which the corporation had in
10. Affidavit of the publisher anent the
the property terminates, the legal interest vests
publication of the notice of the dissolution
in the trustees, and the beneficial interest in the
once a week for three (3) consecutive weeks
stockholders, members, creditors or other
in two (2) newspapers of general circulation
persons in interest.
in the Philippines.
Upon the winding up of the corporate affairs, any
The SEC may appoint a receiver to collect such asset distributable to any creditor or stockholder
assets and pay the debts of the corporation.
or member who is unknown or cannot be found
It has been held that where corporate directors shall be escheated to the city or municipality
are guilty of a breach of trust and intracorporate where such assets are located.
remedy is futile, the minority stockholders may
resort to the courts for appropriate relief and,
Except by decrease of capital stock and as
incidentally, as for the appointment of a receiver
otherwise allowed by this Code, no corporation
for the protection of their rights.

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shall distribute any of its assets or property Section 123. Definition and rights of foreign
except upon lawful dissolution and after corporations. – For the purposes of this Code, a
payment of all its debts and liabilities. foreign corporation is one formed, organized or
existing under any laws other than those of the
Methods of Liquidation Philippines and whose laws allow Filipino citizens
1. Liquidation by the directors themselves. and corporations to do business in its own
2. Liquidation by a duly country or state. It shall have the right to transact
appointed receiver. business in the Philippines after it shall have
3. Liquidation by trustees to whom the board of obtained a license to transact business in this
directors had conveyed the corporate assets. country in accordance with this Code and a
certificate of authority from the appropriate
government agency.
Rules of corporate recovery
The SEC approved the Rules of Procedure on
Definition
Corporate recovery effective on January 15,
2000. Foreign Corporation is one formed, organized or
existing under any laws other than those of the
1. It governs the rules on definition of terms
Philippines and whose laws allow Filipino citizens
2. Common provisions and corporations to do business in its own
3. Suspension of payments country or state.
4. Rehabilitation
5. Dissolution and liquidation Section 124. Application to existing foreign
corporations. – Every foreign corporation which
A corporation that has a pending action and on the date of the effectivity of this Code is
which cannot be terminated within the three- authorized to do business in the Philippines
year period after dissolution is authorized to under a license therefore issued to it, shall
convey all its property to trustees to enable it to continue to have such authority under the terms
prosecute and defend suits by or against the and condition of its license, subject to the
corporation beyond the three-year period. provisions of this Code and other special laws.

Distribution of Assets A foreign corporation can have no legal existence


Distribution among the shareholders of the beyond the bounds of the state or sovereignty by
assets in winding up, formal or informal may be which it is created. It exists only in contemplation
made only to the prior claim of creditors and of law and by force of the law, and where that
after all debts have been paid or provided for. law ceases to operate, the corporation can have
This is sometimes expressed in terms of the trust no existence. It must dwell in the place of its
fund doctrine. creation, and cannot migrate to another
sovereignty.
Liquidation Rehabilitation
Foreign corporations may do business in the
- Connotes a winding up - Connotes a Philippines either by directly entering into
or setting with reopening of transactions with resident persons, firms or
creditors and debtors. reorganization corporations or by creating a domestic subsidiary
. corporation which would have its own distinct
It is a winding up of a personality.
corporation so that - Contemplates a
-
assets are distributed Licensed foreign corporations is authorized to do
continuance of
to those entitled to business in the Philippines shall continue to have
corporate life
receive them. such authority under the terms and condition of
and activities in
its license, subject to the provisions of the Code
It is the process of an effort to
and other special laws.
reducing assets to restore and
cash, discharging reinstate the
Section 125. Application for a license. – A foreign
- liabilities and corporation in
corporation applying for a license to transact
dividing surplus or loss. its former
business in the Philippines shall submit to the
position of
Securities and Exchange Commission a copy of its
successful articles of incorporation and by-laws, certified in
operation and accordance with law, and their translation to an
solvency. official language of the Philippines, if necessary.
The application shall be under oath and, unless
already stated in its articles of incorporation,
shall specifically set forth the following:

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English under oath of the translator shall be


1. The date and term of incorporation. attached thereto.

2. The address, including the street number, of The application for a license to transact business
the principal office of the corporation in the in the Philippines shall likewise be accompanied
country or state of incorporation. by a statement under oath of the president or
any other person authorized by the corporation,
showing to the satisfaction of the Securities and
3. The name and address of its resident agent
Exchange Commission and other governmental
authorized to accept summons and process
agency in the proper cases that the applicant is
in all legal proceedings and, pending the
solvent and in sound financial condition, and
establishment of a local office, all notices
setting forth the assets and liabilities of the
affecting the corporation.
corporation as of the date not exceeding one (1)
year immediately prior to the filing of the
4. The place in the Philippines where the application.
corporation intends to operate.
Foreign banking, financial and insurance
5. The specific purpose or purposes which the corporations shall, in addition to the above
corporation intends to pursue in the requirements, comply with the provisions of
transaction of its business in the Philippines: existing laws applicable to them. In the case of all
Provided, That said purpose or purposes are other foreign corporations, no application for
those specifically stated in the certificate of license to transact business in the Philippines
authority issued by the appropriate shall be accepted by the Securities and Exchange
government agency. Commission without previous authority from the
appropriate government agency, whenever
6. The names and addresses of the present required by law.
directors and officers of the corporation.

7. A statement of its authorized capital stock Section 126. Issuance of a license. – If the
and the aggregate number of shares which Securities and Exchange Commission is satisfied
the corporation has authority to issue, that the applicant has complied with all the
itemized by classes, par value of shares, requirements of this Code and other special laws,
shares without par value, and series, if any. rules and regulations, the Commission shall issue
a license to the applicant to transact business in
8. A statement of its outstanding capital stock the Philippines for the purpose or purposes
and the aggregate number of shares which specified in such license. Upon issuance of the
the corporation has issued, itemized by license, such foreign corporation may commence
classes, par value of shares, shares without to transact business in the
par value, and series, if any. Philippines and continue to do so for as long as it
retains its authority to act as a corporation under
9. A statement of the amount actually paid in. the laws of the country or state of its
incorporation, unless such license is sooner
surrendered, revoked, suspended or annulled in
10. Such additional information as may be
accordance with this Code or other special laws.
necessary or appropriate in order to enable
the Securities and Exchange Commission to
Within sixty (60) days after the issuance of the
determine whether such corporation is
license to transact business in the Philippines, the
entitled to a license to transact business in
license, except foreign banking or insurance
the Philippines, and to determine and assess
corporation, shall deposit with the Securities and
the fees payable.
Exchange Commission for the benefit of present
and future creditors of the licensee in the
Attached to the application for license shall be a
Philippines, securities satisfactory to the
duly executed certificate under oath by the
Securities and Exchange Commission, consisting
authorized official or officials of the jurisdiction
of bonds or other evidence of indebtedness of
of its incorporation, attesting to the fact that the
the Government of the Philippines, its political
laws of the country or state of the applicant allow
subdivisions and instrumentalities, or of
Filipino citizens and corporations to do business
government-owned or controlled corporations
therein, and that the applicant is an existing
and entities, shares of stock in “registered
corporation in good standing. If such certificate is
enterprises” as this term is defined in Republic
in a foreign language, a translation thereof in
Act No. 5186, shares of stock in domestic
corporations registered in the stock exchange, or

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shares of stock in domestic insurance companies Republic Act No. 5455. Regulates the entry of
and banks, or any combination of these kinds of foreign investments whenever foreign equity
securities, with an actual market value of at least participation exceeds 30 percent of the capital
one hundred thousand (P100,000.) pesos; stock.
Provided, however, That within six (6) months
after each fiscal year of the licensee, the Under Republic Act no. 5455 “doing business
Securities and Exchange Commission shall includes”:
require the licensee to deposit additional a. Soliciting orders, purchases, service
securities equivalent in actual market value to contracts, opening offices whether called
two (2%) percent of the amount by which the liaison offices or branches.
licensee’s gross income for that fiscal year b. Appointing representatives or distributors
exceeds five million (P5,000,000.00) pesos. The who are domiciled in the Philippines or who
Securities and Exchange Commission shall also in any calendar year stay in the Philippines
require deposit of additional securities if the for a period or periods totalling one hundred
actual market value of the securities on deposit eighty days or more.
has decreased by at least ten (10%) percent of
c. Participating in the management,
their actual market value at the time they were
supervision, or control of any domestic
deposited. The Securities and Exchange
business firm, entity, or corporation in the
Commission may at its discretion release part of
Philippines.
the additional securities deposited with it if the
gross income of the licensee has decreased, or if d. Any other act or acts that imply a continuity
the actual market value of the total securities on of commercial dealings or arrangements,
deposit has increased, by more than ten (10%) and contemplates to that extent the
percent of the actual market value of the performance of acts or works, or the exercise
securities at the time they were deposited. The of some of the function normally incident to,
Securities and Exchange Commission may, from and in progressive prosecution of,
time to time, allow the licensee to substitute commercial gain or of the purpose and
other securities for those already on deposit as object of the business organization.
long as the licensee is solvent. Such licensee shall
be entitled to collect the interest or dividends on The Board of Investments requires license not
the securities deposited. In the event the licensee only of corporations organized abroad but also of
ceases to do business in the Philippines, the domestic corporations, if more than 40% of its
securities deposited as aforesaid shall be voting shares are owned and held by aliens or
returned, upon the licensee’s application more than 30% of its total capitalization is in the
therefor and upon proof to the satisfaction of the hands of aliens.
Securities and Exchange Commission that the
licensee has no liability to Philippine residents, Guidelines for issuance of certificate of authority
including the Government of the Republic of the to do business under BOI (Rep. Act No.5455)
Philippines. 1. That the operation or activity is not
inconsistent with the Investment
Definition Priorities Plan.
Transacting business means the carrying on of 2. That the business or economic activity will
the operations of the corporation, or some contribute to the sound and balanced
portion of them, in the usual and regular course development of the national economy on a
of the prosecution of the corporate enterprise for self-sustaining basis.
profit. 3. That the activity will not conflict with the
Constitution and laws of the
The Corporation Code outlines the procedural Philippines.
requirements for the application and issuance of 4. That the nosiness or economic activity is not
a license before a foreign corporation may one (1) adequately exploited by Philippine
transact business in the Philippines. Except in the Nationals.
case of foreign banking, financial and insurance 5. That the entry of the applicant will not pose
corporations and other subject to special laws, a clear and present danger of promoting
rules and regulations, if the applicant foreign monopolies or combination in restraint of
corporation has complied with all the trade.
requirements of issuance of a license, the SEC
shall issue such license and thereafter the foreign
Presidential Decree No. 151 allows citizens of the
corporation may transact business in the
Philippines or corporations which have acquired
Philippines.
lands of the public domain or which or any other
law, to enter into service contracts for financial,
technical, management or other forms of

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assistance with any foreign person or entity Commission shall be necessary part of and shall
whenever and wherever such contracts are vital complete such service. All expenses incurred by
to achieve sound and more expeditious the Commission for such service shall be paid in
exploration, development, exploitation or advance by the party at whose instance the
utilization of such lands owned, held or service is made. In case of a change of address of
controlled by such citizens or corporations. the resident agent, it shall be his or its duty to
immediately notify in writing the Securities and
Section 127. Who may be a resident agent. – A Exchange Commission of the new address.
resident agent may be either an individual
residing in the Philippines or a domestic The SEC shall require as a condition precedent to
corporation lawfully transacting business in the the issuance of the license to transact business in
Philippines: Provided, That in the case of an the Philippines by any foreign corporation that
individual, he must be of good moral character such corporation file with the SEC, a written
and of sound financial standing. power of attorney designating some person who
must be a resident of the Philippines, on whom
Section 128. Resident agent; service of process. any summons and other legal processes may be
– The Securities and Exchange Commission shall served in all actions or other legal proceedings
require as a condition precedent to the issuance against such corporation.
of the license to transact business in the
Philippines by any foreign corporation that such Section 129. Law applicable. – Any foreign
corporation file with the Securities and Exchange corporation lawfully doing business in the
Commission a written power of attorney Philippines shall be bound by all laws, rules and
designating some person who must be a resident regulations applicable to domestic corporations
of the Philippines, on whom any summons and of the same class, except such only as provide for
other legal processes may be served in all actions the creation, formation, organization or
or other legal proceedings against such dissolution of corporations or those which fix the
corporation, and consenting that service upon relations, liabilities, responsibilities, or duties of
such resident agent shall be admitted and held as stockholders, members, or officers of
valid as if served upon the duly authorized corporations to each other or to the corporation.
officers of the foreign corporation at its home
office. Any such foreign corporation shall likewise Licensed foreign corporations lawfully doing
execute and file with the Securities and Exchange business in the Philippines shall be subject to our
Commission an agreement or stipulation, laws just like domestic corporations of the same
executed by the proper authorities of said class.
corporation, in form and substance as follows:
Philippine laws will not apply when it refers to the
“The (name of foreign corporation) does hereby creation, formation, organization or dissolution
stipulate and agree, in consideration of its being of corporations or such as fux the relations,
granted by the Securities and Exchange liabilities, responsibilities, or duties of
Commission a license to transact business in the stockholders, members, or officers of
Philippines, that if at any time said corporation corporations to each other or to the corporation.
shall cease to transact business in the Philippines,
or shall be without any resident agent in the Section 130. Amendments to articles of
Philippines on whom any summons or other legal incorporation or by-laws of foreign
processes may be served, then in any action or corporations. – Whenever the articles of
proceeding arising out of any business or incorporation or by-laws of a foreign corporation
transaction which occurred in the Philippines, authorized to transact business in the Philippines
service of any summons or other legal process are amended, such foreign corporation shall,
may be made upon the Securities and Exchange within sixty (60) days after the amendment
Commission and that such service shall have the becomes effective, file with the Securities and
same force and effect as if made upon the Exchange Commission, and in the proper cases
dulyauthorized officers of the corporation at its with the appropriate government agency, a duly
home office.” authenticated copy of the articles of
incorporation or by-laws, as amended, indicating
Whenever such service of summons or other clearly in capital letters or by underscoring the
process shall be made upon the Securities and change or changes made, duly certified by the
Exchange Commission, the Commission shall, authorized official or officials of the country or
within ten (10) days thereafter, transmit by mail state of incorporation. The filing thereof shall not
a copy of such summons or other legal process to of itself enlarge or alter the purpose or purposes
the corporation at its home or principal office. for which such corporation is authorized to
The sending of such copy by the transact business in the Philippines.

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pursuant to the requirements of


Section 131. Amended license. – A foreign Philippines law on the matter.
corporation authorized to transact business in Section 133. Doing business without a license. –
the Philippines shall obtain an amended license No foreign corporation transacting business in
in the event it changes its corporate name, or the Philippines without a license, or its
desires to pursue in the successors or assigns, shall be permitted to
Philippines other or additional purposes, by maintain or intervene in any action, suit or
submitting an application therefor to the proceeding in any court or administrative agency
Securities and Exchange Commission, favorably of the Philippines; but such corporation may be
endorsed by the appropriate government agency sued or proceeded against before Philippine
in the proper cases. courts or administrative tribunals on any valid
Section 132. Merger or consolidation involving a cause of action recognized under Philippine laws.
foreign corporation licensed in the Philippines. –
One or more foreign corporations authorized to Unlicensed foreign corporations doing business
transact business in the Philippines may merge or in the Philippine do not have the capacity to sue
consolidate with any domestic corporation or before the local court is well-established.
corporations if such is permitted under Philippine
laws and by the law of its incorporation: A foreign corporation which is not licensed to
Provided, That the requirements on merger or transact business therein can maintain an action
consolidation as provided in this Code are in the courts of the Philippines for the purpose of
followed. protecting its reputation, corporate name and
goodwill.
Whenever a foreign corporation authorized to
transact business in the Philippines shall be a A foreign corporation doing business in the
party to a merger or consolidation in its home Philippines without a license may maintain suit in
country or state as permitted by the law of its the Philippines against a domestic corporation or
incorporation, such foreign corporation shall, person who is party to a contract as the domestic
within sixty (60) days after such merger or corporation or person is deemed estopped from
consolidation becomes effective, file with the challenging the personality of the foreign
Securities and Exchange Commission, and in corporation.
proper cases with the appropriate government
agency, a copy of the articles of merger or Section 134. Revocation of license. – Without
consolidation duly authenticated by the proper prejudice to other grounds provided by special
official or officials of the country or state under laws, the license of a foreign corporation to
the laws of which merger or consolidation was transact business in the Philippines may be
effected: Provided, however, That if the revoked or suspended by the Securities and
absorbed corporation is the foreign corporation Exchange Commission upon any of the following
doing business in the Philippines, the latter shall grounds:
at the same time file a petition for withdrawal of
it license in accordance with this Title. 1. Failure to file its annual report or pay any
fees as required by this Code.
Section 132 covers two legal situations:
1. The merger of a licensed foreign 2. Failure to appoint and maintain a resident
corporation with a domestic corporation. agent in the Philippines as required by this
• Must be accomplished by complying Title.
with the provisions of the Corporation
Code. 3. Failure, after change of its resident agent or
2. The merger of a licensed foreign of his address, to submit to the Securities
corporation with another corporation in its and Exchange Commission a statement of
country of origin which is not doing business such change as required by this Title.
in the Philippines.
• If the licensed foreign corporation is 4. Failure to submit to the Securities and
absorbed by merger or consolidation, it Exchange Commission an authenticated
must withdraw its license to do copy of any amendment to its articles of
business in the Philippines. incorporation or by-laws or of any articles of
• Nevertheless, if the foreign absorbing merger or consolidation within the time
corporation desire to continue the prescribed by this Title.
business of the absorbed corporation in
the Philippines, it has to file an 5. A misrepresentation of any material matter
application for a license to do business in any application, report, affidavit or other

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document submitted by such corporation Sec. 137. Outstanding capital stock defined. –
pursuant to this The term "outstanding capital stock", as used in
Title. this Code, means the total shares of stock issued
under binding subscription agreements to
6. Failure to pay any and all taxes, imposts, subscribers or stockholders, whether or not fully
assessments or penalties, if any, lawfully due or partially paid, except treasury shares.
to the Philippine Government or any of its
agencies or political subdivisions. Sec. 138. Designation of governing boards. – The
provisions of specific provisions of this Code to
7. Transacting business in the Philippines the contrary notwithstanding, non-stock or
outside of the purpose or purposes for which special corporations may, through their articles
such corporation is authorized under its of incorporation or their by-laws, designate their
license. governing boards by any name other than as
board of trustees.
8. Transacting business in the Philippines as
Sec. 139. Incorporation and other fees. – The
agent of or acting for and in behalf of any
Securities and Exchange Commission is hereby
foreign corporation or entity not duly
authorized to collect and receive fees as
licensed to do business in the Philippines.
authorized by law or by rules and regulations
promulgated by the
9. Any other ground as would render it unfit to Commission.
transact business in the
Philippines.
Sec. 140. Stock ownership in certain
corporations. – Pursuant to the duties specified
Sec. 135. Issuance of certificate of revocation. –
by Article XIV of the Constitution, the National
Upon the revocation of any such license to
Economic and Development Authority shall, from
transact business in the Philippines, the
time to time, make a determination of whether
Securities and Exchange Commission shall issue a
the corporate vehicle has been used by any
corresponding certificate of revocation,
corporation or by business or industry to
furnishing a copy thereof to the appropriate
frustrate the provisions thereof or of applicable
government agency in the proper cases. The
laws, and shall submit to the Batasang Pambansa,
Securities and Exchange Commission shall also
whenever deemed necessary, a report of its
mail to the corporation at its registered office in
findings, including recommendations for their
the Philippines a notice of such revocation
prevention or correction. Maximum limits may
accompanied by a copy of the certificate of
be set by the Batasang Pambansa for
revocation.
stockholdings in corporations declared by it to be
vested with a public interest pursuant to the
Sec. 136. Withdrawal of foreign corporations. – provisions of this section, belonging to
Subject to existing laws and regulations, a foreign individuals or groups of individuals related to
corporation licensed to transact business in the each other by consanguinity or affinity or by close
Philippines may be allowed to withdraw from the business interests, or whenever it is necessary to
Philippines by filing a petition for withdrawal of achieve national objectives, prevent illegal
license. No certificate of withdrawal shall be monopolies or combinations in restraint or trade,
issued by the Securities and Exchange or to implement national economic policies
Commission unless all the following declared in laws, rules and regulations designed
requirements are met: to promote the general welfare and foster
economic development.
1. All claims which have accrued in the
Philippines have been paid, compromised or In recommending to the Batasang Pambansa
settled. corporations, business or industries to be
declared vested with a public interest and in
2. All taxes, imposts, assessments, and formulating proposals for limitations on stock
penalties, if any, lawfully due to the ownership, the National Economic and
Philippine Government or any of its agencies Development
or political subdivisions have been paid. Authority shall consider the type and nature of
the industry, the size of the enterprise, the
3. The petition for withdrawal of license has economies of scale, the geographic location, the
been published once a week for three (3) extent of Filipino ownership, the labor intensity
consecutive weeks in a newspaper of general of the activity, the export potential, as well as
circulation in the Philippines. other factors which are germane to the

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realization and promotion of business and dissolution of a corporation provided in this


industry. Code.

Sec. 141. Annual report or corporations. – Every Sec. 145. Amendment or repeal. – No right or
corporation, domestic or foreign, lawfully doing remedy in favor of or against any corporation, its
business in the Philippines shall submit to the stockholders, members, directors, trustees, or
Securities and Exchange Commission an annual officers, nor any liability incurred by any such
report of its operations, together with a financial corporation, stockholders, members, directors,
statement of its assets and liabilities, certified by trustees, or officers, shall be removed or
any independent certified public accountant in impaired either by the subsequent dissolution of
appropriate cases, covering the preceding fiscal said corporation or by any subsequent
year and such other requirements as the amendment or repeal of this Code or of any part
Securities and Exchange Commission may thereof.
require. Such report shall be submitted within
such period as may be prescribed by the Sec. 146. Repealing clause. – Except as expressly
Securities and Exchange Commission. provided by this Code, all laws or parts thereof
inconsistent with any provision of this Code shall
Sec. 142. Confidential nature of examination be deemed repealed.
results. – All interrogatories propounded by the
Securities and Exchange Commission and the Sec. 147. Separability of provisions. – Should any
answers thereto, as well as the results of any provision of this Code or any part thereof be
examination made by the Commission or by any declared invalid or unconstitutional, the other
other official authorized by law to make an provisions, so far as they are separable, shall
examination of the operations, books and remain in force.
records of any corporation, shall be kept strictly
confidential, except insofar as the law may Sec. 148. Applicability to existing corporations. –
require the same to be made public or where All corporations lawfully existing and doing
such interrogatories, answers or results are business in the
necessary to be presented as evidence before Philippines on the date of the effectivity of this
any court. Code and heretofore authorized, licensed or
registered by the Securities and Exchange
Sec. 143. Rule making power of the Securities Commission, shall be deemed to have been
and Exchange Commission. – The Securities and authorized, licensed or registered under the
Exchange Commission shall have the power and provisions of this Code, subject to the terms and
authority to implement the provisions of this conditions of its license, and shall be governed by
Code, and to promulgate rules and regulations the provisions hereof: Provided, That if any such
reasonably necessary to enable it to perform its corporation is affected by the new requirements
duties hereunder, particularly in the prevention of this Code, said corporation shall, unless
of fraud and abuses on the part of the controlling otherwise herein provided, be given a period of
stockholders, members, directors, trustees or not more than two (2) years from the effectivity
officers. of this Code within which to comply with the
same.
Sec. 144. Violations of the Code. – Violations of
any of the provisions of this Code or its Sec. 149. Effectivity. – This Code shall take effect
amendments not otherwise specifically immediately upon its approval. Approved: May 1,
penalized therein shall be punished by a fine of 1980
not less than one thousand (P1,000.00) pesos but
not more than ten thousand (P10,000.00) pesos
or by imprisonment for not less than thirty (30)
days but not more than five (5) years, or both, in
the discretion of the court. If the violation is
committed by a corporation, the same may, after
notice and hearing, be dissolved in appropriate
proceedings before the Securities and Exchange
Commission: Provided, That such dissolution
shall not preclude the institution of appropriate
action against the director, trustee or officer of
the corporation responsible for said violation:
Provided, further, That nothing in this section
shall be construed to repeal the other causes for

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