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PARTNERSHIP failure to comply with the requirements of


Article 1772, first paragraph.
Art. 1767. By the contract of partnership
two or more persons bind themselves to Partnership, a juridical person
contribute money, property, or industry to As an independent juridical person, a
a common fund with the intention of partnership may enter into contracts,
dividing the profits among themselves. acquire and possess property of all kinds in
its name, as well as incur obligations and
Definition bring civil or criminal actions. Thus, a
Partnership is a contract whereby two or partnership may be declared insolvent even
more persons bind themselves to if the partners are not. It may enter into
contribute money, property or industry to a contracts and may sue and be sued in its
common fund with the intention of dividing firm name or by its duly authorized
profits among themselves. representative. It is sufficient that service
of summons be served on any partner.
Elements
1. Intention to form a contract of Partners cannot be held liable for the
partnership obligations of the partnership unless it is
2. Participation in both profits and losses shown that the legal fiction of a different
3. Community of interests juridical personality is being used for a
fraudulent, unfair or illegal purpose.
Basic Features
1. Voluntary agreement Effect of failure to comply with statutory
2. Association for profit requirements
3. Mutual contribution to a common fund Under Art 1772
4. Lawful purpose or object Partnership still acquires personality despite
5. Mutual agency of partners failure to comply with the requirements of
6. Articles must not be kept secret execution of public instrument and
7. Separate juridical personality registration of name in SEC.

Characteristics Under Arts 1773 and 1775


1. Consensual – perfected by mere Partnership with immovable property
consent. contributed, if without requisite inventory,
2. Bilateral – formed by two or more signed and attached to public instrument,
persons creating reciprocal rights and shall not acquire any juridical personality
obligations. because the contract itself is void. This is
3. Preparatory - entered into as a means also true for secret associations or societies.
to an end.
4. Nominate – has a special name or To organize a partnership not an absolute
designation. right
5. Onerous – contributions in the form of It is but a privilege which may be enjoyed
either money, property and/or industry only under such terms as the State may
must be made. deem necessary to impose.
6. Commutative – the undertaking of each
partner is considered as the equivalent Art. 1769. In determining whether a
of 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
Principle of Delectus Personae (choice of each other are not partners as to third
persons) – a person has the right to select persons.
persons with whom he wants to be
associated with in partnership. 2. Co-ownership or co-possession does
not of itself establish a partnership,
Art. 1768. The partnership has a juridical whether such co-ownership or co-
personality separate and distinct from that possessors do or do not share any
of each of the partners even in case of profits made by the use of the property.

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3. The sharing of gross returns does not partnership, they become subject to
of itself establish a partnership, liabilities of partners (doctrine of
whether or not the persons sharing estoppel).Whether or not the parties call
them have a joint or common right or their relationship or believe it to be a
interest in any property from which the partnership is immaterial. Thus, with the
returns are derived. exception of partnership by estoppel, a
partnership cannot exist as to third persons
4. The receipt by a person of a share of if no contract of partnership has been
the profits of a business is prima entered into between the parties
facie evidence that he is a partner in the themselves.
business, but no such inference shall be
drawn if such profits were received in Co-ownership or co-possession
payment: There is co-ownership whenever the
ownership of an undivided thing or right
a. As a debt by installments or belongs to different persons.
otherwise.
Clear intent to derive profits from
b. As wages of an employee or rent to operation of business
a landlord. Co-ownership does not of itself establish
the existence of a partnership, although it is
c. As an annuity to a widow or one of its essential elements. This is true
representative of a deceased even if profits are derived from the joint
partner. ownership. The profits must be derived
from the operation of business by
d. As interest on a loan, though the the members of the association and
amount of payment vary with the not merely from property ownership. The
profits of the business. law does not imply a partnership between
co-owners because of the fact that they
e. As the consideration for the sale of develop or operate a common property,
a goodwill of a business or other since they may rightfully do this by virtue of
property by installments or their respective titles. There must be a clear
otherwise. intent to form a partnership.

In general, to establish the existence of a Existence of fiduciary relationship


partnership, all of its essential features or
characteristics must be shown as being Partners have a well-defined fiduciary
present. In case of doubt, art.1769 shall relationship between them. Co-owners do
apply. This article seeks to exclude from the not. Should there be dispute; the remedy of
category of partnership certain partners is an action for dissolution,
features enumerated herein which, by termination and accounting. For co-owners
themselves, are not indicative of the it would be one, for instance, for non-
existence of a partnership. performance of contract. People can
become co-owners without a contract but
Persons not partners as to each other they cannot become partners without one.
Persons who are partners as between
themselves are partners as to third persons. Persons living together without benefit
Generally, the converse is true: if they are of marriage
not partners between themselves, they Property acquired governed by rules on co-
cannot be partners as to third persons. ownership.
Partnership is a matter of intention, each
partner giving his consent to become Sharing of gross returns not even
a partner. However, whether a partnership presumptive evidence of partnership
exists between the parties is a factual The mere sharing of gross returns alone
matter. Where parties declare they are not does not even constitute prima facie
partners, this, as a rule, settles the question evidence of partnership, since in a
between them. But where a person partnership, the partners share profits after
misleads third persons into believing that
satisfying all of the partnership’s liabilities.
they are partners in a non-existent

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Reason for the rule asserting its termination. One who alleges
Partner interested in both failures and partnership cannot prove it merely by
successes; it is the chance of loss or gain evidence of an agreement using the term
that characterizes a business. Where “partner”. Non-use of the term, however,
the contract requires a given portion of is entitled to weight. The question of
gross returns to be paid over, the portion is whether a partnership exists is not always
paid over as commission, wages, rent, etc. dependent upon the personal arrangement
or understanding of the parties. Parties
Where there is evidence of mutual intending to do a thing which in law
management constitutes partnership are partners.
Where there is further evidence of mutual
management and control, partnership may Legal intention is the crux of partnership.
result. Parties may call themselves partners but
their contract may be adjudged something
Receipt of share in the profits strong quite different. Conversely, parties may
presumptive evidence of partnership expressly state that theirs in not a
An agreement to share both profits partnership yet the law may determine
and losses tends strongly to establish the otherwise on the basis of legal intent.
existence of a partnership. It is not However, courts will be influenced to some
conclusive, however, just prima facie and extent by what the parties call their
may be rebutted by other circumstances. contract.

When no such inference will be drawn Tests and incidents of partnership


Under par. 4 of art. 1769, sharing of profits In determining whether a partnership
is not prima facie evidence of partnership in exists, it is important to distinguish
the cases enumerated under subsections (a) between tests or indicia and incidents of
– (e). In these cases, the profits are not partnership. Only those terms of a contract
shared as partner but in some other upon which the parties have reached an
respects or purpose. The basic test actual understanding, either expressly or
of partnership is whether the business is impliedly, may afford a test by which to
carried on in behalf of the person sought to ascertain the legal nature of the contract.
be held liable. Some of the typical incidents of a
partnership are:
Sharing of profits as owner 1. The partners share in profits and losses.
It is not merely the sharing of profits, but 2. They have equal rights in the mgt and
the sharing of them as co-owner of the conduct of the partnership business.
business or undertaking that makes one 3. Every partner is an agent of the
partner. Test: Does the recipient have an partnership, and entitled to bind the
equal voice as proprietor in the conduct and others by his acts. He may also be liable
control of the business? Does he own a for the entire partnership obligations.
share of the profits as proprietor of the 4. All partners are personally liable for
business producing them? One must have the debts of the partnership with their
an interest with another in the profits of a separate property except that limited
business as profits. partners are not bound beyond the
amount of their investment.
Burden of proof and presumption 5. A fiduciary relation exists between
The burden of proving the existence of a the partners.
partnership rests on the party having the 6. On dissolution, the partnership is not
affirmative of that issue. The existence of terminated, but continues until the
a partnership must be proved and will not winding up of partnership is completed.
be presumed. The law presumes that those Such incidents may be modified by
acting as partners have entered into a stipulation of the partners.
contract of partnership. Where the law
presumes the existence of partnership, the Similarities between a partnership and a
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 distinct from that of the individuals
and the burden of proof is on the person composing it;

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2. Both can only act through its agents; Right to return of contribution where
3. Both are organizations composed of an partnership is unlawful
aggregate of individuals; Partners must be reimbursed the amount of
4. Both distribute profits to those who their respective contributions. The partner
contribute capital to the business; who limits himself to demanding only the
5. Both can only be organized where there amount contributed by him need not resort
is a law authorizing is organization; to the partnership contract on which to
6. Partnerships are taxable base his claim or action. Since the purpose
as corporations. for which the contribution was made has
not come into existence, the manager or
Art. 1770. A partnership must have a lawful administrator must return it, and he who
object or purpose, and must be established has paid his share is entitled to recover it.
for the common benefit or interest of the
Right to receive profits where partnership
partners. When an unlawful partnership is
is unlawful
dissolved by a judicial decree, the profits Law does not permit action for obtaining
shall be confiscated in favor of the earnings from an unlawful partnership
State, without prejudice to the provisions because for that purpose, the partner will
of the Penal Code governing the have to base his action upon the
confiscation of the instruments and effects partnership contract, which is null and
of a crime. Object or purpose of partnership without legal existence by reason of its
unlawful object; and it is self-evident that
The provision of the 1st paragraph what does not exist cannot be a cause
reiterates 2 essential elements of a of action. Profits earned do not constitute
contract of partnership: or represent the partner’s contribution. He
1. Legality of the object; and must base his claim on the contract which is
2. Community of benefit or interest of the void. It would be immoral and unjust for the
partners. The parties possess absolute law to permit a profit from an industry
freedom to choose the transaction or prohibited by it. T he courts will refuse to
transactions they must engage in. The recognize its existence, and will not lend
only limitation is that the object must their aid to assist either of the parties
be lawful and for the common benefit thereto in an action against each other.
of the members. The illegality of the Therefore, there cannot be no accounting
object will not be presumed; it must demanded of a partner for the profits which
appear to be of the essence of the may be in his hands, nor can recovery be
relationship. had.

Effects of an unlawful partnership Effect of partial illegality of partnership


1. The contract is void and the partnership business
never existed in the eyes of the law; Where a part of the business is legal and
2. The profits shall be confiscated in favor part illegal, a n account of that which is
of the government; legal may be had. Where, w/o the
3. The instruments or tools and proceeds knowledge or participation of the partners,
of the crime shall also be forfeited in the firm’s profits in a lawful business has
favor of the government; been increased by wrongful acts, the
4. The contributions of the partners shall innocent partners are not precluded as
not be confiscated unless they fall against the guilty partners from recovering
under #3. their share of the profits.

A partnership is dissolved by operation of Effect of subsequent illegality of


law upon the happening of an event which partnership business
makes it unlawful. A judicial decree is Contract will not be nullified. Where the
not necessary to dissolve an unlawful business for which the partnership is
partnership. However, advisable that formed is legal when the partnership is
judicial decree be secured. 3rd persons who entered into, but afterward becomes illegal,
deal w/ partnership w/o knowledge of an accounting may be had as to the
illegal purpose are protected. business transacted prior to such time.

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Community of interest between the is in writing or at least evidenced by some


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

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accurately their membership and capital inventory of immovable property


before dealing with them. contributed because w/o its description and
designation, the instrument cannot be
When partnership considered registered subject to inscription in the Registry
The objective of the law is to make the of Property, and the contribution cannot
recorded instrument open to all and to give prejudice 3rd persons.
notice thereof to interested parties. This
objective is achieved from the date the Art. 1774. Any immovable property or an
partnership papers are presented to and interest therein may be acquired in the
left for record in the Commission. This is the partnership name. Title so acquired can be
effective date of registration. If the
conveyed only in the partnership name.
certificate of recording is issued on a
subsequent date, its effectively retroacts to Acquisition or conveyance of property by
date of presentation. partnership

Art. 1773. A contract of partnership is void, Since partnership has juridical personality of
whenever immovable property is its own, it may acquire immovable property
contributed thereto, if an inventory of said in its own name. Title so acquired can
property is not made, signed by the parties, be conveyed only in the partnership name.
and attached to the public instrument.
Partnership with contribution of immovable Art. 1775. Associations and societies, whose
property articles are kept secret among the
members, and wherein any one of the
Where immovable property contributed, members may contract in his own name
failure to comply w/ the following with third persons, shall have no juridical
requisites will render the partnership personality, and shall be governed by the
contract void: provisions relating to co-ownership. Secret
1. The contract must be in a public partnerships without juridical personality
instrument;
2. An inventory of the property Partnership relation is created only by the
contributed must be made, signed by voluntary agreement of the partners. It is
the parties, and attached to the public essential that the partners are fully
instrument. Art. 1773 is intended informed not only of the agreement but of
primarily to protect 3rd persons. W/ all matters affecting the partnership. Secret
regard to 3rdpersons, a de facto partnerships are not by nature
partnership or partnership by estoppel partnerships. Secret partnerships shall be
may exist. There is nothing to prevent governed by the provisions relating to co-
the court from considering the ownership.
partnership agreement an ordinary
contract from which the parties’ rights Importance of giving publicity to articles
and obligations to each other may be of partnership
inferred and enforced. It is essential that the arts of partnership be
given publicity for the protection not only of
When inventory is not required the members themselves but also 3rd
An inventory is required only whenever persons from fraud and deceit. A member
immovable property is contributed. If not who transacts business for the secret
contributed or if personal property, no partnership in his own name becomes
inventory required. personally bound to 3rd persons unaware of
the existence of such association.
Importance of making inventory of real Partnership liability may still
property in a p a r t n e r s h i p result, however, in cases of estoppel.
An inventory is very important in
a partnership to how much is due from each Art. 1776. As to its object, a partnership is
partner to complete his share in the either universal or particular. As regards the
common fund and how much is due to each liability of the partners, a partnership may
of them in case of liquidation. The be general or limited. Classifications of
execution of a public instrument of partnership
partnership would be useless if there is no

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As to extent of its subject matter not avowed or made known to the public by
1. Universal partnership. (Art. 1777) any of the partners.
a. Universal partnership of all present Open or notorious partnership: one whose
property. (Art. 1778) existence is avowed or made known to the
b. Universal partnership of profits. public by the members of the firm.
(Art. 1780)
2. Particular partnership. (Art. 1783) As to purpose
Commercial or trading partnership: one
As to liability of the partners formed or the transaction of business.
General partnership: one consisting of
general partners who are liable pro rata and Professional or non-trading partnership:
subsidiary and sometimes solidarily w/ their one formed for the exercise of a profession.
separate property for partnership debts.
Kinds of partners
Limited partnership: one formed by two or Under the Civil Code
more persons having as members one or 1. Capitalist partner: one who contributes
more general partners and one or more money or property to the common
limited partners, the latter not being fund.
personally liable for the obligations of the 2. Industrial partner: one who contributes
partnership. only his industry or personal service.
3. General partner: one whose liability to
As to duration 3rd persons extends to his separate
Partnership at will: one in w/c no time is property.
specified and is not formed for a particular 4. Limited partner: one whose liability to
undertaking or venture and w/c may be 3rd persons is limited to his capital
terminated at any time by mutual contribution.
agreement of the partners, or by the will of 5. Managing partner: one who manages
any one partner alone; or one for a fixed the entity.
term or particular undertaking w/c is 6. Liquidating partner: one who takes
continued after the end of the term or charge of the winding up of partnership
undertaking w/o express agreement. affairs upon dissolution.
Partnership with a fixed term: one w/c the 7. Partner by estoppel: one who is not
term for w/c the partnership is to exist is really a partner but is liable as a partner
fixed or agreed upon or one formed for for the protection of innocent 3rd
a particular undertaking. persons. He is one represented as being
a partner but who is not so between
As to the legality of its existence the partners themselves.
De jure partnership: one w/c has complied 8. Continuing partner: one who continues
w/ all the legal requirements for the business of a partnership after it
its establishment. has been dissolved by reason of the
De facto partnership: one w/c has failed to admission of a new partner, or the
comply w/ all the legal requirements for its retirement, death or expulsion of one
establishment. or more partners.
9. Surviving partner: one who remains
As to representation to others after a partnership has been dissolved
Ordinary or real partnership: one w/c by the death of any partner.
actually exists among the partners and also 10. Subpartner: one who, not being
as to 3rd persons. a member of the partnership, contracts
Ostensible partnership or partnership or w/ a partner w/reference to the latter’s
partnership by estoppel: one w/c in reality share in the partnership.
is not a partnership, but is considered a
partnership only in relation to those who, Other classifications
by their conduct or admission, are 1. Ostensible partner: one who takes
precluded to deny or disprove its existence. active part and known to the public as a
partner.
As to publicity 2. Secret partner: one who takes active
Secret partnership: one wherein the part in the business but is not known to
existence of certain persons as partners is be a partner by outside parties nor held

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out as a partner by the other partners. Property w/c belonged to each of them at
He is an actual partner. the time of the constitution of the
3. Silent partner: one who does not take partnership;
any active part in the business although Profits w/c they may acquire from the
he may be known to be a partner. property contributed.
4. Dormant partner: one who does not
take active part in the business and is Contribution of future property
not known or held out as a partner. He General rule: future properties cannot be
would be both a silent and a secret contributed. The very essence of the
partner. contract of partnership that the properties
5. Original partner: one who is a member contributed be included in the partnership
of the partnership from the time of its requires the contribution of things
organization. determinate. The position of a partner is
6. Incoming partner: a person lately, or like that of a donor, and donations
about to be, taken into an existing cannot comprehend future property. Thus,
partnership as a member. property subsequently acquired by
7. Retiring partner: one withdrawn from 1.inheritance; 2. Legacy; or 3. Donation
the partnership; a withdrawing partner. cannot be included by stipulation except
Art. 1777. A universal partnership may the fruits thereof. Hence, any stipulation
refer to all the present property or to including property so acquired is void.
all the profits. Profits from other sources (not from
properties contributed) will become
Art. 1778. A partnership of all present common property only is there’s a
property is that in which the partners stipulation.
contribute all the property which actually
belongs to them to a common fund, with Art. 1780. A universal partnership of profits
the intention of dividing the same among comprises all that the partners may acquire
themselves, as well as all the profits they by their industry or work during
may acquire therewith. the existence of the partnership. Movable
or immovable property which each of the
Art. 1779. In a universal partnership of all partners may possess at the time of the
present property, the property which celebration of the contract shall continue to
belongs to each of the partners at the time pertain exclusively to each, only the
of the constitution of the partnership usufruct passing to the partnership.
becomes the common property of all the
partners, as well as all the profits which Universal partnership of profits explained
they may acquire there with. A stipulation A universal partnership of profits is one w/c
for the common enjoyment of any other comprises all that the partners may acquire
profits may also be made; but the property by their industry or work during the
which the partners may acquire existence of the partnership and the
subsequently by inheritance, legacy or usufruct of movable or immovable property
donation cannot be included in such w/c each of the partners may possess at the
stipulation, except the fruits thereof. time of the celebration of the contract.

Universal partnership of all present Ownership of present and future property


property explained The partners retain their ownership over
A universal partnership of profits is one w/c their present and future property. What
comprises all that the partners may passes to the partnership are the profits or
acquire by their industry or work during the income and the use or usufruct of the same.
existence of the partnership and the Consequently, upon dissolution, such
usufruct of movable or immovable property property is returned to the partners who
w/c each of the partners may possess at the own it.
time of the celebration of the contract. In
this kind of partnership, the following Profits acquired through chance
become the common property of all the Since the law only speaks of profits w/c
partners: the partners may acquire by their industry
or work, profits acquired purely by chance
are not included.

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Art. 1783. A particular partnership has for


Fruits of property subsequently acquired its object determinate things, their use or
Fruits of property subsequently acquired by fruits, or a specific undertaking, or the
the partners do not belong to exercise of a profession or vocation.
the partnership. Such profits, however, may
be included by express stipulation. Particular partnership explained
A particular partnership is one w/c is
Art. 1781. Articles of universal partnership, neither a universal partnership of present
entered into without specification of its property nor a universal partnership of
nature, only constitute a universal profits. The fundamental difference
partnership of profits. between a universal partnership and a
particular partnership lies in the scope of
Presumption in favor of universal their subject matter or object. In the
partnership of profits former, the object is vague and
Reason for presumption: universal indefinite, contemplating a general business
partnership of profits imposes less w/ some degree of continuity, while in the
obligations on the partners, since they latter, it is limited and well-defined, being
preserve the ownership of their separate confined to an undertaking of a
property. single, temporary, or ad hoc nature.

Art. 1782. Persons who are prohibited from Business of partnership need not be
giving each other any donation or continuing in nature
advantage cannot enter into a universal The carrying on of a business of a
partnership. Limitations upon the right to continuing nature is not essential to
form a partnership constitute a partnership. An agreement to
undertake a particular piece of work or a
Persons who are prohibited by law to give single transaction or a limited number of
donations cannot enter into a universal transactions and immediately divide the
partnership for the reason that each of the resulting profits would seemt o fall w/in the
partners virtually makes a donation. To meaning of the term “partnership” as used
allow it would be permitting them to do in the law.
indirectly what the law expressly prohibits.
A partnership formed in violation of this Rule under American law
article is null and void. Consequently, no The above is not true under the Uniform
legal personality is acquired. A husband and Partnership Act w/c does not include joint
wife, however, may enter into a particular ventures w/c exists for a single transaction
partnership or be members thereof. or a limited number of transactions.
Relevant provisions:
Joint venture
Art. 87: Donations between spouses during While a joint venture is not a formal
marriage void, except moderate gifts on partnership in the legal or technical sense,
occasion of family rejoicing. Also applies both are governed, subject to certain
to those living together as husband and qualifications, practically by the same rules
wife w/o valid marriage. or principles of partnership. This is logical
Art. 739: The following donations are void: since in a joint venture, like in
Those made between persons who are a partnership, there is a community of
guilty of adultery or concubinage at the interest in the business and a mutual right
time of the donation (no need for of control and an agreement to share jointly
conviction; preponderance of evidence only in profits and losses.
required);
Those made between persons found guilty Corporation as a partner
of the same criminal offense, While under the Philippine Civil Code, a
inconsideration thereof; joint venture is a form of partnership w/ a
c.)Those made to a public officer or his wife, legal personality separate and distinct from
descendants and ascendants, by reason of the parties composing it, and should thus
his office. be governed by the law of partnership,
the Supreme Court has recognized the
distinction between these two business

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forms, and has held that although a have contributed it up to actual delivery
corporation cannot enter into a partnership without necessity of any demand;
contract, it may, however, engage in a joint 4. Shall preserve said properties with the
venture if the nature of the venture is diligence of a good father of a family
authorized by its charter. pending their delivery to the
partnership;
Art. 1784. A partnership begins from the 5. And shall indemnify the partnership for
moment of the execution of the contract, any damage caused it by the retention
unless it is otherwise stipulated. (1679) of said properties or by the delay in
their contribution.
Art. 1785. When a contract for a fixed term
or particular undertaking is continued after Art. 1787. When the capital or part thereof
the termination of such term or particular which a partner is bound to contribute
undertaking without any express consists of goods, their appraisal must be
agreement, the rights and duties of the made in the manner prescribed in the
partners remains the same as they were at contract of partnership, and in the absence
such termination, so far as is consistent of stipulation, it shall be made by experts
with a partnership at will. chosen by the partners, and according to
current prices, the subsequent changes
A continuation of the business by the thereof being for the account of the
partners or such of them as habitually acted partnership.
therein during the term, without any
settlement or liquidation of the partnership Art. 1788. A partner who has undertaken to
affairs, is prima facie evidence of a contribute a sum of money and fails to do
continuation of the partnership. so becomes a debtor for the interest and
damages from the time he should have
Partnership at will is one in which no term complied with his obligation.
of 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
Art. 1786. Every partner is a debtor of the coffers, and his liability shall begin from the
partnership for whatever he may have time he converted the amount to is own
promised to contribute thereto. use.

He shall also be bound for warranty in case Liability of partner for estafa
of eviction with regard to specific and Failure to return the money taken, there is
determinate things which he may have the element of fraudulent appropriation of
contributed to the partnership, in the same the money delivered to a partner with
cases and in the same manner as the specific instructions for the use of the
vendor is bound with respect to the vendee. partnership, then estafa is committed under
He shall also be liable for the fruits thereof the Revised Penal Code.
from the time they should have been
delivered, without the need of any demand. Art. 1789. An industrial partner cannot
engage in any business for himself, UNLESS
Obligations of partners to contribute: the partnership expressly permits him to do
1. Shall deliver at the beginning of the so; and if he should do so, the capitalist
partnership or, if a different date has partners may either exclude him from the
been agreed upon, at the stipulated firm or avail themselves of the benefits
time the properties he agreed to which he may have obtained in violation of
contribute; this provision, with a right to damages in
2. Shall answer for eviction, in case the either case.
partnership is deprived of the
ownership of any specific property he Industrial partner is one who contributes
contributed; his industry or labor in the partnership.
3. Shall answer to the partnership for the
fruits of the properties whose delivery Industrial partner barred from engaging in
he delayed from the date he should business

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To prevent any conflict of interest between compensate them with the profits and
the industrial and the partnership, and to benefits which he may have earned for the
insure faithful compliance by said partner partnership by his industry. However, the
with his prestation. courts may equitably lessen this
responsibility if through the partner’s
Art. 1790. Unless there is a stipulation to extraordinary efforts in other activities of
the contrary, the partners shall contribute the partnership, unusual profits have been
equal shares to the capital of the realized.
partnership.
Partner liable for damages caused the
Art. 1791. If there is no agreement to the partnership
contrary, in case of an imminent loss of the Art. 1794 follows the general rule of
business of the partnership, any partner contracts that where a person is at fault in
who refuses to contribute an additional the fulfillment of his obligations he shall be
share to the capital, except an industrial liable for the payment of damages. The
partner, to save the venture, shall be partner’s fault, however, must be
obliged to sell his interest to the other determined in accordance with the
partners. circumstances of person, time and place.

Art. 1792. If a partner authorized to Liquidation necessary to ascertain


manage collects a demandable sum, which damages
was owed to him in his own name, from a It is first necessary that a liquidation of the
person who owned the partnership another business thereof be made to the end that
sum also demandable, the sum thus the profits and losses may be known and
collected shall be applied to the two credits the causes of the latter and the
in proportion to their amounts, even responsibility of the defendant as well as
though he may have given a receipt for his the damages which each partner may have
own credit only; but should he have given it suffered, may be determined.
for the account of the partnership credit,
the amount shall be fully applied to the Art. 1795. The risk of specific and
latter. determinate things, which are not fungible,
contributed to the partnership so that only
The provisions of this article are understood their use and fruits may be for the common
to be without prejudice to the right granted benefit, shall be borne by the partner who
to the debtor by Art. 1252, but only if the owns them.
personal credit of the partner should be
more onerous to him. If the things contributed are fungible, or
cannot be kept without deteriorating, or if
Requisites: they were contributed to be sold, the risk
1. Two existing debts shall be borne by the partnership. In the
2. Both debts must be demandable absence of stipulation, the risk of things
3. The one who collected the debt is a brought and appraised in the inventory,
partner who is authorized to manage shall also be borne by the partnership, and
and is actually managing the in such case the claim shall be limited to the
partnership value at which they were appraised.

Art. 1793. A partner who has received, in Risk of Specific and determinate things
whole or in part, his share of a partnership The risk of specific and determinate things
credit, when the other partners have not which are not fungible, like a boat, only the
collected theirs, shall be obliged, if the use of which is contributed, shall be borne
debtor should thereafter become insolvent, by the partner as the ownership thereof is
to bring to the partnership capital what he not transferred to the partnership. This
received even though he may have given follows the general rule that the thing
receipt for his share only. perished with the owner.

Art. 1794. Every partner is responsible to Things fungible or perishable


the partnership for damages suffered by it If the things contributed are fungible or
through his fault, and he cannot cannot be kept without deteriorating

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(perishable) like wine, oil, etc., even if they also receive a share in the profits in
are contributed only for the use of the proportion to his capital.
partnership, the risk of loss shall be for the
account of the partnership for the latter Rules in profit sharing:
cannot make use of them without their 1. The partners share the profits in
getting consumed or presumed. accordance with the ratio established
by their contract.
Things contributed to be sold 2. If there is no such stipulation in the
If the things contributed are to be sold, the partnership contract, then:
partnership bears the risk of loss, for 1. If all are capitalist partners they
obviously the partnership is the intended have the profits in proportion to
owner; otherwise, the firm cannot make the their capital contributions;
sale. 2. If there are capitalist as well as
industrial partners, the industrial
Things brought and appraised in inventory partner get a share each that is
The partnership bears the risk of loss of just and equitable while the
things brought and appraised in the capitalist partners divide the
inventory as this has the effect of an implied remainder in proportion to their
sale thus making the partnership the owner capital contributions; and
of said things. 3. If there is a capitalist-industrial
partner, he gets a share in the
Art. 1796. The partnership shall be profits as an industrial partner and
responsible to every partner for the an additional share in proportion to
amounts he may have disbursed on behalf his capital contribution to be
of the partnership and for the determined as in (b), above.
corresponding interest, from the time the
expenses are made; it shall also answer to Rules in loss sharing:
each partner for the obligations he may 1. The stipulation in the partnership
have contracted in good faith in the interest agreement regarding loss sharing must
of the partnership business, and for the risk be followed.
inconsequence of its management. 2. If there is no such agreement, but the
contract provides for a profit sharing
Responsibility of the partnership to a ration, the profit sharing ratio shall also
partner be 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,
amounts advanced by him with interest. then the loss shall be borne by the
This must be so for the reason that a partners in proportion to their capital
partner is a mere agent of the partnership contributions; but a purely industrial
and under the rules of agency, an agent partner is exempted from participation
who advances funds for his principal may in the loss.
recover the same interest.
Share of industrial partner in profits and
Art. 1797. The profits and losses shall be losses
distributed in conformity with the Unless agreed upon, the industrial partner
agreement. If only the share of each partner shall receive such share in the profits as
in the profits has been agreed upon, the may be just and equitable under the
share of each in the losses shall be in the circumstances. As for the losses, the
same proportion. industrial partner is not liable. However,
In the absence of stipulation, the share of under Art. 1816, if the partnership has a
each partner in the profits and losses shall contractual debt and it cannot pay, the
be in proportion to what he may have industrial partner equally with the capitalist
contributed, but the industrial partner shall partners, can be compelled by the creditor
not be liable for the losses. As for the to pay his pro rata share out of his own
profits, the industrial partner shall receive property or assets.
such share as may be just and equitable
under the circumstances. If besides his Art. 1798. If the partners have agreed to
services he has contributed capital, he shall entrust to a third person the designation of

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the share of each one in the profits and partner’s capital contribution.
losses, such designation may be impugned
only when it is manifestly inequitable. In no Appointed as manager after the
case may a partner who has begun to constitution of the partnership
execute the decision of the third person, or Partner appointed in arts of partnership
who has not impugned the same within a may execute all acts of administration
period of three months from the time he notwithstanding the opposition of the other
had knowledge thereof, complain of such partners, unless he should act in bad faith.
decision. His power is revocable only upon just and
lawful cause and upon the vote of the
The designation of profits and losses cannot partners representing the controlling
be entrusted to one of the partners. interest.
Reason: revocation represents change in
Reason for the provision terms of contract.
Admittedly, the designation of profits and In case of mismanagement: Usual remedies
losses cannot be entrusted to one of the allowed by law including dissolution.
partners as the fulfillment of a contract
cannot be left to one of the contracting Appointment as manager after the
parties. It may, however, be entrusted to a constitution of the partnership
third person by common interest. Appointment may be revoked at any time
for any cause what so ever.
Art. 1799. A stipulation which excludes one
or more partners from any share in the Reason: revocation not founded on a
profits or losses is void. change of will on the part of the partners.
Appointment not condition of contract. It is
Stipulation to exclude a partner from merely a simple contract of agency, which
profits and losses is void may be revoking at any time. It is believe
The law does not allow a provision in the that the vote for revocation must also
contract of partnership excluding one or represent the controlling interest.
more partners from sharing in the profits
and losses. The reason is that a partnership Scope of the power of the managing
is organized for the common benefit or partner
interest of the partners. General rule: partner appointed as manager
has all the powers of a general agent as well
Reason for exclusion of industrial partner as all the incidental powers necessary to
An industrial partner is not liable for losses carry out the object of the partnership in
because if the partnership fails to realize the transaction of its business.
any profits, the industrial partner would Exception: When powers of manager is
have contributed his labor in vain. specifically restricted. A managing partner
Furthermore, the industrial partner cannot may not bind the partnership by contract
withdraw the work already done by him for foreign to its business.
the partnership.
Compensation for service rendered
Art. 1800. The partner who has been Partner Generally not entitle to
appointed manager in the articles of the compensation, In the absence of an
partnership may execute all acts of the agreement to the contrary, each member of
administration despite the opposition of his the partnership assumes the duty to give his
partners, unless he should act in Bad faith., time, attention, and skill to the
and his powers is irrevocable without the management of its affairs, as may be
just or lawful cause. The vote of the reasonably necessary to the success of the
partners representing the controlling common enterprise; and for this service a
interest shall be necessary for such share of the profits is his only
revocation of power. A power granted after compensation. In managing partnership
the partnership has constituted may affairs, a partner is practically taking care of
revoked at any time. Each partner has a his own interest or managing his own
right to an equal voice in the conduct of the business. In the absence of any prohibition
partnership business. This right is not in the arts. Of partnership for the payment
dependent on the amount or size of the of salaries to general partners, there is

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nothing to prevent the partners to enter respective duties;


into a collateral verbal agreement to that 3. There is no stipulation that one of them
effect. shall not act without the consent of all
EXCEPTIONS: In proper cases, the law may the others.
imply a contract for compensation;
1. A partner engaged by his co-partners to
ART. 1802 In case it should have been
perform services not required of him in
stipulated that none of the managing
fulfilment of the duties and in capacity
partner shall act without the consent of the
other than that of a partner.
others, the concurrence of all shall be
2. When there is extraordinary neglect on
necessary for validity of the acts, and the
the part of one partner to perform his
absence or disability of any one of them
duties, imposing entire burden on
cannot alleged, unless there is imminent
remaining partner.
danger of grave or irreparable injury to the
3. One partner may employ the other
partnership.
to do work for him outside of and
independent of the co-partnership.
When unanimity of action stipulated
4. Partners exempted by terms of
concurrence necessary for validity of acts
partnership from rendering services
The partners may stipulate that none of the
may demand pay for services rendered.
managing partners shall act without the
5. Where one partner is entrusted with
consent of the others. In such a case, the
management and devotes his whole
unanimous consent of all the managing
time and devotion at the instance of the
partners shall be necessary for the validity
other partners who are attending to
of their acts. This consent is
their individual business and giving no
so indispensable that neither absence nor
time or attention to the partnership
disability of any one of them may allege as
business.
excuse to dispense with requirement.
Exception: When there is imminent danger
Art. 1801. If two or more partners have of grave or irreparable injury to the
been intrusted with the management of the partnership then a partner may act alone
partnership without the specification of without consent of partner who is absent or
their respective duties or without the under disability.
stipulation that one of them shall not act
without the consent of all others, each one Consent of managing partners not
separately execute all acts of necessary in routine transactions
administration, but if anyone of them The requirement of written authority refers
should oppose the act of each other, the evidently to formal and unusual written
decision of the majority shall prevail. In the contracts.
case of tie the partners owning the
controlling interest shall decide the matter. Art. 1803. When the manner of
Where respective duties of two or more management has not agreed upon, the
managing partners not specifies. following rules shall observed:

1. All partners shall be considered agents


Each one may separately perform acts of
and whatever any one of them may do
administration
alone shall bind the partnership without
1. If one or more of the managing partners
prejudice to the provision of article
shall oppose the acts of the others, then
1801
the decision of the majority of the
managing partners shall prevail. Right to
2. None of the partners may, without the
oppose can be exercise only by those
consent of others, make any important
entrusted with mgt.
alteration in the immovable property of
2. In case of tie, matter shall be decided by
the partnership, even if it may be useful
the vote of the partners owning the
to the partnership, but if there ids
controlling interest.
refusal of the consent by the other
partners is manifestly prejudicial to the
REQUISITES FOR APPLICATION OF RULE
interest of the partnership, the court’s
1. Two or more partners have been
intervention may be sought.
appointed as managers;
2. There is no specification of their

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Rules when manner of the management not become a member of the partnership,
that has not agreed upon all partners even if the other partners know about the
considered as managers and agents agreement. Not being a member of
All partners shall have equal rights in the the partnership, he does not acquire the
mgmt. and conduct of partnership affairs. rights of a partner nor is he liable for its
All of them shall considered mgrs. and debts.
agents and whatever any one of them may
do alone shall bind the partnership. If there Reason for the rule
is timely opposition, however, the matter Partnership is based on mutual trust and
shall decided by majority vote. In case confidence among the partners. Inclusion of
of tie, vote of partners representing new partner would be a modification of the
controlling interest. original contract of partnership requiring
unanimous consent of all the partners.
Unanimous consent required for alteration Prohibition applies even if person
of immovable property associated is already a partner.
The consent need not be express. It may
presume from the fact of knowledge of the Art. 1805. The partnership books shall be
alteration without interposing any kept, subject to any agreement between the
objection. Prohibition only applies partners, at the principal place of the
to immovable property because of the business of the partnership, and every
greater importance of this kind of property, partner shall at any reasonable hour have
and the alteration thereof must be access to and may inspect and copy any of
important. This would be an act of strict them.
dominion. If refusal to give consent is
manifestly prejudicial to the interest of Keeping of partnership books
the partnership, court intervention maybe Partner with duty to keep partnership
sought. Consent may presume from silence books
(lack of opposition despite knowledge).If The duty to keep true and correct books
alteration is necessary for preservation of showing the firm’s accounts, such books
the property, consent of the other partners being at all times open to inspection of all
not required. members of the firm, primarily rests on the
managing or active partner. It is presume
Art. 1804. Every partner may associate that the partners have knowledge of the
another person with him in his share, but contents of the partnership books and that
the associates shall not admitted into the said books state accurately the state
partnership without the consent of all other of accounts, but errors can corrected.
partners, even of the partner having an
associate should be a manager of Rights with the respect to partnership
subpartnership nature books
Books should kept at the principal place of
The partnership formed between a business as each partner has the right to
member of a partnership and a third free access to them and to inspect or copy
Person for a division of the profits coming to any of them at any reasonable time, even
him from the partnership enterprise is after dissolution. Inspection rights not
termed subpartnership. absolute can restrained from using info
It is a partnership within a partnership and for other than partnership purpose.
is distinct and separate from the main or
principal partnership. Access to partnership books
Rights can exercise at any reasonable hour.
This means reasonable hours on business
Right of the person associated with the
days throughout the year and not merely
partnership’s share
during some arbitrary period of a few days
Subpartnership agreements do not
chosen by the managing partners.
affect the composition, existence, or
operations of the firm. The subpartners are
Art. 1806. Partners shall render on demand
partners interest,
true and full information of all things
affecting the partnership to any partner or
However, in the absence of the mutual
the legal representative of any deceased
assent of all the parties, a subpartner does

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partner or of any partner under legal i.e. the winding up of partnership affairs
disability. Duty to render information, there is completed.
must be no concealment between partners
in all matters affecting the partnership. Duty to account for secret and similar
Information must use only for partnership profits
purpose. Not just on demand but partner The duty of a partner to account as a
also has duty of voluntary disclosure. fiduciary operates to prevent from making a
However, duty to render info does notarise secret profit out of the operation of the
with respect to matters appearing partnership and from carrying on the
in partnership books since each partner has business for his private advantage or
the right to inspect those. Good faith not a business in competition w/ the firm
only requires that a partner should not w/o consent of other partners. Violation
make a false statement but also that he may be ground for dissolution.
should abstain from any false concealment.
Duty to account for earnings accruing even
Art. 1807. Every partner must account the after termination of partnership
partnership for any benefit, and hold as If a partner uses info obtained by him from
trustee for it any profits derived from him the partnership for his own account w/o the
without the consent of the partners from consent of the other partners, he is liable to
any transaction connected with the account for any benefit he might obtain.
formation, conduct, or liquidation of the
partnership or from any use by him of his Duty to make full disclosure of information
property. belonging to partnership
A partner is also subject to the fiduciary
The relation between the partners duty of undivided loyalty and complete
is essentially fiduciary involving trust and disclosure of info of all things affecting the
confidence, each partner considered in law, partnership. By Information is meant
as he is, in fact, the confidential agent of the information, which can be used for the
others. The duties of a partner are purposes of the partnership. Info cannot
analogous to those of a trustee. use for a partner’s private gain – even if
after termination.
Duty to act for common benefit
Cannot use and apply exclusively to own Duty not to acquire interest or right
individual benefit partnership assets or adverse to partnership
results of knowledge and info gained in If partner does, he holds it in trust for the
character of partner. Managing partners benefit of the partnership and must account
particularly owe a fiduciary duty to inactive to the firm for the profits of the transaction,
partners. unless it appears that the others consented

Duty begins during the formation of Art. 1808. The Capitalist partners cannot
partnership engage for their own account in any
Principle of good faith applies not only operation, which is of the kind of business
during partnership but during the in which the partnership is engaged, unless
negotiations leading to the formation of the there is a stipulation to the contrary. Any
partnership. Also, a person who agreed w/ capitalist partner violating this prohibition
another to form a partnership has the shall bring to the common funds any profit
obligation to account for commissions and accruing to him from his transactions, and
discounts received in acquiring property for shall personally bear all the losses.
the future partnership.
Prohibition against partner engaging the
Duty continues even after the dissolution business
of the partnership Prohibition relative – Prohibition against
Duty of partner to act w/ utmost good faith capitalist partner to engage in business is
towards his co-partners continues relative, unlike the industrial partner who is
throughout the entire life of the partnership absolutely prohibited from engaging in any
even after dissolution for whatever reason business for himself. Capitalist partner is
or whatever means, until the relationship is only prohibited from engaging for his own
terminated, account in any operation which is the same

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as or similar to the business in which the


partnership is engaged and which is Art. 1810. The property rights of a partner
competitive w/ said business are:
VIOLATION – Obligation to bring to 1. His rights in specific partnership
common fund any profits derived and in property;
case of losses, he shall bear them alone.
Partners, however, by stipulation may 2. His interest in the partnership;
permit it. The law permits him to carry on a
business not connected or competing with 3. His right to participate in the
that of the partnership. Law is silent on management, extent of property rights
whether he can engage in same line of of a partner.
business for the account of another.
Prohibition still applies because of fiduciary Principal Rights
position imposing duties of utmost good 1. Rights in specific partner property;
faith. He may not carry on any other 2. Interest in partnership;
business in rivalry w/ the partnership. 3. Right to participate in management.

Reason for prohibition RELATED RIGHTS


Fiduciary nature of relationship imposes 1. Right to reimbursement for amounts
obligation of utmost good faith. Rule advanced to partnership and to
prevents use of info obtained in course indemnification for risks inconsequence
of transaction of partnership business or of management (art. 1796).
because of connection w/ firm regarding 2. Right of access and inspection of
business secrets and clientele of firm to its partnership books (art. 1805).
prejudice. 3. Right to true and full information of all
things affecting partnership (art. 1806).
Art. 1809. Any partner shall have the right 4. Right to formal account of partnership
to a formal account as partnership affairs: affairs under certain circumstances (art.
1809).
1. If he is wrongfully excluded from the 5. Right to have partnership dissolved also
partnership business or possession of under certain conditions (arts. 1830-
its property by his co-partner; 1831).

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

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unanimous partners;
consent of
the partners. 2. A partner’s right in specific partnership
Assets Includes not The property is not assignable except in
Included only the aggregate connection with the assignment of rights of
original of the all the partners in the same property;
capital individual
contributions, contributions 3. A partner’s right in specific partnership
but also all made by the property is not subject to attachment or
property partners in execution, except on a claim against the
subsequently establishing partnership;
acquired or continuing
because of the 4. A partner’s right in specific partnership
the partnership. property is not subject to legal support
partnership under art. 291 nature of a partner’s right in
or w/ specific partnership property
partnership
funds, Art. 1811 contemplates tangible property
including but not intangible things. A partner is a co-
partnership owner w/ his partners of specific
name and partnership property, but the rules on co-
goodwill. ownership do not necessarily apply. The
legal incidents of this tenancy in partnership
Ownership of certain property are distinctively characteristic of the
Property use by the partnership – Where partnership relation. They are as follows:
there is no express agreement that property
used by a partnership constitutes Equal rights of possession - Ordinarily, a
partnership property, such use does not partner has an equal right to possess
make it partnership property, and whether specific partnership property for
it is so depends on the intention of the partnership purposes. None of the partner
parties, w/c may be shown by proving an scan possesses and uses the
express agreement or acts of particular specific partnership property other than for
conduct. The intent of the parties is the partnership purposes w/o the consent
controlling factor. of the other partners. Should any of them
Property acquired by a partner with use the property for his own benefit, he
partnership funds – Unless a contrary must account, like a stranger, to the others
intention appears, property acquired by a for the profits derived there from or the
partner in his own name w/ partnership value of his wrongful possession or
funds is partnership property. However, occupation. A partner wrongfully excluded
if the property was acquired after from possession of partnership property
dissolution but before the winding up of the by a co-partner has a right to formal
partnership affairs, it would be his separate account and may even apply for a
property but he would be liable to account judicial decree of dissolution. On the death
to the partnership for the funds used in its of a partner, his right in specific partnership
acquisition. property vests in the surviving partners. By
agreement, the right to possess specific
Art. 1811. A partner is co-owner with his partnership property may surrender. In the
partners of specific partnership property. absence of special agreement, however,
The incidents of this co-ownership are such neither partner separately owns, or has the
that; exclusive right of possession of any
partnership property or any proportional
1. A partner, subject to the provision of this part thereof. Each has dominion over
title and any agreement between the the entire partnership property. The
partner, has an equal right with his partners possession of partnership property by one
to possess specific partnership property for partner is the possession of all until his
partnership purposes; but he has no right to possession becomes adverse. A partner
possess such property for any other cannot initiate title by adverse possession
purpose without the consent of his until and unless he makes an adverse claim.

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partnership and not to the partners.


Right not assignable - A partner cannot However, their interest in the partnership
separately assign his right to specific is. The method of reaching a judgment
partnership property but all of them can debtor’s interest in partnership property is
assign their rights in the same property. specifically set forth in art.1814.

Reasons for non-assignability: Art. 1812. A partner’s interest in the


1. It prevents interference by outsiders in partnership is his share of the profits and
partnership affairs; surplus.
2. It protects the right of other partners
and partnership creditors to have Share of profits and surplus – The partner’s
partnership assets applied to firm interest in the partnership consists of his
debts; share in the undistributed profits during the
3. It is often impossible to determine the life of the partnership as a going concern
extent of a partner’s beneficial interest and his share in the undistributed surplus
in a particular partnership asset. Reason after its dissolution.
for impossibility: Each partner, having a
beneficial interest in the partnership Profits: the excess of returns over
property considered as a whole, has a expenditure in a transaction or series of
beneficial interest in each part. Where, transactions; or the net income of the
however, none of the above reasons partnership for a given period.
apply, an authorized assignment by a
partner of his right in specific Surplus: the assets of the partnership after
partnership property is void, but it may partnership debts and liabilities are paid
be regarded as a valid assignment of and settled and the rights of the partners
the partner’s interest in the partnership. among themselves are adjusted. It is the
The law allows a retiring partner to excess of assets over liabilities. If the
assign his rights in partnership property liabilities are more than the assets, the
to the partner(s) continuing the difference represents the extent of the loss.
business.
Art.1813. A conveyance by a partner by his
Right limited to share of what remains whole interest in the partnership does not
after partnership debts has been paid of itself dissolve the partnership, or, against
Strictly speaking, no particular partnership the other partners in the absence of
property or any specific or an aliquot part agreement, entitle the assignee, during the
thereof can be considered the separate or continuance of the partnership, to interfere
individual property of any partner. The in the management or administration of the
whole of partnership property belongs to partnership business or affairs, or to require
the partnership considered as a juridical any information or account of the
person, and a partner has no interest in it partnership transactions, or to inspect the
but his share of what remains after all partnership books; however it merely
partnership debts are paid. Consequently, entitles the assignee to receive the
specific partnership property is not subject accordance with his contract, the profits to
to attachment, execution, garnishment, or which the assigning partner would
injunction, w/o the consent of all the otherwise be entitled.
partners except on a claim against the
partnership. For the same reason that the In case of fraud in the management of the
property belongs to the partnership, the partnership, the assignee may avail himself
partners cannot claim any right under the of the usual remedies. In case of dissolution
homestead or exemption laws when it is of the partnership, the assignee is entitle to
attached for partnership debts. However, a receive his assignor’s interest and may
judgment creditor may levy upon a require an account from the date only of
partner’s interest in the partnership itself the last account agreed to by all partners.
because it is actually his property, by means Effect of assignment of partner’s whole
of a “charging order.” The right of interest in partnership.
the partners to specific partnership
property is not subject to legal support A partner’s right in specific partnership
since the property belongs to the property is not assignable but he may assign

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his interest in the partnership to any of his preferred rights of the partnership creditors
co-partners or to a third Person irrespective on due application to a competent court by
of the consent of the other partners, in the any judgement creditor of the partner, the
absence of agreement to the contrary. court which entered the interest of the
debtor partner with payment of the
Rights withheld from assignee unsatisfied amount of such judgement debt
1. To interfere in the management. with the interest thereon; and may then or
2. To require any information or account. later appoint a receiver of his share of the
3. To inspect any of the partnership books. profits, and of any other money due or to
fall due to him in respect of the partnership,
No one can be compelled to be partners w/ and make all other orders, directions and
someone else. The assignment does not accounts and inquiries which the debtor
divest the assignor of his status and rights partner might have made, or which
as a partner nor operate as dissolution. circumstances of the case may require. The
The law, however, provides the non- interest charged may redeem at any time
assigning collaborates w/ a ground before foreclosure, or in any case of a sale
for dissolving the partnership if they being directed by the court, may be
so desire. purchase without thereby causing
dissolution:
Remedy of other partners
Dissolution of partnership not intended – 1. With separate property, by any one or
Many partnership agreements are made more of the partners;
merely as security for loans, the assigning
partner never intending to destroy the 2. With partnership property, by any one
partnership relation. If the assigning partner or more of the partners with the
neglects his duties after assignment, consent of all the partners a whose
the other partners may dissolve the interest are not so charged or sold,
partnership under art. 1830. nothing in this title shall be held to
Dissolution of partnership intended – A deprive a partner of his right, if any,
partner’s conveyance of his interest in the 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 Application for a charging order after
entire withdrawal from the partnership of securing judgement on his credit
such partner and the termination of the While a separate creditor of a partner
partnership as between the partners. cannot attach or levy upon specific
partnership property for the satisfaction of
Rights of assignee of partner’s interest his credit because partnership assets are
1. To receive in accordance w/ his contract reserved for partnership creditors, he can
the profits accruing to the assigning secure a judgment on his credit and then
partner; apply to the proper court for a “charging
2. To avail himself of the usual remedies order”, subjecting the interest of the debtor
provided by law in the event of fraud in partner in the partnership w/ the payment
the management; of the unsatisfied amount of such judgment
3. To receive the assignor’s interest in case w/ interest thereon w/ the least
of dissolution; interference w/ the partnership business
4. To require an account of partnership and the rights of the other partners.
affairs, but only in case the partnership By virtue of the charging order, any amount
is dissolved, and such account shall or portion thereof w/c the partnership
cover the period from the date only of would otherwise pay to the debtor-partner
the last account agreed to by all should instead be given to the judgment
partners. The purchaser of a partner’s creditor. This remedy, however, is w/o
interest may apply to the court for prejudice to the preferred rights of
dissolution after the termination of the partnership creditors whose claims should
specified term or undertaking or at any be satisfied first.
time if the partnership is one at will.
Availability of other remedies
Art. 1814. Without prejudice to the Art. 1814 have made this an exclusive

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remedy so that a writ of execution will not synonymous with “company,” “house,” and
be proper. However, if the judgment debt “concern.”
remains unsatisfied, the court may resort to
other courses of action notwithstanding the Importance of having a firm name
issuance of the charging order. A partnership must have a firm name under
which it will operate. A firm name is
Redemption or purchase of interest necessary to distinguish the partnership,
charged which has a distinct and separate juridical
Redemptioner – The interest of the debtor- personality from the individuals composing
partner so charged may be redeemed or the partnership and from other
purchased w/ the separate property of any partnerships and entities.
one or more of the partners, or w/
partnership property but w/ the consent of Right of the partners to choose firm name
all the partners whose interests are not so The partners enjoy the utmost freedom in
charged or sold. the selection of the partnership name.
As a general rule, they may adopt any firm
Redemption Price – The value of name desired.
the partner’s interest in the partnership has
no bearing on the redemption price w/c is Use of misleading name – The partners
likely to be lower since it will be dependent cannot use a name that is identical or
on the amount of the unsatisfied judgment deceptively confusingly similar to that
debt. of any existing partnership or corporation or
to any other name already protected by law
Right of redeeming non-debtor partner – or is patently deceptive, confusing or
There deeming non-debtor partner does contrary to existing laws, as to mislead the
not acquire absolute ownership over the public by passing itself off as another
debtor-partner’s interest but holds it in partnership or corporation, or its goods or
trust for him consistent w/ principles of services as those of such other company.
fiduciary relationship.
Liability inclusion of name in the firm name
Rights of partner under exemption laws – Persons who, not being partners, include
A partner cannot claim any right under the their names in the firm name do not acquire
homestead laws or exemption laws when the rights of a partner but shall be subject
specific partnership property is attached for to the liability of a partner insofar as 3rd
partnership debt. W/ respect, however, to Persons without notice are concerned. Such
the partner’s interest in the partnership as persons become partners by estoppel. Art.
distinguished from his interest in specific 1815 does not cover the case of a limited
partnership property, the partner may avail partner who allows his name to be included
himself of the exemption laws after in the firm name, orof a person continuing
partnership debts have been paid. A the business of a partnership after
partner’s interest or share in the dissolution, who uses the name of the
partnership property is really his property. dissolved partnership or the name of
a deceased partner as part thereof.
Art. 1815. Every partnership shall operate
under a firm name, which may or may not Art. 1816. All partners, including industrial
include the name of one or more of the ones, shall be liable pro rata with all their
partners, those who, not being members of property and after all the partnership assets
the partnership, include their names in the have been exhausted, for the contracts
firm name, shall be subject to liability of a which may be entered into in the name and
partner for the account of the partnership, under its
signature and by a person authorized to act
Requirement of the firm name for the partnership. However, any partner
Meaning of word “firm” – The name, title, may enter into a separate obligation to
or style under which a company transacts perform a partnership contract.
business; a partnership of two or more
persons; a commercial house. In its Article 1816 distinguished from article
common acceptation, the term implies a 1787
partnership. The term is also used as

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Article 1816 applies in cases where third Art. 1818. Every partner is an agent of the
party creditors are concerned as it falls partnership for the purpose of its business,
under the heading of section 3. “Obligations and the act of every partner, including the
of the Partners with Regard to Third execution in the partnership name of any
Persons.” Article 1797 applies only where instrument, for apparently carrying on in
the issue is among the partners as it falls the usual way the business of the
under the heading of Section 1, Chapter 2, partnership of which he is a member binds
which states: “Obligations of the Partners the partnership, unless the partner so
Among Themselves.” The pro rata liability acting has in fact no authority to act for the
of partners to third persons under Article partnership in the particular matter, and
1816 being a clear mandate of the law, any the person with whom he is dealing has
stipulation changing or modifying such knowledge of the fact that he has no
liability is void except as among the such liability.
partners.
An act of a partner which is not apparently
Refers to partnership obligations for the carrying on of business of the
Article 1816 which refers to the payment of partnership in the usual way does not bind
partnership obligations arising from the partnership unless authorized by the
contracts clearly imposes subsidiary and other partners.
joint (pro rata) liability for contractual debts
owing to third persons upon all the Except when authorized by the other
partners, including industrial partners who partners or unless they have abandoned the
ordinarily are not liable for losses. The business, one or more but less than all the
liability is subsidiary because the partners partners have no authority to:
cannot be made answerable with their
separate property unless the partnership 1. Assign the partnership property in trust
property has first been exhausted. for creditors or on the assignee’s
promise to pay the debts of the
Pro rata liability – Literally, pro rata liability partnership.
means proportionate distribution of
liability. In the law of obligations, the 2. Dispose of the goodwill of the business.
concurrence of two or more debtors in one
and the same obligation makes it prima 3. Do any other act which would make it
facie a joint (pro rata) obligation, and the impossible to carry on the ordinary
debts is presumed divided into as many business of a partnership.
equal shares as there are debtors and each
one of them is bound to pay only his share. 4. Confess a judgment.

Art. 1817. Any stipulation against the 5. Enter into a compromise concerning a
liability laid down in the preceding article partnership claim or liability.
shall be void, except as among the partners.
6. Submit a partnership claim or liability to
Industrial partner cannot exempt himself
arbitration.
from liability to third persons
Each one of the industrial partners is liable
to third persons for the debts of the firm 7. Renounce a claim of the partnership.
and if he has paid such debts out of his
private property during the life of the No act of a partner in contravention of a
partnership, when its affairs are settled he restriction on authority shall bind the
is entitled to credit for the amount so paid, partnership to persons having knowledge of
and if its results that there is not enough the restriction.
property in the partnership to pay him, then
the capitalist partners must pay him. Our Art. 1819. Where title to real property is in
conclusion is that neither on principle nor the partnership name, any partner may
on authority can the industrial partner be convey title to such property by a
relieved from liability to third persons for conveyance executed in the partnership
the debts of the partnership. name; but the partnership may recover
such property unless the partner's act binds
the partnership under the provisions of the

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first paragraph of article 1818, or unless partnership, except in the case of fraud on
such property has been conveyed by the the partnership, committed by or with the
grantee or a person claiming through such consent of that partner.
grantee to a holder for value without
knowledge that the partner, in making the Notice to partner is notice to partnership
conveyance, has exceeded his authority. Clearly a third person desiring to give notice
to a partnership of some matter pertaining
Where title to real property is in the name to the partnership business need not
of the partnership, a conveyance executed communicate with all of the partners. If
by a partner, in his own name, passes the notice is delivered to a partner, that is an
equitable interest of the partnership, effective communication to the partnership.
provided the act is one within the authority
of the partner under the provisions of the Knowledge before becoming partner
first paragraph of Article 1818. Where the knowledge or notice had been
received by the partner before he became a
Where title to real property is in the name partner, and his partners are ignorant of
of one or more but not all the partners, and this, and he is not the partner acting in the
the record does not disclose the right of the particular matter, there is no doubt that
partnership, the partners in whose name there has been neither knowledge of nor
the title stands may convey title to such notice to the partnership.
property, but the partnership may recover
such property if the partners’ act does not Art. 1822. Where, by any wrongful act
bind the partnership under the provisions or omission of any partner acting in the
of the first paragraph of Article 1818, unless ordinary course of the business of the
the purchaser or his assignee, is a holder for partnership or with the authority of co-
value, without knowledge. partners, loss or injury is caused to any
person, not being a partner in the
Where the title to real property is in the partnership, or any penalty is incurred, the
name of one or more or all the partners, or partnership is liable therefor to the same
in a third person in trust for the extent as the partner so acting or omitting
partnership, a conveyance executed by a to act.
partner in the partnership name, or in his
own name, passes the equitable interest of Partner liable for wrongful act of a partner
the partnership, provided the act is one The partners are liable for the negligent
within the authority of the partner under operation of a vehicle by a partner, acting in
the provisions of the first paragraph of the course of business, which results in a
Article 1818. traffic accident.

Where the title to real property is in the If he is driving a partnership-owned vehicle


name of all the partners a conveyance for purposes of his own, the acting partner
executed by all the partners passes all their alone is liable it is not a partnership tort.
rights in such property.
Partnership may proceed against negligent
Art. 1820. An admission or representation partner
made by any partner concerning Where a partnership is liable to a third
partnership affairs within the scope of his person, there is a right of indemnity against
authority in accordance with this Title is the partner whose negligence caused the
evidence against the partnership. injuries.

Art. 1821. Notice to any partner of any Art. 1823. The partnership is bound to
matter relating to partnership affairs, and make good the loss:
the knowledge of the partner acting in the
particular matter, acquired while a partner 1. Where one partner acting within the
or then present to his mind, and the scope of his apparent authority receives
knowledge of any other partner who money or property of a third person
reasonably could and should have and misapplies it.
communicated it to the acting partner,
operate as notice to or knowledge of the

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2. Where the partnership in the course of and if he has made such representation or
its business receives money or property consented to its being made in a public
of a third person and the money or manner he is liable to such person, whether
property so received is misapplied by the representation has or has not been
any partner while it is in the custody of made or communicated to such person so
the partnership. giving credit by or with the knowledge of
the apparent partner making the
Partnership bound by partner’s breach of representation or consenting to its being
trust made:
The partnership is liable for the conversion
(misappropriation) of money or property 1. When a partnership liability results, he
entrusted to the partnership by a third is liable as though he were an actual
person. The effect under Article 1824 is the member of the partnership.
same whether by the partnership and
subsequently misappropriated by a partner. 2. When no partnership liability results, he
is liable pro rata with the other persons,
Art. 1824. All partners are liable solidarily if any, so consenting to the contract or
with the partnership for everything representation as to incur liability,
chargeable to the partnership under otherwise separately.
Articles 1822 and 1823.
When a person has been thus represented
Law imposes solidary liability to be a partner in an existing partnership, or
The law imposes solidary liability upon the with one or more persons not actual
partners and the partnership in cases of partners, he is an agent of the persons
torts and acts of conversion by a partner as consenting to such representation to bind
provided in Art. 1824. It may be stated that them to the same extent and in the same
the liability of a partner for a debt of the manner as though he were a partner in fact,
partnership depends upon whether the with respect to persons who rely upon the
debts is contractual or it arises from tort or representation. When all the members of
conversion. If it arises from contract, the the existing partnership consent to the
liability is subsidiary and pro rata; if it arises representation, a partnership act or
from tort or conversion, the liability is obligation results; but in all other cases it is
solidary. the joint act or obligation of the person
acting and the persons consenting to the
Business partners solidarily liable representation.
Arts. 1711 and 1712 of the New Civil Code
and Sec. 2 of the Workmen’s Compensation Estoppel – A preclusion, in law, which
Act reasonably indicate that in prevents a man from alleging or denying a
compensation cases, the liability of business fact, in consequence of his own previous
partners should be merely joint and not act, allegation, or denial of a contrary tenor.
solidary, and one of them happens to be
insolvent, the amount awarded to the Person bound by his representation
dependents of the deceased employee A person who hold himself out as a partner
would only be partially satisfied, which is in a business, or consents to his being so
evidently contrary to the intent and held out, is liable on contracts made with
purpose of the law to give full protection to third persons who deal with the persons
the employee. carrying on the business on the faith of the
representation. He is stopped to deny the
Art. 1825. When a person, by words spoken apparent agency.
or written or by conduct, represents
himself, or consents to another Art. 1826. A person admitted as a partner
representing him to anyone, as a partner in into an existing partnership is liable for all
an existing partnership or with one or more the obligations of the partnership arising
persons not actual partners, he is liable to before his admission as though he had been
any such persons to whom such a partner when such obligations were
representation has been made, who has, on incurred, except that this liability shall be
the faith of such representation, given satisfied only out of partnership property,
credit to the actual or apparent partnership, unless there is a stipulation to the contrary.

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Incoming partner liable for existing b. By the express will of any partner,
obligations who must act in good faith, when
A newly admitted partner is liable for no definite term or particular is
obligations of the partnership at the time of specified.
his admission. The obligation of the
incoming partner shall be satisfied only out c. By the express will of all the
of partnership property. This is not a harsh partners who have not assigned
rule because the incoming partner their interests or suffered them to
“partakes of the benefit of the partnership be charged for their separate debts,
property, and an established business. He either before or after the
has every means of obtaining full termination of any specified term or
knowledge of protecting himself, because particular undertaking.
he may insist on the liquidation or
settlement of existing partnership debts. On d. By the expulsion of any partner
the other hand, the creditors have no from the business bona fide in
means of protecting themselves. accordance with such a power
conferred by the agreement
Art. 1827. The creditors of the partnership between the partners
shall be preferred to those of each partner
as regards the partnership property. 2. In contravention of the agreement
Without prejudice to this right, the private between the partners, where the
creditors of each partner may ask the circumstances do not permit a
attachment and public sale of the share of dissolution under any other provision of
the latter in the partnership assets. this article, by the express will of any
partner at any time.
Art. 1828. The dissolution of a partnership
is the change in the relation of the partners 3. By any event which makes it unlawful
caused by any partner ceasing to be for the business of the partnership to
associated in the carrying on as be carried on or for the members to
distinguished from the winding up of the carry it on in partnership.
business.
4. When a specific thing which a partner
Art. 1829. On dissolution the partnership is
had promised to contribute to the
not terminated, but continues until the
partnership, perishes before the
winding up of partnership affairs is
delivery; in any case by the loss of the
completed.
thing, when the partner who
contributed it having reserved the
“Dissolution,” “Winding up,” and
ownership thereof, has only transferred
“Termination” explained
to the partnership the use or enjoyment
Dissolution, winding up, and termination
of the same; but the partnership shall
should not be confused because they are
not be dissolved by the loss of the thing
distinct terms in law. Dissolution
when it occurs after the partnership has
“designates the point in time when the
acquired the ownership thereof.
partners cease to carry on the business
together: termination is the point in time
when all partnership affairs are wound up; 5. By the death of any partner.
winding up is the process of settling
partnership affairs after dissolution.” 6. By the insolvency of any partner or of
the partnership.
Art. 1830. Dissolution is caused:
7. By the civil interdiction of any partner.
1. Without violation of the agreement
between the partners: 8. By decree of court under the following
article.
a. By the termination of the definite
term or particular undertaking Causes of dissolution in general
specified in the agreement. Generally, a partnership may be dissolved
by causes: (1) without violation of the

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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
partnership; (5) the death of a partner; (6) 5. The business of the partnership can
the insolvency of any partner or of the only be carried on at a loss.
partnership itself; (7) civil interdiction of
any partner; and lastly (8) by judicial 6. Other circumstances render a
decree. dissolution equitable.

Partnership ceased upon expiration of On the application of the purchaser of a


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

2. A partner becomes in any other way 2. With respect to persons not partners,
incapable of performing his part of the as declared in article 1834.
partnership contract.
General Rule
3. A partner has been guilty of such If the cause of dissolution is not by act,
conduct as tends to affect prejudicially death, or insolvency of a partner, the
the carrying on of the business. authority ceases immediately.
Exception
4. A partner willfully or persistently For the purposes of winding-up partnership
commits a breach of the partnership affairs.

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place if more than one) at which


Art. 1833. Where the dissolution is caused the partnership business was
by the act, death or insolvency of a partner, regularly carried on.
each partner is liable to his co-partners for
his share of any liability created by any The liability of a partner under the first
partner acting for the partnership as if the paragraph, No. 2, shall be satisfied out of
partnership had not been dissolved unless: partnership assets alone when such partner
had been prior to dissolution:
1. The dissolution being by act of any
partner, the partner acting for the 1. Unknown as a partner to the person
partnership had knowledge of the with whom the contract is made.
dissolution.
2. So far unknown and inactive in
2. The dissolution being by the death or partnership affairs that the business
insolvency of a partner, the partner reputation of the partnership could not
acting for the partnership had be said to have been in any degree due
knowledge or notice of the death or to his connection with it.
insolvency.
The partnership is in no case bound by any
General Rule act of a partner after dissolution:
If the cause of dissolution is the death, act,
or insolvency of a partner, authority of a 1. Where the partnership is dissolved
partner to bind ceases upon the knowledge because it is unlawful to carry on the
of the dissolution. business, unless the act is appropriate
for winding up partnership affairs.
If dissolution is caused by act of one of
parties, co-partners are also liable to 2. Where the partner has become
contribute towards a liability as if no insolvent.
dissolution has happened, provided that
there is no notice or the partner does not 3. Where the partner has no authority to
have knowledge of the dissolution. wind up partnership affairs; except by a
transaction with one who —
Art. 1834. After dissolution, a partner can
bind the partnership, except as provided in a. Had extended credit to the
the third paragraph of this article: partnership prior to dissolution and
had no knowledge or notice of his
1. By any act appropriate for winding up want of authority.
partnership affairs or completing
transactions unfinished at dissolution. b. Had not extended credit to the
partnership prior to dissolution,
2. By any transaction which would bind and, having no knowledge or notice
the partnership if dissolution had not of his want of authority, the fact of
taken place, provided the other party to his want of authority has not been
the transaction: advertised in the manner provided
for advertising the fact of
a. Had extended credit to the dissolution in the first paragraph,
partnership prior to dissolution and No. 2 (b).
had no knowledge or notice of the
dissolution. Nothing in this article shall affect the
liability under article 1825 of any person
b. Though he had not so extended who after dissolution represents himself or
credit, had nevertheless known of consents to another representing him as a
the partnership prior to dissolution, partner in a partnership engaged in carrying
and, having no knowledge or notice on business.
of dissolution, the fact of
dissolution had not been advertised General Rule
in a newspaper of general Dissolution terminates the authority of the
circulation in the place (or in each partners to bind partnership.

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Exceptions assignee, upon cause shown, may obtain


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

Art. 1836. Unless otherwise agreed, the b. The right, as against each partner
partners who have not wrongfully dissolved who has caused the dissolution
the partnership or the legal representative wrongfully, to damages breach of
of the last surviving partner, not insolvent, the agreement.
has the right to wind up the partnership
affairs, provided, however, that any 2. The partners who have not caused the
partner, his legal representative or his dissolution wrongfully, if they all desire

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to continue the business in the same


name either by themselves or jointly If the partnership was dissolved in
with others, may do so, during the contravention of the agreement
agreed term for the partnership and for 1. The remaining partners have the right
that purpose may possess the to sell partnership property to pay the
partnership property, provided they partnership’s liabilities and the surplus
secure the payment by bond approved is distributed to the remaining partners
by the court, or pay any partner who as well.
has caused the dissolution wrongfully, 2. As against the guilty partner for the
the value of his interest in the dissolution of the partnership, the
partnership at the dissolution, less any remaining partners have the right to
damages recoverable under the second recover damages for breach.
paragraph, No. 1 (b) of this article, and 3. The remaining partners may also
in like manner indemnify him against all continue the business up to end of the
present or future partnership liabilities. stipulated term of the partnership.

3. A partner who has caused the Art. 1838. Where a partnership contract is
dissolution wrongfully shall have: rescinded on the ground of the fraud or
misrepresentation of one of the parties
a. If the business is not continued thereto, the party entitled to rescind is,
under the provisions of the second without prejudice to any other right,
paragraph, No. 2, all the rights of a entitled:
partner under the first paragraph,
subject to liability for damages in 1. To a lien on, or right of retention of, the
the second paragraph, No. 1 (b), of surplus of the partnership property
this article. after satisfying the partnership
liabilities to third persons for any sum
b. If the business is continued under of money paid by him for the purchase
the second paragraph, No. 2, of this of an interest in the partnership and for
article, the right as against his co- any capital or advances contributed by
partners and all claiming through him.
them in respect of their interests in
the partnership, to have the value 2. To stand, after all liabilities to third
of his interest in the partnership, persons have been satisfied, in the
less any damage caused to his co- place of the creditors of the partnership
partners by the dissolution, for any payments made by him in
ascertained and paid to him in cash, respect of the partnership liabilities.
or the payment secured by a bond
approved by the court, and to be 3. To be indemnified by the person guilty
released from all existing liabilities of the fraud or making the
of the partnership; but in representation against all debts and
ascertaining the value of the liabilities of the partnership.
partner's interest the value of the
good-will of the business shall not Right of partner to rescind contract of
be considered. partnership
If one is induced by fraud or
Rights of partners upon dissolution misrepresentation to become a partner, the
1. Dissolution is caused without violation contract is voidable. If the contract is
of the agreement. annulled, the injured party is entitled to
2. In contravention of the agreement. restitution. Here, the fraud or
misrepresentation vitiates consent.
If partnership is dissolved without However, until the partnership contract is
violation of the agreement annulled by a proper action in court, the
1. All partners may have the property sold partnership relations exist and
for payment of partnership liabilities. the defrauded partner is liable for all
2. If there is surplus, after paying the obligations to third persons.
liabilities of the firm, it shall be given in 1. Right of injured partner where
cash to the partners. partnership contract rescinded

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2. Right of retention of partnership 7. The individual property of a deceased


property partner shall be liable for the
3. Right to be subrogated in place of contributions specified in No. 4.
creditors of partnership
4. Right to be indemnified by the guilty 8. When partnership property and the
partner against all liabilities of the individual properties of the partners are
partnership. in possession of a court for distribution,
partnership creditors shall have priority
Art. 1839. In settling accounts between the on partnership property and separate
partners after dissolution, the following creditors on individual property, saving
rules shall be observed, subject to any the rights of lien or secured creditors.
agreement to the contrary:
9. Where a partner has become insolvent
1. The assets of the partnership are: or his estate is insolvent, the claims
against his separate property shall rank
a. The partnership property. in the following order:

b. The contributions of the partners a. Those owing to separate creditors.


necessary for the payment of all the
liabilities specified in No. 2. b. Those owing to partnership
creditors.
2. The liabilities of the partnership shall
rank in order of payment, as follows: c. Those owing to partners by way of
contribution.
a. Those owing to creditors other than
partners. Rules for settling accounts between the
partners
b. Those owing to partners other than 1. The assets of the partnership
for capital and profits. 2. Liabilities of the partnership
3. Application of assets
c. Those owing to partners in respect 4. Contribution by the partners
of capital.
Assets of the partnership
d. Those owing to partners in respect 1. Partnership property
of profits. 2. The contributions of the partners
necessary for the payment of all
3. The assets shall be applied in the order liabilities
of their declaration in No. 1 of this
article to the satisfaction of the Order of application of the assets
liabilities. 1. Those owing to partnership creditors
2. Those owing to partners other than for
4. The partners shall contribute, as capital and profits such as loans given
provided by article 1797, the amount by the partners or advances for
necessary to satisfy the liabilities. business expenses
3. Those owing for the return of the
5. An assignee for the benefit of creditors capital contributed by the partners
or any person appointed by the court 4. The share of the profits, if any, due to
shall have the right to enforce the each partner
contributions specified in the preceding
number. Order of application of partner who
become insolvent or his estate his
6. Any partner or his legal representative insolvent, the claims against his separate
shall have the right to enforce the property
contributions specified in No. 4, to the 1. Those owing to separate creditors
extent of the amount which he has paid 2. Those owing to partnership creditors
in excess of his share of the liability. 3. Those owing to partners by way of
contribution

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Liability of deceased partner’s 6. When a partner is expelled and the


individual property remaining partners continue the
The individual property of a deceased business either alone or with others
partner shall be liable for his share of the without liquidation of the partnership
contributions necessary to satisfy the affairs.
liabilities of the partnership incurred while
he was a partner. The liability of a third person becoming a
partner in the partnership continuing the
Art. 1840. In the following cases creditors of business, under this article, to the creditors
the dissolved partnership are also creditors of the dissolved partnership shall be
of the person or partnership continuing the satisfied out of the partnership property
business: only, unless there is a stipulation to the
contrary.
1. When any new partner is admitted into
an existing partnership, or when any When the business of a partnership after
partner retires and assigns (or the dissolution is continued under any
representative of the deceased partner conditions set forth in this article the
assigns) his rights in partnership creditors of the dissolved partnership, as
property to two or more of the against the separate creditors of the retiring
partners, or to one or more of the or deceased partner or the representative
partners and one or more third of the deceased partner, have a prior right
persons, if the business is continued to any claim of the retired partner or the
without liquidation of the partnership representative of the deceased partner
affairs. against the person or partnership
continuing the business, on account of the
2. When all but one partner retire and retired or deceased partner's interest in the
assign (or the representative of a dissolved partnership or on account of any
deceased partner assigns) their rights consideration promised for such interest or
in partnership property to the for his right in partnership property.
remaining partner, who continues the
business without liquidation of Nothing in this article shall be held to
partnership affairs, either alone or with modify any right of creditors to set aside
others. any assignment on the ground of fraud.

3. When any partner retires or dies and The use by the person or partnership
the business of the dissolved continuing the business of the partnership
partnership is continued as set forth in name, or the name of a deceased partner as
Nos. 1 and 2 of this article, with the part thereof, shall not of itself make the
consent of the retired partners or the individual property of the deceased partner
representative of the deceased liable for any debts contracted by such
partner, but without any assignment of person or partnership.
his right in partnership property.
Dissolution of a partnership by change of
4. When all the partners or their members
representatives assign their rights in Causes
partnership property to one or more 1. New partner is admitted
third persons who promise to pay the 2. Partner retires
debts and who continue the business 3. Partner dies
of the dissolved partnership. 4. Partner withdraws
5. Partner is expelled from partnership
5. When any partner wrongfully causes a 6. Other partners assign their rights
dissolution and the remaining partners to sole remaining partner
continue the business under the 7. All the partners assign their rights in
provisions of article 1837, second partnership property to third persons.
paragraph, No. 2, either alone or with *Any change in membership dissolves a
others, and without liquidation of the partnership and creates a new one
partnership affairs. *When a business of a dissolved
partnership is continued by former or

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without new partners, the old creditors are person or partnership continuing the
creditors of the person or partnership that business, at the date of dissolution, in the
is continuing the business. absence of any agreement to the contrary.

Art. 1841. When any partner retires or dies, Right to demand an accounting of
and the business is continued under any of partnership affairs must be directed
the conditions set forth in the preceding against
article, or in article 1837, second paragraph, 1. Winding-up partners
No. 2, without any settlement of accounts 2. Surviving partners
as between him or his estate and the 3. The person the partnership continuing
person or partnership continuing the the business
business, unless otherwise agreed, he or his
legal representative as against such person Art. 1843. A limited partnership is one
or partnership may have the value of his formed by two or more persons under the
interest at the date of dissolution provisions of the following article, having as
ascertained, and shall receive as an ordinary members one or more general partners and
creditor an amount equal to the value of his one or more limited partners. The limited
interest in the dissolved partnership with partners as such shall not be bound by the
interest, or, at his option or at the option of obligations of the partnership.
his legal representative, in lieu of interest,
the profits attributable to the use of his General partner Limited partner
right in the property of the dissolved Personally liable for Liability extends
partnership; Provided, That the creditors of partnership only to his capital
the dissolved partnership as against the obligations contribution.
separate creditors, or the representative of Have equal right in No share in
the retired or deceased partner, shall have management of management of
priority on any claim arising under this partnership partnership.
article, as provided article 1840, third May contribute May contribute
paragraph. money, property or money and property
industry
Rights of retiring of properties of Proper party to Not proper party to
deceased, partner when business proceedings proceedings
continued Interest cannot be Interest is assignable
To have the value of the interest of assigned to make with assignee
the retiring partner or deceased partner in new partner acquiring all rights of
the partnership determined as of the date the limited partner
of dissolution. His name may Name not included
appear in the firm in firm name
To receive thereafter, as an ordinary name
creditor, an amount equal to the value of Prohibited from No prohibition
his share in the dissolved partnership with engaging in a
interest, or, at his option, in place of business like
interest, the profits attributable to the use partnership’s
of his right. His retirement, His retirement,
insolvency and insolvency and
General Rule death dissolves the death does not
When partner retires from the partnership, partnership dissolve the
he is entitled to the payment of what may partnership
be due to him after liquidation.
Exception Characteristics of limited partnership
No liquidation needed when there is 1. Must be formed in accordance with the
settlement as to what retiring partner shall requirements of the law.
receive. 2. There must be one or more general
partners who control the management
Art. 1842. The right to an account of his of the business.
interest shall accrue to any partner, or his 3. There must be one or more limited
legal representative as against the winding partners contributing to the capital and
up partners or the surviving partners or the

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sharing in the profits but have nothing l. The right, if given, of one or more of
to do with the management. the limited partners to priority over
4. Obligations of the partnership must be other limited partners, as to
paid out of common fund and in the contributions or as to
separate properties of the general compensation by way of income,
partners. and the nature of such priority.

Art. 1844. Two or more persons desiring to m. The right, if given, of the remaining
form a limited partnership shall: general partner or partners to
continue the business on the death,
1. Sign and swear to a certificate, which retirement, civil interdiction,
shall state — insanity or insolvency of a general
partner.
a. The name of the partnership,
adding thereto the word "Limited". n. The right, if given, of a limited
partner to demand and receive
b. The character of the business. property other than cash in return
for his contribution.
c. The location of the principal place
of business. 2. File for record the certificate in the
Office of the Securities and Exchange
d. The name and place of residence of Commission.
each member, general and limited
partners being respectively A limited partnership is formed if there has
designated. been substantial compliance in good faith
with the foregoing requirements.
e. The term for which the partnership
is to exist. Qualifications of limited partnership
f. The amount of cash and a 1. The partners must sign and swear to a
description of and the agreed value certificate of limited partnership
of the other property contributed 2. Must file for record the certificate in
by each limited partner. the office of the Securities and
Exchange Commission
g. The additional contributions, if any,
to be made by each limited partner Art. 1845. The contributions of a limited
and the times at which or events on partner may be cash or property, but not
the happening of which they shall services.
be made.
Limited partners can only contribute money
h. The time, if agreed upon, when the and property and cannot contribute
contribution of each limited partner services to the partnership to protect
is to be returned. persons dealing with the firms with frauds.

i. The share of the profits or the other Art. 1846. The surname of a limited partner
compensation by way of income shall not appear in the partnership name
which each limited partner shall unless:
receive by reason of his
contribution. 1. It is also the surname of a general
partner.
j. The right, if given, of a limited
partner to substitute an assignee as 2. Prior to the time when the limited
contributor in his place, and the partner became such, the business has
terms and conditions of the been carried on under a name in which
substitution. his surname appeared.

k. The right, if given, of the partners to A limited partner whose surname appears
admit additional limited partners. in a partnership name contrary to the
provisions of the first paragraph is liable as

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a general partner to partnership creditors A limited partner is excluded from any


who extend credit to the partnership active voice in the control of the affairs of
without actual knowledge that he is not a the firm.
general partner. Limited partner cannot perform acts of
administration
Limited partner’s surname is not included Limited partners may not perform any act
in the firm name provided these of administration with respect to the
circumstances interests of the partnership, not even in the
1. If the surname of general partner is the capacity of agents of the managing
same with limited partner’s partners.
2. If the limited partner’s surname was ART. 1849. After the formation of a limited
included and was carried on the new partnership, additional limited partners may
partnership be admitted upon filling an amendment to
*If the limited partner’s surname was the original certificate in accordance with
included in the firm name, he is liable as a the requirements of Article 1865.
general partner.
The writing to amend a certificate
Art. 1847. If the certificate contains a false 1. Shall conform to the requirements of
statement, one who suffers loss by reliance Article 1844 as far as necessary to set
on such statement may hold liable any forth clearly the change in the
party to the certificate who knew the certificate which it is desired to make.
statement to be false: 2. Be signed and sworn to by all members,
and an amendment substituting a
1. At the time he signed the certificate. limited partner.
ART. 1850. A general partner shall all have
2. Subsequently, but within a sufficient the rights and powers and be subject to all
time before the statement was relied the restrictions and liabilities of a partner in
upon to enable him to cancel or amend a partnership without limited partners.
the certificate, or to file a petition for its However, without the written consent or
cancellation or amendment as provided ratification of the specific act by all the
in article 1865. limited partners, a general partner or all of
the general partners have no authority to:
Liability for false statement in certificate
Under this provision, any partner to 1. Do any act in contravention of the
the certificate containing a false statement certificate.
is liable provided the following requisites 2. Do any act which would make it
are present: impossible to carry on the ordinary
1. He knew the statement to be false at business of the partnership.
the time he signed the certificate,
or subsequently, but having sufficient 3. Confess a judgement against the
time to cancel or amend it or file a partnership.
petition for its cancellation or
amendment, he failed to do so. 4. Possess partnership property, or assign
2. The person seeking to enforce liability their rights in specific partnership
has relied upon the false statement in property, for other than a partnership
transacting business with the purpose.
partnership.
3. The person suffered loss as a result of 5. Admit a person as a general partner.
reliance upon such false statement.
6. Admit a person as a limited partner,
ART. 1848. A limited partner shall become unless the right so to do is given in the
liable as a general partner unless, in certificate.
addition to the exercise of his rights and
powers as a limited partner, he takes part in 7. Continue the business with partnership
the control of the business. property on the death, retirement,
Limited partner has no control in business insanity, civil interdiction or insolvency
of a general partner, unless the right so
to do is given in the certificate.

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3. Non-participation in the management


Powers of general partner in limited of the business.
partnership
The general partner shall have all the right ART. 1853. A person may be a general
and powers and be subject to all the partner and a limited partner in the same
restrictions and liabilities of a partner in a partnership at the same time, provided that
partnership without limited partners.
this fact shall be stated in the certificate
ART. 1851. A limited partner shall have the provided for in Article 1844.
same rights as a general partner to:
A person who is a general, and also at the
1. Have the partnership books kept at the same time a limited partner, shall have all
principal place of business of the the rights and powers and be subject to all
partnership, and at a reasonable hour restrictions of a general partner; except
to inspect and copy any of them.
that, in respect to his contribution, shall
2. Have on demand true and full have the rights against the other members
information of all things affecting the which he would have had if he were not
partnership, and a formal account of also a general partner.
partnership affairs whenever
circumstances render it just and ART. 1854. A limited partner also may loan
reasonable. money to and transact other business with
the partnership and unless he is also a
3. Have dissolution and winding up by general partner, receive on account of
decree of court. resulting claims against the partnership,
with general creditors, a pro rata share of
A limited partner shall have the right to the assets. No limited partner shall in
receive a share of the profit or other respect to any such claim:
compensation by way of income and to the
return of his contribution as provided in 1. Receive or hold as collateral security
Articles 1856 and 1857. any partnership property.

Rights of limited partner 2. Receive from a general partner or the


It has lesser rights than a general partner. It partnership any payment, conveyance,
may exercise rights similar to a general or release from liability, if at the time
partner. the assets of the partnership are not
sufficient to discharge partnership
ART. 1852. Without prejudice to the liabilities to persons not claiming as
provisions of Article 1848, a person who has general or limited partners.
contributed to the capital of a business
conducted by a person or partnership The receiving of collateral security, or a
erroneously believing that he has become a payment, conveyance, or release in
limited partner in a limited partnership, is violation of the foregoing provisions is a
not, by reason of his exercise of the rights fraud on the creditors of the partnership.
of a limited partner, a general partner with
the person or in the partnership carrying on Loans and business transactions with
the business, or bound by the obligations of limited partners
such person or partnership; provided that A limited partner is allowed to loan money
on ascertaining the mistake he promptly to the firm; transact other business with the
renounces his interest in the profits of the partnership, and receive a pro rata share in
business, or other compensation by way of the assets with general creditors.
income.
Limited partner not allowed to hold
Conditions for exemption from liability collateral security
1. Prompt renunciation of interest and/ or A limited partner may not receive
income upon ascertaining the mistake. partnership property as collateral security.
2. Non-inclusion of limited partner’s name
in the firm name.

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ART. 1855. Where there are several limited the return of the contribution or for the
partners the members may agree that one dissolution of the partnership.
or more of the limited partners shall have a
priority over other limited partners as to In the absence of any statement in the
the return of their contributions, as to their certificate to the contrary or the consent of
compensation by way of income, or as to all members, a limited partner, irrespective
any other matter. If such an agreement is of the nature of his contribution, has only
made it shall be states in the certificate, and the right to demand and receive cash in
in the absence of such a statement all the return for his contribution.
limited partners shall stand upon equal
footing. A limited partner may have the partnership
dissolved and its affairs wound up when:
ART. 1856. A limited partner may receive
from the partnership the share of the 1. He rightfully but unsuccessfully
profits or the compensation by way of demands the return of his contribution.
income stipulated for in the certificate;
provided, that after such payment is made, 2. The other liabilities of the partnership
whether from the property of the have not been paid, or the partnership
partnership or that of a general partner, the property is insufficient for their
partnership assets are in excess of all payment as required by the first
liabilities of the partnership except liabilities paragraph, No. 1, and the limited
to limited partners on account of their partner would otherwise be entitled to
contributions and to general partners. the return of his contribution.

ART. 1857. A limited partner shall not Conditions of a limited partner entitled to
receive from a general partner or out of return of his contribution
partnership property any part of his 1. All liabilities of the partnership have
contributions until: been paid or there are assets sufficient
to pay partnership liabilities.
1. All liabilities of the partnership, except 2. The consent of all the partners is
liabilities to general partners and to obtained.
limited partners on account of their 3. The certificate is cancelled or so
contributions, have been paid or there amended as to set forth the withdrawal
remains property of the partnership or reduction of the contribution.
sufficient to pay them.
When limited partner may demand return
2. The consent of all members is had, 1. The partnership is dissolved
unless the return of the contribution 2. The date specified for its return has
may be rightfully demanded under the arrived
provisions of the second paragraph. 3. If no term is specified, after six months’
notice in writing to all other partners.
3. The certificate is cancelled or so
amended as to set forth the withdrawal Limited partner to receive cash
or reduction. It will be noted that the limited partner has
a right to demand and receive cash only in
Subject to the provisions of the first return for his contribution even when he
paragraph, a limited partner may rightfully contributed property.
demand the return of his contribution:
ART. 1858. A limited partner is liable to the
1. On the dissolution of a partnership. partnership:

2. When the date specified in the 1. For the difference between his
certificate for its return has arrived. contribution as actually made and that
stated in the certificate as having been
3. After he has given six months’ notice in made.
writing to all other members, if no time
is specified in the certificate, either for 2. For any unpaid contribution which he
agreed in the certificate to make in the

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future at the time and on the return of his contribution, to which his
conditions stated in the certificate. assignor would otherwise be entitled.

A limited partner holds a trustee for the An assignee shall have the right to become
partnership: a substituted partner if all the members
1. Specific property stated in the consent thereto or if the assignor, being
certificate as contributed by him, but thereunto empowered by the certificate,
which was not contributed or which has gives the assignee that right.
been wrongfully returned.
An assignee becomes a substituted limited
2. Money or other property wrongfully partner when the certificate is
paid or conveyed to him on account of appropriately amended in accordance with
his contribution. Article 1865.

The liabilities of a limited partners as set The substituted limited partner has all the
forth in this article can be waived or rights and powers, and is subject to all the
compromised only by the consent of all restrictions and liabilities of his assignor,
members; but a waiver or compromise shall except those liabilities of which he was
not affect the right of a creditor of a ignorant at the time he became a limited
partnership who extended credit or whose partner and which could not be ascertained
claim arose after the filling and before a for the certificate.
cancellation or amendment of the
certificate, to enforce such liabilities. The substitution of the assignee as a limited
partner does not release the assignor from
When a contributor has rightfully received liability to the partnership, under article
the return in whole or in part of the capital 1847 and 1858.
of his contribution, he is nevertheless liable
to the partnership for any sum, not in Limited partner’s interest assignable
excess of such return with interest, A limited partner’s interest in the
necessary to discharge its liabilities to all partnership is assignable. The assignee,
creditors who extended credit or whose
however, of a limited partner’s interest
claims arose before such return.
does not necessarily become a substituted
Limited partner liable to partnership for limited partner.
sum returned
A limited partner whose contribution has ART. 1860. The retirement, death,
been rightfully returned is still liable to the insolvency, insanity or civil interdiction of a
partnership for an amount not in excess of general partner dissolves the partnership,
the sum returned plus interest as may be unless the business is continued by the
necessary to pay the claims of persons who remaining general partners:
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 It must be observed that the death, etc., of
admitted to all the rights of a limited a general partner dissolves the partnership
partner who has died or has assigned his while the death of a limited partner does
interest in a partnership. not cause the dissolution of the firm, unless
there is only one limited partner.
An assignee, who does not become a
substituted limited partner, has no right to ART. 1861. On the death of a limited
require any information or account of the partner his executor or administrator shall
partnership transactions or to inspect the have all the rights of a limited partner for
partnership books; he is only entitled to the purpose of settling his estate, and such
receive the share of the profits or other power as the deceased had to constitute his
compensation by way of income, or the assignee a substituted limited partner.

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contribution respectively, in proportion to


The estate of a deceased limited partner the respective amounts of such claims.
shall be liable for all his liabilities as a
limited partner. Art. 1864. The certificate shall be cancelled
when the partnership is dissolved or all
ART. 1862. On due application to a court of limited partners cease to be such.
competent jurisdiction by any creditor of a A certificate shall be amended when:
limited partner, the court may charge the
interest of the indebted limited partner 1. There is a change in the name of the
with payment of the unsatisfied amount of partnership or in the amount or
such claim, and may appoint a receiver, and character of the contribution of any
make all other orders, directions, and limited partner.
inquiries which the circumstances of the
case may require. 2. A person is substituted as a limited
partner.
The interest may be redeemed with the
separate property of any general partner, 3. An additional limited partner is
but may not be redeemed with partnership admitted.
property.
4. A person is admitted as a general
The remedies conferred by the first partner.
paragraph shall not be deemed exclusive of
others which may exist. 5. A general partner retires, dies, becomes
insolvent or insane, or is sentenced to
ART. 1863. In settling accounts after civil interdiction and the business is
dissolution the liabilities of the partnership continued under article 1860.
shall be entitled to payment in the following
order: 6. There is a change in the character of the
1. Those to creditors, in the order of business of the partnership.
priority as provided by law, except
those to limited partners on account of 7. There is a false or erroneous statement
their contributions, and to general in the certificate.
partners.
8. There is a change in the time as stated
2. Those to limited partners in respect to in the certificate for the dissolution of
their share of the profits and other the partnership or for the return of a
compensation by way of income on contribution.
their contributions.
9. A time is fixed for the dissolution of the
3. Those to limited partners in respect to partnership, or the return of a
the capital of their contributions. contribution, no time having been
specified in the certificate.
4. Those to general partners other than
for capital and profits. 10. The members desire to make a change
in any other statement in the certificate
5. Those to general partners in respect to in order that it shall accurately
profits. represent the agreement among them.

6. Those to general partners in respect to Art. 1865. The writing to amend a


capital. certificate shall:

Subject to any statement in the certificate 1. Conform to the requirements of article


or to subsequent agreement, limited 1844 as far as necessary to set forth
partners share in the partnership assets in clearly the change in the certificate
respect to their claims for capital, and in which it is desired to make.
respect to their claims for profit or for
compensation by way of income on their 2. Be signed and sworn to by all members,
and an amendment substituting a

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limited partner or adding a limited or Art. 1866. A contributor, unless he is a


general partner shall be signed also by general partner, is not a proper party to
the member to be substituted or proceedings by or against a partnership,
added, and when a limited partner is to except where the object is to enforce a
be substituted, the amendment shall limited partner's right against or liability to
also be signed by the assigning limited the partnership.
partner.
Art. 1867. A limited partnership formed
The writing to cancel a certificate shall be under the law prior to the effectivity of this
signed by all members. Code, may become a limited partnership
under this Chapter by complying with the
A person desiring the cancellation or provisions of article 1844, provided the
amendment of a certificate, if any person certificate sets forth:
designated in the first and second
paragraphs as a person who must execute 1. The amount of the original contribution
the writing refuses to do so, may petition of each limited partner, and the time
the court to order a cancellation or when the contribution was made.
amendment thereof.
2. That the property of the partnership
If the court finds that the petitioner has a exceeds the amount sufficient to
right to have the writing executed by a discharge its liabilities to persons not
person who refuses to do so, it shall order claiming as general or limited partners
the Office of the Securities and Exchange by an amount greater than the sum of
Commission where the certificate is the contributions of its limited partners.
recorded, to record the cancellation or A limited partnership formed under the law
amendment of the certificate; and when prior to the effectivity of this Code, until or
the certificate is to be amended, the court unless it becomes a limited partnership
shall also cause to be filed for record in said under this Chapter, shall continue to be
office a certified copy of its decree setting governed by the provisions of the old law.
forth the amendment.
CORPORATIONS
A certificate is amended or cancelled when TITLE I - GENERAL PROVISIONS
there is filed for record in the Office of the DEFINITIONS AND CLASSIFICATIONS
Securities and Exchange Commission, where
the certificate is recorded: Sec. 1. Title of the Code. – This Code shall
be known as “The Corporation Coder of the
1. A writing in accordance with the Philippines”.
provisions of the first or second
paragraph. Sec. 2. Corporation defined. - A corporation
is an artificial being created by operation of
2. A certified copy of the order of the law having the right of succession and the
court in accordance with the provisions powers, attributes and properties expressly
of the fourth paragraph. authorized by law or incident to its
existence.
3. After the certificate is duly amended in
accordance with this article, the Definition
amended certified shall thereafter be A corporation is an artificial being created
for all purposes the certificate provided by operation of law having the right of
for in this Chapter. succession and the powers, attributes and
properties expressly authorized by law or
A certificate is considered cancelled or incident to its existence.
amended when there is filed for record
1. A writing to amend the certificate; or Attributes
2. A certified copy of the order of the 1. It is an artificial being.
court in the event of an unjustified 2. It is created by operation of law.
refusal of a partner to sign the writing. 3. It has the right of succession.

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4. It has only the powers, attributes and partnership.


properties expressly authorized by law Right of No right of Possesses
or incident to its existence. Succession succession right of
succession
Similarities between a partnership and a Extent of Partners Stockholders
Liability to (except are liable only
corporation
Third Persons limited to the extent
1. Juridical personality separate and
partners) of their
distinct from the individuals composing are liable investments
it. personally as
2. Act only through its agents. and represented
3. Composed of an aggregate of subsidiarily by the shares
individuals. for subscribed by
4. Distribute profits to those who partnership them.
contribute to capital. debts to
5. May be organized only when there is a third
persons.
law authorizing it.
Transferability A partner A stockholder
6. Subject to income tax.
of interest cannot has the right
transfer to transfer his
Distinctions between a partnership and a interest so shares
corporation as to make a without the
partner prior consent
Point of without the of the other
Partnership Corporation
Comparison consent of stockholders.
Manner of By mere By law or all other
Creation agreement operation of existing
of the law partners.
parties Term of May be May not be
Number of By a Requires at existence established formed for a
Parties minimum of least five (5) for any term in excess
two (2) incorporators period of of 50 years
persons time extendible to
Commence- Generally From the date stipulated not more than
ment of from the of the by the 50 years.
Juridical moment of issuance of partners.
Personality execution of the certificate Firm name A limited A corporation
the contract of partnership may adopt a
incorporation is required firm name
of the to add the provided it is
Securities and word ‘Ltd.’ not identical
Exchange to its name. or deceptively
Commission similar to any
(SEC) registered
Powers May Can exercise firm name or
exercise only the contrary to
powers powers existing laws.
authorized expressly Dissolution May be May only be
by partners granted by dissolved at dissolved with
provided the law or any time by the consent of
same are incident to its the will of the state.
not contrary existence. any or all
to law, partners.
morals, Governing Civil Code Corporation
good Laws Code
customs,
public policy Advantages of a corporate form of
or public business organizations
order. 1. The capacity to hold property, to
Management When it is It is vested in contract, to sue and be sued as a legal
not agreed the board of
unit or distinct entity.
upon, each directors or
partner is an trustees. 2. Exemption of shareholders from
agent of the individual liability.

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3. Continuity of existence in spite of death 2. Quasi-public – are entities engaged in


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

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attacked even in a direct proceeding for 2. The formulation of business and


that purpose by the State. financial plans.
3. Assembling the enterprise by
Sec. 4. Corporations created by special negotiations and obtaining some
laws or charters. – Corporations created by control over the subject matter by
special laws or charters shall be governed option or contracts made on behalf of
primarily by the provisions of the special the proposed corporation or on his own
law or charter creating them or applicable credit.
to them, supplemented by the provisions of 4. The making of arrangements for
this Code, insofar as they are applicable. financing the enterprise and the
floatation of securities.
Sec. 5. Corporators and incorporators, 5. Arrange tactful and painless methods
stockholders, and members. – Corporators for getting his own reward for the task
are those who compose a corporation, of promotion out of the prospective
whether as stockholders or members. investors and for reimbursement for his
Incorporators are those stockholders or expenses, contracts, and services
members mentioned in the articles of without frightening away those who are
incorporation as originally forming and expected to provide the funds.
composing the corporation and who are
signatories thereof. General rule: A corporation is not bound by
any agreement made by a promoter.
Corporators in a stock corporation are Exception to the rule: Unless and until the
called stock-holders or shareholders. corporation approves the agreement.
Corporators in a non-stock corporation are
called members. Sec. 6. Classification of shares. – The
shares of stock of stock corporations may
Components of a Corporation be divided into classes or series of shares,
1. Corporators – are those who composed or both, any of which classes or series of
a corporation, whether as stockholders shares may have such rights, privileges or
of members. The term includes restrictions as may be stated in the articles
incorporators, stockholders or of incorporation: Provided, That no share
members. may be deprived of voting rights except
2. Incorporators – are those stockholders those classified and issued as “preferred” or
or members mentioned in the articles “redeemable” shares, unless otherwise
of incorporation as originally forming provided in this Code: Provided, further,
and composing the corporation and That there shall always be a class or series
who are signatories thereof. of shares which have complete voting
3. Stockholders or shareholders – are rights. Any or all of the shares or series of
those corporators in a stock shares may have a par value or have no par
corporation. value as may be provided for in the articles
4. Members – are those corporators in a of incorporation: Provided, however, That
non-stock corporation. banks, trust companies, insurance
5. Promoters – is a self-constituted companies, public utilities, and building and
organizer who finds an enterprise or loan associations shall not be permitted to
venture and helps to attract investors, issue no-par value shares of stock.
form a corporation and launch it in
business, all with a view to promotion Preferred shares of stock issued by any
profits. corporation may be given preference in the
distribution of the assets of the corporation
Promotion – is the act of procuring the in case of liquidation and in the distribution
initial finances and the making of all of dividends, or such other preferences as
preparations necessary to launch a may be stated in the articles of
corporation. incorporation which are not violative of the
provisions of this Code: Provided, That
Activities of a promoter preferred shares of stock may be issued
1. The discovery and investigation of a only with a stated par value. The board of
promising business opportunity. directors, where authorized in the articles
of incorporation, may fix the terms and

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conditions of preferred shares of stock or 8. Dissolution of the corporation.


any series thereof: Provided, That such
terms and conditions shall be effective Except as provided in the immediately
upon the filing of a certificate thereof with preceding paragraph, the vote necessary to
the Securities and Exchange Commission. approve a particular corporate act as
provided in this Code shall be deemed to
Shares of capital stock issued without par refer only to stocks with voting rights.
value shall be deemed fully paid and non-
assessable and the holder of such shares Definition
shall not be liable to the corporation or to A “stock” or share of stock is one of the
its creditors in respect thereto: Provided; units into which the capital stock has been
That shares without par value may not be divided. It represents the interest or right
issued for a consideration less than the that the holder of the stock or stockholder
value of five (P5.00) pesos per share: has in the corporation.
Provided, further, That the entire
consideration received by the corporation A stock certificate certifies that one is a
for its no-par value shares shall be treated holder or owner of a certain number of
as capital and shall not be available for shares of stock in the corporation. It is a
distribution as dividends. mere documentary evidence of the holder’s
ownership of shares and a convenient
A corporation may, furthermore, classify its instrument for the transfer of title.
shares for the purpose of insuring
compliance with constitutional or legal Classes or series of shares of stock subject
requirements. to restrictions
1. Shares shall not be deprived of voting
Except as otherwise provided in the articles rights except preferred or redeemable
of incorporation and stated in the shares but non-voting shares must still
certificate of stock, each share shall be be entitles to vote on matters specified
equal in all respects to every other share. in the last paragraph of Section 6 like
Where the articles of incorporation provide matters relating to amendment of the
for non-voting shares in the cases allowed articles of incorporation and dissolution
by this Code, the holders of such shares of the corporation.
shall nevertheless be entitled to vote on the 2. Where non-voting shares are provided
following matters: for there must always be a class or
series of shares with complete voting
1. Amendment of the articles of rights.
incorporation. 3. Banks, trust companies, insurance
companies, public utilities, and building
2. Adoption and amendment of by-laws. and loan associations shall not be
permitted to issue no-par value shares
3. Sale, lease, exchange, mortgage, pledge of stock.
or other disposition of all or 4. Preferred shares of stock which may be
substantially all of the corporate given preference in the distribution of
property. assets in case of liquidation and
distribution of dividends or other
4. Incurring, creating or increasing bonded preferences may be issued only with
indebtedness. stated par value.
5. The terms and conditions of preferred
5. Increase or decrease of capital stock. shares or series thereof may be fixed by
the board of directors only when
6. Merger or consolidation of the authorized by the articles of
corporation with another corporation incorporation the effectivity thereof
or other corporations. shall be reckoned from the filing of
certificate with the SEC.
7. Investment of corporate funds in 6. Shares without par value may not be
another corporation or business in issued for a consideration less than the
accordance with this Code. value of five (P5.00) pesos per share.

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7. Unless otherwise provided by law the 4. Incurring, creating or increasing bonded


rights, privileges or restrictions on indebtedness;
classes or series of shares must be 5. Increase or decrease of capital stock;
stated in the articles of incorporation 6. Merger or consolidation of the
and in the stock certificates. corporation with another corporation
or other corporations;
Classes or series of shares 7. Investment of corporate funds in
1. Voting and Non-Voting Shares; another corporation of business in
General rule: Every member of a non- accordance with the Corporation Code;
stock corporation and every legal owner and
of shares in a stock corporation, has a 8. Dissolution of the corporation.
right to be present and vote at all
corporate meetings. Sec. 7. Founders’ shares. – Founders' shares
Exception to the rule: Unless there is a classified as such in the articles of
stipulation in contrary. incorporation may be given certain rights
2. Par Value and No-Par Value Shares and privileges not enjoyed by the owners of
Par value is the given fixed or definite other stocks, provided that where the
value of a share in the articles of exclusive right to vote and be voted for in
incorporation. the election of directors is granted, it must
3. Common and Preferred Shares. be for a limited period not to exceed five (5)
Preferred shares of stock may be: (a) years subject to the approval of the
preferred as to assets; (b) preferred as Securities and Exchange Commission. The
to dividends. Preferred as to dividends five-year period shall commence from the
may either be cumulative or non- date of the aforesaid approval by the
cumulative, or participating or non- Securities and Exchange Commission.
participating
4. Promotion Shares – are such stocks Definition
issued to those who may originally own Founders’ shares, generally common stock,
the mining ground or valuable rights are given to the founders or promoters of a
connected therewith, in consideration corporation in payment of money expended
of their deeding the same to the mining or services rendered in the promotion of it.
company when the company is
incorporated, or it may mean such stock Sec. 8. Redeemable shares. – Redeemable
as is issued to promoters. shares may be issued by the corporation
5. Shares of Escrow – are shares subject to when expressly so provided in the articles
an escrow agreement, that is, an of incorporation. They may be purchased or
agreement under which the shares are taken up by the corporation upon the
deposited by the grantor or his agent expiration of a fixed period, regardless of
with a third person, to be delivered by the existence of unrestricted retained
the depositary to the vendee or earnings in the books of the corporation,
subscriber only upon the happening of and upon such other terms and conditions
certain conditions. as may be stated in the articles of
6. Founder’s Shares; incorporation, which terms and conditions
7. Redeemable “Callable” Shares; must also be stated in the certificate of
8. Treasury Shares; stock representing said shares.
9. Other shares classified to comply with
constitutional or legal requirements. Definition
Redeemable (“Callable”) shares of stock
Instances when non-voting shares may which are usually preferred are frequently
vote issued subject to redemption at the option
1. Amendment of the articles of of either the corporation, the stockholder,
incorporation; or both, at a definite price representing
2. Adoption and amendment of by-laws; premium above the amount originally paid.
3. Sale, lease, exchange, mortgage, pledge
or other disposition of all or Sinking fund refers to a fund set-up by the
substantially all of the corporate corporation where cash is gradually set
property; aside in order to accumulate the amount
necessary to meet the redemption price of

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redeemable shares of specified dates in the extension as may be determined by the


future. Securities and Exchange Commission.

Sec. 9. Treasury shares. - Treasury shares Sec. 12. Minimum capital stock required of
are shares of stock which have been issued stock corporations. – Stock corporations
and fully paid for, but subsequently incorporated under this Code shall not be
reacquired by the issuing corporation by required to have any minimum authorized
purchase, redemption, donation or through capital stock except as otherwise
some other lawful means. Such shares may specifically provided for by special law, and
again be disposed of for a reasonable price subject to the provisions of the following
fixed by the board of directors. (n) section.

Definition Sec.13. Amount of capital stock to be


Treasury shares are owned by the subscribed and paid for purpose of
corporation having been reacquired by the incorporation. – At least twenty-five
issuing corporation by “purchase, percent (25%) of the authorized capital
redemption, donation or through some stock as stated in the articles of
other lawful means.” It has no voting rights incorporation must be subscribed at the
or rights as to dividends or distributions. time of incorporation, and at least twenty-
five percent (25%) of the total subscription
TITLE II - INCORPORATION AND must be paid upon subscription, the
ORGANIZATION OF PRIVATE balance to be payable on a date or dates
CORPORATIONS fixed in the contract of subscription without
Definition need of call, or in the absence of fixed date
Incorporation is the act of creating a or dates, upon call for payment by the
corporation. board of directors: Provided, however, that
in no case shall the paid-up capital be less
Sec. 10. Number and qualifications of than five thousand (P5,0000) pesos.
incorporators. – Any number of natural
persons not less than five (5) but not more Amount to be subscribed and paid
than fifteen (15), all of legal age and a Illustration:
majority of whom are residents of the If X, Inc. has authorized capital
Philippines, may form a private corporation stock of P100, 000 divided into 1,000 shares
for any lawful purpose or purposes. Each of with par value of P100.00 per share, it must
the incorporators of s stock corporation be shown that at least P25, 000 or 250
must own or be a subscriber to at least one shares of the authorized capital stock must
(1) share of the capital stock of the be subscribed. Of the total subscription of
corporation. P25, 000, at least P6, 250.00 or 25% of total
subscription must be paid. It is not
Qualifications of incorporators necessary that each subscriber pay Twenty-
1. Must be a natural person. five percent (25%) on his subscription. On
2. Must be of legal age. the other hand, where the authorized
capital stock is stated at 2,000 no par value
Sec. 11. Corporate term. – A corporation shares , it must be shown that at least 500-
shall exist for a period not exceeding fifty no par value share have been subscribed.
(50) years from the date of incorporation The basis of computation is on the number
unless sooner dissolved or unless said of shares.
period is extended. The corporate term as
originally stated in the articles of Securities and Exchange
incorporation may be extended for periods Commission (SEC) may conduct compliance
not exceeding fifty (50) years in any single with paid-up capital requirements because
instance by an amendment of the articles of it has come to the knowledge of the
incorporation, in accordance with this Code; Commission that some corporation have
Provided, That no extension can be made been organized merely as fronts for some
earlier than five (5) years prior to the hidden objectives with no real intention of
original or subsequent expiry date(s) unless carrying out the purported purposes in their
there are justifiable reasons for an earlier articles of incorporation. If a bigger capital

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Law on Business Organizations Reviewer

stock is required, the abuse of the privileges the Philippines, and no association,
of a corporation would be minimized. partnership, or corporation the capital
of which is not wholly owned by citizens
Capital stock requirements under the of the Philippines, shall engage directly
special laws or indirectly in the retail trade business.
1. In case of mining and agricultural
incorporation, or corporation organized 7. Only vessels of domestic ownership are
for the purpose of the disposition , authorized to engage in coastwise
exploitation, development or utilization shipping in the Philippines. Vessels are
of natural resources of the Philippines, considered of domestic ownership
as well as corporation organized for the when such ownership is vested in some
operations of public utilities, the one or more of the following: (1)
Constitution provides that at least 60 % Citizens of the Philippines; (2) any
of the capital stock of such corporation corporation or any company composed
must be owned by citizens of the wholly of the citizens of the Philippines;
Philippines. (3) any corporation or company created
under the laws of the Philippines,
2. The Insurance Code provide that “no provided at least 75% of the capital
domestic insurance company shall, if a stock thereof or of any interested in
stock corporation, engage in business in said capital is wholly owned by the
the Philippines unless posses of a paid citizens of the Philippines.
up capital stock equal to at least two
million pesos”. Where the insurance Sec.14. Contents of articles of the
company is to engage in insurance incorporations. – All corporation organized
business it must have a “paid-up capital under this Code shall file with the Securities
stock of at least five million pesos” to and Exchange Commission articles of
be invested in securities specified by incorporation in any of the official
law, which securities are to be languages, duly signed and acknowledged
deposited with the Insurance by all of the incorporators containing
Commissioner. substantially the following matters, except
as otherwise prescribed by this Code or by
3. The Financing Company Act requires special laws:
that “at least sixty per centum of the
capital of financing companies must be 1. The name of the corporation.
owned by citizens of the Philippines and
shall have a paid-up capital of not less 2. The specific purpose or purposes for
than five hundred thousand pesos”. which the corporation is being
incorporated. Where the corporation
4. Commercial banks are required to have have more than one stated purpose,
a paid-up capital of 100 million pesos. the article of incorporation shall state
When a commercial bank having licence which the primary is and which is/are
to operate an expanded foreign the secondary purpose or purposes:
currency deposit system it must have a Provided, That a non-stock corporation
paid-up capital of at least 150 million may not include a purpose which would
pesos and when a commercial bank is change or contradict its nature as such.
authorized to engage in universal
banking it must have a paid up capital 3. The place where the principal office of
of at least 500 million pesos. the corporation is to be located, which
must be within the Philippines.
5. The New Constitution provides that:
“The ownership and management of 4. The term for which the corporation is to
mass media shall be limited to citizens exist.
of the Philippines or to corporations or
association wholly-owned and manage 5. The names, nationalities and residences
by such citizen”. of the incorporators.

6. Under the Retail Trade Nationalization


law “no person who is not a citizen of

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6. The number of directors or trustees Incorporators may choose any name they
which shall not be less than five (5) nor see fit , however strange, uneuphonious, or
more than fifteen (15). unrhetorical it may be , provided it is one
not identical with or prejudicially similar to
7. The names, nationalities and residences a name which has previously been adopted
of the person who shall act as directors by and is being use by another corporation
or trustees until the first regular as its corporate name
directors or trustees are duly elected
and qualified accordance with this Change of Corporate name
Code. The change of the corporate name
doesn’t mean a new corporation, nor the
8. If it be a stock corporation, the amount successor of the original corporation. It is
of its authorized capital stock in lawful the same corporation with a different name
money of the Philippines, the number having its character with no respect change.
of shares which it is divided, and in case The corporation continues, as before,
the shares are par value shares, the par responsible in its new name for all debts or
value of each, the names, nationalities other liabilities it had previously contracted
and residences of the original or incurred.
subscriber, and the amount subscribed
and paid by each on his subscription, 2. Specific purpose or purposes.
and if some or all of the shares are The statement of the purpose has its
without par value, such fact must be principal function the affirmative
stated. authorization of the management to enter
into those contracts and business
9. If it be a non-stock corporation, the transactions which may be considered as
amount of its capital, the names, incidental to its attainment of the purposes.
nationalities and residences of the It also imposes implied limitations of their
contributors and the amount, authority by the exclusion of lines of activity
contributed by each. which are not covered.

10. Such other matters are not inconsistent 3. Principal office of the Corporation.
with law and which the incorporators The principal office of the corporation must
may deem necessary and convenient. be within the Philippines. It is where the
books of the corporation are kept and its
The Securities and Exchange Commission officers usually and ordinarily meet for the
shall not accept the articles of incorporation purpose of managing the affairs and
of any stock corporation unless transactions of the business of the
accompanied by a sworn statement of the corporation.
Treasurer elected by the subscriber
showing that at least 25% of the authorized 4. Terms of Existence of the Corporation.
capital stock of the corporation has been The corporation shall exist for a period not
subscribed, and at least 25% of the total exceeding fifty (50) years from the date of
subscription has been fully paid to him in incorporation unless sooner dissolved or
actual cash and/or in property the fair unless said period is extended.
valuation of which are equal to at least 25%
of the said subscription , such paid up 5. Names, Nationalities and residences of
capital being not less than five-thousand incorporators.
pesos (P5,000). The names, nationalities and residences of
the incorporators must be stated in the
Sec.15. Forms of Articles of Incorporation. articles of the corporation for the purpose
– Unless otherwise prescribed by special of complying with legal requirement that
law, articles of incorporation of all domestic majority of the incorporators must be
corporations shall supply substantially the residents of the Philippines and complying
following requirements in the form as with the statutory requirement on share
provided for by the SEC: ownership and in other instances where
Filipino Citizens are required.
1. The name of the corporation.
6. Number of directors and trustees.

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The number of the director and trustees Property as subscription payment –


must not be less than five (5) nor more than Generally, all forms of tangible properties
fifteen (15). are acceptable for purposes of payment to
subscription provided that the three test of
7. Names, nationalities and residences of paid-up capital determination are complied
directors. with, i.e., ownership, existence and
A majority of the directors or trustees of all valuable, subject to certain restrictions as
corporation organized under this Code must may be imposed by law.
be a residents citizens of the Philippines.
SEC adopted the policy that
8. Amount of authorized capital stock. discourages the inclusion of intangible
A stock corporation must state the “amount assets as goodwill, lease-hold rights, or
of its authorized capital stock in lawful timber concession rights, payment of such
money of the Philippines, the number of properties Motor vehicle, real estate
shares into which it is divided, and in case properties and navigable vessels in payment
the shares are par value shares, the par of pre-incorporation subscription, increases
value of each, the names, nationalities, and of capital stock or in exchange for additional
residences of the original subscribers, and issuance of shares are allowed only by the
the amount subscribed and paid by each on SEC provided that:
his subscription, and if some or all the 1. There has been a proof of valid
shares are without par value, such fact must transfer;
be stated”. 2. All taxes due from the properties
has been paid; and
9. Non-stock Corporation. 3. Such properties have been
The Corporation Code requires the articles reasonably valued.
of the non-stock corporation to states: the
amount of its capital, the names, Papers to accompany articles with SEC
nationalities and residences of its The SEC requires the following papers to be
contributors and the amount contributed submitted to it with the articles of
by each. A non-stock corporation may have incorporation:
capital but it has no authorized capital 1. A verification slip executed by the
stock. Chief of the Record Section states
that the proposed name of the
10. Inclusion of other matters. corporation has been verified and
The articles of incorporation “may include found to be distinct/ not similar to
other matters that is not inconsistent with the names of already existing
law and which the incorporators may deem corporation or those pending
necessary and convenient”. registration.
2. Written undertaking to change
Sworn Statement of the Treasurer corporate name in case there is a
The Securities and Exchange Commission person, firm or entity with a prior
shall not accept the articles of incorporation right to the use of said name or one
of any stock corporation unless similar to it.
accompanied by a sworn statement of the 3. Sworn statement of assets and
Treasurer elected by the subscribers liabilities, duly executed under oath
showing that at least: by the corporate treasurer together
with the amount P50.00 to defray
1. 25% of the authorized capital stock has publication expenses.
been subscribed. 4. Bank certificate of deposit, issued
under oath by the bank manager or
2. 25% of the subscription has been fully any authorized bank officer, that
paid in actual cash or property. there is a deposit of the stated
amount representing the paid-up
3. The paid-up capital being not less than capital of the corporation either in
P5,000.00. the name of the treasurer in trust
for the corporation or in the name
SEC Policy of the corporation itself.

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

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Code: Provided, That the Commission shall by which the corporation can be identified
give the incorporators a reasonable time and distinguished from other corporation,
within which to correct or modify the firms or entities.
objectionable portions of the articles or
amendment. The following are grounds for Change of corporate name
such amendment or disapproval: A corporation may change its name by
merely amending its charter in the manner
1. That the articles of incorporation or any prescribed by law. The change of name of
amendment thereto is not substantially the corporation does not result in
in accordance with the form prescribed dissolution. The changing of the name of a
herein. corporation is no more the creation of a
corporation than the changing of the name
2. That the purpose or purposes of the of a natural person.
corporation are patently
unconstitutional, illegal, immoral, or Restriction in use in certain names of
contrary to government rules and words
regulation. There are special laws prohibiting the use of
certain names and/or words. Thus, under
3. That the Treasurer’s Affidavit the General Banking Act, no person or
concerning the amount of capital stock entity not conducting the business of
subscribed and/or paid is false. commercial banking shall use the words
“bank”, “banking”, “banker”, “building and
4. That the required percentage of loan association”, “trust corporation”, etc.
ownership of the capital stock to be or words of similar import. The word
owned by citizens of the Philippines has “National” under Act 2612 may not be use
not been complied with as required by by those doing business as bankers,
existing laws of the constitution. brokers, or savings institutions. “United
Nations” both in its full and abbreviated
No articles of incorporation or amendment forms, for commercial and business
to articles of incorporation of banks, purposes. There are other names or words
banking and quasi-banking institutions, which pursuant to other special laws may
building and loan association, trust not be used.
companies, public utilities, educational
institution, and other corporations Sec. 19. Commencement of Corporate
governed by special laws shall be accepted Existence. – A private corporation formed
or approved by the Commission unless or organized under this Code commences to
accompanied by a favourable have corporate existence and juridical
recommendation of the appropriate personality and is deemed incorporated
government agency to the effect that such from the date the Securities and Exchange
articles or amendment is in accordance with Commission issues a certificate of
law. incorporation under its official seal; and
thereupon the incorporators,
Sec. 18. Corporate name. – No corporate stockholders/members, and their
name may be allowed by the Securities and successors shall constitute a body politic
Exchange Commission if the proposed name and corporate under the name stated in the
is identical or deceptively or confusingly articles of incorporation for the period of
similar to that of any existing corporation or time mentioned therein, unless said period
to any other name already protected by law is extended or the corporation is sooner
or its patently deceptive, confusing or dissolved in accordance with law.
contrary to existing laws. When the change
in a corporate name is approved, the Sec. 20. De Facto corporation. – The due
commission shall issue an amended incorporation any corporation claiming in
certificate of incorporation under the good faith to be a corporation under this
amended name. Code, and its right to exercise corporate
powers, shall not be inquired into
Necessity of Corporate name collaterally in any private suit to which such
It is necessary that a corporation should corporation may be a party. Such inquiry
have a name because that is the only way

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may be made by the Solicitor General in a of a contrary tenor. The object of the
quo warranto proceeding. principle of estoppel is to prevent injustice
to an otherwise innocent person.
De facto corporation – generally refer to
organizations exercising corporate power Sec. 22. Effect of non-use of corporate
under colour of a more or less legally charter and continuous in operation of a
constituted corporation. corporation. – If a corporation does not
formally organize and commence the
Elements of De facto corporation transaction of its business or the
1. Existence of a valid law under which a construction of its works within two (2)
corporation can be organized. years from the date of its incorporation, its
2. An attempt in good faith to incorporate. corporate powers cease and the
3. Actual exercise of incorporate powers. corporation shall be deemed dissolved.
However, if a corporation has commenced
Quo warranto – an inquiry made into the the transaction of its business but
right of a corporation to conduct business. subsequently becomes continuously
inoperative for a period of at least five (5)
Illustration years, the same shall be ground for the
Seven competent individual organized a suspension or revocation of its corporate
corporation by filing the articles of franchise or certificate of incorporation.
incorporation and securing a certificate of
incorporation with the SEC. However, the This provision shall not apply if the failure
addresses of two of the original subscribers to organize, commence the transactions of
were omitted in the articles of its businesses or the construction of its
incorporation. In suit filed by X, a creditor, works, or to continuously operate is due to
against the corporation he alleged that the causes beyond the control of the
corporation has no valid existence and corporation as may be determined by the
sought to hold the seven incorporators (also Securities and Exchange Commission.
directors) liable personally on the
obligation. X’s allegation that the Organization
corporation had no valid existence would The idea of organization in reference to
constitute a collateral (side) attack in a corporations means executive structure,
private suit. Only the Solicitor General as election of officers, providing for
government lawyer may raise the question subscription and payment of capital,
by quo warranto proceeding. (Literally by adoption of by-laws, and other steps
“what right”). necessary to endow the legal entity with
capacity to transact business for which it
Sec. 21. Corporation by estoppel. – All was created.
persons who assume to act as a corporation
knowing it to be without authority to do so The Grant of corporate existence, conferred
shall be liable as general partners for all by the issuance of certificate of
debts, liabilities and damages incurred or incorporation, is subject to two subsequent
arising as a result thereof: Provided, conditions, to wit:
however, That when any such ostensible 1. The corporation must “formally
corporation is sued on any transaction organize”.
entered by it as a corporation or on any tort 2. The corporation must actually begin the
committed by it as such, it shall not be “transaction of its business”.
allowed to use as a defense its lack of
corporate personality. Failure to comply with either or both of
these conditions within two (2) years from
One who assumes an obligation to an the date of its incorporation, its corporate
ostensible corporation as such cannot resist power cease and the corporation must be
performance thereof on the ground that deemed dissolved.
there was in fact no corporation.
Sec. 23. The board of directors or trustees.
Estoppel – It is preclusion, which prevent a – Unless otherwise provided in this Code,
man from denying a fact in consequences of the corporate powers of all corporation
his own previous act, allegations, or denial formed under this Code shall be exercised ,

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all business conducted and all property of 3. Domestic air carrier, the directing head
such corporations controlled and held by or 2/3 of the board of directors and
the board of directors or trustees to be other managing officers shall be citizens
elected from among the holders of stock, of the Philippines.
or where there is no stock, from among 4. Registered investments companies, the
the members of the corporation, who shall directors thereof must be Filipino
hold office for one (1) year and until their citizen.
successors are elected and qualified. 5. Private development banks, all the
members of the board of directors shall
Every director must own at least one (1) be citizen of the Philippines.
share of the capital stock of the corporation 6. In case of financing corporation, at least
of which he is a director, which share shall 2/3 of all members of the board of
stand in his name on the books of the directors shall be citizen of the
corporation. Any director who ceases to be Philippines.
the owner of at least one (1) share of the
capital stock of the corporation of which he Sec. 24. Election of directors or trustees. –
is the director shall thereby cease to be a At all elections of directors or trustees,
director. Trustees of non-stock corporations there must be present, either in person or
must be members thereof. A majority of the by representative authorized to act by
directors or trustees of all corporations written proxy, the owners of the majority of
organized under this Code must be the outstanding capital stock, or if there be
residents of the Philippines. no capital stock, a majority of the members
entitled to vote. The election must be by
Qualifications of directors ballot if requested by any voting
1. He must own at least one (1) share of stockholder or member. In stock
the capital stock of the corporation in corporations, every stockholder entitled to
his name. vote shall have the right to vote in person
2. Majority of the directors must be a or by proxy the number of shares of stock
resident citizen of the Philippines. standing, at the time fixed in the by-laws, in
3. A director must not have been his own name on the stock books of the
convicted by final judgement of an corporation, or where the by-laws are
offense punishable by imprisonment silent, at the time of the election; and said
exceeding six (6) years or a violation of shareholder may vote such number of
the provisions of the Corporation Code shares for as many persons as there are
committed within five (5) years prior to directors to be elected or he may cumulate
the date of election or appointment. said shares and give one candidate as many
votes as the number of directors to be
The directors, once elected, become the elected multiplied by the number of his
representatives of the corporation itself, shares shall equal, or he may distribute
not its stockholders. The directors of a non- them on the same principle among as many
stock corporation are required to be candidate as he shall see fit; Provided, That
members thereof and like stock the total number of votes cast by him shall
corporations “majority of the directors and not exceed the numbers of shares owned
trustees of all corporations organized under by him as shown in the books of the
the Corporation Code must be residents corporation multiplied by the whole
citizen of the Philippines”. There are some number of directors to be elected: Provided,
special corporation not organized with the however, that no delinquent stocks shall be
Corporation Code where directors are voted. Unless otherwise provided in the
required to be citizens of the Philippines. articles of incorporation, or in the by- laws,
They are as follows: members of corporation which have no
1. Bank and banking institution, at least capital stock may cast as many votes as
2/3 of the members of the board of there are trustees to be elected but may
directors shall be citizen of the not cast more than one vote for one
Philippines. candidate. Candidates receiving the highest
2. Rural banks, every member of the number of votes shall be declared elected.
board of directors shall be citizens of Any meeting of the stockholders or
the Philippines. members called for an election may
adjourn from day to day or from time to

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time but not sine die or definitely if, for any Sec. 25. Corporate officers, quorum. –
reason, no election is held, or if there are Immediately after their election, the
not present or represented by proxy, at the directors of a corporation must formally
meeting, the owners of the majority of the organized by the election of a president,
outstanding capital stock, or if there be no who shall be a director, a treasurer who
capital stock, a majority of the members may or may not be a director, a secretary
entitled to vote. who shall be a resident citizen of the
Philippines, and such other officers as may
Methods of voting be provided for in the by-laws. Any two (2)
The voting methods which may be resorted or more positions may be held concurrently
to by a voting stockholder are as follows: by the same person, except that no one
1. Straight voting. shall act as president and secretary or as
2. Cumulative voting for one candidate. president and treasurer at the same time.
3. Cumulative voting by distribution.
The directors or trustees and officers to be
Example of Straight Voting elected shall perform the duties enjoined
A owns 100 shares of stock in X corporation. on them by law and by the by-laws of the
During the meeting for the purpose of corporation. Unless the articles of
electing five directors, he may cast his vote incorporation or the by-laws provide form a
by giving each of the five candidates 100 greater majority, a majority of the number
votes, hence, he distribute equally his vote of directors or trustees as fixed in the
without preference or discrimination. articles of incorporation shall constitute a
quorum for the transaction of corporate
Example of Cumulative voting for one business, and every decision of at least a
candidate majority of the directors or trustees present
In the preceding illustration, if A owns 100 at a meeting at which there is a quorum
voting shares and there are five directors to shall be valid as a corporate act , except for
be elected, A is entitled to 500 votes which the election of the officers which shall
he may “cumulate” by giving it to candidate require the vote of a majority of all the
Z alone. members of the board.
Example of Cumulative voting by Qualification of corporate officer
distribution 1. President. He must be a director.
As in the same example above, if A owns 2. Treasurer. He may or may not be a
100 voting shares, and there are five director.
directors to be elected, A is entitled to 500 3. Secretary. He must be a resident and
votes which he may distribute to candidate citizen of the Philippines
Y and Z giving the former 300 and the latter 4. Other officers provided for in the by-
200 provided that the total number of laws.
votes cast by him does not exceed 500
votes. Three levels of corporate control
1. The board of director which is
Voting of sequestered shares of stock responsible for the corporate policies
It has been held that the “Presidential and the general management of the
Commission on Good Government may business affairs of the corporation.
properly exercise the prerogative to vote 2. The officers, who in theory execute the
sequestered stock of corporation, granted policies lay down by the board , but in
to it by the President of the Philippines xxx practice often have wide latitude in
pending the outcome of proceeding to determining the course of business
determine the ownership of sequestered operations.
shares of stock. xxx Substitution of 3. Stockholders who like amendments of
directors is not be done without reason or the articles of incorporation.
rhyme, and undertaken only when essential
to prevent disappearance or wastage of Teleconferencing of Board Members
corporate property, and always under such In the Philippines, teleconferencing and
circumstance as assure that replacements videoconferencing of members of board of
are truly processed of competence, directors of private corporation is a reality,
experience and probity. in light of the Republic Act No. 8792.The
Securities and Exchange Commission issued

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SEC Memorandum Circular No. 15, on has authority to act in his stead, and to
November 30, 2001, providing the perform the duties of the office.
guidelines to be complied with related to
such conferences. Thus, the court agrees Secretary
with the RTC that persons in the Philippines A secretary must be a resident citizen of the
may have a teleconference with a group of Philippines. It is generally its duty to make
persons in South Korea relating to business and keep corporate records; to make
transactions or corporate governance. proper entries of the votes, resolution and
proceedings of the shareholders and
Directors and officers distinguished directors in the management of the
The officers of a corporation, unlike the corporation, and of all other matters
directors, are true agent of the corporation. required to be entered in the records. The
Each officer may bind the corporation by his secretary is the ministerial officer who
individual acts within the actual or apparent cannot bind the corporation unless he is
scope of authority. On the other hand, a authorized to do so.
director has no authority to act for the
corporation. Treasurer
The treasurer of the corporation “may or
Authority of corporate officers may not be a director”. He is the proper
The corporation transact its business officer and the only proper officer in the
through its officers or agents. An officer’s absence of express provision to the
power as an agent of the corporation must contrary, to receive and keep the money of
be sought from the statute, charter, and the the corporation and to disburse them as he
by-laws or in a delegation of authority to may be authorized.
such officers, from the acts of board of
directors, formally expressed or implied Other officers
from a habit or custom of doing business. The by-laws of the corporation may
provide for such other officers and agent as
Chairman of the Board may be necessary and convenient
A chairman of the board of directors must considering the nature and needs of the
himself director be a director of the business. Their compensation is provided
corporation. His duty as presiding officer is for by the by-laws and the board of
not an executive one. It has been suggested directors in a suitable manner.
that he well be given advisory duties in
determining executive salaries, bonus plans Quorum – signifies the number of persons
and pensions, determining dividend policy, belonging to a corporation required to
selecting auditors, and dealing questions transact business.
with labor and company policy.
Section 25 of the Corporation Code
President requires more people than a simple
The president must be a director of the majority to form a quorum. If no such
corporation. The powers of the president of defining number is determined, a quorum is
a corporation are vested in him by law or a simple majority.
the by-laws; otherwise, he has no power
over the corporate property and business Directors cannot vote by proxy
than has any other director. However, he The directors cannot vote by proxy but
may be given actual authority to make must personally present, and act by
particular contracts, or to execute themselves.
conveyances, borrow money, execute
mortgages, and do other acts, by the Sec. 26. Report of election of directors,
charter, the by-laws, resolutions of trustees and officers. – Within thirty (30)
directors or their informal acquiescence. days after the election of the officers,
trustees and directors of the corporation,
Vice- President the secretary, or any other officer of the
In the absence of the president, or if the corporation shall submit to the Securities
office of the president becomes vacant, as a and Exchange Commission, the names,
rule, the vice president elected and nationalities and residences of the
appointed by the shareholders or directors directors, trustees and officers elected.

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

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directors in a stock corporation is majority of the outstanding capital stock at


mandatory and cannot be dispensed with in a regular or special stockholders’ meeting.
the by-laws. Being a statutory right, the In no case shall the total yearly
stockholders cannot be deprived of the use compensation of directors, as such
of cumulative voting. directors, exceed ten percent (10%) of the
net income before income tax of the
May the result of the duly held election of corporation during the preceding year.
directors be altered by mere agreement of
the directors? Sec. 31. Liability of directors, trustees or
The Securities and Exchange Commission officers. – Directors or trustees who willfully
ruled that: “An agreement by which and knowingly vote for or assent to patently
director is reposed in any body except unlawful acts of the corporation or who are
majority of stockholders is in violation of guilty of gross negligence or bad faith in
‘public policy’ and ‘enforceable’ ”. directing the affairs of the corporation or
acquire any personal or pecuniary interest
The Securities and Exchange Commission in conflict with their duty as such directors,
has jurisdiction or authority to “hear and or trustees shall be liable jointly and
decide cases” involving controversies in the severally for all damages resulting
election or appointments of directors, therefrom suffered by the corporation, its
trustees, officers or managers of such stockholders or members and other
corporations, partnerships or associations. persons.
Controversy concerning removal of
directors or trustees may also be heard by When a director, trustee or officer attempts
the SEC. to acquire or acquires, in violation of his
duty, any interest adverse to the
Sec. 29. Vacancies in the office of director corporation in respect of any matter which
or trustee. – Any vacancy occurring in the has been reposed in him in confidence, as
board of directors or trustees other than by to which equity imposes a disability upon
removal by the stockholders or members or him to deal in his own behalf, he shall be
by expiration of term, may be filled by the liable as a trustee for the corporation and
vote of at least a majority of the remaining must account for the profits which
directors or trustees, if still constituting a otherwise would have accrued to the
quorum; otherwise, said vacancies must be corporation.
filled by the stockholders in a regular or
special meeting called for that purpose. A Directors are trustees
director or trustee so elected to fill the It is well-stated rule in corporate law that
vacancy shall be elected only for the directors of corporations are trustees and
unexpired term of his predecessor in office. are required to act in the utmost good faith.

Any directorship or trusteeship to be filled Liability of corporate directors and officers


by reason of an increase in the number of for illegal dismissal of employees
directors or trustees shall be filled only by In cases of illegal dismissal, corporate
an election at a regular or at a special directors and officers are solidarily liable
meeting of stockholders or members duly with the corporation, where terminations of
called for the purpose, or in the same employment are done with malice or in bad
meeting authorizing the increase of faith. (Acesite Corp. vs. NLRC, G.R. No.
directors or trustees if so stated in the 152308, January 26, 2005, 449 SCRA 360)
notice of the meeting.
Sec. 32. Dealings of directors, trustees or
Sec. 30. Compensation of directors. – In the officers with the corporation. – A contract
absence of any provision in the by-laws of the corporation with one or more of its
fixing their compensation, the directors directors or trustees or officers is voidable,
shall not receive any compensation, as such at the option of such corporation, unless
directors, except for reasonable per diems: all the conditions are present:
Provided, however, That any such
compensation (other than pier diems) may 1. That the presence of such director or
be granted to directors by the vote of the trustee in the board meeting in which
stockholders representing at least a the contract was approved was not

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necessary to constitute a quorum for with such officers or agents. (Yao Ka Sin
such meeting. Trading vs. Court of Appeals, G.R. No.
53820, June 15, 1992, citing Francisco vs.
2. That the vote of such director or GSIS, 7 SCRA 577)
trustee was not necessary for the
approval of the contract. Corporate president presumed to have
authority
3. That the contract is fair and reasonable As a strict rule, the corporate president has
under the circumstances. no inherent power to act for the
corporation, slowly giving way to realization
4. That in the case of an officer, the that such officer has certain limited powers
contract with the officer has been in the transaction of the usual and ordinary
previously authorized by the Board of business of the corporation. In the absence
Directors. of agreement or by law provision to the
contrary, the president is presumed to have
Where any of the first two conditions set the authority to act within the domain of
forth in the preceding paragraph is absent, the general of his or her usual duties.
in the case of a contract with a director or (People’s Aircargo, and Warehousing Co.,
trustee, such contract may be ratified by Inc. vs. Court of Appeals, G.R. No. 117847,
the vote of the stockholders representing Oct. 7, 1998)
at least two-thirds (2/3) of the outstanding
capital stock or of two-thirds (2/3) of the Sec. 33. Contracts between corporations
members in a meeting called for the with interlocking directors. – Except in
purpose: Provided, That full disclosure of cases of fraud, and provided the contract is
the adverse interest of the directors or fair and reasonable under the
trustees involved is made at such meeting: circumstances, a contract between two or
Provided, however, That the contract is fair more corporations having interlocking
and reasonable under the circumstances. directors shall not be invalidated on that
ground alone; Provided, That if the interest
Director disqualified to vote if he has of the interlocking director in one
personal interest corporation or corporations is merely
A director is disqualified to vote at a nominal, he shall be subject to the
meeting of the board if he has any personal provisions of the preceding section insofar
interest in a matter before the board; in as the latter corporation or corporations are
such case, his vote cannot be counted in concerned.
making up a quorum. Stockholdings exceeding twenty
percent (20%) of the outstanding capital
Disclosure of adverse interest by director stock shall be considered substantial for
It has been held that in dealing with their purposes of interlocking directors.
corporation the directors must make full
disclosure of all relevant facts or the Interlocking directors – Interlocking
transaction is voidable. The failure of a directors are persons who serve as member
director to inform his fellow directors of his of the board of directors of two or more
adverse bargaining position and other competing corporations or corporations
material circumstances should be seriously engaged in practically the same kind of
considered and inspected by the courts as business.
manner on the fairness and good faith of
the transaction and whether it is just and Effect of Corporate contracts with
reasonable as to the corporation. interlocking directors
Interlocking directors of corporations does
Exceptions in Signing contract without not make a contract between or among the
authority of Board of Directors is void corporations void and of no effect provided
If a private corporation intentionally or there in no fraud and reasonable under the
negligently clothed its officers or agents circumstances.
with apparent power to perform acts of it,
the corporation will be estopped to deny Sec. 34. Disloyalty of a director. – Where a
that such apparent authority is real, as to director, by virtue of his office, acquires for
innocent third persons dealing in good faith himself a business opportunity which

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should belong to the corporation, thereby majority vote of the board, except with
obtaining profits to the prejudice of such respect to: (1) approval of any action for
corporation, he must account to the latter which shareholders’ approval is also
for all such profits by refunding the same, required; (2) the filling of vacancies in the
unless his act has been ratified by a vote of board; (3) the amendment or repeal of by-
the stockholders owning or representing at laws or the adoption of new by-laws; (4) the
least two-thirds (2/3) of the outstanding amendment or repeal of any resolution of
capital stock. This provision shall be the board which by it express terms is not
applicable notwithstanding the fact that the so amenable or repealable; and (5) a
director risked his own funds in the venture. distribution of cash dividends to the
shareholders.
Duties of directors Sec. 36. Corporate powers and
Directors owe a three-fold duty to the capacity. – Every corporation incorporated
corporation. First, they must be obedient; under this Code has the power and
they owe a duty to keep within the powers capacity:
of the corporation as well as within those of
the board of directors. Second, they must 1. To sue and be sued in its corporation
be diligent; they owe a duty to exercise name.
reasonable care and prudence. The third
duty owing by directors is that of individual 2. Of succession by its corporate name for
loyalty. the period of time stated in the articles
of incorporation and the certificate of
Concept of “corporate or business incorporation.
opportunity.”
The doctrine of “corporate opportunity” is 3. To adopt and use a corporate seal.
but one phase of the cardinal rule of
undivided loyalty on the part of the 4. To amend its articles of incorporation in
fiduciaries. If there is a presented to a accordance with the provisions of this
corporate officer or director a business code.
opportunity which the corporation is 5. To adopt by-laws, not contrary to law,
financially able to undertake, is from its morals, or public policy, and to amend
nature, in the line of the corporation’s or repeal the same in accordance with
business and is of practical advantage to it, this Code.
is one in which the corporation will be
brought into conflict with that of his 6. In case of stock corporations, to issue or
corporation, the law will not permit him to sell stocks to subscribers and to sell
seize the opportunity for himself. treasury stocks in accordance with the
provisions of this code; and to admit
Director is a fiduciary. members to the corporation if it be a
He who is in such fiduciary position cannot non-stock corporation.
serve himself first and his cestuis
(beneficiary) second. He cannot manipulate 7. To purchase, receive, take or grant,
the affairs of his corporation to their hold, convey, sell, lease, pledge,
disadvantage and in disregard of the mortgage and otherwise deal with such
standards of common decency. He cannot real and personal property, including
by the intervention of a corporate entity securities and bonds of other
violate the ancient principle against serving corporations, as the transaction of the
two masters. lawful business of the corporation may
be reasonably and necessarily require,
Sec. 35. Executive Committee. – The by- subject to the limitations prescribed by
laws of a corporation may create an law and the Constitution.
executive committee, composed of not less
than three members of the board, to be 8. To enter into with other corporations
appointed by the board. Said committee merger or consolidation as provided in
may act, by majority vote of all its this code.
members, on such specific matters within
the competence of the board, as may be 9. To make reasonable donations,
delegated to it in the by-laws or on a including those for the public welfare or

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for hospital, charitable, cultural, or trustees and ratified at a meeting by the


scientific, civic, or similar purposes: stockholders representing at least two-
Provided, That no corporation, domestic thirds (2/3) of the outstanding capital stock
or foreign, shall give donations in aid of or by at least two-thirds (2/3) of the
any political party or candidate or for members in case of non-stock corporations.
purposes of partisan political activity. Written notice of proposed action and of
the time and place of the meeting shall be
10. To establish pension, retirement, and addressed to each stockholder or member
other plans for the benefit of its at his place of residence as shown on the
directors, trustees, officers and books of the corporation and deposited to
employees. the addressee in the post office with
postage prepaid, or served personally:
11. To exercise such other powers as may Provided, That in case of extension of
be essential or necessary to carry out its corporate term, any dissenting stockholder
purpose or purposes as stated in its may exercise his appraisal right under the
articles of incorporation. conditions provided in this Code.

Powers of a corporation Extension of corporate term limited to 50


A corporation has such powers, and such years
powers only, as are conferred upon it by The corporate term may be extended for
law or by its agreement. Powers may be periods not exceeding 50 years in any single
conferred upon a corporation: instance as provided by section 11 of the
1. Expressly. Corporation Code. No extension can be
2. Impliedly, because they are incidental made earlier than 5 years prior to the
to corporate existence. original or subsequent expiry date(s) unless
3. Impliedly, because they are necessary there are justifiable reasons for an earlier
or proper in order to exercise the extension as determined by the SEC.
powers expressly conferred.
Corporation cannot extend expired term.
General express powers A corporation cannot extend its life by
Section 36 of the Corporation Code amendment of its articles of incorporation
enumerates the general and express effected during the three-year statutory
powers of corporations. period for liquidation when its original term
of existence had already expired.
Other corporate powers
The Corporation Code enumerates other Sec. 38. Power to increase or decrease
express powers of corporations as follows: capital stock; incur, create or increase
1. Power to extend or shorten corporate bonded indebtedness. – No corporation
term (Sec. 37). shall increase or decrease its capital stock
2. Power to increase or decrease capital or incur, create or increase any bonded
stock; incur, create or increase bonded indebtedness unless approved by a majority
indebtedness (Sec. 38). vote of the board of directors and, at a
3. Power to deny pre-emptive right (Sec. stockholders’ meeting duly called for the
39). purpose, two-thirds (2/3) of the
4. Power to sell or dispose assets (Sec. 40). outstanding capital stock shall favor the
5. Power to acquire own shares (Sec. 41). increase or diminution of the capital stock,
6. Power to invest corporate funds in or the incurring, creating or increasing of
another corporation or business or for and bonded indebtedness. Written notice
any other purpose (Sec. 42). of the proposed increase or diminution of
7. Power to declare dividends (Sec. 43). the capital stock or of the incurring,
8. Power to enter into management creating, or increasing of any bonded
contracts (Sec. 44). indebtedness and of the time and place of
the stockholders’ meeting at which the
Sec. 37. Power to extend or shorten proposed increase or diminution of the
corporate term. – A private corporation capital stock or the incurring or increasing
may extend or shorten its terms as stated in of any bonded indebtedness is to be
the articles of incorporation when improved considered, must be addressed to each
by a majority vote of the board of directors stockholder at his place of residence as

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shown on the books of the corporation and incorporation. From and after approval by
deposited to the addressee in the post the Securities and Exchange Commission
office with postage prepaid, or served and the issuance by the Commission of its
personally. certificate of filing, the capital stock shall
stand increased or decreased and the
A certificate in duplicate must be signed by incurring, creating or increasing of any
a majority of the directors of the bonded indebtedness authorized, as the
corporation and countersigned by the certificate of filing may declare: Provided,
chairman and secretary of the stockholders’ That the Securities and Exchange
meeting, setting forth: Commission shall not accept for filing any
certificate of increase of capital stock unless
1. That the requirements of this section accompanied by the sworn statement of
have been complied with. the Treasurer of the corporation lawfully
holding office at the time of the filing of the
2. The amount of the increase or certificate, showing that at least twenty-five
diminution of the capital stock. percent (25%) of such increased capital
stock has been subscribed and that at least
3. If an increase of the capital stock, the twenty-five percent (25%) of the amount
amount of capital stock or number of subscribed has been paid either in actual
shares of no-par stock thereof actually cash to the corporation or that there has
subscribed, the names, nationalities been transferred to the corporation
and residences of the persons property the valuation of which is equal to
subscribing, the amount of capital stock twenty-five percent (25%) of the
or number of shares of no-par stock subscription: Provided, further, That no
subscribed by each, and the amount decrease of the capital stock shall be
paid by each on his subscription in cash approved by the Commission, if its effect
or property, or the amount of capital shall prejudice the rise of corporate
stock or number of shares of no-par creditors.
stock allotted to each stockholder if Non-stock corporations may incur or create
such increase is for the purpose of bonded indebtedness, or increase the
making effective stock dividend same, with the approval by a majority vote
therefor authorized. of the board of trustees and of at least two-
thirds (2/3) of the members in a meeting
4. Any bonded indebtedness to be duly called for the purpose.
incurred, created, or increased.
Bonds issued by a corporation shall be
5. The actual indebtedness of the registered with the Securities and Exchange
corporation on the day of the meeting. Commission, which shall have the authority
to determine the sufficiency of the terms
6. The amount of the stock represented at thereof.
the meeting.
Bonds – Bonds are in form and effect similar
7. The vote authorizing the increase or to promissory notes, secured by mortgage
diminution of the capital stock, or the or trust deed upon specified property of the
incurring, creating or increasing of any debtor corporation.
bonded indebtedness.
Properties to a bond
Any increase or decrease in the capital Every bond issue usually involve three
stock or the incurring, creating or increasing parties: (1) the debtor – corporation; (2) the
of any bonded indebtedness shall require creditor – bondholder; and (3) the trustee.
prior approval of the Securities and
Exchange Commission. Bonds classified
Bonds are classified into: coupon or
One of the duplicate certificate shall be registered bonds, mortgage bonds,
kept on file in the office of the corporation debentures, convertible bonds,
and the other shall be filed with the participating bonds, collateral trust bands,
Securities and Exchange Commission and and guaranteed bonds.
attached to the original articles of

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Coupon or registered bonds


Coupon bonds are payable to bearer or to Pre-emptive right – It means literally to
the order of a person, and have attached to establish a prior right. A stockholder’s pre-
them coupon notes for each instalment of emptive right is his right to subscribe to
interest as it falls due. new shares of stock in proportion to his
existing stockholdings, before the new
Mortgage bond shares are issued to others.
A mortgage bond is one secured by a
mortgage on corporate property. Sec. 40. Sale or other disposition of assets.
– Subject to the provisions of existing laws
Debenture bonds on illegal combinations and monopolies, a
Debenture bonds are not secured by corporation may, by a majority vote of its
specific corporate property but rather solely board of directors or trustees, sell, lease,
on the issuer’s ability to pay the exchange, mortgage, pledge or otherwise
indebtedness. dispose of all or substantially all of its
property and assets, including its goodwill,
Convertible bonds upon such terms and conditions and for
Convertible bonds are those which includes such consideration, which may be money,
a provision which permits the holder of the stocks, bonds or other instruments for the
bond to convert the bond into a specified payment of money or other property or
number of shares of stock of the consideration, as its board of directors or
corporation at his option within a period trustees may deem expedient, when
fixed therein. authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the
Participating bonds outstanding capital stock; or in case of non-
The owners or holders of participating stock corporation, by the vote of at least
bonds entitle them to participate in two-thirds (2/3) of the members, in a
earnings of the corporation above the stockholders’ or members’ meeting duly
specified rates of interest fixed. called for the purpose. Written notice of the
proposed action and of the time and place
Collateral trust bonds of the meeting shall be addressed to each
Collateral trust bonds are secured by a lien stockholder or member at his place of
on securities deposited with a named residence as shown on the books of the
trustee constituting the collateral. corporation and deposited to the addressee
in the post office with the postage prepaid,
Guaranteed bonds or served personally: Provided, That any
Guaranteed bonds are guaranteed or dissenting stockholder may exercise his
secured by another corporation other than appraisal right under the conditions
the issuing corporation. provided in this Code.

Sec. 39. Power to deny pre-emptive right. – A sale or other disposition shall be
All stockholders of a stock corporation shall deemed to cover substantially all the
enjoy pre-emptive right to subscribe to all corporate property and assets if thereby
issues or disposition of shares of any class, the corporation would be rendered
in proportion to their respective incapable of continuing the business or
shareholdings, unless such right is denied accomplishing the purpose for which it was
by the articles of incorporation or an incorporated.
amendment thereto: Provided, That such
pre-emptive right shall not extend to shares After such authorization or
to be issued in compliance with laws approval by the stockholders or members,
requiring stock offerings or minimum stock the board of directors or trustees may,
ownership by the public; or to shares to be nevertheless, in its discretion, abandon
issued in good faith with the approval of the such sale, lease, exchange, mortgage,
stockholders representing two-thirds (2/3) pledge or other disposition of property and
of the outstanding capital stock, in assets, subject to the rights of third parties
exchange for property needed for corporate under any contract relating thereto,
purposes or in payment of a previously without further action or approval by the
contracted debt. stockholders or members.

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members in the case of non-stock


Nothing in this section is intended corporations, at a stockholders’ or
to restrict the power of any corporation, members’ meeting duly called for the
without the authorization by the purpose. Written notice of the proposed
stockholders or members, to sell, lease, investment and the time and place of the
exchange, mortgage, pledge or otherwise meeting shall be addressed to each
dispose of any of its property and assets if stockholder or member at his place of
the same is necessary in the usual and residence as shown on the books of the
regular course of business of said corporation and deposited to the addressee
corporation or if the proceeds of the sale or in the post office with postage prepaid, or
other disposition of such property and served personally; Provided, That any
assets be appropriated for the conduct of dissenting stockholder shall have appraisal
its remaining business. right as provided in this Code: Provided,
however, That were the investment by the
In non-stock corporations, where corporation is reasonably necessary to
there are no members with voting rights, accomplish its primary purpose as stated in
the vote of at least a majority of the the articles of incorporation, the approval
trustees in office will be sufficient of the stockholders or members shall not be
authorization for the corporation to enter necessary.
into any transaction authorized by this
section. Sec. 43. Power to declare dividends. – The
board of directors of a stock corporation
Sec. 41. Power to acquire own shares. – A may declare dividends out of the
stock corporation shall have the power to unrestricted retained earnings which shall
purchase or acquire its own shares for a be payable in cash, in property, or in stock
legitimate corporate purpose or purposes, to all stockholders on the basis of
including but not limited to the following outstanding stock held by them: Provided,
cases: Provided, That the corporation has That any cash dividends due on delinquent
unrestricted retained earnings in its books stock shall first be applied to the unpaid
to cover the shares to be purchased or balance on the subscription plus costs and
acquired: expenses, while stock dividends shall be
withheld from the delinquent stockholder
1. To eliminate fractional shares arising until his unpaid subscription is fully paid:
out of stock dividends. Provided, further, That no stock dividend
shall be issued without the approval of
2. To collect or compromise an stockholders representing not less than
indebtedness to the corporation, arising two-thirds (2/3) of the outstanding capital
out of unpaid subscription, in a stock at a regular or special meeting duly
delinquency sale, and to purchase called for the purposes.
delinquent shares sold during said sale.
Stock corporation are prohibited from
3. To pay dissenting or withdrawing retaining surplus profits in excess of one
stockholders entitled to payment for hundred percent (100%) of their paid-in
their shares under the provisions of this capital stock, except: (1) when justified
Code. approved by the Board of Directors; or (2)
when the corporation is prohibited under
Sec. 42. Power to invest corporate funds in any loan agreement with any financial
another corporation or business or for any institution or creditor, whether local or
other purpose. – Subject to the provisions foreign, from declaring dividends without
of this code, a private corporation may its/his consent, and such consent has not
invest its funds in any other corporation or yet been secured; or (3) when it can be
business or for any purpose other than the clearly shown that such retention is
primary purpose for which it was organized necessary under special circumstance
when approved by a majority of the board obtaining in the corporation, such as when
of directors or trustees and ratified by the there is a need for special reserve for
stockholders representing at least two- probable contingencies.
thirds (2/3) of the outstanding capital stock,
or by at least two-thirds (2/3) of the Concept of dividends

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A dividend is a corporate profit set aside,


declared and ordered by the directors to be Scrip dividend
paid to the stockholders on demand or at a Scrip dividend is a writing or a certificate
fixed time. issued to a stockholder entitling him to the
payment of money or the like at some
Dividends distinguished from profits future time inasmuch as the company, at
“Dividends” means the profits or that the time the scrip dividends are declared,
portion of the profits of the corporation has profits not in cash.
which its board of directors, by proper
resolution, sets apart for rotable Liquidating dividend
distribution among the stockholders. It is Liquidating dividend involves the
distinguished from “profits” for the profits distribution of assets by a corporation to its
in the hands of a corporation do not stockholders upon dissolution.
become dividends until they have been set
apart, or at least declared, as dividends and Sec. 44. Power to enter into a
transferred to the separate property of the management contract. – No corporation
individual stockholders. shall conclude a management contract with
another corporation unless such contract
Surplus profits – Surplus or net profits of a shall have been approved by the Board of
corporation is the difference between the Directors and by stockholders owning at
total present value of its assets, after least the majority of the outstanding capital
deducting losses and liabilities, and the stock, or by at least majority of the
amount of its capital stock. (11 Fletcher, members in the case of a non-stock
Sec. 5335) corporation, of both the managing and the
managed corporation, at a meeting duly
Basis of dividend declaration called for the purpose: Provided, That (a)
The board of directors of a stock where a stockholder or stockholders
corporation may declare dividends on the representing the same interest of both the
basis of outstanding stock held by the managing and the managed corporations
stockholders. The basis therefore is the own and control more than one-third (1/3)
stockholder’s total subscription and not on of the total outstanding capital stock
the amount paid by him on the entitled to vote of the managing
subscription. This is for the reason that his corporation; or (b) where the majority of
entire subscription represents his holding in the members of the Board of Directors of
the corporation for which he pays interests the managing corporation also constitute a
on any unpaid portion. (SEC Opinion, Dec. majority of the members of the Board of
17, 1973) Directors of the managed corporation, then
the management contract must be
Classes of dividends approved by the stockholders of the
Dividends which a corporation may declare managed corporation owning of at least
and distribute to its stockholders may be two-thirds (2/3) of the total outstanding
classified into: cash dividend, stock capital stock entitled to vote, or by at least
dividend, property dividend, scrip dividend, two-thirds (2/3) of the members in case of a
and liquidating dividend. non-stock corporation. No management
contract shall be entered into for a period
Cash dividend longer than five years for any one term.
Cash dividend is one payable in money.
The provisions of the next preceding
Stock dividend paragraph shall apply to any contract
Stock dividend is a dividend payable in stock whereby a corporation undertakes to
instead of cash or property. manage or operate all or substantially all of
the business of the other corporation,
Property dividend whether such contracts are called service
The directors in their discretion may contracts, operating agreements or
authorize distributions in bonds or in otherwise: Provided, however, That such
property, such as warehouse receipts for service contracts or operating agreements
whiskey or shares of stock of a subsidiary which relate to the exploration,
corporation. development, exploitation or utilization of

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natural resources may be entered into for deprive either the corporation or the other
such periods as may be provided by the part of money or property acquired under
pertinent laws or regulations. the contract. On the other hand, the great
weight of authority is to consider executor
Concept of management contract
A management contract is an agreement contracts as unenforceable.
under which the board of directors of a
corporation delegates the powers of Ultra vires contracts accepted doctrines
management to another person or 1. If the contract is fully executed on both
corporation for a period of time provided sides, the contract is effective and the
for in the agreement. courts will not interfere to deprive
either part of what has been acquired
Effects of Management contracts
Contracts by which the board of directors under it.
delegates the power of supervision and 2. If the contract is executor on both sides,
management to another person or as a rule either party can maintain an
corporation for a specified period are action for its non-performance.
invalid if they involve a surrender by the 3. Where the contract is executor on side
board of its power and duty of supervision only, and has been fully performed on
and control.
the other, the courts differ as whether
Management prerogatives an action will lie on the contract against
An owner of a business enterprise is given the party who has received benefits of
considerable margin in managing his performance under it. Majority of the
business because it is deemed important to courts hold that the party who has
society as a whole that he should succeed. received benefits from the performance
is stopped” to set up that the contract
Sec. 45. Ultra vires acts of corporations. –
us ultra vires to defeat an action on the
No corporation under this Code shall
contract. There is, however, a rule
possess or exercise any corporate powers
which is widely recognized by the
except those conferred by this Code or by
courts that ultra vires. “Should not be
its articles of incorporation and except such
allowed to prevail, when involved for or
as are necessary or incidental to the
against the corporation, where it will
exercise of the powers so conferred.
defeat the ends of justice or work a
legal wrong.
Intra vires – The acts of a corporation within
its express or implied powers.
Acts which are ultra vires are voidable but
Ultra vires – The acts of a corporation
may be ratified. In order that such ultra
outside its express or implied powers.
vires may be ratified it must be shown that
1. The act was consummated or executed.
It denotes some act or transaction on the
2. No creditors are prejudiced or they
part of a corporation which, although not
have given their consent thereto.
unlawful or contrary to public policy of
3. The right of the public or the state are
executed by an individual, is yet beyond the
not involved.
legitimate powers of the corporation as
4. All of the stockholders consent thereto.
they are defined by the statute under which
it is formed, or which are applicable to it, or
A corporation, like an individual, may ratify
by its charter or incorporation papers.
and thereby render binding upon it the
originally authorized acts of its officers or
Admittedly, if the contract is executed on
other agents. This is true because the
both sides neither party can maintain an
questioned investment is neither contrary
action to set aside the transaction or to
to law, morals, public order or public policy.
recover what has been parted with. The
It is a corporate transaction or contract
courts will not interfere in such a case to
which is within the corporate powers but

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which is defective from a purported failure the appropriate government agency to the
to observe in its execution the requirement effect that such by-laws or amendments are
of the law that the investment must be in accordance with law.
authorized by the affirmative vote of the
Necessity of by-laws
stockholders holding 2/3 of the voting The corporation must adopt the code of by-
power. laws for its internal government.

Sec. 46. by-laws Adoption. – Every Corporation has inherent power to adopt
corporation formed under this code, must, by-laws
within one month after receipt of official One of its legal incidents and is usually
notice of the issuance of its certificate of expressly granted by law of the charter
incorporation by the Securities and subject to such limitations as may be
Exchange Commission, adopt a new code of contained in the statute or the charter,
by-laws for its government not inconsistent subject to such limitations as may be
with this code. For the adoption of by-laws contained in the statute or charter, and the
by the corporation the affirmative vote of general requirements of validity. If a
the stockholders representing at least a corporation fails to file its by-laws within
majority of the outstanding capital stock, or the period required by law its certificate of
of at least a majority of the outstanding incorporation may be suspended or even
capital stock, or of at least a majority of the revoked.
members, in the case of non-stick
corporations, shall be necessary. The by- Section 46 allows the adoption and filing of
laws shall be signed by the stockholders or the by-laws before incorporation provided
members voting for them and shall be kept the same is approved by all the
in the principal office of the corporation, incorporators and submitted to the
subject to the inspection of the Securities and Exchange Commission
stockholders or members during office together with the articles of incorporation.
hours; and a copy thereof, duly certified to
by a majority of the directors or trustees By-laws cannot provide for unreasonable
and countersigned by the secretary of the restriction
corporation, shall be filed with the Restriction upon the traffic in stock must
Securities and Exchange Commission which have their source in legislative enactment,
shall be attached to the original articles of as the corporation itself cannot create such
incorporation. impediments. By-laws are created for
protection and not for restriction.
Notwithstanding the provisions of the
preceding paragraph, by-laws may be Elements of valid by-laws
adopted and filed prior to incorporation; in 1. Must not be inconsistent with the
such case, such by-laws shall be approved general law and the Corporation Code.
and signed by all the incorporators and 2. Must not be inconsistent with public
submitted to the Securities and Exchange policy.
Commission, together with the articles of 3. Must be general in application and not
incorporation. directed against particular individuals.
4. Must not be inconsistent with the
In all cases, by-laws shall be effective only articles of incorporation.
upon the issuance by the Securities and 5. Must not impair obligations and
Exchange Commission of a certification that contracts.
the by-laws are not inconsistent with the 6. Must not be in restraint of trade.
Code. 7. Must not restrict religious freedom.

The Securities and Exchange Commission By-laws validity


shall not accept for filing the by-laws or any As a rule, the by-laws of a corporation are
amendment thereto of any bank, banking valid if they are reasonable and calculated
institution, building and loan association, to carry into effect the objects of the
trust company, insurance company, public corporation, and are not contradictory to
utility, educational institution or other the general policy of the laws of the land.
special corporations governed by special
laws, unless accompanied by a certificate of

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Binding effect of by-laws transaction of its corporate business


By-laws when valid, substantially the same and affairs.
force and effect as laws of the corporation
as have the provisions of its charter in so far The enumerations of contents of by-laws
as the corporation, the persons within it is are not exclusive and neither does the
concerned. They are in effect written into provision require all the matters mentioned
the charter and in this sense; they become to appear in the by-laws.
part of the fundamental law of the
corporation. And the corporation, and its The By-laws must not violate the
directors and officers are bound by and Constitution, the Corporation Code, other
must comply with them. Strangers, special laws and the articles of
however, are not bound to know by-laws incorporation.
which are merely provisions for the
government of a corporation and notice of A corporation which has failed to file its by-
them will not be presumed. laws within the prescribed period does not
ipso facto lost its powers as such.
Sec 47. Contents of by-laws. – Subject to
the provisions of the Constitution, this Sec. 48. Amendments to by-laws. – The
Code, other special laws, and the articles of board of directors or trustees, by a majority
incorporation, a private corporation may vote thereof, and the owners of at least a
provide in its by-laws for: majority of the outstanding capital stock, or
at least a majority of the members of a non-
1. The time, place and manner of calling stock corporation, at a regular or special
and conducting regular or special meeting duly called for the purpose, may
meetings of the directors or trustees. amend or repeal any by-laws or adopt new
by-laws. The owners of 2/3 of the
2. The time and manner of calling and outstanding capital stock or 2/3 of the
conducting regular or special meetings members in a non-stick corporation may
of the stockholders or members. delegate to the repeal any by-laws or adopt
new by-laws: provided, that any power
3. The required quorum in meetings of delegated to the board of directors or
stockholders or members and the trustees shall be considered as revoked
manner of voting therein. whenever stockholders owning or
representing a majority of the outstanding
4. The form for proxies of stockholders capital stock or a majority of the members
and members and the manner of voting in non-stock corporations, shall so vote at a
them. regular or special meeting.

5. The qualifications, duties and Whenever any amendment or new by-laws


compensation of directors or trustees, are adopted, such amendment or new by-
officer and employees. laws shall be attached to the original by-
laws in the office of the corporation, and a
6. The time for holding the annual election copy thereof, duly certified under oath by
of directors or trustees and the mode or the corporate secretary and a majority of
manner of giving notice thereof. the directors or trustees, shall be filed with
the Securities and Exchange Commission,
7. The manner of election or appointment the same to be attached to the original
and the term of office of all offices articles of incorporation and original by-
other than directors or trustees. laws.

8. The penalties for violation of the by- Amender or new by-laws shall only be
laws. effective upon the issuance by the SEC of a
certification that the same are not
9. In the case of stick corporations, the inconsistent with this code.
manner of issuing stock certificates.
The authority to make or adopt the original
10. Such other matter as may be necessary by-laws of a corporation cannot be given to
for the proper or convenient the board of directors or trustees. The

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stockholders of a stock corporation or the Notice of any meeting may be waived,


members of the non-stick corporation expressly or impliedly, by any stockholder
adopt or make the original by-laws. or member.

An amendment of by-law renders Whenever, for any cause, there is no person


stockholder ineligible as director authorized to call a meeting, the SEC, upon
It is well-settled xxx that corporations have petition of a stockholder or member, and
the power to make by-laws declaring a on the showing of good cause there for,
person employed in the service of a rival may issue an order to the petitioning
company to be ineligible for the stockholder or member directing him to call
corporation’s Board of Directors. An a meeting of the corporation by giving
amendment which renders ineligible, or if proper notice required by this Code or by
elected, subjects to removal, a director if he the by-laws. The petitioning stockholder or
be also a director in a corporation whose member shall preside thereat until at least
business is in competition with or is a majority of the stockholders or members
antagonistic to the other corporation is present have chosen one of their numbers
valid. This is based upon the principle that as presiding officer.
where the director is so employed in the
service of a rival company, he cannot serve Corporate decisions; rationale of meetings
both, but must betray one or the other. As a rule, a majority of the shareholders or
Such an amendment advances the benefit members have no power to vote or act for
of the corporation and is good. the corporation as to matters on which
shareholders have authority, except at a
Meetings Necessity meeting called and conducted according to
A majority of the stockholders or members law. Written or oral consent to a corporate
can bind the corporation only at a meeting act by the shareholders or members
regularly held and conducted. To constitute individually, even though a majority may
a legal meeting, so as to render the acts and agree, is not binding on the corporation.
vote of the majority binding the meeting
must be regularly called by one having When there is no person authorized to call
authority. In the absence of provision to the a meeting
contrary such authority exists in the A stockholder or member may petition the
directors or managing agents. SEC upon showing of good cause, to call a
meeting and directing the petitioner
Sec. 49. Kinds of Meeting. – Meetings of (stockholder or member) to give notice
directors, trustees, stockholders, or required by the Code and the by-laws. The
members may be regular or special. petitioning stockholder or member shall
preside at such meeting until at least a
Sec. 50. Regular and special meetings of majority of the stockholders or members
stock holders or members. – Regular present have chosen one of their numbers
meetings of stockholders or members shall as presiding officer.
be held annually on a date fixed in the by-
laws, or if not so fixed, on any date in April Sec. 51. Place and time of meetings of
of every year as determined by the board of stockholders or members. – Stockholders’
directors or trustees: Provided, that written or members’ meetings, whether regular or
notice of regular meetings shall be sent to special, shall be held in the city or
all stockholders or members of record at municipality where the principal office of
least 2 weeks prior to the meeting, unless a the corporation is located, and if practicable
different period is required by the by-laws. in the principal office of the corporation:
Provided, that Metro Manila shall, for the
Special meetings of stockholders or purposes of his section, be considered a city
members shall be held at any time deemed or municipality
necessary or as provided in the by-laws:
Provided, however, that at least 1 week Notice of meetings shall be in writing, and
written notice shall be sent to all stock the time and place thereof stated therein.
holders or members, unless otherwise All proceedings had and any business
provided in the by-laws. transacted at any meeting of the
stockholders or members, if within the

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powers or authority of the corporation,


shall be valid even of the meeting be Sec. 54. Who shall preside at meetings. –
improperly held or called, provided all the The president shall preside at all meeting of
stockholders or members of the the directors or trustees as well as of the
corporation are present or duly represented stockholders or members, unless the by-
at the meeting. laws provide otherwise.

Place of meetings The meetings of directors or trustees may


(Regular or special) meetings shall be held be held anywhere in the by-laws. Notice of
in the city or municipality where the regular or special meetings of directors or
principal office of the corp. is located. trustees must be sent to them at least 1 day
prior to the scheduled meeting, unless the
If the meeting be improperly held or called by-laws provided otherwise.
(as when there was a defective notice) the
same shall still be valid provided that Sec. 55. Right to vote of pledgors,
1. The act done was within the powers of mortgagors and administrators. – In case
the corporation. of pledged or mortgaged share in stock
2. All the stockholders or members were corporations, the pledgor or mortgagor
present or duly represented. shall have the right to attend and vote at
meetings of stockholders, unless the pledge
Sec 52. Quorum in meetings. – Unless or mortgagee is expressly given such right in
otherwise provided for in this Code or in the writing which is recorded on the
by-laws, a quorum shall consist of the appropriate corporate books by the pledgor
stockholders representing a majority of the or mortgagor.
outstanding capital stock or a majority of
the members in the case of non-stock Executors, administrators, receivers and
corporations. other legal representatives duly appointed
by the court may attend and vote in behalf
Quorum – Signifies the number of persons of the stockholders or members without
belonging to a corporation required to need of any written proxy.
transact business. Within the meaning of
section 52 above, a quorum shall consist of The pledgor or mortgagor of shatem in the
the stockholders representing a majority of absence of agreement to the contrary, if
the outstanding capital stock or a majority the shate remain in his name on the books
of the members in the case of non-stock of the corporation has the right to attend
corporations. and vote at meetings of stockholders.

Sec. 53. Regular of special meetings of A person who appears on the books of a
directors or trustees. – The meetings shall corporation or otherwise as the absolute
be held monthly, unless the by-laws provide owner of stock clearly has the right to
otherwise. vote, although in face he may hold it as
trustee.
Special meetings of the board of directors
or trustees may be held at any time upon Executor and administrator has the right, to
the call of the president or as provided in vote shares belonging to the estate of his
the by-laws decedent, and it can make no difference
that the share stand on the books of the
Meetings of directors or trustees of corporation in the name of the decedent.
corporations may be held anywhere in or
outside of the Philippines, unless the by- Sec. 56. Voting in case of joint ownership
laws provide otherwise. Notice of regular or of stock. – In case of share of stock owned
special meetings stating the date, time and jointly by 2 or more persons, in order to
place of the meeting must be sent to every vote the same, the consent of all the co-
director or trustee at least 1 day prior to the owners shall be necessary, unless there is a
scheduled meeting, unless otherwise written proxy, signed by all the co-owners.
provided in the by-laws. A director or Authorizing one or some of them or any
trustee may waive this requirement, either other person to vote such share or shares:
expressly or impliedly. provided, that when the shares are owned

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in an capacity by the holders therof, any of a voting trust specifically required as a


one of the joint owner can vote said shares condition in a loan agreement, said voting
or appoint a proxy therfor. trust may be for a period exceeding 5 years
but shall automatically expire upon full
If share are owned by 2 or more persons payment of the loan. A voting trust
jointly, the right to vote is in them jointly, agreement must be in writing and
and , in order that the shares may be voted, notarized, and shall specify the terms and
they must agree upon the vote. This rule of conditions thereof. A certified copy of such
joint action applies to shares held by several agreement shall be filed with the
executors or trustees, in the absence of corporation and with the SEC: otherwise,
provision for a majority vote if the said agreement is ineffective and
fiduciaries disagree. unenforceable. The certificate or of stock
covered by the voting trust agreement shall
Sec. 57. Voting right for treasury share. – be cancelled and new one shall be issued in
Treasury shares shall have no voting right as the name of the trustee or trustees stating
long as such stock remains in the treasury. that they are issued pursuant to said
agreement. In the books of the corporation,
Treasury shares have no voting rights. it shall be noted that the transfer in the
name of the trustee or trustees is made
Sec. 58. Proxies. – Stockholders and pursuant to said voting trust agreement.
members may vote in person or by proxy in
all meetings of stock holders or members. The Trustee or trustees shall be execute and
Proxies shall be in writing, signed by the deliver to the transferors voting trust
stock holder or member and filed before certificates, which shall be transferable in
the scheduled meeting with the corporate the same manner and with the same effect
secretary. Unless otherwise provided in the as certificates of stock.
proxy, it shall be valid only for the meeting
for which it is intended. No proxy shall be The voting trust agreement filed with the
valid and effective for a period longer than corporation shall be subject to examination
five years at any one time. by any stockholder of the corporation in the
same manner as any other corporate book
Proxy – In corporate law, is a person who or record: Provided, That both the
votes for and this represents the transferor and the trustee or trustees may
stockholders or members. exercise the right of inspection of all
corporate books and records in accordance
Voting by proxy with the provisions of this code.
Ordinarily the right to vote shall be
exercised by the stockholders themselves or Any other stock holder may transfer his
by their duly authorized representatives. shares to the same trustee or trustees upon
Proxy to be valid must be: the terms and conditions stated in the
1. In writing, signed by the stockholder or voting trust agreement, and there upon
member giving it. shall be bound by all the provisions of said
2. Filed with the corporate secretary agreement.
before the scheduled meeting.
3. It is valid only for the meeting for which No voting trust agreement shall be entered
it is intended unless otherwise into for the purpose of circumventing the
stipulated. law against monopolies and illegal
4. Even if the proxy is a continuing one it combinations in restraint of trade or used
shall not be longer than 5 year at any for purposes of fraud.
one time.
Unless expressly renewed, all rights granted
Sec 59. Voting trusts. – One or more in a voting trust agreement shall
stockholders of a stock corporation may be automatically expire at the end of the
create a voting trust for the purpose of agreed period, and the voting trust
conferring upon a trustee or trustees the certificates as well as the certificates of
right to vote and other rights pertaining to stick in the name of the trustee or trustees
the share for a period not exceeding 5 years shall thereby be deemed cancelled and new
at any one time: Provided, that in the case

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certificates of stock shall be reissued in the No person can become a stockholder in a


name of the transferors. corporation by virtue of a subscription for
stock unless there is a valid contract
The voting trustee or trustees may vote by between him and the corporation. When a
proxy unless the agreement provides contract of subscription for stock in a
otherswise. corporation is binding it is a contract
between the subscriber or subscribers and
Concept of voting trusts the corporation, and its formation and
A voting trust is an agreement by which validity are governed by the same principles
stockholders surrender their voting power substantially as any other contract except in
and place it irrevocably in the hands of so far as such principles may be rendered
others for a definite period of time. In inapplicable by particular charter or
exchange for the certificates of stock the statutory provisions. No express promise to
trustee delivers to the stockholder voting pay is necessary to make the subscriber
trust certificates. liable.

Limitations on voting trust agreement No form required of subscription contracts


1. It shall be for a period not exceeding 5 Unless otherwise required by law. Thus, a
years but if required under a loan person who accepts a certificate of stock
agreement, the period may be for more from a corporation, or who acts as a
than 5 years but shall automatically stockholder by participating in stockholders’
cease upon full payment of the loan. meeting, making payments, or otherwise,
2. It must be in writing and notarized. thereby becomes a stockholder and liable
3. It shall not be entered into to as such, not only to creditors, but also to
circumvent laws on monopolies and the corporation, although there may have
restraint of trade, nor shall it be no express contract of subscription.
entered into purposes of fraud.
4. It shall be filed with the corporation and Sale of Shares of Stock Needs SEC Approval
with SEC otherwise it shall be The Securities Act requires that before a
ineffective and unenforceable. corporation, except a public utility, bank,
5. It shall be subject to examinations by corporation association and a few others,
any stockholder in the same manner as sells, or offers for sale in the Philippines any
any other corporate book or record. of its securities, like shares of stocks or
6. Parties to the voting trust agreement bonds, it must register the same and/or
shall be bound by all the provisions of secure a permit from the SEC for the
said agreement. purpose. The authorization is in the form of
an exemption from the requirements of
Sec. 60. Subscription contract. – Any registration and licensing, and is issued by
contract for the acquisition of unissued the way of resolution of the SEC.
stock in an existing corporation or a
corporation still to be formed shall be Power to issue shares is lodged in the
deemed a subscription within the meaning board of directors and no stockholders’
of this Title, notwithstanding the fact that meeting is necessary to consider it because
the parties refer to it as a purchase or some additional issuance of shares of stock does
other contract. not need approval of the stockholders. The
“Board of Trustees shall, in of stock of the
How can a person become a shareholder in corporation and shall prescribe the form of
a stock corporation? the certificate of stock of corporation.”
1. By subscription contract with an
existing corporation for the acquisition Kinds of Subscription:
of unissued shares. 1.1. Pre-incorporation – is one agreed upon
2. By purchase from the corporation of before the incorporation of the
treasury shares. proposed corporation.
3. By transfer from a previous stockholder 1.2. Post-incorporation Subscription –
of the outstanding shares or existing entered into after the incorporation or
subscription to shares. formation of the corporation.

Binding effect of subscription

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2. Absolute Subscription – one not subject Sec. 62. Considering for stocks. – Stocks
to any condition or happening of shall not be issued for a consideration less
certain unknown events. than the par or issued price thereof.
3. Conditional Subscription – its fulfillment Consideration for the issuance of stock may
depends upon the happening of be any or a combination of any two or more
uncertain events of contingencies. It of the following:
does not make the subscriber a
stockholder or render him liable to pay 1. Actual cash paid to the corporation.
the amount of the subscription, until
performance or fulfillment of the 2. Property, tangible or intangible, actually
condition. received by the corporation and
4. Subscription upon special terms – where necessary or convenient for its use and
“the corporation agreed, as an lawful purposes at a fair valuation equal
independent element, to do a certain to the par or issued value of the stock
thing or things, but not as condition to issued.
the accrual of liability of the subscriber
or the acquisition of the rights of a 3. Labor performed for or services actually
stockholder. rendered to the corporation.

Sec. 61. Pre-incorporation subscription. – A 4. Previously incurred indebtedness of the


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

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rendered fact or other person legally authorized to


4. Previously incurred indebtedness by the make the transfer. No transfer, however,
corporation shall be valid, except as between the
5. Amounts transferred from unrestricted parties, until the transfer is recorded in the
retained earnings to stated capital books of the corporation showing the
6. Outstanding shares exchanged for stock names of the parties to the transaction, the
in the event of reclassification or date of the transfer, the number of the
conversion certificate or certificates and the number of
shares transferred.
Sources of corporate capital
1. Funds furnished by shareholders No shares of stock against which the
2. Borrowings corporation holds any unpaid claim shall be
3. Profits and stock dividends transferable in the books of the
corporation.
Different modes by which a corporation
may issue shares of stock SEC. 63 The capital stock of stock
1. By subscription before and after corporation shall be divided into shares
incorporation, to original, unissued Certificate of stock shall be issued for said
stocks. shares.
2. By sale of treasury stock after
incorporation for money property, or Nature of a certificate of stock
service. 1. It is a written instrument signed by the
3. By subscription to new stocks, when all proper officer of a corporation stating
the original stocks have been issued and or acknowledging that the person
the amount of the capital stock named therein is the owner of a
increased. designated number of shares of stock.
4. By making a stock dividend. 2. It indicates the name of the holder, the
number, kind and class of shares
Limitations in the issuance of stocks represented, and the date of issuance.
1. Shall not be issued for a consideration 3. It i merely the evidence of the holder's
less than the par or issued price thereof interest in the corporation, his
except treasury shares so long as the ownership of the share represented
price is reasonable. thereby.
2. Shall not be issued in exchange of 4. It is not essential to make one a
promissory notes or future services. stockholder in a corporation.
3. When the consideration is other than
actual cash or consists of intangible  Every stockholder has a right to
property, the value thereof shall be have proper certificate issued to
initially determined by the him as soon as he has complied
incorporators or the board of directors, with the conditions which entitle
subject to the approval of the SEC. him to one.
4. The issued price of no par value shares  A corporation cannot issue shares
must be fixed as provided in Sec. 62. in excess of the maximum
 issued price may vary from time to time authorized in its AOI.
but value may not be less than P5.  An over issued stock is absolutely
void even if possessor is in good
Sec. 63. Certificate of stock and transfer of faith.
shares. – The capital stock of stock  Shares can be transferred
corporations shall be divided into shares for represented by the certificate by its
which certificates signed by the president or endorsement by the owner or his
vice president, countersigned by the agent and delivery to the
secretary or assistant secretary, and sealed transferee.
with the seal of the corporation shall be
issued in accordance with the by-laws. Restrictions on transfer of stock
Shares of stock so issued are personal 1. A by-law prohibits a transfer of stock
property and may be transferred by without the consent or approval of all
delivery of the certificate or certificates stockholders or of the president or
endorsed by the owner or his attorney-in- board of directors is ILLEGAL.

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2. A provision in the certificate that is dividends as against the


transferable only to some person first corporation but the transferor,
approved by the board of directors as the nominal owner of the
unlawfully restricts the right of the share, is the trustee for the
stockholder. benefit of the real owner.
3. The condition “non-transferable” 3. It is invalid as against corporate
appearing on certificates of stock is creditors, and the transferor is still
VOID. liable to the corporation. The
4. corporations which will engage in any transfer of stock by a shareholder
business reserved for Filipino citizens does not relieve him from the
are required to indicate in AOI and all liability to creditors of the
certificates. corporation for unpaid subscription
until the transfer is consummated
Two requirements to effect transfer of by being registered in the books.
stocks 4. It is invalid as against creditors of
Endorsement and delivery of stock the transferor without notice of the
certificate transfer.
-the usual practice is for the stockholder to
sign the form on the back of the stock Shares of stock against which the
certificate. corporation holds any unpaid claim shall
-if the holder of the certificate desires to not be transferable in the books – no
assume the legal right of the stockholder he unpaid claims against the stock.
fills up the blank in the form inserting his  no unpaid subscriptions due and
name as transferee. payable.
-then he delivers the certificate to the
secretary of the corporation so that the Sec. 64. Issuance of stock certificates. – No
transfer may be entered in the books. certificate of stock shall be issued to a
subscriber until the full amount of his
Other modes of transfer subscription together with interest and
1. Assignment thru a separate instrument. expenses (in case of delinquent shares), if
2. Judicial or extra-judicial settlement of any is due, has been paid.
the estate.
SEC. 64 It is prohibited to issue certificates
Validity of stock transfer of stock to a subscriber who has not paid
1. As between parties the full amount of his subscription together
-merely the delivery of the certificate with interest and expenses.
indorsed by the owner or his attorney-
in-fact or other person legally Derivative suit – one brought by one or
authorized to make the transfer. more stockholders or members in the name
2. As against third persons and in behalf of the corporation to redress
-the transfer of shares must be entered wrongs committed against it or to protect
and noted upon the books of the or vindicate corporate rights.
corporation
Individual suit – one brought by a
-only absolute transfer are recorded
stockholder in his own name against the
corporation for direct violation of his
Effects of unregistered shares
contractual rights such as right to vote, to
1. It is valid and binding as between
dividends etc.
the transferor and transferee.
2. It is invalid insofar as the Representative suit – a group of
corporation is concerned except stockholders may bring a direct suit against
when notice is given to the the corporation. This is when a wrong is
corporation for purposes of committed against a group of stockholders.
registration.
a) the transferor has the right to Certificate of Stock – a written instrument
vote and to be voted for, and signed by the proper corporate officers, and
has the right to participate in evidencing the fact that the person therein
any meeting named is the registered owner of the share
b) the transferor has the right to or shares therein described.

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Nature and Functions of Certificates 2. By delivering the certificate


It represents the number of shares which accompanied by a separate assignment.
the corporation acknowledges that the 3. Where stock is levied on in execution of
holder of the certificate is entitled to and is judgment, by delivering the certificate
a solemn and continuing affirmation by the coupled with an assignment by the
corporation that the person to whom it was sheriff who conducted the levy.
issued is entitled to all the rights and 4. Transfer by sale of delinquent shares.
subject to all the liabilities of a stockholder
in the company in respect of the number of Liabilities of a stockholders
shares named, and that the company will 1. Liability to the corporation for unpaid
respect his rights and the rights of anyone subscription
to whim he may transfer such shares, by 2. Liability to the corporation for interest
refusing to admit any new transferee to the on unpaid subscription
rights of a stockholder except upon the 3. Liability to creditors of the corporation
surrender of the certificate. on unpaid subscription
4. Liability for watered stock
Issuance of Stock Certificate. It requires: 5. Liability for dividends unlawfully paid
1. sign by the president or vice-president, 6. Liability for failure to create a
countersigned by the secretary or corporation
assistant secretary, and sealed with the
seal of the corporation, and issued in Sec. 65. Liability of directors for watered
accordance with the law. stocks. – Any director or officer of a
2. The certificate must be delivered or corporation consenting to the issuance of
mailed to the subscriber, with the stocks for a consideration less than its par
documentary stamps required by law or issued value or for a consideration in any
affirmed thereon. form other than cash, valued in excess of its
3. The par value with respect to shares fair value, or who, having knowledge
with par value, or the full subscriptions, thereof, does not forthwith express his
as to no-par value shares must be fully objection in writing and file the same with
paid. the corporate secretary, shall be solidarily,
4. Where it involves transfer of liable with the stockholder concerned to
outstanding shares, the original the corporation and its creditors for the
certificate must be retained. difference between the fair value received
at the time of issuance of the stock and the
Purpose of Registration of Transfer par or issued value of the same.
1. To enable the corporation to know at all
times who its actual shareholders are, SEC. 65 watered stocks – stock issued for no
because mutual rights and obligations value at all or for a value less than its
exist between the corporation and its equivalent either in cash, property, shares,
stockholders. stock dividends, or services the law
2. To afford to the corporation an prohibits the issuance of watered stocks
opportunity to object or refuse its (only refers to original issue)
consent to the transfer in case it has 1. To protect persons who may acquire
any claim against the stock sought to be stock and those who may become the
transferred or for any other valid creditors of the corporation on the faith
reason. of its outstanding capital stock being
3. To avoid fraudulent or fictitious fully paid.
transfer. 2. To secure equality among subscribers
4. It is intended also for the benefit and and prevents discrimination against
protection of persons who may deal those who have paid in full the par or
with the corporation and become issued value.
creditors, so that they know who are
the stockholders, and as such liable to Who are liable for watered stocks?
its creditors. Both consenting director or officer and the
stockholder concerned for the whole
Right to Transfer shares of stock amount of difference.
1. By delivering the certificate, duly
indorsed on the back.

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Trust Fund Theory – involves an implied 3. Denying a stockholder delinquent for


promise to the corporation to pay the par unpaid subscription the right to vote
value of the shares in money or its (under section 71)
equivalent, supplementing it by a legal 4. Collection from cash dividends and
restriction against release or fictitious withholding stock dividends (under
payment of this obligation to the prejudice Section 43)
of creditors.
Sanctions on stock delinquent
Sec. 66. Interest on unpaid subscriptions. – 1. Rights denied to stockholder shall not
Subscribers for stock shall pay to the be voted or be entitled to vote or
corporation interest on all unpaid representation at any stockholders'
subscriptions from the date of subscription, meeting, nor entitled the holder thereof
if so required by, and at the rate of interest to any of the rights of a stockholder
fixed in the by-laws. If no rate of interest is except the right to dividends.
fixed in the by-laws, such rate shall be 2. Right given to the corporation.
deemed to be the legal rate. 3. The corporation has the right to apply
cash dividends due on delinquent stock
Sec. 67. Payment of balance of to the unpaid balance on the
subscription. – Subject to the provisions of subscription plus cost and expenses.
the contract of subscription, the board of
directors of any stock corporation may at While stock dividends, corporation to
any time declare due and payable to the withhold the same from the delinquent
corporation unpaid subscriptions to the stockholder until his unpaid subscription is
capital stock and may collect the same or fully paid.
such percentage thereof, in either case with
accrued interest, if any, as it may deem When is the balance of subscription
necessary. payable?
1. On the date specified in the contract of
Payment of any unpaid subscription or any subscription.
percentage thereof, together with the 2. In the absence of any specified date in
interest accrued, if any, shall be made on the contract of subscription, on the
the date specified in the contract of date stated in the call made by the
subscription or on the date stated in the call board of directors.
made by the board. Failure to pay on such
date shall render the entire balance due When does the stock become delinquent?
and payable and shall make the stockholder A stock becomes delinquent upon failure of
liable for interest at the legal rate on such the holder to pay the unpaid subscription or
balance, unless a different rate of interest is balance thereof within 30 days from the
provided in the by-laws, computed from date specified in the contract of
such date until full payment. If within thirty subscription or on the date stated in the
(30) days from the said date no payment is call.
made, all stocks covered by said
subscription shall thereupon become Call – a declaration officially made by a
delinquent and shall be subject to sale as corporation usually expressed in the form
hereinafter provided, unless the board of of a resolution of the board of directors
directors orders otherwise. requiring payment of all or a certain
prescribed portion of a subscriber's stock
Remedies to enforce payment of stock subscription.
subscription
1. Extra-judicial sale at public auction – Requisites for a valid call
Permits the corporation to put up 1. It must be made in the manner
unpaid stock for sale and dispose of it prescribed by law.
for the account of the delinquent 2. It must be made by the board of
subscribers (governed by sections 67-69 directors.
of the Corporation Code of the 3. It must operate uniformly upon all
Philippines). shares.
2. Judicial action by court action (provided
under Section 70)

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Sec. 68. Delinquency sale. – The board of


directors may, by resolution, order the sale Procedure:
of delinquent stock and shall specifically 1. The board of directors passes a
state the amount due on each subscription resolution declaring payable the whole
plus all accrued interest, and the date, time or certain percentage of the unpaid
and place of the sale which shall not be less subscription stating the date fixed for
than thirty (30) days nor more than sixty payment. If the date of payment is
(60) days from the date the stocks become specified in the contract of subscription,
delinquent. no call is necessary.
2. The stockholders are given notice of the
Notice of said sale, with a copy of the resolution by the secretary of the
resolution, shall be sent to every delinquent corporation. If the stockholders fails to
stockholder either personally or by pay within 30 days from date specified,
registered mail. The same shall furthermore the stocks becomes delinquent.
be published once a week for two (2) 3. the board of directors, by resolution,
consecutive weeks in a newspaper of orders the sale of delinquent stocks,
general circulation in the province or city stating the amount due and the date,
where the principal office of the time, and place of sale with notice to
corporation is located. the delinquent stockholders which
notice shall be published.
Unless the delinquent stockholder pays to 4. On the date of sale, will be sold at
the corporation, on or before the date public auction to higher bidder for cash.
specified for the sale of the delinquent
stock, the balance due on his subscription, Highest bidder – the person offering at the
plus accrued interest, costs of sale to pay the full amount of the balance
advertisement and expenses of sale, or on the subscription together with accrued
unless the board of directors otherwise interest, cost of advertisement and
orders, said delinquent stock shall be sold expenses of sale, for the smallest number of
at public auction to such bidder who shall shares.
offer to pay the full amount of the balance
on the subscription together with accrued In the absence of bidders or highest bidder,
interest, costs of advertisement and the corporation may purchase for itself the
expenses of sale, for the smallest number of delinquent stock.
shares or fraction of a share. The stock so
purchased shall be transferred to such Sec. 69. When sale may be questioned. –
purchaser in the books of the corporation No action to recover delinquent stock sold
and a certificate for such stock shall be can be sustained upon the ground of
issued in his favor. The remaining shares, if irregularity or defect in the notice of sale, or
any, shall be credited in favor of the in the sale itself of the delinquent stock,
delinquent stockholder who shall likewise unless the party seeking to maintain such
be entitled to the issuance of a certificate of action first pays or tenders to the party
stock covering such shares. holding the stock the sum for which the
same was sold, with interest from the date
Should there be no bidder at the public of sale at the legal rate; and no such action
auction who offers to pay the full amount of shall be maintained unless it is commenced
the balance on the subscription together by the filing of a complaint within six (6)
with accrued interest, costs of months from the date of sale.
advertisement and expenses of sale, for the
smallest number of shares or fraction of a Grounds for the recovery of stock
share, the corporation may, subject to the unlawfully sold for delinquency are:
provisions of this Code, bid for the same, 1. Irregularity or defect in the notice of
and the total amount due shall be credited sale
as paid in full in the books of the 2. Irregularity or defect in the sale itself of
corporation. Title to all the shares of stock the delinquent stock
covered by the subscription shall be vested
in the corporation as treasury shares and Sec. 70. Court action to recover unpaid
may be disposed of by said corporation in subscription. – Nothing in this Code shall
accordance with the provisions of this Code. prevent the corporation from collecting by

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action in a court of proper jurisdiction the SEC. 72 Before unpaid shares become
amount due on any unpaid subscription, delinquent, the holder thereof is not
with accrued interest, costs and expenses. considered to have violated any contract
with the corporation, and, therefore, he has
As a general rule, a corporation may not all the rights of a stockholder which rights
maintain a suit for the enforcement of include the right to vote.
unpaid subscription without first making a
call. Sec. 73. Lost or destroyed certificates. –
The following procedure shall be followed
Judicial remedy is limited to the amount for the issuance by a corporation of new
due on any unpaid subscription with certificates of stock in lieu of those which
accrued interest, costs and expenses have been lost, stolen or destroyed:

Sec. 71. Effect of delinquency. – No 1. The registered owner of a certificate of


delinquent stock shall be voted for be stock in a corporation or his legal
entitled to vote or to representation at any representative shall file with the
stockholder's meeting, nor shall the holder corporation an affidavit in triplicate
thereof be entitled to any of the rights of a setting forth, if possible, the
stockholder except the right to dividends in circumstances as to how the certificate
accordance with the provisions of this Code, was lost, stolen or destroyed, the
until and unless he pays the amount due on number of shares represented by such
his subscription with accrued interest, and certificate, the serial number of the
the costs and expenses of advertisement, if certificate and the name of the
any. corporation which issued the same. He
shall also submit such other information
SEC. 71 Stock delinquency does not deprive and evidence which he may deem
the holder of all his rights as a stockholder necessary.
except the right to be voted for or be
entitled to representation at any 2. After verifying the affidavit and other
stockholders' meeting. He shall still receive information and evidence with the
dividends. But delinquent stocks shall be books of the corporation, said
subject to delinquency sale. corporation shall publish a notice in a
newspaper of general circulation
Effects of Stocks declared delinquent: published in the place where the
1. Cannot be voted for or be entitled to corporation has its principal office, once
vote in corporate meetings or be a week for three (3) consecutive weeks
represented by proxy at any at the expense of the registered owner
stockholders’ meeting. of the certificate of stock which has
2. The holder of delinquent stock is not been lost, stolen or destroyed. The
entitled to exercise the rights of a notice shall state the name of said
stockholder (i.e. to inspect books and corporation, the name of the registered
records, etc.). owner and the serial number of said
3. The holder of delinquent stocks is certificate, and the number of shares
entitled to dividends. Section 43 represented by such certificate, and
provides however, that “ any cash that after the expiration of one (1) year
dividends due on delinquent stock shall from the date of the last publication, if
first be applied to the unpaid balance no contest has been presented to said
on the subscription plus costs and corporation regarding said certificate of
expense, while stock dividends shall be stock, the right to make such contest
withheld from the delinquent shall be barred and said corporation
stockholder until his unpaid shall cancel in its books the certificate
subscription is fully paid”. of stock which has been lost, stolen or
destroyed and issue in lieu thereof new
Sec. 72. Rights of unpaid shares. – Holders certificate of stock, unless the
of subscribed shares not fully paid which registered owner files a bond or other
are not delinquent shall have all the rights security in lieu thereof as may be
of a stockholder. required, effective for a period of one
(1) year, for such amount and in such

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

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whom made; and such other entries as the 1. Certificated changing the
by-laws may prescribe. The stock and composition of the board of
transfer book shall be kept in the principal directors and officers
office of the corporation or in the office of 2. Certificates changing the ownership
its stock transfer agent and shall be open of the controlling interest in the
for inspection by any director or corporation
stockholder of the corporation at
reasonable hours on business days. Management contracts duly approved by
the stockholders.
No stock transfer agent or one engaged
principally in the business of registering Sec. 75. Right to financial statements. –
transfers of stocks in behalf of a stock Within ten (10) days from receipt of a
corporation shall be allowed to operate in written request of any stockholder or
the Philippines unless he secures a license member, the corporation shall furnish to
from the Securities and Exchange him its most recent financial statement,
Commission and pays a fee as may be fixed which shall include a balance sheet as of the
by the Commission, which shall be end of the last taxable year and a profit or
renewable annually: Provided, That a stock loss statement for said taxable year,
corporation is not precluded from showing in reasonable detail its assets and
performing or making transfer of its own liabilities and the result of its operations.
stocks, in which case all the rules and
regulations imposed on stock transfer At the regular meeting of stockholders or
agents, except the payment of a license fee members, the board of directors or trustees
herein provided, shall be applicable. shall present to such stockholders or
members a financial report of the
Books and records to be kept by operations of the corporation for the
Corporation preceding year, which shall include financial
1. Record of all business transactions statements, duly signed and certified by an
2. Minutes of all meetings of stockholders independent certified public accountant.
or members, or of board of directors or
trustees However, if the paid-up capital of the
3. Stock and transfer books corporation is less than P50,000.00, the
4. Optional records and supplementary financial statements may be certified under
books as many be necessary or required oath by the treasurer or any responsible
by special laws officer of the corporation.

SEC Rules requiring filing of documents. The Stockholder’s rights to financial statements
SEC requires all corporations whose and reports
securities are listed in any stock exchange 1. Balance sheet as of the end of the last
or with permits to sell shares to the public taxable year.
or with twenty or more stockholders shall 2. A profit and loss statement for said
hereafter submit to this Commission within taxable year.
thirty (30) days after approval of the 3. The board of directors or trustees shall
corporate action, certified true copies of present “a financial report” to
the following documents evidencing the stockholders or members.
same, to wit:
a. Minute of meetings SEC REPORTORIAL REQUIREMENTS
1. Calling for payment of unpaid Period Requirements
subscriptions Within 30 days from a) Set up books of
2. Increasing or decreasing the capital registration of accounts duly
stock articles onaf registered with the
3. Changing the nomenclature of incorporation BIR wherein receipts
shares of stock or certificates of and disbursements
indebtedness made are
4. Authorizing the borrowing of immediately
material sums of money recorded.
b. Other documents, such as:
b) Set up and

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register with the SEC stockholder


its stock and  Address
transfer book.  Nationality
 No. of shares
c) File its by-laws subscribed
with the  Amt. subscribed
Commission. by each
Within 15 days from Submit a statement Shall be made for
end of 3 months of sources and inspection.
from registration application of funds Within 5 days Submit list of
certified by an before the date of stockholders/memb
independent CPA. annual meeting ers entitled to vote
a) Within 105 days i) If paid-up capital > as of a date prior to
after the end of its P50,000, file a copy the meeting.
fiscal year of BS and P&L
statement. The SEC must be notified of any:
1. Change or transfer of address.
ii) If paid-up capital 2. Any investment of corporate funds in
< P50,000, same as any of the secondary purposes of the
(i) and certified corporation by filing a copy of the
under oath by the resolution approved by 2/3 of the
Treasurer or any subscribed capital stock entitled to vote
responsible officer. authorizing the BoD to invest in any of
b) Within 45 days Certified under oath the secondary purposes.
by the Treasurer or
any responsible Sec. 76. Plan of merger or consolidation. –
officer. Two or more corporations may merge into a
Within 30 days from Submit: single corporation which shall be one
the date of annual 1) General constituent corporations or may
meeting information sheet consolidate into a new single corporation
for the fiscal year. which shall be consolidated corporation.

2) Minutes of The board of directors or trustees of each


meeting of corporation, party to the merger or
stockholders/memb consolidation, shall approve a plan of
ers electing the BoD merger or consolidation setting forth the
certified by the following:
Secretary and
subscribed and 1. The names of the corporations
sworn to before a proposing to merge or consolidate,
notary public. hereinafter referred to as the
constituent corporations.
3) Minutes of
meeting of BoD 2. The terms of the merger or
electing the officers, consolidation and the mode of carrying
certified by the the same into effect.
secretary and
subscribed and 3. A statement of the changes. If any, in
sworn to before a the articles of incorporation of the
notary public surviving corporation in case of merger;
Within 5 days from Submit list of and, with respect to the consolidated
stockholders/memb stockholders/memb corporation in case of consolidation, all
ers meeting ers as of the date of the statements required to be set forth
annual or special in the articles of incorporation for
stockholders/memb corporations organized under this Code.
ers’ meeting,
showing:
 Name of the

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4. Such other provisions with respect to combination by consolidation or merger are


the proposed merger or consolidation called the “constituent” corporations.
as are deemed necessary or desirable.
Sec. 78. Articles of merger or consolidation.
Sec. 77. Stockholders’ or members’ – After the approval by the stockholders or
approval. – Upon approval by majority vote members as required by the preceding
of each of the board of directors or trustees section, articles of merger or articles of
of the constituent corporations of the plan consolidation shall be executed by each of
of merger or consolidation, the same shall the constituent corporations, to be signed
be submitted for approval by the by the president or vice-president and
stockholders or members of each of such certified by the secretary or assistant
corporations at separate corporate secretary of each corporation setting forth:
meetings duly called for stockholders or
members of the respective corporations, at 1. The plan of the merger or the plan of
least two (2) weeks prior to the date of the consolidation.
meeting, either personally or by registered
mail. Said notice shall state the purpose of 2. As to stock corporations, the number of
the meeting and shall include a copy or a shares outstanding, or in case of non-
summary of the plan of merger or stock corporations, the number of
consolidation as the case may be. The members.
affirmative vote of stockholders
representing at least two-thirds (2/3) of the 3. As to each corporation, the number of
outstanding capital stock of each shares or members voting for and
corporations in case of stock corporations against such plan, respectively.
or at least two-thirds of the members in
case of non-stock corporations, shall be Sec. 79. Securities and Exchange
necessary for the approval of such plan. Any Commission’s approval and effictivity of
dissenting stockholder in stock corporations merger or consolidation. – The articles of
may exercise his appraisal right in merger or of consolidation signed and
accordance with this Code; Provided, That if certified as hereinabove required, shall be
after the approval by the stockholders of submitted to the Securities and Exchange
such plan, the board of directors should Commission in quadruplicate for its
decide to abandon the plan, the appraisal approval: Provided, That in the case of
right shall be extinguished. merger or consolidation of banks or banking
institutions, building and loan associations,
Any amendment to the plan of merger or trust companies, insurance companies,
consolidation may be made, provided such public utilities, educational institutions and
amendment is approved by majority vote of other special corporations governed by
the respective boards of directors or special laws, the favorable recommendation
trustees of all the constituent corporations of the appropriate government agency shall
and ratified by the affirmative vote of first be obtained. Where the Commission is
stockholders representing at least two- satisfied that the merger or consolidation of
thirds (2/3) of the members of each of the the corporations concerned is not
constituent corporations. Such plan, inconsistent with the provisions of this Code
together with any amendment, shall be and existing laws, it shall issue a certificate
considered as the agreement of merger or of merger or consolidation, as the case may
consolidation. be, at which time the merger or
consolidation shall be effective.
Definition
Consolidation – the uniting or If, upon investigation, the Securities and
amalgamation of two or more existing Exchange Commission has reason to believe
corporations to form a new corporation. that the proposed merger or consolidation
The united concern resulting from the union is contrary to or inconsistent with the
is called the consolidated corporation. provisions of this Code or existing laws, it
Merger – a union effected by the absorbing shall set a hearing to give the corporations
of one or more existing corporations by concerned the opportunity to be heard.
another which survives and continues the Written notice of the date, time and place
combined business. The parties to a of said hearing shall be given to each

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constituent corporation at least two (2) corporation, as the case may be.
weeks before said hearing. The Commission Neither the rights of creditors nor any
shall thereafter proceed as provided in this lien upon the property of any of such
Code. constituent corporations shall be
impaired by such merger or
Sec. 80. Effects of merger or consolidation. consolidation.
– The merger or consolidation, as provided
in the preceding sections shall have the Steps to achieve merger or consolidation
following effects: 1. The BoD of each corporation must draw
up a plan of merger or consolidation.
1. The constituent corporations shall 2. A plan must be submitted to the S/M of
become a single corporation which, in each corporation for approval. The vote
case of merger, shall be the surviving or two-thirds (members) or two-thirds
corporation designated in the plan of of the outstanding capital stock
merger; and, in case of consolidation, (stockholders) would be required.
shall be the consolidated corporation 3. There has to be a formal agreement
designated in the plan of consolidation. known as the articles of M/C by the
officers of each of the constituent
2. The separate existence of the corporations.
constituent corporations shall cease, 4. The articles of M/C must be submitted
except that of the surviving or the to the SEC for approval.
consolidated corporation. 5. The SEC shall if it deems necessary set a
hearing giving notice to all corporations
3. The surviving or the consolidated concerned.
corporation shall possess all the rights, 6. The SEC issues the certificate of M/C.
privileges, immunities and powers and The M/C becomes effective upon the
shall be subject to all the duties and issuance of the corresponding
liabilities of a corporation organized certificate.
under this Code.
Remedy of creditors of constituent
4. The surviving or the consolidated corporations
corporation shall thereupon and The only remedy is either against the united
thereafter possess all the rights, corporation, or to pursue the assets of the
privileges, immunities and franchises of constituents into its hands on the ground of
each of the constituent corporations; fraudulent conveyance.
and all property, real or personal, and
all receivables due on whatever Sec. 81. Instances of appraisal right. – Any
account, including subscriptions to stockholder of a corporation shall have the
shares and other chooses in action, and right to dissent and demand payment of the
all and every other interest of, or fair value of his shares in the following
belonging to, or due to each constituent instances:
corporation, shall be taken and deemed
to be transferred to and vested in such 1. In case any amendment to the articles
surviving or consolidated corporation of incorporation has the effect of
without further act or dead. changing or restricting the rights of any
stockholders or class of shares, or of
5. The surviving or consolidated authorizing preferences in any respect
corporation shall be responsible and superior to those of outstanding shares
liable for all the liabilities and of any class, or of extending or
obligations of each of the constituent shortening the term of corporate
corporations in the same manner as if existence.
such surviving or consolidated
corporation had itself incurred such 2. In case of sale, lease, exchange,
liabilities or obligations; and any claim, transfer, mortgage, pledge or other
action or proceeding pending by or disposition of all or substantially all of
against any of such constituent the corporate property and assets as
corporations may be prosecuted by or provided in this Code.
against the surviving or consolidated

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3. In case of merger or consolidation.


Exercising the appraisal right
Sec. 81, not exclusive. By one who has voted against the proposed
corporate action, by making a written
Such appraisal right may also be exercised demand on the corporation within thirty
when a stockholder dissents when a (30) days after the date on which the vote
corporation or business or for a purpose was taken for payment of the fair value of
other than its main purpose. (Sec. 42) his shares. Those who are absent and
present abstained their vote cannot
When a stockholder of a close corporation exercise the appraisal right.
may for any reason compel the corporation
to purchase his shares from the par or Sec. 83. Effect of demand and termination
issued value, when the corporation has of right. – From the time of demand for
sufficient assets in its books to cover its payment of the fair value of a stockholder’s
debts and liabilities, exclusive of capital shares until either the abandonment of the
stock. (Sec. 105) corporate action involved or the purchase
of the said shares by the corporation, all
Sec. 82. How right is exercised. – The rights accruing to such shares, including
appraisal right may be exercised by any voting and dividend rights, shall be
stockholder who shall have voted against suspended in accordance with the
the proposed corporate action, by making a provisions of this Code, except the right of
written demand on the corporation within such stockholder to receive payment of the
thirty (30) days after the date on which the fair value thereof: Provided, That if the
vote was taken for payment of the fair dissenting stockholder is not paid the value
value of his shares: Provided, That failure to of his shares within 30 days after the award,
make the demand within such period shall his voting and dividend rights shall be
be deemed a waiver of the appraisal right. If immediately be restored.
the proposed corporate action is
implemented or effected, the corporation Sec. 84. When right to payment ceases. –
shall pay to such stockholder, upon No demand for payment under this Title
surrender of the certificate(s) of stock may be withdrawn unless the corporation
representing his shares, the fair value consents thereto. If, however, such demand
thereof as of the day prior to the date on for payment is withdrawn with the consent
which the vote was taken, excluding any of the corporation, or if the proposed
appreciation or depreciation in anticipation corporate action is abandoned or rescinded
of such corporate action. by the corporation or disapproved by the
Securities and Exchange Commission where
If within a period of sixty (60) days from the such approval is necessary, or if the
date the corporate action was approved by Securities and Exchange Commission
the stockholders, the withdrawing determines that such stockholder is not
stockholder and the corporation cannot entitled to the appraisal right, then the right
agree on the fair value of the shares, it shall of said stockholder to be paid the fair value
be determined and appraised by three (3) of his shares shall cease, his status as a
disinterested persons, one of whom shall be stockholder shall thereupon be restored,
named by the stockholder, another by the and all dividend distributions which would
corporate and the third by the two (2) thus have accrued on his shares shall be paid to
chosen. The findings of the majority of the him.
appraisers shall be final, and their award
shall be paid by the corporation within Effect of refusal of corporation to pay
thirty (30) days after such award is made: If... Then...
Provided, That no payment shall be made to FV of the shares Restore all his rights
any dissenting stockholder unless the within thirty (30) automatically.
corporation has unrestricted retain earnings days from the award
in its books to cover such payment: and Insufficiency of the Restore by
Provided, further, That upon payment by unrestricted RE reacquiring his
the corporation of the agreed or awarded former status as a
price, the stockholder shall forthwith stockholder.
transfer his shares to the corporation. Abandoned;

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Rescinded;  The rate of dividends


Unsecured approval  The regularity with which they have
of the SEC; been paid
Stockholder is not Same effects as  The management and reputation of
entitled; above. the company
Withdrawal  Its prospects for the future
(dissenting  All other circumstances which will
stockholder with aid them in estimating the future
consent of the corp) course of the stock in the market

Sec. 85. Who bears costs of appraisal. – The important thing to consider in arriving
The costs and expenses of appraisal shall be at the appraisal value is whether the
borne by the corporation, unless the fair valuation arrived at is fair, just and
value ascertained by the appraisers is reasonable to all parties concerned.
approximately the same as the price which
the corporation may have offered to pay Other instances when appraisal right may
the stockholder, in which case they shall be be granted
borne by the latter. In case of an action to 1. Amendment of “any provision or matter
recover such fair value, all costs and stated in the articles of incorporation.”
expenses shall be assessed against the 2. When the corporate term is extended.
corporation, unless the refusal of the 3. Any purpose other than the primary
stockholder to receive payment was purpose.
unjustified. 4. Close corporation – a stockholder may
compel the corporation to purchase FV
Consideration of the costs of appraisal “for any reasons.”
Expenses of appraisal: Exercise of appraisal right provided
 Appraisers’ fees compensatory alternative to investor
 Attorneys’ fees Appraisal statutes extending to corporate
 Expert accountants’ fees purpose or duration amendments would
 Witnesses before the appraisers’ seem to be of limited value.
fees
Thus, clarifies an otherwise delicate aspect Appraisal rights cannot challenge this power
of appraisal proceeding. but they can provide a compensatory
alternative to an investor faced with a loss
Sec. 86. Notation on certificate(s); right of of existing stock rights and should be so
transferee. – Within ten (10) days after employed.
demanding payment for his shares, a
dissenting stockholder shall submit the When right of stockholder to payment
certificate(s) of stock representing his ceases
shares to the corporation for notation 1. The demand for payment is withdrawn
thereon that such shares are dissenting with the consent of the corporation.
shares. His failure to do so shall, at the 2. The proposed corporate action is
option of the corporation, terminate his abandoned or rescinded by the
rights under this Title. If shares represented corporation.
by the certificate(s) bearing such notation 3. Proposed action is disapproved by the
are transferred, and the certificate(s) SEC where such approval is necessary.
consequently cancelled, the rights of the 4. Such stockholder is not entitled to
transferor as a dissenting stockholder under exercise his appraisal right.
this Title shall cease and the transferee shall
have all the rights of a regular stockholder; Sec. 87. Definition. – For the purposes of
and all dividend distributions which would this Code, a non-stock corporation is one
have accrued on such shares shall be paid where no part of its income is distributable
to the transferee. as dividends to its members, trustees, or
officers, subject to the provisions of this
Valuation of shares of dissenting Code on dissolution: Provided, That, any
shareholders profit which a non-stock corporation may
Appraisers should consider the elements obtain as an incident to its operation shall,
that tend to affect market quotations: whenever necessary or proper, be used for

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the furtherance of the purpose or purposes under such conditions which may be,
for which the corporation was organized, prescribed by, the Securities and Exchange
subject to the provisions of this Title. Commission.

The provisions governing stock Voting by proxy may be denied in articles


corporations, when pertinent, shall be or by-laws
applicable to non-stock corporations, The law makes voting by proxy merely
except as may be covered by specific directory in the case of non-stock
provisions of this Title. corporations and even allows the articles of
incorporation or by-laws thereof to deny
Definition proxy voting.
Non-stock corporation – one where no part
of its income is distributable as dividends to If proxy voting may be denied outrightly in
its members, trustees, or officers. the articles or by-laws of non-stock
corporations, it necessarily follows that the
Sec. 88. Purposes. – Non-stock corporations qualifications or limitations on who should
may be formed or organized for charitable, be appointed proxies may also be made
religious, educational, professional, cultural, therein.
fraternal, literary, scientific, social, civic
service, or similar purposes, like trade, Sec.90. Non-transferability of membership.
industry, agricultural and like chambers, or – Membership in a non-stock corporation
any combination thereof, subject to the and all rights arising therefrom are personal
special provisions of this Title governing and non-transferable, unless the articles of
particular classes of non-stock corporations. incorporation or the by-laws otherwise
provide.
Distinction between a stock corporation
and a non-stock corporation Sec.91. Termination of membership. –
Point of Stock Non-Stock Membership shall be terminated in the
Comparison Corporation Corporation manner and for the causes provided in the
Membership Ownership Consent of articles of incorporation or the by-laws.
of stock the Termination of membership shall have the
associates effect of extinguishing all rights of a
member in the corporation or in its
Solicitation of gifts, donations or property, unless otherwise provided in the
contributions by non-stock corporations articles of incorporation or the by-laws.
A certificate of registration must be secured
from the Insurance Commissioner Sec.92. Election and term of trustees. –
otherwise the articles of incorporation Unless otherwise provided in the articles of
cannot be filed. incorporation or the by-laws, the board of
trustees of non-stock corporations, which
Sec. 89. Right to vote. – The right of the may be more than fifteen (15) in number as
members of any class or classes to vote may may be fixed in their articles of
be limited, broadened or denied to the incorporation or by-laws, shall, as soon as
extent specified in the articles of organized, so classify themselves that the
incorporation or the by-laws. Unless so term of office of one-third (1/3) of their
limited, broadened or denied, each number shall expire every year; and
member, regardless of class, shall be subsequent elections of trustees comprising
entitled to one vote. one-third (1/3) of the board of trustees shall
be held annually and trustees so elected
Unless otherwise provided by the articles of shall have a term of three (3) years.
incorporation or the by-laws, a member Trustees thereafter elected to fill vacancies
may vote by proxy in accordance with the occurring before the expiration of a
provisions of this Code. particular term shall hold office only for the
unexpired period.
Voting by mail or other similar means by
members of non-stock corporations may be No person shall be elected as trustee unless
authorized by the by-laws of non-stock he is a member of the corporation.
corporations with the approval of, and

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Unless otherwise provided in the articles of “RESOLVED, that the corporation or


incorporation or the by-laws, officers of a associatin will comply with the S.E.C.
non-stock corporation may be directly REQUIREMENTS FOR NON-STOCK
elected by the members. CORPORATION dated May 24, 1963 , in
the course of its operation.”
Three-year term for trustees in non-stock 4. LIST OF MEMBERS of the association
corporation containing their manual signature and
The term of trustees in non-stock attested by the Acting Secretary, if the
corporation is three (3) years except incorporators are the present members
educational corporations where the term is so far, state such fact in writing and
five (5) years. further state that the list of additional
members who will be admitted in
Elections of directors by regions in non- accordance with the by-laws of the
stock corporations not allowed association shall e submitted to the
The Securities and Exchange Commission in Commission from time to time. (3
an opinion stated that the “Election of Copies)
members of the Board of Directors of a non
stock corporation by zones or regions would Sec. 94. Rules of distribution. – In case
violate the law which requires that at all dissolution of a non-stock corporation in
elections of directors, there must be accordance with the provisions of this Code,
present a majority of the members entitled its assets shall be applied and distributed as
to vote. ” follows:

Sec.93. Place of meetings. – The by-laws 1. All liabilities and obligations of the
may provide that the members of a non- corporation shall be paid, satisfied and
stock corporation may hold their regular or discharged, or adequate provision shall
special meetings at any place even outside be made therefore.
the place where the principal office of the
corporation is located: Provided, That 2. Assets held by the corporation upon a
proper notice is sent to all members condition requiring return, transfer or
indicating the date, time and place of the conveyance, and which condition
meeting: and Provided, further, That the occurs by reason of the dissolution,
place of meeting shall be within the shall be returned, transferred or
Philippines. conveyed in accordance with such
requirements.
Supporting papers required to be
submitted to the Securities and Exchange 3. Assets received and held by the
Commission: corporation subject to limitations
1. LETTER OF UNDERTAKING addressed to permitting their use only for charitable,
the Commission signed by at least a religious, benevolent, educational or
majority of the incorporators or by a similar purposes, but not held upon a
duly authorized representative, to the condition requiring return, transfer or
effect that the association will change conveyance by reason of the
its corporate name in the event another dissolution, shall be transferred or
person, firm or entity has acquired a conveyed to one or more corporations,
prior right to use the same name or societies or organizations engaged in
similar to it. (3 copies) activities in the Philippines substantially
2. MODUS OPERANDI or a detailed similar to those of the dissolving
explanation as to how the association corporation according to a plan of
shall carry out its objectives signed by distribution adopted pursuant to this
atleast a majority of the incorporators Chapter.
or by a duly authorized representative.
(3 Copies) 4. Assets other than those mentioned in
3. RESOLUTION of the Board signed by the preceding paragraphs, if any, shall
atleast a majority of the Directors or be distributed in accordance with the
certified under oath by the Secretary in provisions of the articles of
the following tenor to wit: (3 Copies) incorporation or the by-laws, to the
extent that the articles of incorporation

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or the by-laws, determine the shall be held of record by not more


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

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stockholders of the corporation rather than identity and personality of each shareholder
by a board of directors. So long as this are important to his associates, so that
provision continues in effect: although they may consider their business
as corporation in their dealings with third
1. No meeting of stockholders need be persons, among themselves the
called to elect directors. stockholders act and feel as partners.”

2. Unless the context clearly requires Entities which may not be organized as
otherwise, the stockholders of the close corporations
corporation shall be deemed to be  Mining or oil companies
directors for the purpose of applying  Stock exchanges
the provisions of this Code.  Banks
 Insurance companies
3. The stockholders of the corporation  Public utilities
shall be subject to all liabilities of  Educational institutions
directors.  Corporations declared to be vested
with public interest
The articles of incorporation may likewise
provide that all officers or employees or Stockholders authorized to manage close
that specified officers or employees shall be corporations
elected or appointed by the stockholders, As a rule, management of stock corporation
instead of by the board of directors. is normally given to board of directors or
trustees. However, the Corporation Code
Requisites of Close Corporation provides: “The articles of incorporation of a
Within the meaning of a close corporation close corporation may provide that the
under the Corporation Code the following business of the corporation shall be
are its attributes: managed by the stockholders of the
1. Its stockholders are limited not corporation rather than by a board of
exceeding 20 persons. directors.” Also, “The articles of
2. Its shares of stock are subject to one or incorporation may likewise provide that all
more restrictions on transfer. officers or employees or that specified
3. Its shares of stock are not listed in any officers or employees shall be elected or
stock exchange. appointed by the stockholders, instead of by
the board of directors.”
Salient Feature of Close Corporations
1. It has only a few stockholders, who if Sec. 98. Validity of restrictions on transfer
not related by blood or marriage, know of shares. – Restrictions on the right to
each other well and are aware of each transfer shares must appear in the articles
other’s business skills. of incorporation and in the by-laws as well
2. All or more of them are active in the as in the certificate of stock; otherwise, the
corporate business, either as directors, same shall not be binding on any purchaser
officers or as key men in management. thereof in good faith. Said restrictions shall
3. The stocks of the corporation are not not be more onerous than granting the
listed on the exchange nor is there existing stockholders or the corporation the
trading in them outside the stock option to purchase the shares of the
market. transferring stockholder with such
*It would seem that base on these reasonable terms, conditions or period
features many corporations in the stated therein. If upon the expiration of said
Philippines would be close period, the existing stockholders or the
corporations. corporation fails to exercise the option to
purchase, the transferring stockholder may
Reasons for formation of close sell his shares to any third person.
corporations
“The existence of close corporations can be Sec. 99. Effects of issuance or transfer of
attributed to the desire of intimate groups stock in breach of qualifying conditions. –
of business associates to obtain the 1. If stock of a close corporation is issued
advantages of a corporate organization, like or transferred to any person who is not
that of limited liability. However, the entitled under any provision of the

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articles of incorporation to be a holder 6. The term "transfer", as used in this


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

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Unless “consented to by all the operation of the business and affairs of


stockholders or if the close corporation has a close corporation, the stockholders
amended its articles of incorporation,” a shall be held to strict fiduciary duties to
transfer of shares of stock in breach of each other and among themselves. Said
qualifying conditions would justify the stockholders shall be personally liable
corporation through the corporate for corporate torts unless the
secretary to refuse to register the transfer corporation has obtained reasonably
of stock. Such transfer need not be for adequate liability insurance.
value, hence it may be the result of a
donation. Effect of the Stockholders’ agreement
before and after formation of corporation
Sec. 100. Agreements by stockholders. – Stockholders’ agreements before and after
1. Agreements by and among stockholders formation and organization of the
executed before the formation and corporation survive incorporation and shall
organization of a close corporation, be valid and binding for as long as they are
signed by all stockholders, shall survive not inconsistent with the articles of
the incorporation of such corporation incorporation. Agreements made prior to
and shall continue to be valid and incorporation require fairly literal
binding between and among such performance. There must be an actual
stockholders, if such be their intent, to contractual relation. Given such relation,
the extent that such agreements are the pre-incorporators are promoters and
not inconsistent with the articles of may arrange agreements to form and
incorporation, irrespective of where the manage the corporation.
provisions of such agreements are
contained, except those required by Sec. 101. When board meeting is
this Title to be embodied in said articles unnecessary or improperly held. – Unless
of incorporation. the by-laws provide otherwise, any action
by the directors of a close corporation
2. An agreement between two or more without a meeting shall nevertheless be
stockholders, if in writing and signed by deemed valid if:
the parties thereto, may provide that in
exercising any voting rights, the shares 1. Before or after such action is taken,
held by them shall be voted as therein written consent thereto is signed by all
provided, or as they may agree, or as the directors.
determined in accordance with a
procedure agreed upon by them. 2. All the stockholders have actual or
3. No provision in any written agreement implied knowledge of the action and
signed by the stockholders, relating to make no prompt objection thereto in
any phase of the corporate affairs, shall writing.
be invalidated as between the parties
on the ground that its effect is to make 3. The directors are accustomed to take
them partners among themselves. informal action with the express or
implied acquiescence of all the
4. A written agreement among some or all stockholders.
of the stockholders in a close
corporation shall not be invalidated on 4. All the directors have express or implied
the ground that it so relates to the knowledge of the action in question and
conduct of the business and affairs of none of them makes prompt objection
the corporation as to restrict or thereto in writing.
interfere with the discretion or powers
of the board of directors: Provided, If a director's meeting is held without
That such agreement shall impose on proper call or notice, an action taken
the stockholders who are parties therein within the corporate powers is
thereto the liabilities for managerial deemed ratified by a director who failed to
acts imposed by this Code on directors. attend, unless he promptly files his written
objection with the secretary of the
5. To the extent that the stockholders are corporation after having knowledge
actively engaged in the management or thereof.

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Sec. 102. Pre-emptive right in close unnecessary or even if improperly held


corporations. - The pre-emptive right of would be valid. The by-laws, however, may
stockholders in close corporations shall provided otherwise or a stockholder may
extend to all stock to be issued, including file his written objection in writing after
reissuance of treasury shares, whether for having knowledge of the action taken by
money, property or personal services, or in the directors.
payment of corporate debts, unless the
articles of incorporation provide otherwise. Pre-emptive right in close corporations;
Issuance of new Stock
Exceptions in Section 39, not applicable A stockholder in a close corporation has a
It is submitted that in a close corporation, right to purchase his pro rata share of the
the exceptions provided in Sec 39 are not new stock. If the pre-emptive right is
applicable. The first exception mentioned violated he can sue the corporation for
therein regarding the shares issued in damages, enjoin the stock issue, obtain an
compliance with laws requiring stock order permitting him to subscribe, or obtain
offerings or minimum stock ownership by cancellation of the issue. But even where
the public cannot by its very nature refer to the stockholder’s pre-emptive right is
a close corporation. The pre-emptive right preserved. The right may be inadequate as
of shareholders in close corporation is thus a protective devise for the stockholder in a
broadened to include all issues without any close corporation because the lack of a
exception, unless of course, restricted by market for his stock leaves him with the
the articles of incorporation and printed in alternatives of investing more capital or
the stock certificates. It may be mentioned having the value of his stock diluted.
however, that any prior waiver of pre-
emptive right must be expressly provided Sec. 104. Deadlocks. - Notwithstanding any
for in the articles of incorporation and not contrary provision in the articles of
in an ordinary agreement executed by the incorporation or by-laws or agreement of
parties. This rule however, would not stockholders of a close corporation, if the
militate against the unanimous agreement directors or stockholders are so divided
of all the stockholders. respecting the management of the
corporation's business and affairs that the
Sec. 103. Amendment of articles of votes required for any corporate action
incorporation. – Any amendment to the cannot be obtained, with the consequence
articles of incorporation which seeks to that the business and affairs of the
delete or remove any provision required by corporation can no longer be conducted to
this Title to be contained in the articles of the advantage of the stockholders
incorporation or to reduce a quorum or generally, the Securities and Exchange
voting requirement stated in said articles of Commission, upon written petition by any
incorporation shall not be valid or effective stockholder, shall have the power to
unless approved by the affirmative vote of arbitrate the dispute. In the exercise of such
at least two-thirds (2/3) of the outstanding power, the Commission shall have authority
capital stock, whether with or without to make such order as it deems appropriate,
voting rights, or of such greater proportion including an order:
of shares as may be specifically provided in
the articles of incorporation for amending, 1. Canceling or altering any provision
deleting or removing any of the aforesaid contained in the articles of
provisions, at a meeting duly called for the incorporation, by-laws, or any
purpose. stockholder's agreement.

Rule and Exceptions when board meeting 2. Canceling, altering or enjoining any
unnecessary resolution or act of the corporation or
General Rule: the directors of a corporation its board of directors, stockholders, or
cannot act individually or separately in officers.
order to bind the corporation. They must
act as a board at a meeting duly called for 3. Directing or prohibiting any act of the
the purpose. corporation or its board of directors,
Exception: Section 101. It enumerates the stockholders, officers, or other persons
instances when a board at a meeting is party to the action.

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4. Requiring the purchase at their fair provided either for directorial disputes or
value of shares of any stockholder, for stockholder disputes. Although there
either by the corporation regardless of are some disadvantages of arbitration
the availability of unrestricted retained proceedings, nevertheless, the advantages
earnings in its books, or by the other of arbitration, in saving both money and
stockholders. hard feelings, would seem to outweigh the
disadvantages in most cases.
5. Appointing a provisional director.
Provisional director and SEC supervised
6. Dissolving the corporation. management
In accordance with Section 104, the SEC
7. Granting such other relief as the may in case of deadlocks in the close
circumstances may warrant. corporation appoint a provisional director.
“A provisional director shall be an impartial
A provisional director shall be an impartial person who is neither a stock-holder nor a
person who is neither a stockholder nor a creditor of the corporation and whose other
creditor of the corporation or of any qualifications, may be determined by the
subsidiary or affiliate of the corporation, SEC.”
and whose further qualifications, if any,
may be determined by the Commission. A Under Section 2 (Pres Decree No. 1653), the
provisional director is not a receiver of the SEC has the power “to create and appoint a
corporation and does not have the title and management committee, board, or body to
powers of a custodian or receiver. A undertake the management of
provisional director shall have all the rights corporations, partnership or other
and powers of a duly elected director of the associations in appropriate cases wherein
corporation, including the right to notice of there is imminent danger or dissipation,
and to vote at meetings of directors, until loss or wastage or destruction of assets or
such time as he shall be removed by order other properties or paralization of business
of the Commission or by all the operations of such corporations or entities
stockholders. His compensation shall be prejudicial to the interest of the minority,
determined by agreement between him party-litigants or the general public.”
and the corporation subject to approval of
the Commission, which may fix his Sec. 105. Withdrawal of stockholder or
compensation in the absence of agreement dissolution of corporation. – In addition
or in the event of disagreement between and without prejudice to other rights and
the provisional director and the remedies available to a stockholder under
corporation. this Title, any stockholder of a close
corporation may, for any reason, compel
Deadlock – Deadlock signifies a standstill in the said corporation to purchase his shares
the management of the corporate affairs at their fair value, which shall not be less
resulting from the evenly divide action of than their par or issued value, when the
directors or stockholders in a close corporation has sufficient assets in its books
corporation. to cover its debts and liabilities exclusive of
capital stock: Provided, That any
In the event of deadlocks SEC may stockholder of a close corporation may, by
arbitrate written petition to the Securities and
In the event of a deadlock in a close Exchange Commission, compel the
corporation, the SEC has the power to dissolution of such corporation whenever
arbitrate the deadlock “upon written any of acts of the directors, officers or those
petition of any stockholder.” In close in control of the corporation is illegal, or
corporations that are subject to a checks fraudulent, or dishonest, or oppressive or
and balances system because of control unfairly prejudicial to the corporation or
devices there are bound to be deadlocks, any stockholder, or whenever corporate
and some steps must be taken to cope with assets are being misapplied or wasted.
them. Many of the problems that arise can
be settled by arbitration, Arbitration (the • Appraisal rights in regular corporations
determination of a matter of difference can be opted by the dissenting stockholder
between contending parties) may be only in cases where the fundamental

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change in the corporate structure or or other institutions of learning shall, as


operations is involved, whereas a soon as organized, so classify themselves
stockholder of a close corporation may, for that the term of office of one-fifth (1/5) of
any reason, compel the said coporation to their number shall expire every year.
purchase his shares at their par value, when Trustees thereafter elected to fill vacancies,
the corporation has sufficient assets in its occurring before the expiration of a
books to cover his debts and liabilities particular term, shall hold office only for the
exclusive of capital stock. ( In Appraisal unexpired period. Trustees elected
right, fair value of shares is given but in thereafter to fill vacancies caused by
Withdrawal Right, the fair value cannot be expiration of term shall hold office for five
less than the par or issued value of the (5) years. A majority of the trustees shall
shares; In Appraisal right, there must be constitute a quorum for the transaction of
present unrestricted retained earnings in business. The powers and authority of
the books of the corporation) trustees shall be defined in the by-laws.

• The corporation is not a close corporation For institutions organized as stock


even if the shares belong to less than corporations, the number and term of
twenty if not all the requisites are present. directors shall be governed by the
San Juan Structural and Steel Fabricators v. provisions on stock corporations.
CA (1998)
**
EDUCATIONAL CORPORATIONS There are three (3) ways by which a
For Educational corporations, where the religious organization can provide for the
trustees should be divided into multiples of administration of its properties:
five. So you should have five, ten or fifteen 1. by forming a non-stock corporation
trustees if they are organized as non-stock 2. by corporation sole
corporation. And unless otherwise provided 3. by religious aggregate or society
in the articles of incorporation or by-laws,
the terms of the trustees should be five Corporation sole may constitute of one
years, and every year only one fifth (1/5) is person only so the head of a religious sect
elected, again to provide for continuity in would incorporate himself for the purpose
policies. But you can provide that they will of administering the properties of a
be all elected instead for a term of one religious sect. To incorporate what you will
year, everybody has to be elected. file with the SEC is an affidavit. The affidavit
will state that the affiant is the head of a
Sec. 106. Incorporation. – Educational religious denomination or sect and would
corporations shall be governed by special want to become a corporation sole. and the
laws and by the general provisions of this rules of his religion allow him to incorporate
Code. as a corporation sole and that he is charged
with the administration of its properties
Sec. 107. Pre-requisites to incorporation. – and in fact he will be required to submit an
Except upon favourable recommendation of inventory and the manner in which the
the Ministry of Education and Culture, the successor will be chosen and the place
Securities and Exchange Commission shall where he will hold his office.
not accept or approve the articles of The Roman Catholic Archbishop of Manila is
incorporation and by-laws of any a corporation sole so if Cardinal Sin dies the
educational institution. new archbishop will simply submit his
appointment and he need not incorporate
Sec. 108. Board of trustees. – Trustees of again because the corporation is different
educational institutions organized as non- from the occupant of the position. The
stock corporations shall not be less than Iglesia ni Kristo is incorporated as a
five (5) nor more than fifteen (15): corporation sole.
Provided, however, That the number of The court has held in Roman Catholic
trustees shall be in multiples of five (5). Apostolic Adm. of Davao, Inc. v. Land
Registration Commission that although the
Unless otherwise provided in the articles of Bishop was a foreigner, he could register a
incorporation on the by-laws, the board of parcel of land in his name because he is a
trustees of incorporated schools, colleges, mere administrator the property really

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belongs to the faithful and since they are


Filipinos they could register the land in the Who may form and for what purpose?
administrator’s name. Sec. 110. Corporation sole. – For the
Under the law if a corporation sole wants to purpose of administering and managing, as
dispose of or mortgage real property, he trustee, the affairs, property and
has to get authorization from the Regional temporalities of any religious
Trial Court unless the rules of the religious denomination, sect or church, a corporation
sect allow him to dispose of or mortgage sole may be formed by the chief
real property and that is usually the case. archbishop, bishop, priest, minister, rabbi
The last is the religious aggregate or or other presiding elder of such religious
religious society. It can incorporate for the denomination, sect or church. (154a)
purpose of managing its properties and the
articles would indicate that the members How formed?
constitute a religious order or society and Sec. 111. Articles of incorporation. – In
that at least 2/3 of the members have order to become a corporation sole, the
agreed to incorporate, that the rules allow chief archbishop, bishop, priest, minister,
them to incorporate they desire to rabbi or presiding elder of any religious
incorporate to manage their properties in denomination, sect or church must file with
the place where located. The recollects are the Securities and Exchange Commission
incorporated to manage their properties, articles of incorporation setting forth the
they are the single biggest bloc of following:
stockholder of San Miguel Corporation.
1. That he is the chief archbishop, bishop,
RELIGIOUS CORPORATIONS priest, minister, rabbi or presiding elder
Sec. 109. Classes of religious corporations. of his religious denomination, sect or
– Religious corporations may be church and that he desires to become a
incorporated by one or more persons. Such corporation sole.
corporations may be classified into
corporations sole and religious societies. 2. That the rules, regulations and
Religious corporations shall be governed by discipline of his religious denomination,
this Chapter and by the general provisions sect or church are not inconsistent with
on non-stock corporations insofar as they his becoming a corporation sole and do
may be applicable. not forbid it.

a) Corporation Sole 3. That as such chief archbishop, bishop,


 Corporation sole is a special form of priest, minister, rabbi or presiding
corporation usually associated with the elder, he is charged with the
clergy and consists of one person only administration of the temporalities and
and his successors, who are the management of the affairs, estate
incorporated by law to give some legal and properties of his religious
capacities and advantages. denomination, sect or church within his
 Nationality. A corporation sole does not territorial jurisdiction, describing such
have any nationality but for purposes of territorial jurisdiction.
applying our nationalization laws,
nationality is determined not by the 4. The manner in which any vacancy
nationality of its head but by the occurring in the office of chief
nationality of the members constituting archbishop, bishop, priest, minister,
the sect in the Philippines even if it is rabbi of presiding elder is required to
headed by the Pope. (Roman Catholic be filled, according to the rules,
Apostolic Church v. LRC, 1957) regulations or discipline of the religious
 Effect of Separation of Members. denomination, sect or church to which
Members of the sect who left and who he belongs.
formed a separate religious group are
not entitled to any right to vote over 5. The place where the principal office of
the properties of their former sect. the corporation sole is to be established
(Canete v. CA, 1989) and located, which place must be within
 Dissolution. By filing a verified the Philippines.
declaration of dissolution. (JRS at 323)

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

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The declaration of dissolution shall set at a duly convened meeting of the


forth: body.

1. The name of the corporation. 3. That the incorporation of the religious


society or religious order, or diocese,
2. The reason for dissolution and winding synod, or district organization desiring
up. to incorporate is not forbidden by
competent authority or by the
3. The authorization for the dissolution of constitution, rules, regulations or
the corporation by the particular discipline of the religious denomination,
religious denomination, sect or church. sect, or church of which it forms a part.

4. The names and addresses of the 4. That the religious society or religious
persons who are to supervise the order, or diocese, synod, or district
winding up of the affairs of the organization desires to incorporate for
corporation. the administration of its affairs,
properties and estate.
Upon approval of such declaration of
dissolution by the Securities and Exchange 5. The place where the principal office of
Commission, the corporation shall cease to the corporation is to be established and
carry on its operations except for the located, which place must be within the
purpose of winding up its affairs. Philippines.

Religious societies or corporations 6. The names, nationalities, and


aggregate residences of the trustees elected by
Sec. 116. Religious societies. – Any religious the religious society or religious order,
society or religious order, or any diocese, or the diocese, synod, or district
synod, or district organization of any organization to serve for the first year
religious denomination, sect or church, or such other period as may be
unless forbidden by the constitution, rules, prescribed by the laws of the religious
regulations, or discipline of the religious society or religious order, or of the
denomination, sect or church of which it is a diocese, synod, or district organization,
part, or by competent authority, may, upon the board of trustees to be not less
written consent and/or by an affirmative than five (5) nor more than fifteen (15).
vote at a meeting called for the purpose of
at least two-thirds (2/3) of its membership, Case
incorporate for the administration of its Long v. Basa (2001)
temporalities or for the management of its • Since in matters purely
affairs, properties and estate by filing with ecclesiastical the decisions of the proper
the Securities and Exchange Commission, church tribunals are conclusive upon the
articles of incorporation verified by the civil tribunals, then a church member who is
affidavit of the presiding elder, secretary, or expelled from the membership by the
clerk or other member of such religious church authorities, or a priest or minister
society or religious order, or diocese, synod, who is by them deprived of his sacred
or district organization of the religious office, is without remedy in the civil courts.
denomination, sect or church, setting forth Long v. Basa, 366 SCRA 113 (2001).
the following: Additional Material: SEC Opinion No. 04-45,
Nov.28, 2004 to Ferrer and Ferrer Law
1. That the religious society or religious Office re term of existence of religious
order, or diocese, synod, or district corporation.
organization is a religious organization
of a religious denomination, sect or SEC Opinion No. 04-45, (Nov. 28, 2004)
church. Re: Term of Existence of Religious
Corporations
2. That at least two-thirds (2/3) of its Section 116 (as well as Sec. 160 of the
membership have given their written former Corporation Law) does not provide
consent or have voted to incorporate, for a term of existence of religious
corporations, whether classified as a

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corporation sole or a corporation dissolve the juridical entity. For


aggregate. As such, the law intends that dissolution to be effective “[t]he
religious organizations may exist requirements mandated by the
perpetually (SEC Opinion dated Dec. 10, Corporation Code should have been
1981). Moreover, where the Articles of strictly complied with.” Vesagas v. Court
Incorporation does not provide for a term of Appeals, 371 SCRA 509, 516 (2002).
of existence, it shall be understood that the  A corporation cannot extend its life by
intention is for the corporation to exist for amendment of its articles of
an indefinite period (SEC Opinion dated Oct. incorporation effected during the three-
23, 1995) year statutory period for liquidation
when its original term of existence had
DISSOLUTION already expired, as the same would
Dissolution of a corporation is the constitute new business. Alhambra
extinguishment of the franchise of a Cigar & Cigarette Manufacturing
corporation and termination of its Company, Inc. v. SEC, 24 SCRA 269
corporate existence. (1968).
 When the period of corporate life
Modes of Dissolution: expires, the corporation ceases to be a
1. Voluntary Dissolution body corporate for the purpose of
2. Involuntary Dissolution continuing the business for which it was
3. Shortening of term organized. PNB v. Court of First Instance
4. Expiration of term (JRS at 311) of Rizal, Pasig, Br. XXI, 209 SCRA 294
5. Failure to organize and commence (1992).
business within two years from the date
of issuance of certificate of DISSOLUTION **
incorporation There are different ways to dissolve a
6. Legislative Dissolution (CLV’s CLR at corporation one is voluntarily and the other
936) involuntarily, under the law there are three
provisions governing voluntary dissolution.
Effects of Dissolution: The first one is if no creditors are affected.
1. Transfer of Legal title to corporate In all the methods of voluntary dissolution,
property. you need a resolution approved by a
2. The corporation ceases as a body majority of directors and a resolution
corporate to continue the business for approved by at least 2/3 of the stockholders
which it was established. In Section 118, where no creditors are
3. Continuation of a body corporation (the affected the directors and the stockholders
corporation continues as a body pass the resolution dissolving the
corporate for 3 years for purposes of corporation and that will be filed in the SEC
winding up or liquidation). for approval. In a case where a suit was filed
4. After the expiration of the 3 year and the corporation said, we have already
winding up period, the corporation been dissolved and they submitted a board
ceases to exist for all purposes. (JRS at resolution, the SC held that it is not enough
314). to dissolve a corporation.
The Second one, is under Section 119 where
 The termination of the life of a juridical creditors are affected. Here the board and
entity does not by itself cause the the stockholders will approve the
extinction or diminution of the rights dissolution but a petition will be filed signed
and liability of such entity, since it is by the majority of the directors and verified
allowed to continue as a juridical entity by the president, secretary or one of the
for 3 years for the purpose of directors which will indicate the claims of
prosecuting and defending suits by or creditors. That will be set for hearing and
against it and enabling it to settle and not less than thirty (30) days nor more than
close its affairs, to dispose of and sixty (60) days after the entry of the
convey its property, and to distribute its issuance of the order and a copy of the
assets. Republic v. Tancinco, 394 SCRA order will be published once a week for
386 (2002). three consecutive weeks in a newspaper of
 A board resolution to dissolve the general circulation and that will also be
corporation does not operate to so posted for three weeks in three public

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

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

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principal office of the corporation is 6. Affidavit of stockholders/directors/


situated, or if there be no such newspaper, officers/members regarding any valid
then in a newspaper of general circulation claim against the corporation.
in the Philippines, and a similar copy shall 7. Latest balance sheet which must be
be posted for three (3) consecutive weeks earlier than the date of the meeting of
in three (3) public places in such the stockholders approving the
municipality or city. amendment of the articles of
incorporation.
Upon five (5) days’ notice, given after the 8. Notice of dissolution.
date on which the right to file objections as 9. Tax clearance from the BIR.
fixed in the order has expired, the 10. Affidavit of the publisher anent the
Commission shall proceed to hear the publication of the notice of the
petition and try any issue made by the dissolution once a week for three (3)
objections filed; and if no such objection is consecutive weeks in two (2)
sufficient, and the material allegations of newspapers of general circulation in the
the petition are true, it shall render Philippines.
judgment dissolving the corporation and
directing such disposition of its assets as The SEC may appoint a receiver to collect
justice requires, and may appoint a receiver such assets and pay the debts of the
to collect such assets and pay the debts of corporation.
the corporation. It has been held that where corporate
directors are guilty of a breach of trust and
Sec. 120. Dissolution by shortening intracorporate remedy is futile, the minority
corporate term. – A voluntary dissolution stockholders may resort to the courts for
may be effected by amending the articles of appropriate relief and, incidentally, as for
incorporation to shorten the corporate the appointment of a receiver for the
term pursuant to the provisions of this protection of their rights.
Code. A copy of the amended articles of
incorporation shall be submitted to the Section 121. Involuntary dissolution. – A
Securities and Exchange Commission in corporation may be dissolved by the
accordance with this Code. Upon approval Securities and Exchange Commission upon
of the amended articles of incorporation of filing of a verified complaint and after
the expiration of the shortened term, as the proper notice and hearing on the grounds
case may be, the corporation shall be provided by existing laws, rules and
deemed dissolved without any further regulations.
proceedings, subject to the provisions of
this Code on liquidation. Rules of Court provides that a quo
warranto proceedings may be brought
SEC requirements on shortening corporate against a corporation:
term 1. When it has offended against a
1. Amended article of incorporation provision of an Act for its creation or
shortening its corporate term in renewal.
accordance with Section 16 of the Code. 2. When it has forfeited its privileges and
2. A director’s certificate signed by at least franchises by non-user.
a majority of the directors/trustees and 3. When it has committed or omitted an
attested by the secretary, certified act which amounts to a surrender of its
under oath, stating that the amended corporate rights, privileges, or
articles of incorporation is a true and franchises.
correct copy as amended by the 4. When it has misused a right, privilege,
stockholders representing at least 2/3 or franchise conferred upon it by law,
of the outstanding capital stock or at or when it has exercised a right,
least 2/3 of the members in case of privilege or franchise in contravention
non-stock corporations. of law.
3. A certification that no creditor shall be
prejudiced by the dissolution. Section 122. Corporate liquidation. – Every
4. A list of creditors, if any. corporation whose charter expires by its
5. Consent of the creditors with regard to own limitation or is annulled by forfeiture
the dissolution. or otherwise, or whose corporate existence

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for other purposes is terminated in any 5. Dissolution and liquidation


other manner, shall nevertheless be
continued as a body corporate for three (3) A corporation that has a pending action and
years after the time when it would have which cannot be terminated within the
been so dissolved, for the purpose of three-year period after dissolution is
prosecuting and defending suits by or authorized to convey all its property to
against it and enabling it to settle and close trustees to enable it to prosecute and
its affairs, to dispose of and convey its defend suits by or against the corporation
property and to distribute its assets, but not beyond the three-year period.
for the purpose of continuing the business
for which it was established. Distribution of Assets
Distribution among the shareholders of the
At any time during said three (3) years, the assets in winding up, formal or informal
corporation is authorized and empowered may be made only to the prior claim of
to convey all of its property to trustees for creditors and after all debts have been paid
the benefit of stockholders, members, or provided for. This is sometimes
creditors, and other persons in interest. expressed in terms of the trust fund
From and after any such conveyance by the doctrine.
corporation of its property in trust for the
benefit of its stockholders, members, Liquidation Rehabilitation
creditors and others in interest, all interest - Connotes a winding - Connotes a
which the corporation had in the property up or setting with reopening of
terminates, the legal interest vests in the creditors and reorganization
trustees, and the beneficial interest in the debtors. .
stockholders, members, creditors or other
persons in interest. - It is a winding up of - Contemplates
a corporation so a continuance
Upon the winding up of the corporate that assets are of corporate
affairs, any asset distributable to any distributed to those life and
creditor or stockholder or member who is entitled to receive activities in an
unknown or cannot be found shall be them. effort to
escheated to the city or municipality where restore and
such assets are located. - It is the process of reinstate the
reducing assets to corporation in
Except by decrease of capital stock and as cash, discharging its former
otherwise allowed by this Code, no liabilities and position of
corporation shall distribute any of its assets dividing surplus or successful
or property except upon lawful dissolution loss. operation and
and after payment of all its debts and solvency.
liabilities.
Section 123. Definition and rights of
Methods of Liquidation foreign corporations. – For the purposes of
1. Liquidation by the directors themselves. this Code, a foreign corporation is one
2. Liquidation by a duly appointed formed, organized or existing under any
receiver. laws other than those of the Philippines and
3. Liquidation by trustees to whom the whose laws allow Filipino citizens and
board of directors had conveyed the corporations to do business in its own
corporate assets. country or state. It shall have the right to
transact business in the Philippines after it
Rules of corporate recovery shall have obtained a license to transact
The SEC approved the Rules of Procedure business in this country in accordance with
on Corporate recovery effective on January this Code and a certificate of authority from
15, 2000. the appropriate government agency.
1. It governs the rules on definition of
terms Definition
2. Common provisions Foreign Corporation is one formed,
3. Suspension of payments organized or existing under any laws other
4. Rehabilitation than those of the Philippines and whose

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laws allow Filipino citizens and corporations 3. The name and address of its resident
to do business in its own country or state. agent authorized to accept summons
and process in all legal proceedings and,
Section 124. Application to existing foreign pending the establishment of a local
corporations. – Every foreign corporation office, all notices affecting the
which on the date of the effectivity of this corporation.
Code is authorized to do business in the
Philippines under a license therefore issued 4. The place in the Philippines where the
to it, shall continue to have such authority corporation intends to operate.
under the terms and condition of its license,
subject to the provisions of this Code and 5. The specific purpose or purposes which
other special laws. the corporation intends to pursue in the
transaction of its business in the
A foreign corporation can have no legal Philippines: Provided, That said purpose
existence beyond the bounds of the state or or purposes are those specifically stated
sovereignty by which it is created. It exists in the certificate of authority issued by
only in contemplation of law and by force of the appropriate government agency.
the law, and where that law ceases to
operate, the corporation can have no 6. The names and addresses of the
existence. It must dwell in the place of its present directors and officers of the
creation, and cannot migrate to another corporation.
sovereignty.
7. A statement of its authorized capital
Foreign corporations may do business in the stock and the aggregate number of
Philippines either by directly entering into shares which the corporation has
transactions with resident persons, firms or authority to issue, itemized by classes,
corporations or by creating a domestic par value of shares, shares without par
subsidiary corporation which would have its value, and series, if any.
own distinct personality.
8. A statement of its outstanding capital
Licensed foreign corporations is authorized stock and the aggregate number of
to do business in the Philippines shall shares which the corporation has
continue to have such authority under the issued, itemized by classes, par value of
terms and condition of its license, subject to shares, shares without par value, and
the provisions of the Code and other special series, if any.
laws.
9. A statement of the amount actually
Section 125. Application for a license. – A paid in.
foreign corporation applying for a license to
transact business in the Philippines shall 10. Such additional information as may be
submit to the Securities and Exchange necessary or appropriate in order to
Commission a copy of its articles of enable the Securities and Exchange
incorporation and by-laws, certified in Commission to determine whether such
accordance with law, and their translation corporation is entitled to a license to
to an official language of the Philippines, if transact business in the Philippines, and
necessary. The application shall be under to determine and assess the fees
oath and, unless already stated in its payable.
articles of incorporation, shall specifically
set forth the following: Attached to the application for license shall
be a duly executed certificate under oath by
1. The date and term of incorporation. the authorized official or officials of the
jurisdiction of its incorporation, attesting to
2. The address, including the street the fact that the laws of the country or
number, of the principal office of the state of the applicant allow Filipino citizens
corporation in the country or state of and corporations to do business therein,
incorporation. and that the applicant is an existing
corporation in good standing. If such
certificate is in a foreign language, a

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translation thereof in English under oath of Securities and Exchange Commission,


the translator shall be attached thereto. consisting of bonds or other evidence of
indebtedness of the Government of the
The application for a license to transact Philippines, its political subdivisions and
business in the Philippines shall likewise be instrumentalities, or of government-owned
accompanied by a statement under oath of or controlled corporations and entities,
the president or any other person shares of stock in “registered enterprises”
authorized by the corporation, showing to as this term is defined in Republic Act No.
the satisfaction of the Securities and 5186, shares of stock in domestic
Exchange Commission and other corporations registered in the stock
governmental agency in the proper cases exchange, or shares of stock in domestic
that the applicant is solvent and in sound insurance companies and banks, or any
financial condition, and setting forth the combination of these kinds of securities,
assets and liabilities of the corporation as of with an actual market value of at least one
the date not exceeding one (1) year hundred thousand (P100,000.) pesos;
immediately prior to the filing of the Provided, however, That within six (6)
application. months after each fiscal year of the
licensee, the Securities and Exchange
Foreign banking, financial and insurance Commission shall require the licensee to
corporations shall, in addition to the above deposit additional securities equivalent in
requirements, comply with the provisions of actual market value to two (2%) percent of
existing laws applicable to them. In the case the amount by which the licensee’s gross
of all other foreign corporations, no income for that fiscal year exceeds five
application for license to transact business million (P5,000,000.00) pesos. The
in the Philippines shall be accepted by the Securities and Exchange Commission shall
Securities and Exchange Commission also require deposit of additional securities
without previous authority from the if the actual market value of the securities
appropriate government agency, whenever on deposit has decreased by at least ten
required by law. (10%) percent of their actual market value
at the time they were deposited. The
Securities and Exchange Commission may at
Section 126. Issuance of a license. – If the its discretion release part of the additional
Securities and Exchange Commission is securities deposited with it if the gross
satisfied that the applicant has complied income of the licensee has decreased, or if
with all the requirements of this Code and the actual market value of the total
other special laws, rules and regulations, securities on deposit has increased, by
the Commission shall issue a license to the more than ten (10%) percent of the actual
applicant to transact business in the market value of the securities at the time
Philippines for the purpose or purposes they were deposited. The Securities and
specified in such license. Upon issuance of Exchange Commission may, from time to
the license, such foreign corporation may time, allow the licensee to substitute other
commence to transact business in the securities for those already on deposit as
Philippines and continue to do so for as long long as the licensee is solvent. Such licensee
as it retains its authority to act as a shall be entitled to collect the interest or
corporation under the laws of the country dividends on the securities deposited. In the
or state of its incorporation, unless such event the licensee ceases to do business in
license is sooner surrendered, revoked, the Philippines, the securities deposited as
suspended or annulled in accordance with aforesaid shall be returned, upon the
this Code or other special laws. licensee’s application therefor and upon
proof to the satisfaction of the Securities
Within sixty (60) days after the issuance of and Exchange Commission that the licensee
the license to transact business in the has no liability to Philippine residents,
Philippines, the license, except foreign including the Government of the Republic
banking or insurance corporation, shall of the Philippines.
deposit with the Securities and Exchange
Commission for the benefit of present and Definition
future creditors of the licensee in the Transacting business means the carrying on
Philippines, securities satisfactory to the of the operations of the corporation, or

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some portion of them, in the usual and 1. That the operation or activity is not
regular course of the prosecution of the inconsistent with the Investment
corporate enterprise for profit. Priorities Plan.
2. That the business or economic activity
The Corporation Code outlines the will contribute to the sound and
procedural requirements for the application balanced development of the national
and issuance of a license before a foreign economy on a self-sustaining basis.
corporation may transact business in the 3. That the activity will not conflict with
Philippines. Except in the case of foreign the Constitution and laws of the
banking, financial and insurance Philippines.
corporations and other subject to special 4. That the nosiness or economic activity
laws, rules and regulations, if the applicant is not one (1) adequately exploited by
foreign corporation has complied with all Philippine Nationals.
the requirements of issuance of a license, 5. That the entry of the applicant will not
the SEC shall issue such license and pose a clear and present danger of
thereafter the foreign corporation may promoting monopolies or combination
transact business in the Philippines. in restraint of trade.

Republic Act No. 5455. Regulates the entry Presidential Decree No. 151 allows citizens
of foreign investments whenever foreign of the Philippines or corporations which
equity participation exceeds 30 percent of have acquired lands of the public domain or
the capital stock. which or any other law, to enter into service
contracts for financial, technical,
Under Republic Act no. 5455 “doing management or other forms of assistance
business includes”: with any foreign person or entity whenever
a. Soliciting orders, purchases, service and wherever such contracts are vital to
contracts, opening offices whether achieve sound and more expeditious
called liaison offices or branches. exploration, development, exploitation or
b. Appointing representatives or utilization of such lands owned, held or
distributors who are domiciled in the controlled by such citizens or corporations.
Philippines or who in any calendar year
stay in the Philippines for a period or Section 127. Who may be a resident agent.
periods totalling one hundred eighty – A resident agent may be either an
days or more. individual residing in the Philippines or a
c. Participating in the management, domestic corporation lawfully transacting
supervision, or control of any domestic business in the Philippines: Provided, That
business firm, entity, or corporation in in the case of an individual, he must be of
the Philippines. good moral character and of sound financial
d. Any other act or acts that imply a standing.
continuity of commercial dealings or
arrangements, and contemplates to Section 128. Resident agent; service of
that extent the performance of acts or process. – The Securities and Exchange
works, or the exercise of some of the Commission shall require as a condition
function normally incident to, and in precedent to the issuance of the license to
progressive prosecution of, commercial transact business in the Philippines by any
gain or of the purpose and object of the foreign corporation that such corporation
business organization. file with the Securities and Exchange
Commission a written power of attorney
The Board of Investments requires license designating some person who must be a
not only of corporations organized abroad resident of the Philippines, on whom any
but also of domestic corporations, if more summons and other legal processes may be
than 40% of its voting shares are owned served in all actions or other legal
and held by aliens or more than 30% of its proceedings against such corporation, and
total capitalization is in the hands of aliens. consenting that service upon such resident
agent shall be admitted and held as valid as
Guidelines for issuance of certificate of if served upon the duly authorized officers
authority to do business under BOI (Rep. of the foreign corporation at its home
Act No.5455) office. Any such foreign corporation shall

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likewise execute and file with the Securities Section 129. Law applicable. – Any foreign
and Exchange Commission an agreement or corporation lawfully doing business in the
stipulation, executed by the proper Philippines shall be bound by all laws, rules
authorities of said corporation, in form and and regulations applicable to domestic
substance as follows: corporations of the same class, except such
only as provide for the creation, formation,
“The (name of foreign corporation) does organization or dissolution of corporations
hereby stipulate and agree, in consideration or those which fix the relations, liabilities,
of its being granted by the Securities and responsibilities, or duties of stockholders,
Exchange Commission a license to transact members, or officers of corporations to
business in the Philippines, that if at any each other or to the corporation.
time said corporation shall cease to transact
business in the Philippines, or shall be Licensed foreign corporations lawfully doing
without any resident agent in the business in the Philippines shall be subject
Philippines on whom any summons or other to our laws just like domestic corporations
legal processes may be served, then in any of the same class.
action or proceeding arising out of any
business or transaction which occurred in Philippine laws will not apply when it refers
the Philippines, service of any summons or to the creation, formation, organization or
other legal process may be made upon the dissolution of corporations or such as fux
Securities and Exchange Commission and the relations, liabilities, responsibilities, or
that such service shall have the same force duties of stockholders, members, or officers
and effect as if made upon the duly- of corporations to each other or to the
authorized officers of the corporation at its corporation.
home office.”
Section 130. Amendments to articles of
Whenever such service of summons or incorporation or by-laws of foreign
other process shall be made upon the corporations. – Whenever the articles of
Securities and Exchange Commission, the incorporation or by-laws of a foreign
Commission shall, within ten (10) days corporation authorized to transact business
thereafter, transmit by mail a copy of such in the Philippines are amended, such
summons or other legal process to the foreign corporation shall, within sixty (60)
corporation at its home or principal office. days after the amendment becomes
The sending of such copy by the effective, file with the Securities and
Commission shall be necessary part of and Exchange Commission, and in the proper
shall complete such service. All expenses cases with the appropriate government
incurred by the Commission for such service agency, a duly authenticated copy of the
shall be paid in advance by the party at articles of incorporation or by-laws, as
whose instance the service is made. amended, indicating clearly in capital letters
In case of a change of address of the or by underscoring the change or changes
resident agent, it shall be his or its duty to made, duly certified by the authorized
immediately notify in writing the Securities official or officials of the country or state of
and Exchange Commission of the new incorporation. The filing thereof shall not of
address. itself enlarge or alter the purpose or
purposes for which such corporation is
The SEC shall require as a condition authorized to transact business in the
precedent to the issuance of the license to Philippines.
transact business in the Philippines by any
foreign corporation that such corporation Section 131. Amended license. – A foreign
file with the SEC, a written power of corporation authorized to transact business
attorney designating some person who in the Philippines shall obtain an amended
must be a resident of the Philippines, on license in the event it changes its corporate
whom any summons and other legal name, or desires to pursue in the
processes may be served in all actions or Philippines other or additional purposes, by
other legal proceedings against such submitting an application therefor to the
corporation. Securities and Exchange Commission,
favorably endorsed by the appropriate
government agency in the proper cases.

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Section 132. Merger or consolidation Section 133. Doing business without a


involving a foreign corporation licensed in license. – No foreign corporation
the Philippines. – One or more foreign transacting business in the Philippines
corporations authorized to transact without a license, or its successors or
business in the Philippines may merge or assigns, shall be permitted to maintain or
consolidate with any domestic corporation intervene in any action, suit or proceeding
or corporations if such is permitted under in any court or administrative agency of the
Philippine laws and by the law of its Philippines; but such corporation may be
incorporation: Provided, That the sued or proceeded against before Philippine
requirements on merger or consolidation as courts or administrative tribunals on any
provided in this Code are followed. valid cause of action recognized under
Philippine laws.
Whenever a foreign corporation authorized
to transact business in the Philippines shall Unlicensed foreign corporations doing
be a party to a merger or consolidation in business in the Philippine do not have the
its home country or state as permitted by capacity to sue before the local court is
the law of its incorporation, such foreign well-established.
corporation shall, within sixty (60) days
after such merger or consolidation becomes A foreign corporation which is not licensed
effective, file with the Securities and to transact business therein can maintain an
Exchange Commission, and in proper cases action in the courts of the Philippines for
with the appropriate government agency, a the purpose of protecting its reputation,
copy of the articles of merger or corporate name and goodwill.
consolidation duly authenticated by the
proper official or officials of the country or A foreign corporation doing business in the
state under the laws of which merger or Philippines without a license may maintain
consolidation was effected: Provided, suit in the Philippines against a domestic
however, That if the absorbed corporation corporation or person who is party
is the foreign corporation doing business in to a contract as the domestic corporation or
the Philippines, the latter shall at the same person is deemed estopped from
time file a petition for withdrawal of it challenging the personality of the foreign
license in accordance with this Title. corporation.

Section 132 covers two legal situations: Section 134. Revocation of license. –
1. The merger of a licensed foreign Without prejudice to other grounds
corporation with a domestic provided by special laws, the license of a
corporation. foreign corporation to transact business in
 Must be accomplished by the Philippines may be revoked or
complying with the provisions of suspended by the Securities and Exchange
the Corporation Code. Commission upon any of the following
2. The merger of a licensed foreign grounds:
corporation with another corporation in
its country of origin which is not doing 1. Failure to file its annual report or pay
business in the Philippines. any fees as required by this Code.
 If the licensed foreign corporation is
absorbed by merger or 2. Failure to appoint and maintain a
consolidation, it must withdraw its resident agent in the Philippines as
license to do business in the required by this Title.
Philippines.
 Nevertheless, if the foreign 3. Failure, after change of its resident
absorbing corporation desire to agent or of his address, to submit to the
continue the business of the Securities and Exchange Commission a
absorbed corporation in the statement of such change as required
Philippines, it has to file an by this Title.
application for a license to do
business pursuant to the 4. Failure to submit to the Securities and
requirements of Philippines law on Exchange Commission an authenticated
the matter. copy of any amendment to its articles of

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incorporation or by-laws or of any 1. All claims which have accrued in the


articles of merger or consolidation Philippines have been paid,
within the time prescribed by this Title. compromised or settled.

5. A misrepresentation of any material 2. All taxes, imposts, assessments, and


matter in any application, report, penalties, if any, lawfully due to the
affidavit or other document submitted Philippine Government or any of its
by such corporation pursuant to this agencies or political subdivisions have
Title. been paid.

6. Failure to pay any and all taxes, 3. The petition for withdrawal of license
imposts, assessments or penalties, if has been published once a week for
any, lawfully due to the Philippine three (3) consecutive weeks in a
Government or any of its agencies or newspaper of general circulation in the
political subdivisions. Philippines.

7. Transacting business in the Philippines Sec. 137. Outstanding capital stock


outside of the purpose or purposes for defined. – The term "outstanding capital
which such corporation is authorized stock", as used in this Code, means the total
under its license. shares of stock issued under binding
subscription agreements to subscribers or
8. Transacting business in the Philippines stockholders, whether or not fully or
as agent of or acting for and in behalf of partially paid, except treasury shares.
any foreign corporation or entity not
duly licensed to do business in the Sec. 138. Designation of governing boards.
Philippines. – The provisions of specific provisions of
this Code to the contrary notwithstanding,
9. Any other ground as would render it non-stock or special corporations may,
unfit to transact business in the through their articles of incorporation or
Philippines. their by-laws, designate their governing
boards by any name other than as board of
Sec. 135. Issuance of certificate of trustees.
revocation. – Upon the revocation of any
such license to transact business in the Sec. 139. Incorporation and other fees. –
Philippines, the Securities and Exchange The Securities and Exchange Commission is
Commission shall issue a corresponding hereby authorized to collect and receive
certificate of revocation, furnishing a copy fees as authorized by law or by rules and
thereof to the appropriate government regulations promulgated by the
agency in the proper cases. The Securities Commission.
and Exchange Commission shall also mail to
the corporation at its registered office in Sec. 140. Stock ownership in certain
the Philippines a notice of such revocation corporations. – Pursuant to the duties
accompanied by a copy of the certificate of specified by Article XIV of the Constitution,
revocation. the National Economic and Development
Authority shall, from time to time, make a
Sec. 136. Withdrawal of foreign determination of whether the corporate
corporations. – Subject to existing laws and vehicle has been used by any corporation or
regulations, a foreign corporation licensed by business or industry to frustrate the
to transact business in the Philippines may provisions thereof or of applicable laws, and
be allowed to withdraw from the shall submit to the Batasang Pambansa,
Philippines by filing a petition for whenever deemed necessary, a report of its
withdrawal of license. No certificate of findings, including recommendations for
withdrawal shall be issued by the Securities their prevention or correction.
and Exchange Commission unless all the Maximum limits may be set by the Batasang
following requirements are met: Pambansa for stockholdings in corporations
declared by it to be vested with a public
interest pursuant to the provisions of this
section, belonging to individuals or groups

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of individuals related to each other by Sec. 143. Rule making power of the
consanguinity or affinity or by close Securities and Exchange Commission. – The
business interests, or whenever it is Securities and Exchange Commission shall
necessary to achieve national objectives, have the power and authority to implement
prevent illegal monopolies or combinations the provisions of this Code, and to
in restraint or trade, or to implement promulgate rules and regulations
national economic policies declared in laws, reasonably necessary to enable it to
rules and regulations designed to promote perform its duties hereunder, particularly in
the general welfare and foster economic the prevention of fraud and abuses on the
development. part of the controlling stockholders,
members, directors, trustees or officers.
In recommending to the Batasang
Pambansa corporations, business or Sec. 144. Violations of the Code. –
industries to be declared vested with a Violations of any of the provisions of this
public interest and in formulating proposals Code or its amendments not otherwise
for limitations on stock ownership, the specifically penalized therein shall be
National Economic and Development punished by a fine of not less than one
Authority shall consider the type and nature thousand (P1,000.00) pesos but not more
of the industry, the size of the enterprise, than ten thousand (P10,000.00) pesos or by
the economies of scale, the geographic imprisonment for not less than thirty (30)
location, the extent of Filipino ownership, days but not more than five (5) years, or
the labor intensity of the activity, the export both, in the discretion of the court. If the
potential, as well as other factors which are violation is committed by a corporation, the
germane to the realization and promotion same may, after notice and hearing, be
of business and industry. dissolved in appropriate proceedings before
the Securities and Exchange Commission:
Sec. 141. Annual report or corporations. – Provided, That such dissolution shall not
Every corporation, domestic or foreign, preclude the institution of appropriate
lawfully doing business in the Philippines action against the director, trustee or
shall submit to the Securities and Exchange officer of the corporation responsible for
Commission an annual report of its said violation: Provided, further, That
operations, together with a financial nothing in this section shall be construed to
statement of its assets and liabilities, repeal the other causes for dissolution of a
certified by any independent certified corporation provided in this Code.
public accountant in appropriate cases,
covering the preceding fiscal year and such Sec. 145. Amendment or repeal. – No right
other requirements as the Securities and or remedy in favor of or against any
Exchange Commission may require. Such corporation, its stockholders, members,
report shall be submitted within such directors, trustees, or officers, nor any
period as may be prescribed by the liability incurred by any such corporation,
Securities and Exchange Commission. stockholders, members, directors, trustees,
or officers, shall be removed or impaired
Sec. 142. Confidential nature of either by the subsequent dissolution of said
examination results. – All interrogatories corporation or by any subsequent
propounded by the Securities and Exchange amendment or repeal of this Code or of any
Commission and the answers thereto, as part thereof.
well as the results of any examination made
by the Commission or by any other official Sec. 146. Repealing clause. – Except as
authorized by law to make an examination expressly provided by this Code, all laws or
of the operations, books and records of any parts thereof inconsistent with any
corporation, shall be kept strictly provision of this Code shall be deemed
confidential, except insofar as the law may repealed.
require the same to be made public or
where such interrogatories, answers or Sec. 147. Separability of provisions. –
results are necessary to be presented as Should any provision of this Code or any
evidence before any court. part thereof be declared invalid or
unconstitutional, the other provisions, so

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far as they are separable, shall remain in


force.

Sec. 148. Applicability to existing


corporations. – All corporations lawfully
existing and doing business in the
Philippines on the date of the effectivity of
this Code and heretofore authorized,
licensed or registered by the Securities and
Exchange Commission, shall be deemed to
have been authorized, licensed or
registered under the provisions of this
Code, subject to the terms and conditions
of its license, and shall be governed by the
provisions hereof: Provided, That if any
such corporation is affected by the new
requirements of this Code, said corporation
shall, unless otherwise herein provided, be
given a period of not more than two (2)
years from the effectivity of this Code
within which to comply with the same.

Sec. 149. Effectivity. – This Code shall take


effect immediately upon its approval.
Approved: May 1, 1980

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