PARTNERSHIP

Article 1767
By the ​contract of partnership​​ two or more persons bind themselves to contribute
MONEY, PROPERTY, OR INDUSTRY​​ to a common fund, with the intention of dividing the
profits among themselves

A partnership is an association of two or more persons to carry on as co-owners a business for

profit.
A profession is a calling in the preparation for or practice of which academic learning is required
and which has for its prime purpose the rendering of public service.
The practice of a profession is not a business or an enterprise for profit. The law does not allow
individuals to practice a profession as a corporate entity - personal qualifications for such
practice cannot be possessed by a corporation.

Characteristic elements of partnership:

1. Consensual - perfected by mere consent
2. Nominate - has a special name or designation in our law
3. Bilateral - entered into by two or more persons and the rights and obligations arising
therefrom are always reciprocal
4. Onerous - each of the parties aspires to procure for himself a benefit through the giving
of something (burdensome)
5. Commutative - the undertaking of each of the partner is considered as the equivalent of
that of the others
6. Principal - it does not depend for its existence or validity upon some other contract
7. Preparatory - it is entered into as a means to an end
A partnership contract, in its essence, is a ​contract of agency​​.

Essential features of partnership​​:

1. There must be a valid contract.
2. The parties must have legal capacity to enter into the contract.
3. There must be a mutual contribution of money, property, or industry to a common fund.
4. The object must be lawful.
5. The purpose or primary purpose must be to obtain profits and to divide the same among
the parties.

Existence of a valid contract:

1. A form of voluntary and personal association - element of ​delectus personae​ exists (no
one can become a member of a partnership association without the consent of ​all​​ the
other associates)
2. Creation and proof of existence - may be informally created but it is customary to
embody the terms of the association in a written document known as ​Articles of
Partnership​​.
 3. Other forms of association excluded - there is no such thing as a partnership created by
law or by operation or implication of law.
A limited partnership, however, as distinguished from general partnership, cannot be created by
mere voluntary agreement alone.

Legal capacity of parties to enter into the contract:

1. General rule - before there can be a valid contract of partnership, it is essential that the
contracting parties have the necessary legal capacity to enter into the contract. Hence,
the following cannot give their consent to a contract of partnership:
a. Unemancipated minors
b. Insane or demented persons
c. Deaf-mutes who do not know how to write
d. Persons who are suffering from civil interdiction (convicted of crime involving
imprisonment)
e. Incompetents who are under guardianship
2. Exceptions - persons who are prohibited from giving each other any donation or
advantage cannot enter into a universal partnership.
3. Capacity of partnership/corporation to be a partner - the typical partnership is composed
of individual human beings

Sharing of profits:
1. Not necessarily in equal shares - if silent in sharing profits, use capital contribution
2. Not conclusive evidence of partnership - you can share profit but it doesn’t make you a
partner
Sharing of losses:
1. Necessary corollary of sharing in profits - share of loss same w/ profits
2. Agreement not necessary

Article 1769
In determining whether a partnership exists, these rules shall apply:
1. Except as provided by Article 1825, persons who are not partners as to each other are
not partners as to third persons
2. Co-ownership or co-possession does not of itself establish a partnership, whether such
co-owners or co-possessors do or do not share any profits made by the use of the
property
3. The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which
the returns are derived
4. The receipt by a person of a share of the profits of business is ​prima facie​ evidence that
he is a partner in the business, but no such inference shall be drawn if such profits were
received in payment
a. As a debt by installments or otherwise
b. As wages of an employee or rent to a landlord
 c. As an annuity to a widow or representative of a deceased partner
d. As interest on a loan, though the amounts of payment vary with the profits of the
business
e. As the consideration for the sale of a goodwill of a business or other property by
installments or otherwise

Persons not partners as to each other:

1. Partnership, a matter of intention
2. Partnership by estoppel

Partnership distinguished from co-ownership:

There is co-ownership whenever the ownership of an undivided thing or right belongs to
different persons.
1. Creation - co-ownership may exist even without a contract, but partnership is always
created by a contract
2. Juridical personality - partnership has a judicial personality separate and distinct from
that of each partner, while co-ownership has none
3. Purpose - purpose of partnership is the realization of profits, while co-ownership purpose
is the common enjoyment of a thing or right
4. Duration - no limitation upon the duration of a partnership, while in co-ownership an
agreement to keep the thing undivided for more than ten years is not allowed
5. Disposal of interests - partner may not dispose of his individual interest in the
partnership, a co-owner may freely do so
6. Power to act with third persons - in the absence of any stipulation to the contrary, a
partner may bind the partnership
7. Effect of death - death of a partner results in the dissolution of the partnership

Partnership distinguished from conjugal partnership of gains:

Conjugal partnership of gains​​ is a partnership formed by marriage of husband and
wife by virtue of which, they place in a common fund the fruits of their separate properties

Article 1770
A partnership must have a lawful object or purpose, and must be established for the
common benefit or interest of the partners.
When an unlawful partnership is dissolved by a juridical decree, the profits shall be
confiscated in favor of the State, without prejudice to the provisions of the Penal Code
governing the confiscation of the instruments and effects of a crime.

Effects of an unlawful partnership:

1. The contract is void ​ab initio​ and the partnership never existed in the eyes of the law
2. The profits shall be confiscated in favor of the government
3. The instruments or tools and proceeds of the crime shall be forfeited in favor of the
government
 4. The contributions of the partners shall not be confiscated unless they fall under No. 3
A judicial decree is not necessary to dissolve an unlawful partnership.

Article 1774
Any immovable property or an interest therein may be acquired in the partnership name.

Article 1776
As to its object, a partnership is either universal or particular. As regards to the liability of
the partners, a partnership may be general or limited.

Classifications of partnership:
1. As to the extent of its subject matter:
a. Universal partnership
i. Universal partnership of all present property
1. Property which belonged to each of the partners at the time of the
constitution of the partnership (future properties cannot be
contributed)
2. Profits which they may acquire from all property contributed
ii. Universal partnership of profits - comprises all that the partners may
acquire by their industry or work during the existence of the partnership
b. Particular partnership​​ - has for its objects:
i. Determinate things
ii. Their use of fruits
iii. Specific undertaking
iv. Exercise or profession or vocation
2. As to liability of the partners:
a. General partnership​​ - consists of general partners who are liable ​pro rata​ and
subsidiarily and sometimes solidarily with their separate property for partnership
debts
b. Limited partnership​​ - one formed by two or more persons having as members
one or more general partners and one or more limited partners, the latter not
being personally liable for the obligations of the partnership
3. As to its duration:
a. Partnership at will​​ - one in which not ime is specified and is not formed for a
particular undertaking or venture which may be terminated anytime by mutual
agreement
b. Partnership with a fixed term ​- the term for which the partnership is to exist is
fixed or agreed upon or one formed for a particular undertaking
4. As to the legality of its existence:
a. De jure p ​ artnership​​ - one which has complied with all legal requirements for its
establishment
b. De facto​ partnership​​ - one which has failed to comply with all legal
requirements for its establishment
 5. As to representation to others:
a. Ordinary or real partnership​​ - one which actually exists among the partners
and also as to 3rd persons
b. Ostensible partnership or partnership by estoppel​​ - one which in reality is not
a partnership but is considered a partnership only in relation to those who, by
their conduct or omission, are precluded to deny or disprove its existence
6. As to publicity:
a. Secret partnership​​ - one wherein the existence of certain persons as partners is
not avowed or made known to the public by any of the partners
b. Open or notorious partnership​​ - one whose existence is avowed or made
known to the public by members of the partnership
7. As to purpose:
a. Commercial or trading partnership​​ - a partnership formed for the transaction of
business
b. Professional or non-trading partnership​​ - a partnership formed for the
exercise of a profession

Article 1780
A universal partnership of profits comprises all that the partners may acquire ny their
industry of work during the existence of the partnership.

Article 1781
Articles of universal partnership, entered into without specification of its nature, only
constitute a universal partnership of profits.
Where the articles of partnership do not specify the nature of the partnership, it will be
presumed that the parties intended merely a ​partnership of profits​​.

Article 1782
Persons who are prohibited from giving each other any donation or advantage cannot
enter into a universal partnership.
The best example of this are ​married couples​​.

The following donations shall be void (Article 739):

1. Those made between persons who were guilty of adultery or concubinage at the time of
the donation.
2. Those made between persons found guilty of the same criminal offense, in consideration
thereof.
3. Those made to a public officer or his wife, descendants and ascendants by reason of his
office.
In order that Article 739 may apply, it is ​not required​​ that there be a previous conviction for
adultery or concubinage.
Article 1783
A ​particular partnership​​ or a g
​ eneral professional partnership​​ has for its object
determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession
or vocation.

Relations created by a contract of partnership:

1. Relations among the partners themselves
2. Relations of the partners with the partnership
3. Relations of the partnership with third persons with whom it contracts
4. Relations of the partners with such third persons
A partnership is consensual contract hence, it exists from the moment of the celebration of the
contract by the partners.

Future Partnerships -
A ​partnership with a fixed term​​ is one in which the term of its existence has been agreed upon
expressly or implied. The ​expiration of the term​​ this fixed or the accomplishment of the
particular undertaking specified will cause the ​automatic dissolution of the partnership​​.

1. To contribute at the beginning of the partnership of at the stipulated time the money,
property, or industry which he may have promised to contribute
2. To answer for eviction in case the partnership is deprived of the determinate property
contributed
3. To answer to the partnership for the fruits of the property the contribution of which he
delayed, from the date they should have been contributed up to the time of actual
delivery
4. To preserve said property with the diligence of a good father of a family pending delivery
to the partnership
5. To indemnify the partnership for any damage caused to it by the same or by the delay in
its contributions

Effect if failure to contribute property:

1. Liability as debtor to partnership - mutual contribution to a common fund is of the
essence of the contract of partnership
2. Remedy of other partners - not rescission or cancellation of the contract of partnership
but an action for specific performance with damages and interest from the defaulting
partner

Article 1787
When the capital or a part thereof which a partner is bound to contribute consists of
goods, their appraisal must be made in the manner prescribed in the contract of partnership,
and in the absence of stipulation, it shall be made by experts chosen by the partners

Article 1788
 A partner who has undertaken to contribute a sum of money and fails to do so becomes
a debtor for the interest and damages from the time he should have complied with his
obligation.

Article 1789
An ​industrial partner cannot engage in business for himself​​, unless the partnership
expressly permits him to do so; and if he should do so, the capitalist partners may either
exclude him from the firm​​ or ​avail themselves of the benefits​​ which he may have obtained
in violation of this provision, with a ​right to damages​​ in either case.
An ​industrial partner​​ is one who ​contributes his industry, labor, or services to the
partnership​​. He is considered the owner of his services, which are his contribution to the
common fund. The partnership acquires an exclusive right to avail itself of his industry.

Prohibition against engaging in business:

1. As regards an ​industrial partner​​ ​- the ​prohibition is absolute​​ and applies whether the
industrial partner is to engage in the same business in which the partnership is engaged
or in any kind of business. It is clear that the reason for the prohibition exists in both
cases, which is to ​prevent any conflict of interest​​ between the industrial partner and
the partnership and to insure faithful compliance by said partner with his obligation.
2. As regards ​capitalist partners​​ ​- the prohibition extends only to any operation which is of
the same kind of business in which the partnership is engaged unless there is a
stipulation to the contrary.

Article 1790
Unless there is a stipulation to the contrary, the partners shall contribute ​equal shares​​ to
the capital of the partnership.

Article 1791
If there is no agreement to the contrary, in case of an imminent loss of the business of
the partnership, any partner who refuses to contribute an additional share to the capital, except
an industrial partner, to save the venture, shall be obliged to sell his interest to the other
partners.

Article 1796
The partnership shall be responsible to every partner for the amounts he may have
disbursed on behalf of the partnership and for the corresponding interest, from the time the
expenses are made.
Being a ​mere agent​​, the ​partner is not personally liable​​, provided, however, that he is free
from all fault and he acted within the scope of his authority.

Rules for distribution of profits and losses:

1. Distribution of profits
a. The partners share the profits according to their agreement
 b. There is no such agreement
i. The share of each capitalist partner shall be in proportion to his capital
contribution. This rule is based on the presumed will of the partners.
ii. The industrial partner shall receive such share, which must be satisfied
first before the capitalist partners shall divide the profits.

Article 1799
A stipulation which excludes one or more partners from any share in the profits or losses
is void.

Article 1800
The partner who has been appointed manager in the articles of partnership may execute
all acts of administration despite the opposition of his partners, unless he should act in bad faith;
and his power is irrevocable without just or lawful cause.

Scope of power of a managing partner:

1. General rule -
a. The minor power to issue receipt
b. The manager of a partnership engaged in buying and selling is clothed with
sufficient authority even without approval
2. Exceptions - when the powers of the manager are specifically restricted or expressly
withheld
Partner generally ​NOT entitled to compensation​​.

Article 1803
When the manner of management has not been agreed upon, the following rules shall
be observed:
1. All partners shall be considered agents​​ and whatever any of them may do alone shall
bind the partnership, without prejudice to the provisions of Article 1801
2. None of the partners may, without the consent of the others, make any important
alteration in the immovable property​​ of the partnership, even if it may be useful to the
partnership.

Article 1804
Every partner may associate another person with him in his share, but the associate
shall not be admitted into the partnership without the consent of all the other partners, even if
the partner having an associate should be a manager.

Article 1805
The ​partnership books shall be kept​​, subject to any agreement between the partners,
at the ​principal place of business of the partnership​​, and every partner shall at ​any
reasonable hour have access​​ to and may inspect and copy any of them.
Article 1807
Every partner must account to the partnership for any benefit, and hold as trustee for it
any profits derived by him without the consent of the other partners from any transaction
connected with the formation, conduct, or liquidation of the partnership or from any use by him
of its property.

Article 1808
The capitalist partners cannot engage for their own account in any operation which is of
the kind of business in which the partnership is engages, ​unless there is a stipulation to the
contrary​​.
Any capitalist partner violating this prohibition shall bring to the common fund any profits
accruing to him from his transactions, and shall personally bear all the losses.

Right of capitalist partner to engage in business​​:

1. The capitalist partner is only prohibited from engaging for his own account in any
operation which is the ​same as or similar to the business in which the partnership is
engaged​​.
2. The law does not prohibit a partner from engaging in enterprises in his own behalf during
the period that he is a member of a firm but permits him to carry on a ​business or
activity not connected or competing with that of the partnership​​, as long as the
partnership agreement does not prohibit such activity.
3. The law is silent on whether a capitalist partner can engage in the ​same line of
business for the account of another​​.

Article 1810
The property rights of a partner are:
1. His rights in specific partnership property;
2. His interest in the partnership ;
3. His right to participate in the management

Article 1815
Every partnership shall operate under a firm name, which may or may not include the
name of one or more of the partners.

Right of partners to choose firm name:

1. Use of misleading name - the partnership may adopt any name it wishes as long as it is
not identical with or deceptively similar to a name which was previously adopted by any
other entity
2. Use of names of deceased persons - “In the choice of a firm name, no false, misleading
or assumed name shall be used. The continued use of the name of a deceased partner
is permissible provided that the firm indicates in all its communications that said partner
is deceased.”
Article 1818
Every partner is an agent of the partnership for the purpose of business and the act of
every partner, including the execution in the partnership name of any instrument, for apparently
carrying on in the usual way the business of the partnership of which he is a member binds the
partnership.
Except when authorized by the other partners or unless they have abandoned the business, one
or more but less than all partners have no authority to:
1. Assign the partnership property in trust for creditors or on the assignee’s promise to pay
the debts of the partnership;
2. Dispose of the goodwill of the business;
3. Do any other act which would make it impossible to carry on the ordinary business of a
partnership;
4. Confess a judgment;
5. Enter into a compromise concerning a partnership claim or liability;
6. Submit a partnership claim or liability to arbitration;
7. Renounce a claim of the partnership.

Partner by estoppel; partnership by estoppel:

1. Meaning and effect by estoppel
2. When person a partner by estoppel

Article 1828
The dissolution of a partnership is the change in the relation of the partners caused by
any partner ceasing to be associated in the carrying on as distinguished from the winding up of
the business.
Dissolution​​ - change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on of the business. It is that point in time when the ​partners cease to
carry on the business together​​. It represents the d ​ emise of a partnership​​.
Winding​​ - process of ​settling the business​​ or partnership affairs ​after dissolution​​.
Termination​​ - point in time when all partnership affairs are completely wound up and finally
settled. It signifies the ​end of the partnership life​​.

Article 1829
On dissolution the partnership is not terminated, but continues until the winding up of
partnership affairs is completed.

Article 1830
Dissolution is caused:
1. Without violation of the agreements between the partners:
a. By the termination of the definite term of particular undertaking specified in the
agreement;
b. By the express will of any partner, who must act in good faith, when no definite
term or particular undertaking is specified;
 c. By the express will of all the partners who have not assigned their interests or
suffered them to be charged for their separate debts, either before or after the
termination of any specified term or particular undertaking;
d. By the expulsion of any partner from the business ​bona fide​ in accordance with
such a power conferred by the agreement between the partners;
2. In contravention of the agreement between the partners, where the circumstances do
not permit a dissolution under any other provision of this article, by the express will of
any partner at any time;
3. By any event which makes it unlawful for the business of the partnership to be carried on
or for the members to carry it on in partnership;
4. When a specific thing, which a partner had promised to contribute to the partnership,
perishes before the delivery; in any case by the loss of the thing, when the partner who
contributed it having reserved the ownership thereof, has only transferred to the
partnership the use or the enjoyment of the same;
5. By the death of any partner;
6. By the insolvency of any partner or of the partnership;
7. By the civil interdiction of any partner;
8. By decree of court under the following article (1700a and 1701a).

Article 1831
On application by or for a partner the court shall decree a dissolution whenever:
1. A partner has been declared insane in any judicial proceeding or is shown to be of
unsound mind;
2. A partner becomes in any other way incapable of performing his part of the partnership
contract;
3. A partner has been guilty of such conduct as tends to affect prejudicially the carrying on
of the business;
4. A partnership willfully or persistently commits a breach of the partnership agreement, or
otherwise so conducts himself in matters relating to the partnership business that it is not
reasonably practicable to carry on the business in partnership with him;
5. The business of the partnership can only be carried on at a loss;
6. Other circumstance render a dissolution equitable.
On the application of the purchaser of a partner’s interest under Article 1813 or 1814:
1. After the termination of the specific term or particular undertaking;
2. At any time if the partnership was a partnership at will when the interest was assigned or
when the charging order was issued.

Article 1833
Where the dissolution is caused by the ​act, death or insolvency​​ of a partner, each
partner is liable to his co-partners for his share of any liability created by any partner acting for
the partnership as if the partnership had not been dissolved unless:
1. The dissolution being by act of any partner, the partner acting for the partnership had
knowledge of the; or
 2. The dissolution being by the death or insolvency of a partner, the partner acting for the
partnership had knowledge or notice of the death or insolvency.

Article 1836

Manner of winding up:

1. Judicially
2. Extrajudicially

Article 1843
A limited partnership is one formed by two or more persons under the provisions of the
following article, having as members one or more general partners and one or more limited
partners. The limited partners as such shall not be bound by the obligations of the partnership.

Characteristics of limited partnership:

1. A limited partnership is formed by compliance with the statutory requirements;
2. One or more
3. One or more limited partners
4. The limited partners may ask for
5. The partnership debts

Differences between a general and a limited partner:

1. A general partner is personally liable for partnership obligations, while a limited partner’s
liability extends only to his capital contribution;
2. When the manner of management has not been agreed upon, all of the general partners
have an equal right in the management of the business whether or not the general
partner has made any capital contribution, while a limited partner has no share in the
management of a limited partnership;
3. A general partner may contribute money, property or industry to the partnership while a
limited partner must contribute cash or property to the partnership but not services;
4. Unlike a general partner, a limited partner is not a proper party to proceedings by or
against a partnership;
5. A general partner’s interest in the partnership may not be assigned as to make the
assignee a new partner without the consent of the other partners in his share, while a
limited partner’s interest is freely assignable;
6. The name of a general partner may appear in the firm name, while, as a general rule,
that of a limited partner must not;
7. The retirement, death, insolvency or insanity of a general partner dissolves the
partnership, while the retirement, etc., of a limited partner does not have the same effect,
for his executor or administrator shall have the rights of a limited partner for the purpose
of selling his estate.

Differences between a general and a limited partnership:

 1. A general partnership may, as a general rule, be constituted in any form by contract or
conduct of the parties, while a limited partnership is created by the members after
compliance with the requirements set forth by law;
2. A general partnership is composed only of general partners;
3. It must operate under a firm name which in the case of limited partnership must be
followed by the word “Limited”; and
4. Their dissolution and winding up are governed by different rules.

Article 1844

Article 1845
The contributions of a limited partner may be cash or other property, but not services.

Article 1846

Article 1848
A limited partner shall not become liable as a general partner unless, in addition to the
exercise of his rights and powers as a limited partner, he takes part in the control of the
business.

Article 1849
After the formation of a limited partnership, additional limited partners may be admitted
upon filing an amendment to the original certificate in accordance of Article 1865.

Article 1850
A general partner shall have all the rights and powers and be subject to all the restriction
and liabilities of a partnership without limited partners. However, without the written consent or
ratification of the specific act by all the limited partners, a general partner or all the general
partners have no authority to:
1. Do any act in contravention of the certificate;
2. Do any act which would make it impossible to carry on the ordinary business of the
partnership;
3. Confess a judgment against the partnership;
4. Possess partnership property, or assign their rights in specific partnership property, for
other than a partnership purpose;
5. Admit a person as a general partner;
6. Admit a person as a limited partner, unless the right to do so is given in the certificate;
7. Continue the business with the partnership property on the death, retirement, insanity,
civil interdiction or insolvency of a general partner, unless the right to do so is given in
the certificate.

Article 1851
A limited partner shall have the same rights as a general partner to:
 1. Have the partnership books kept at the principal place of business of the partnership,
and at a reasonable hour to inspect and copy any of them;
2. Have on demand true and full information of all things affecting the partnership, and a
formal account of partnership affairs whenever circumstances render it just and
reasonable; and
3. Have dissolution and winding up by decree of court

Article 1853
A person may be a general partner and a limited partner in the same partnership at the
same time, provided that this fact shall be stated in the certificate provided for in Article 1844.
A person who is a general, and also at the same time a limited partner, shall have all the
rights and powers and be subject to all the restrictions of a general partner; except that, in
respect to his contribution, he shall have the rights against the other members which he would
have had if he were not also a general partner.

Article 1854 (look at example p.189)

A limited partner also may loan money to and transact other business with the
partnership, and, unless he is also a general partner, receive on account of resulting claims
against the partnership, with general creditors, a ​pro rata​ share of the assets. No limited partner
shall in respect to any such claim:
1. Receive or hold as collateral security any partnership property, or
2. Receive from a general partner or the partnership any payment, conveyance, or release
from liability, if at the time the assets of the partnership are not sufficient to discharge
partnership liabilities to persons not claiming as general or limited partners.

Article 1855
Where there are several limited partners the members may agree that one or more of
the limited partners shall have a priority over the other limited partners as to the return of their
contributions, as to their compensation by way of income, or as to any other matter. If such an
agreement is made, it shall be stated in the certificate, and in the absence of such a statement
all the limited partners shall stand upon equal footing.

Article 1863

Article 1864
The certificate shall be cancelled when the partnership is dissolved or all limited partners
cease to be such. A certificate shall be amended when:
1. There is a change in the name of the partnership or in the amount or character of the
contribution of any limited partner;
2. A person is substituted as a limited partner;
3. An additional limited partner is admitted;
4. A person is admitted as a general partner;
5. A general partner retires, dies, becomes insolvent or insane, or is sentenced to civil
interdiction and the business is continued under Article 1860;
6. There is change in the character of the business of the partnership;
7. There is a false or erroneous statement in the certificate;
8. There is a change in the time as stated in the certificate for the dissolution of the
partnership or for the return of a contribution;
9. A time is fixed for the dissolution of the partnership, or the return of a contribution, no
time having been specified in the certificate; or
10. The members desire to make a change in any other statement in the certificate in order
that it shall accurately represent the agreement among them.
 PRIVATE CORPORATIONS

Section 2. Corporation defined

A corporation is an artificial being created by operation of law, having the right of
succession and the powers, attributes and properties expressly authorized by law or
incident to its existence.

Article XII, Section 16 of the Constitution provides:

“The Congress shall not, except by general law, provide for the formation, organization,
or regulation of private corporations. Government-owned or controlled corporations may be
created or established by special charters in the interest of the common good and subject to the
test of viability.”

Scope of the Code.

1. Provides for the incorporation, organization, and regulation of private corporations, both
stock and non-stock, including educational and religious corporations;
2. Defines their powers and provides for their dissolution;
3. Fixes their duties and liabilities of directors or trustees and other officers thereof;
4. Declares the rights and liabilities of stockholders or members;
5. Prescribes the conditions under which corporations including foreign corporations may
transact business;
6. Provides penalties for violations of the Code; and
7. Repeals all laws and parts of laws in conflict and inconsistent with the Code.

Corporation as an artificial personality:

1. A corporation is not liable for the debts of its stockholders, and the latter are not
individually liable for the corporation’s debts. They can lose no more than their
investment on the corporation.
2. It may acquire and possess property of all kinds, as well as incur obligations and bring
civil and criminal actions in its own name in the same manner as a natural person.
3. Property conveyed to or acquired by the corporation is in law the property of the
corporation itself as a distinct legal entity and not that of the members of stockholders as
such.
4. All contracts entered into in its name by its regular appointed officers and agents are the
contracts of the corporation and not those of the members or stockholders. A corporation
cannot be held liable for the personal indebtedness or obligation of a stockholder even if
he should be its president. Neither is the latter liable for the indebtedness of the former.
5. A tax exemption granted to a corporation cannot be extended to include the dividends
paid by such corporation to its stockholders if such dividends are not exempted from tax.
6. A corporation has no personality to bring an action for in behalf of its stockholders or
members for the purpose of recovering property which belongs to said stockholders or
members in their personal capacities.
 7. Likewise, as an entity distinct from its members or stockholders, a corporation remains
unchanged and unaffected in its identity by changes in its individual membership. It has
continuous existence since it would exist even if all the stockholders die.

Disregarding fiction of corporate entity​​:

Being a mere creature of the law, a corporation may be allowed to exist solely for lawful
purposes bit where the fiction of corporate entity is being used as a cloak or cover for fraud or
illegality, this fiction will be disregarded and the individuals composing it will be treated as
identical. This non-recognition is sometimes referred to as ​the doctrine of piercing the veil of
corporate entity or disregarding the fiction of corporate entity​​ or the ​doctrine of corporate
alter ego​​.

Instances where fiction disregarded:

1. Where a ​corporation functions for the benefit of a single person ​who has complete
control over the funds and the said person is the sole owner thereof. In such case, the
corporate entity is but an ​alter ego​​ or the business conduit of the owner and the property
of the controlling individual and may be seized in an action against the latter.
2. Where the ​corporation is a mere instrumentality of the individual stockholders​​, the
latter must individually answer for corporate obligations. To hold the stockholders liable
for the corporate obligations is not really to ignore the corporation’s entity but merely to
apply the established principle that such entity cannot be invoked or used for purposes
that could not have been intended by law that created that separate personality.
3. Where a domestic or ​Philippine corporation is controlled by aliens​​, its nationality
shall be deemed that of the controlling stockholders thereof during wartime, for reasons
of national security. This is the ​control test​​ in determining the nationality of a private
corporation.
4. Where a ​corporation is organized by an insolvent debtor to defraud his creditors​​,
and he transfers his properties to it in furtherance of such fraudulent purpose.
5. Where a ​subsidiary company is created by a parent company merely as an agency
of the latter​​ especially of the stockholders of the two corporations are substantially the
same or their system of operations is unified.
6. Where a ​corporation is formed by a person for the purpose of evading his
individual contract​​.
7. Where a ​corporation is dissolved and its assets are transferred to another
corporation to avoid a financial liability of the first corporation​​ to its employees,
both firms being owned and controlled by the same person, with the result that the
second corporation should be considered a continuation and successor of the first entity.

Right of succession of a corporation:

A corporation has a capacity of continuous existence irrespective of the death, withdrawal,
insolvency, or incapacity of the individual members or stockholders and regardless of the
transfer of their interest or shares of stock.
 1. Under the Corporation Code, the life of the corporation is limited to the period of time
stated in the articles of incorporation not exceeding 50 years from the date of
incorporation unless sooner dissolved or said period is extended.
2. Corporations created by special laws have the right of succession for the term provided
in the laws creating them.

Distinctions between a partnership and a corporation​​:

1. Manner of creation
a. A partnership is created by mere agreement of the parties, while a corporation is
created by law or by operation of law.
2. Number of incorporators
a. A partnership may be organized by only two persons, while a corporation
requires at least five incorporators.
3. Commencement of juridical personality
a. A partnership commences to acquire juridical personality from the moment of the
execution of the contract of partnership, while a corporation begins to have
corporate existence and juridical personality only from the date of the issuance of
the certificate of incorporation by the SEC under its official seal.
4. Powers
a. A partnership may exercise any power authorized by the partners provided it is
not contrary to law, morals, good customs, public order, or public policy, while a
corporation can exercise only the powers expressly granted by law or implied
from those granted or incident to its existence.
5. Management
a. In a partnership, when the management is not agreed upon, every partner is an
agent of the partnership, while in a corporation, the power to do business and
manage its affairs is vested in the board of directors or trustees.
6. Effect of mismanagement
a. In a partnership, a partner as such can sue a co-partner who mismanages, while
in a corporation, the suit against a member of the board of directors or trustees
who mismanages must be in the name o the corporation.
7. Right of succession
a. A partnership has no right of succession, while a corporation has such a right.
8. Extent of liability to third persons
a. In a partnership, the general partners are liable personally and subsidiarily for
partnership debts to third persons, while in a corporation, the stockholders are
liable only to the extent of their investments as represented bt the shares
subscribed by them.
9. Transferability of interest
a. In a partnership, a partner cannot transfer his interest in the partnership so as to
make the transferee a partner without the consent of all the other existing
partners because of the partnership is based on the principle of ​delectus
personarum,​ while in a stock corporation, a stockholder has the right to transfer
 his shares without prior consent of the other stockholders because a corporation
is not based on this principle.
10. Term of existence
a. A partnership may be established for any period of time stipulated by the
partners, while a corporation may not be formed for a term in excess of 50 years
extendible to not more than 50 years in any one instance.
11. Firm name
a. A limited partnership is required by the law to add the word “Ltd.” to its name,
while a corporation may adopt any firm name provided it is not identical or
deceptively similar to any registered firm name, or contrary to existing laws.
12. Dissolution
a. A partnership may be dissolved at any time by the will of any or all of the
partners, while a corporation can only be dissolved with the consent of the State.
13. Laws which govern
a. A partnership is governed by the Civil Code, while a corporation is governed by
the Corporation Code.

Advantages of a business corporation​​:

1. The corporation has a legal capacity to act as a legal unit.
2. It has continuity of existence because of its non-dependence on the lives of those who
compost it.
3. Its credit is strengthened by such continuity of existence.
4. Its management is centralized in the board of directors.
5. Its creation, organization, management and dissolution are standardized as they are
governed under one general incorporation law.
6. It makes feasible gigantic financial enterprises since it enables many individuals to invest
their separate funds in the enterprise.

Disadvantages of a business corporation:

1. The corporation is relatively complicated in formulation and management.
2. It entails relatively high cost of formation and operation.
3. Its credit is weakened by the limited liability of the stockholders.
4. There is ordinarily lack of personal element in view of the transferability of shares.
5. There is a greater degree of governmental control and supervision than in any other
forms of business organization.
6. The stockholders’ voting rights have become theoretical particularly in large corporations
because of the use of proxies and widespread ownership.
7. The stockholders have little voice in the conduct of business.
8. In large corporations, management and control are separate from ownership.

Classification of corporations under the Code:

 1. A ​stock corporation​​ is the ordinary business corporation created and operated for the
purpose of making a profit which may be distributed in the form of dividends to
stockholders on the basis of their invested capital.
2. Non-stock​​ corporations do not issue stock and are created not for profit but for the
public good and welfare. Of this character most of the religious, social, literary, scientific,
civic and political organizations and societies, Non-stock corporations have no capital
stock which can be subscribed by members. Their capital are sourced from contributions
and donations.

Other classifications of corporations:

1. As to number of persons who compose them:
a. Corporation aggregate​​ or a corporation consisting of more than one member or
corporator
b. Corporation sole​​ or a religious corporation which consists of one member or
corporator only and his successors, such as a bishop
2. As to whether they are for religious purpose or not:
a. Ecclesiastical corporation ​or one organized for religious purposes
b. Lay corporation or one organized for a purpose other than for religion. Lay
corporations, in turn, may be either eleemosynary or civil
3. As to whether they are for charitable purposes or not:
a. Eleemosynary corporation ​or one established for charitable purposes
b. Civil corporation ​or one established for business or profit
4. As to state or country under or by whose laws they have been created:
a. Domestic corporation ​or one incorporated under the laws of the Philippines
b. Foreign corporation ​or one formed, organized, or existing under any laws other
than those of the Philippines
5. As to their legal right to corporate existence:
a. De jure c ​ orporation ​or a corporation existing in fact and in law
b. De facto c ​ orporation ​or a corporation existing in fact but not in alw
6. As to whether they are open to the public or not:
a. Close corporation ​or one which is limited to selected persons or members of a
family
b. Open corporation ​or one which is open to any person who may wish to become
a stockholder or member thereto
7. As to their relation to another corporation:
a. Parent or holding corporation ​or one which is so related to another corporation
that it has the power either, directly or indirectly to, elect the majority of the
directors of such other corporation
b. Subsidiary corporation ​or one which is so related to another corporation that
the majority of its directors can be elected either, directly or indirectly, by such
other corporation
8. As to whether they are corporations in a true sense or only in a limited sense:
a. True corporation ​or one which exists by statutory authority
 b. Quasi-corporation ​or one which exists without formal legislative grant
i. Corporation by prescription ​or one which has exercused corporate
powers for an indefinite period without interference on the part of the
sovereign power and which, by fiction of law, is given the status of a
corporation. The ​Roman Catholic Church​​ has been recognized as a
corporation by prescription having acted as such and assumed corporate
powers for a long period of time
ii. Corporation by estoppel ​or one which in reality is not a corporation,
wither ​de jure​ or ​de facto,​ because it is so defectively formed, but it is
considered in relation to those only who, by reason of their acts or
admissions, are precluded from asserting that it is not a corporation
9. As to whether they are for public or private purpose:
a. Public corporations ​or those formed or organized for the government of a
portion of the State
b. Private corporations ​or those formed for some private purpose, benefit, or endl
it may be either a stock or non-stock corporation, government-owned or
controlled corporation or quasi-public corporation

Components of a corporation​​:
1. Corporators ​or those who compose the corporation, whether stockholders or members.
Hence the term ​includes incorporators, stockholders, or members​​.
2. Incorporators ​or those corporators mentioned in the articles of incorporation as
originally forming and composing the corporation and who executed and signed the
articles of incorporation as such.
3. Stockholders ​or the owners of shares of stock in a stock corporation. They are the
owners of the corporation. They are ​also called shareholders​​. They are the corporators
in a stock corporation. Stockholders may be natural or juridical persons by only natural
persons can be incorporators.
4. Members ​or corporators of a corporation which has no capital stock.

Three other classes:

1. Promoters​​ or “persons who bring about or cause to bring about the formation and
organization of a corporation by bringing together the incorporators or the persons
interested in the enterprise, procuring subscriptions or capital for the corporation and
setting in motion the machinery which leads to the incorporation of the corporation itself.”
2. Subscribers​​ or “persons who have agreed to take and pay for original, unissued shares
of a corporation formed or to be formed.”
3. Underwriter ​or “a person, usually an investment banker, who: (a) has guaranteed the
sale of an issue by agreement to buy at stated terms an entire issue of securities or a
substantial part thereof; or (b) has guaranteed the sale of an issue by agreement to buy
from the issuing party any unsold portion at a stated price; or has agreed to use his “best
efforts” to market all or part of an issue; or (d) has offered for sale stock he has
purchased from a controlling stockholder.”
Capital stock​​ is the amount fixed in the articles of incorporation, to be subscribed and paid in
by the shareholders of a corporation, either in money or property, labor or services, at the
organization of the corporation or afterwards and upon which it is to conduct its operation.
1. Authorized capital stock
2. Subscribed capital stock
3. Outstanding capital stock
4. Paid-up capital stock
5. Unissued capital stock
6. Legal capital

Nature of share of stock:

1. A share of stock merely represents a ​distinct undivided share or interest in the
common property of the corporation​​. A shareholder is not the owner of any of the
property or assets of the corporation nor is he entitled to the possession of any definite
portion thereof.
2. Shares of stock constitute ​property distinct from the capital​​ or tangible property of the
corporation and belong to the different owners. Incorporeal in nature, the shares are
personal property.
3. They ​do not constitute an indebtedness of the corporation to the shareholder​​ and
are, therefore, not credits. Hence, no action can be maintained against the corporation
for the return of the contributions of the shareholders as long as the corporation needs
them and is not under dissolution.
4. A share of stock only represents ​an undivided part of the corporation’s property​​, or
the right to share in its proceeds to that extent when distributed according to law.

Certificate of stock​​ is a written acknowledgement by the corporation if the interest, right, and
participation of a person in the management, profits, and assets of a corporation.

Classes of shares defined​​:

1. Par value share ​is one with a specific money value fixed in the articles of incorporation
and appearing in the certificate of stock for each share of stock of the same issue.
a. The primary purpose of par value is to fix the minimum issue price of the shares
thus assuring creditors that the corporation would receive a minimum amount for
its stock.
b. It is not usually the price at which investors buy or sell the stock.
2. No par value share ​is one without any stated or par value appearing on the face of the
certificate of stock. In other words, it is a stock which does not state how much money it
represents.
3. Voting share ​is share with right to vote.
4. Non-voting share ​is share without right to vote.
5. Common share of stock ​is stock which entitles the holder thereof to ​pro rata​ division of
the profits, if there are any, without any preference or advantage in that respect over
other stockholder or class of stockholders.
 6. Preferred share of stock ​is stock which entitles the holder thereof to certain
preferences over the holders of common stock.
7. Promotion share ​is such share as is issued to promoters, or those in some way
interested in the company, for incorporating the company, or for services rendered in
launching or promoting the welfare of the company, such as advancing the fees for
incorporating, advertising, attorney’s fee, surveying, etc.
8. Share in escrow ​is share subject to an agreement by virtue of which the share is
deposited by the grantor or his agent with a third person to be kept by the depositary
until the performance of a certain condition or the happening of a certain event contained
in the agreement.
9. Convertible stock​​ is stock which convertible or changeable by the stockholder from one
class to another class, such as from preferred to common, at the conversion ratio, i.e.,
the price at which the common is to be valued as against the preferred.

Nature of par value/book value/market value:

1. Par value​​ - The par value indicated in the certificate of stock represents the amount of
money or property contributed by the shareholder to the capital stock of the corporation.
Patently, the assets of a company cannot always equal to the par value of the
outstanding stock, the assets being constantly in a state of fluctuation as the business
prospers or declines.
2. Book value​​ - Hence, the par value does not always reflect its actual or true value or
book value which may be determined by dividing net value of the total corporate assets
by the number of shares issued or outstanding.
3. Market value​​ - Par value and book value may be more or less than market value which
may be defined as the price a willing seller would sell and a willing buyer would buy
neither being under abnormal pressure to sell or buy. Market value is, of course, affected
by the law of supply and demand.

Kinds of preferred shares as to dividends:

1. Cumulative preferred share ​is the share which entitles the holder thereof not only to
the payment of current dividends but also to dividend in arrears.
2. Non-cumulative preferred share ​is share which entitles the holder thereof to the
payment of current dividends only in preference to common stockholders.
3. Participating preferred share ​is share which gives the holder thereof not only the right
to reveive the stipulated dividends at the preferred rate but also to participate with the
holders of common shares in the remaining profits ​pro rata​ after the common shares
have been paid the amount of the stipulated dividednd at the same preferred rate.
4. Non-participating preferred share ​is share which entitles the holder thereof to reveive
the stipulated preferred dividends and no more. The balance, if any, is given entirely to
the common stocks.
5. Cumulative-participating preferred share ​is share which is a combination of the
cumulative share and participating share. This means that the holder is entitled not only
 to dividends in arrears but also, after receiving his preferred share of dividends, to
participation with the holders of common stock in the remaining profits.

Founders’ shares​​ have been defined as “shares issued to the organizers and promoters of a
corporation in consideration of some supposed right or property. Such shares usually share in
profits only after a certain percentage has been paid upon the common stock, but are often
given special privileges over other stock as to voting and as to division of profits in excess of a
minimum dividend on the common stock.”

Redeemable​​ or ​callable share​​ is share, usually preferred, which by its terms is redeemable at
a fixed date or at the option of either the issuing corporation or the stockholder or both at a
certain redemption price.

INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATION

Sec. 10. Number and qualifications of incorporators - Any number of natural persons not less
than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents
of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of
the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of
the capital stock of the corporation.

Incorporation of a private corporation, ​a mere privilege​​.

Steps in the creation of a corporation:

1. Promotion;
2. Incorporation; and
3. Formal organization and commencement of business operations.

Promotion of corporations:
The term “​promotion​​” is said to be not a legal but a business term, usefully summing up in a
single word, a number of business operations peculiar to the business world by which a
company is generally brought into existence.
1. The formation and organization of a corporation are brought about generally at the
instance and under the supervision of one or more so-called “promoters.” The activity on
the part of such persons is not, strictly speaking, formal part of the organization of a
corporation, inasmuch as they are not in any sense the agents of the corporation before
it comes into existence. There cannot be an agency unless there is a principal.
2. Upon incorporation, the practice is for the board of directors to pass a resolution ratifying
the contracts entered into by the incorporators with the promoters. In such case, they
become agents of the corporation.
3. A corporation, however, ​may ​be formed and organized by the incorporators themselves
without getting the services of so-called promoters.
Steps in incorporation:
1. Drafting and execution of the articles of incorporation by the incorporators. In this
connection, the person chosen as temporary treasurer pending incorporation must also
execute:
a. An affidavit regarding the capital subscribed and paid up;
2. Filing with the Securities and Exchange Commission of the articles of incorporation
together with the following:
a. Treasurer’s affidavit showing at least 25% of the entire of the subscription has
been paid in cash and or property to the corporation; and
b. In case the corporation is governed by a special law, a favorable
recommendation of the appropriate government agency that such articles of
incorporation is in accordance with law;
3. Payment of the filing and publication fees; and
4. The issuance by the Securities and Exchange Commission of the certificate of
incorporation if all the papers filed after verification and examination, are found in order.

Incorporators: number and qualifications​​:

1. Natural persons - ​These five or more persons must be natural persons​​.
2. Capacity to contract - The incorporators must have the capacity to enter into a valid
contract, the act of forming a corporation as between the parties being contractual. A
married woman may be an incorporator without the need of obtaining the consent
of her husband​​ since under the law “either spouse may exercise any legitimate
profession, occupation, business or activity without the consent of the other” subject to
the right of the husband to “object only on valid, serious, and moral grounds.”
3. Residents of the Philippines - ​A majority of the incorporators must be residents of
the Philippines​​; the rest may be persons who are neither residents nor citizens of the
Philippines.
4. Citizens of the Philippines - By specific constitutional and legal provisions, citizenship is
a necessary qualification for incorporators in corporations in which a ​certain percentage
of the capital stock is required to be owned by Filipino citizens​​.
5. Owners of or subscribers to at least one share - The Code now expressly requires that
“​each of the incorporators of a stock corporation must own or be a subscriber to
at least one share of he capital stock of the corporation​​.”

Requirement of minimum number of incorporators mandatory.

1. Reduction of stockholders or members to less than minimum.
2. Beneficial ownership in one individual.
3. Subsequent accumulation of shares in one individual.

Sec. 12

Filipino percentage ownership requirement regarding corporate capital:

 1. Corporations for exploration, development and utilization of natural resources - ​at least
60%​​ of the capital of which is owned by citizens of the Philippines;
2. Public service corporations - ​at least 60%​​ of the capital of which is owned by citizens of
the Philippines;
3. Educational corporations - other than those established by religious orders and mission
boards, ​at least 60%​​ of the capital of which is owned by citizens of the Philippines;
4. Banking corporations - ​at least 60%​​ of the capital stock of any bank or banking
institution which may be established after the approval of the General Banking Act shall
be owned by citizens of the Philippines;
5. Corporations engaged in retail trade - the capital of which ​must be wholly owned by
citizens​​ of the Philippines;
6. Rural banks - at least 60% of the capital stock of which is owned by Filipino citizens;
7. Corporations engaged in coastwise shipping - ​at least 60%​​ of the capital stock of which
or of any interest in said capital is totally owned by citizens of the Philippines;
8. Corporations engaged in the pawnshop business - ​at least 70%​​ of the voting capital
stock shall be owned by citizens of the Philippines;
9. Under the Flag Law - in the purchase of articles for the Government, preference shall be
given to materials and supplies produced, made, or manufactured in the Philippines, and
to domestic entities. The term “domestic entities” means any citizen of the Philippines or
any corporate body or commercial company ​at least 75%​​ of the capital of which is
owned by citizens of the Philippines.

The ​articles of incorporation​​ is the document prepared by the persons establishing a

corporation and filed with the SEC containing the matters required by the Code.

Capital stock/capital and subscribers/contributors:

1. Stock corporation -
a. The amount
b. The number
c. The par value
d. The names
e. The amount of capital
f. If some or all
2. Non-stock corporation -
a. The amount
b. The names
c. The respective

Sec. 17. Grounds when articles of incorporation or amendment may be rejected or disapproved.
The SEC may reject the articles of incorporation or disapprove any amendment thereto if
the same is not in compliance with the requirements of this Code: Provided, That the
Commission shall give the incorporators reasonable time within which to correct or modify the
objectionable portions of the articles or amendment. The following are grounds for such
rejection:
1. That the articles of incorporation or any amendment thereto is not substantially in
accordance with the form prescribed herein;
2.

Suspension or revocation of the certificate of registration of corporations:

Sec. 19. Commencement of corporate existence.

A private corporation formed or organized under this Code commences to have
corporate existence and juridical personality and is deemed incorporated from the date the
Securities and Exchange Commission issues a certificate of incorporation under its official seal;
and thereupon the incorporators, stockholders/members and their successors shall constitute a
body politic and corporate under the name stated in the articles of incorporation for the period of
time mentioned therein, unless said period is extended or the corporation is sooner dissolved in
accordance with law.

Sec. 20. ​De facto​ corporations.

The due incorporation of any corporation claiming in good faith to be a corporation under
this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any
private suit to which such corporation may be a party. Such inquiry may be made by the
Solicitor General in a ​quo warranto p​ roceeding.

A ​de jure​ corporation​​ is one created in strict or substantial conformity with the mandatory
statutory requirements for incorporation and whose right to exist as a corporation cannot be
successfully questioned by any party even direct proceeding for the purpose by the State.
A ​de facto corporation​ is one which actually exists for all practical purposes as a corporation
but which has no legal right to corporate existence as against the State.

Questioning validity of corporate existence:

The well-settled rule is that assuming that a ​de facto c​ orporation actually exists, its
existence as a corporation cannot be collaterally attacked or questioned either by the state or by
private individuals. The State must bring a direct proceeding (i.e. ​quo warranto​) against the
corporation to oust it from the exercise of corporate powers usurped by it and to have it
dissolved.

Direct attack​​ is one whereby the State, in a proceeding brought for that purpose, attacks the
existence of an association claiming to be a corporation. A ​direct attack can only be instituted
by the government through the Solicitor General by ​quo warranto proceedings​.

A ​collateral attack​​ is one whereby corporate existence is questioned in some incidental

proceeding not provided by law for the express purpose of attacking the corporate existence.
 BOARD OF DIRECTORS/TRUSTEES/OFFICERS

Sec. 23. The board of directors or trustees.

Unless otherwise provided in this Code, the corporate powers of all corporations formed
under this Code shall be exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected from among the holders of
stocks, or where there is no stock, from among the members of the corporation, who shall hold
office for one (1) year and until their successors are elected and qualified.

Corporate powers exercise by board of directors or trustees:

1. Governing body of the corporation - it is well-established in corporation law that the
corporation can act only through its board of directors or trustees. Section 23 provides
that “unless otherwise provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business conducted and all property of
such corporations controlled and held by the board of directors or trustees.”
2. Binding effect of stockholders’ action - with the exception only of some powers reserved
by law to stockholders, the directors have sole authority to determine policy and conduct
the ordinary business of the corporation within the scope of its charter in all those
matters which do not require the consent or approval of the stockholders.
a. The law is settled that contracts between a corporation and third persons
must be made by or under the authority of its board of directors​​ and not by
its stockholders.
b. For the same reason that a corporation can act only through the board of
directors, ​a resolution adopted at a meeting of stockholders refusing to
recognize a corporate contract effected with the approval of the board of
directors or repudiating it, is without effect​​.
3. Extent of judicial review - ​As long as the directors act honestly and the contract
does not violate the rights of the minority opposed to it, the courts will not
interfere​​. The well-known rule is that courts cannot undertake to control the discretion of
the board of directors about administrative matters as to which they have the legitimate
power of action.

Limitations on powers of board of directors or trustees:

1. It must observe the limitations or restriction imposed by the Constitution, statutes and
rules and regulations having the force of law on the corporation including its articles of
incorporation and by-laws;
2. It cannot perform constituent acts, that is, acts involving fundamental or major changes
in the corporation; and
3. It cannot exercise powers not possessed by the corporation.

The board of directors or trustees ​must act together as a body in a lawful meeting​​, not
individually or separately, in order to bind the corporation by their acts.
Delegation of power of directors or trustees:
It is the general rule that​ the power to bind the corporation by contracts​​ rests in its board of
directors or trustees, but the power ​may be delegated, either expressly or impliedly​​, to other
officers or agents of the corporation.
It has been held, however, that ​discretionary powers​​ which, by provisions of law or the
by-laws or by the vote of the stockholders are vested exclusively in the board of directors or are
especially delegated to them, ​cannot be delegated to subordinate officers and agents​​.

Number of directors or trustees:

1. Under the Code
2. In ordinary
3. In a close corporation
4. Trustees of non-stock
5. In a corporation sole
6. The board of trustees

Qualifications of directors or trustees:

1. Stock corporations
a. Every director must own at least one share of capital stock;
b. The share of stock held by the director must be registered in his name on the
books of the corporation;
c. Every director must continuously own at least a share of stock during his term,
otherwise, he shall automatically cease to be a director; and
d. A majority of the directors must be residents of the Philippines.
2. Non-stock corporations - trustees of non-stock corporations must be members thereof
and like in stock corporations, a majority of them must be residents of the Philippines.
An ​independent director​​ “refers to a person other than an officer or employee of the
corporation, its parents or subsidiaries, or any other individual having any relationship with the
corporation which would interfere with the exercise of independent judgment in carrying out the
responsibilities of a director.”

Sec. 24. Election of directors or trustees.

At all elections of directors or trustees, there must be present, either in person or by
representative authorized to act by written proxy, the owners of the majority of the outstanding
capital stock, or if there be no capital stock, a majority of the members entitled to vote. The
election must be by ballot if requested by any voting stockholder or member. ​In stock
corporations, every stockholder entitled to vote in person or by proxy​​.

Any two or more positions may be held concurrently by the same person except as provided in
Sec. 25. The ​positions of president and secretary or treasurer are considered by law as
incompatible ​with each other due to the very nature appertaining to each office.
There is no prohibition in the law against a stockholder being a director or officer of two or more
corporations.

Extent of authority of corporate officers:

1. President
a. Must be a director of the corporation
b. The only officer required by law to be a member of the board of directors/trustees
c. Cannot act as president and secretary or president and treasurer at the same
time
2. Vice-President
3. Secretary
a. Must be a resident and a citizen of the Philippines
b. Not allowed to act as president and secretary at the same time
c. Need not be a director unless required by the by-laws
d. A ministerial officer who cannot bind the corporation unless especially authorized
4. Treasurer
a. Proper officer entrusted with the authority to receive and keep the money of the
corporation and to disburse them as he may be authorized
The ​treasurer​​ of the corporation is the proper officer ​entrusted with the authority to receive
and keep the money of the corporation and to disburse them as he may be authorized​​.
A ​comptroller​​ is different from a treasurer. The former is said to be an officer appointed to
control accounts and to check expenditures. By virtue of his office, the authority of a comptroller
is restricted to doing those things which are usual and necessary in the performance of his
duties.
5. General Manager

Sec. 28. Removal of directors or trustees

Any director or trustee of a corporation may be removed from office by a vote of the
stockholders holding or representing two-thirds of the outstanding capital stock, or if the
corporation be a non-stock corporation, by a vote of two-thirds of the members entitled to vote

Sec. 29. Vacancies in the office of director or trustee

Sec. 31. Liability of directors, trustees or officers

Sec. 34. Disloyalty of a director

Where a director, by virtue of his office, acquired for himself a business opportunity
which should belong to the corporation, thereby obtaining profits to the prejudice of such
corporation, he must account to the latter for all such profits by refunding the same, unless his
act has been ratified by a vote of the stockholders owning or representing at least ⅔ of the
outstanding capital stock.

The “​corporate opportunity​​” doctrine.

 POWERS OF CORPORATIONS

Sec. 36. Corporate powers and capacity:

1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
3. To adopt

Sec. 37. Power to extend or shorten corporate term.

Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness

Sec. 39. Power to deny pre-emptive right

Sec. 40. Sale or other disposition of assets

Sec. 41. Power to acquire own shares

Sec. 42. Power to invest corporate funds in another corporation or business or for any other
purpose

Sec. 43. Power to declare dividends

Sec. 44. Power to enter into management contract

Sec. 45. ​Ultra vires​ acts of corporations

No corporation under this Code shall possess or exercise any corporate powers except
those conferred by this Code or by its articles of incorporation and except such as are
necessary or incidental to the exercise of the powers so conferred.

By-laws​​ may be defined as the rules of action adopted by the corporation for its internal
regulations and for the government of its officers and of its stockholders or members.
Memorize: Matters in which the law requires specific number of votes: ​(p. 427)
1. To amend the articles of incorporation ​(MV, ⅔)
2. To elect directors or trustees ​(MOCS)
3. To remove directors or trustees ​(⅔)
4. To call a special meeting to remove directors or trustees​ (MOCS)
5. To ratify a contract of a director/trustee or officer with the corporation ​(⅔)
6. To extend or shorten corporate term ​(MV, ⅔)
7. To increase or decrease the capital stock​ (MV, ⅔)
8. To incur, create, or increase bonded indebtedness ​(MV, ⅔)
9. To sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all
of the corporation assets​ (MV, ⅔)
10. To invest corporate funds in another corporation or business or for any purpose other
than the primary purpose ​(MV, ⅔)
11. To issue stock dividends ​(Q, ⅔)
12. To enter into a management contract ​(Q, MOCS)
13. To adopt bylaws ​(MOCS)
14. To amend or repeal the bylaws or adopt new bylaws ​(MV, MOCS)
15. To delegate to the board of directors or trustees the power to amend or repeal bylaws or
adopt new bylaws​ (⅔)
16. To revoke the preceding power delegated to the board of directors or trustees ​(MOCS)
17. To fix the issued price of no par value shares ​(Q or MOCS)
18. To effect or amend a plan of merger or consolidation ​(MV, ⅔)
19. To dissolve the corporation ​(MV, ⅔)
20. To adopt a plan of distribution of assets of a non-stock corporation ​(MV, ⅔)

Merger and consolidation

Appraisal right

Dissolution