Batangas State University study guide on partnerships and corporations

Republic of the Philippines
BATANGAS STATE UNIVERSITY

COLLEGE OF ACCOUNTANCY, BUSINESS, ECONOMICS, AND
INTERNATIONAL HOSPITALITY MANAGEMENT
Pablo Borbon Main I, Rizal Avenue, Batangas City
HECTOR DE LEON’S
THE LAW ON PARTNERSHIPS AND
PRIVATE CORPORATIONS
STUDY GUIDE ANSWERS
FINAL REQUIREMENT IN
LAW 202
LAW ON BUSINESS ORGANIZATIONS
Bagui, Edward Glenn L.

Evangelista, Cindy B.
Fernandez, Janelle Ann Marie M.
BSA – 2203
Atty. April M. Uy
LAW202 Instructor
May 2020
TABLE OF CONTENTS
PAGE
PART I: PARTNERSHIP
Chapter 1: General Provisions …………………………………………………….. 2
Chapter 2: Obligations of the Partners
Section 1: Among Themselves ……………………………………………… 7
Section 2: Property Rights of a Partner ……………………………………… 12
Section 3: With Regard to Third Persons ……………………………….….. 15
Chapter 3: Dissolution and Winding Up ……………………………………………… 19
Chapter 4: Limited Partnership …………………………………………………….... 25
PART II: PRIVATE CORPORATIONS

Title I: General Provisions ……………………………………………………………. 33
Title II: Incorporation and Organization of Private Corporations ………………….. 42
Title III: Board of Directors/Trustees/Officers ……………………………………… 46
Title IV: Powers of Corporations ……………………………………………………… 51
Title V: By-Laws ……………………………………………………………………… 56
Title VI: Meetings ……………………………………………………………………… 59
Title VII: Stocks and Stockholders …………………………………………………... 63
Title VIII: Corporate Books and Records …………………………………………….. 67
Title IX: Merger and Consolidation …………………………………………………… 69
Title X: Appraisal Right ……………………………………………………………….. 71
Title XI: Non-Stock Corporations ……………………………………………………. 73
Title XII: Close Corporations …………………………………………………………. 75
Title XIII: Special Corporations ……………………………………………………….. 77
Title XIV: Dissolution …………………………………………………………………… 80
Title XV: Foreign Corporations ………………………………………………………. 83
Title XVI: Miscellaneous Provision …………………………………………………… 85
PART I:
PARTNERSHIP
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CHAPTER 1
GENERAL PROVISIONS
I. Definitions
Define or give the meaning of the following.
1. Partnership
– Partnership is a contract whereby two or more persons bind themselves to
contribute money, property or industry to a common fund with the intention
of dividing profits among themselves.
2. Element of delectus personae
– Delectus personae (choice of persons) is a person who has the right to
select persons with whom he wants to be associated with partnership.
3. Particular partnership
– Particular partnership is a partnership formed for a single transaction or
enterprise as distinguished from one organized for carrying on a general
business.
4. Secret partnership
– Secret partnership or a secret partner is the one who takes active part in
the business but is not known to be a partner by outside parties nor held
out as a partner by the other partners, although he participates in the
profits and losses of partnership.
5. Universal partnership of profits
– Universal partnership of profits is one which comprises all that the
partners may acquire by their industry or work during the existence of the
partnership and the usufruct of movable or immovable property which
each of the partners may possess at the time of the celebration of the
contract.
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II. Discussions
a. Enumerate the five essential features of a partnership contract. Why is a
partnership characterized as a preparatory contract?
Five essential features of a partnership contract:
 There must be a valid contract
 The parties must have legal capacity to enter into the contract
 There must be a mutual contribution of money, property, or industry to
a common fund.
 The object must be lawful
 The purpose or primary purpose must be to obtain profits and to
divide the same among the parties.
A partnership is characterized as a preparatory contract in the sense that

it is a means of entering into further contracts. In case of imminent loss of the
business of the partnership, he is obliged to contribute an additional share to the
capital to save the venture.
b. Explain and illustrate: a partnership is a juridical person.

A partnership duly formed under the law is juridical person to which the
law grants a juridical personality separate and distinct from that of each of the
partners. As a juridical person, a partnership may acquire and possess property
of all kinds, as well as incur obligations and bring civil or criminal actions in
conformity with the laws and regulations of its organizations.
c. Give the cases when a person who is not a partner has a right to share
in the profits of a partnership.
The receipt by a person of a share of the profits of a 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:
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(1) As a debt by instalments or otherwise

(2) As wages of an employee or rent to a landlord
(3) As an annuity to a window or representative of a deceased partner
(4) As interest on a loan, though the amounts of payment may vary with
the profits of the business
(5) As the consideration for the sale of a goodwill of a business or other
property by instalment or otherwise
d. What is the importance of giving publicity to the articles of partnership?

It is essential that the articles of partnership be given publicity for the
protection not only of the members themselves but also third persons from fraud
and deceit to which otherwise they would be easy victims.
e. Give the effects where a partnership is formed for an unlawful purpose.

Effects of an unlawful partnership:
(a) The contract is void ab initio and the partnership never existed in the
eyes of the law.
(b) The profits shall be confiscated in favor of the government.
(c) The instruments or tools and proceeds of the crime shall also be
forfeited in favor of the government
(d) The contributions of the partners shall not be confiscated unless they
fall under no. 3.
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III. Problems
Explain or state briefly the rule or reason for your answers.
a. X, Y and Z formed a partnership to which they contributed a total of
P30,000. The partnership is not registered with the Securities and
Exchange Commission. Does the partnership have juridical personality?
Yes because Art 1768 states that partnership has a juridical
personality separate and distinct from that of each of the partners, even in
case of failure to comply with the requirements of Art 1772.
Art 1772 states that failure to comply with the requirements of the
preceding paragraph shall not affect the liability of the partnership and the
members thereof to third persons, therefore the contract is still void. When the
property is immovable, then the contract of partnership is void.
Failure to register with the Securities and Exchange Commission does
not prevent the formation of the partnership or affect its liability and that of the
partners to third persons.
b. Same partnership. The partners agreed on the sharing of profits but not
of losses. Is there a valid partnership?
Yes, losses shall be shared according to Article 1799. Absent to such
agreement, the share of losses shall be in accordance of profit-sharing ratio.
Absent to profit-sharing ratio, losses shall be borne by partners in proportion
to their capital contribution.
c. Same partnership. Among the purpose of the partnership is the

promotion of social and religious ends. Will this prevent the creation of
a valid partnership in view of Article 1767?
No, the realizations of financial profit need not to be the exclusive aim of
a partnership. It is sufficient that it is the principal purpose even if there are
incidentally social and religious ends.
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d. Same partnership. The partnership was orally formed without the

contract being put in writing signed by partners. Is the contract of
partnership valid?
It depends. If it has the essential features of partnership, it is valid. But
when a capital is P3000 or more, it must appear in writing.
e. N donated a condominium unit to X, Y and Z who agreed among

themselves to lease it to W and share in the rentals. Are X, Y and Z
partners?
No, they are not partners. They are co-owners of the property. It doesnot
establish the existence of partnership.
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CHAPTER 2: SECTION 1
OBLIGATIONS OF THE PARTNERS AMONG THEMSELVES
I. Definitions
Define or give the meaning of the following:
1. Partnership with a fixed term
– Partnership with a fixed term is the one in which the term or period for which
the partnership is to exist is agreed upon.
2. Subpartnership
– Subpartnership is the partnership formed between a member of a
partnership and a third person for a division of the profits coming to him from
the partnership enterprise.
3. Industrial Partner
– Industrial partner is the one who contributes money or property as well as his
work or industry to the partnership.
4. Eviction
– Eviction shall take place whenever a final judgment based on a right prior to
the sale or an act imputable to the vendor, the vendee is deprived of the
whole part of the thing purchased.
5. Future Partnership
– Future partnership is where the partners may stipulate some other date for
the commencement of the partnership.
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II. Discussions
1. Illustrate the relations created by a contract of partnership.
A contract of partnership gives rise to at least four distinct juridical
relations, namely:
(1) Relations among the partners themselves;
(2) Relations of the partners with the partnership;
(3) Relations of the partners with third persons with the partners with
whom it contracts and;
(4) Relations of the partners with such third persons
2. State the five (5) obligations of a partner with respect to property he

promised to contribute.
(1) To contribute at the beginning of the partnership or at a 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 be contributed up to the
time of actual delivery;
(4) To preserve such property with diligence of a good father of a family
pending delivery to the partnership and;
(5) To indemnify the partnership for any damage caused to it by the retention
of the same or by the delay in its contribution.
3. Give the requisites before a capitalist partner may be obliged to sell his
interest in a partnership to the other partners.
The following are the requisites before a capitalist partner may be
obliged to sell his interest to the others:
(1) There is an imminent loss of the business of the partnership.
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(2) The majority of the capitalist partners are of the opinion that an
additional contribution to the common fund would save the business.
(3) The capitalist partner refuses (deliberately not because of his financial
inability to do so) to contribute an additional share to the capital.
(4) There is no agreement that even in case of an imminent loss of the
business the partners are not obliged to contribute.
4. Why is appraisal of the value of the goods or property contributed by a

partner required? How shall it be made?
The appraisal of the value of the goods contributed is necessary to
determine how much has been contributed by the partners.
Their appraisal must be made in a manner prescribed in the contract of
partnership. Without stipulation, it shall be made by experts chosen by the
partners, and according to current prices, the subsequent changes thereof
being for the account of the partnership.
5. State the liability of a partner if he fails or delays his obligation with

respect to contribution of property. What is the reason for the rule?
Obligations:
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
To indemnify partnership for any damage caused to it by the retention
of the same or by the delay in its contribution
Effect:
Partners becomes ipso jure “by operation of law” a debtor of the
partnership even in the absence of any demand
Remedy of the other partner is not rescission but specific performance
with damages from defaulting partner
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III. Problems
1. X, a partner in a partnership, upon arriving from abroad, demands a

formal accounting of partnership affairs. Has X the right to insist on his
demand if the other partners Y and Z refuse?
Yes because according to Article 1809, an example under No. 4:

“Whenever other circumstances renter just and reasonable.”
Where a partner has been assigned abroad for a long period of time in
connection with the partnership business and the partnership books during
such period being in the possession of the other partners. The right of a
partner to demand accounting without bringing about dissolution is necessary
result to his right to share in the profits.
2. Same partnership. The partnership is engaged in the grocery business.

(a) Can X also engage in the same business?
(b) Give the reason why X may be prohibited from engaging in a
business for himself.
(a) Yes, X can also engage in the same business if he is with the
partnership.
(b) Article 1789: X may be prohibited from engaging in the business for
himself when he is an industrial partner unless the partnership
expressly permits him to do so.
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3. Same partnership. X is appointed manager in the articles of partnership.

May Y and Z who represent the controlling interest, revoke the power
given to X if the latter insists on executing a contract for the partnership
which Y and Z oppose?
Yes, his power is revocable only upon just and lawful cause and upon
vote of the partners representing the controlling interest.
4. Same partnership. The liabilities of the partners are as follows: X -

₱50,000; Y - ₱30,000; and Z - ₱20,000.
(a) How shall the profits of ₱15,000 be distributed?
(b) Suppose W is an industrial partner. What shall be his share?
(a) The partners share the profits according to their agreement without
violating Article 1799. Absent to such agreement, share shall be
proportioned to their capital contribution.
(b) The share of W shall be satisfied first before the capitalist partners
divide the profits.
5. Same partnership. The partners stipulate that Z shall not be liable for
losses. Is the stipulation valid?
No because Article 1799 states:
A stipulation which excludes one or more partners from any share in the
profits or losses is void. The partnership must exist for the common benefit
and interest of the partners but the partnership is still valid.
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PROPERTY RIGHTS OF A PARTNER
I. Definitions
1. Partner’s interest in partnership
– Partnership Interest means a partner's share of the profits and losses of a
limited partnership and the right to receive distributions of partnership assets.
2. Profit
– A profit in the law of real property is a non-possessory interest in land similar
to the better-known easement, which gives the holder the right to take
natural resources such as petroleum, minerals, timber, and wild game from
the land of another.
3. Surplus
– Surplus are the assets of the partnership after partnership debts and
liabilities are paid and settled and the rights of the partners among
themselves are adjusted.
– Surplus is a term that is subject to different definitions. In a broad sense, it
means an excess of something. In the context of personal property, there are
federal and state laws governing the disposition of surplus government
property.
4. Partnership capital
– Partnership capital is constant. It remains unchanged as the amount fixes by
agreement of the partners, and is not affected by fluctuations in the value of
partnership property and it represents the aggregate of the individual
contributions made by the partners.
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II. Discussions
1. What are the property rights of a partner in a partnership?
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
2. What rights are not acquired by an assignee or transferee of a partner who

conveys all his interest in a partnership?
(a) To interfere in the management or administration of the partnership business
or affairs
(b) To require any information or account of partnership transactions
(c) To inspect the partnership books
3. What are the only rights acquired by said assignee or transferee?

(a) To receive accordance with his contract the profits accruing to the assigning
partner
(b) To avail himself of the usual remedies provided by law in the event of fraud
in the management
(c) To receive the assignor’s interest in case of dissolution
(d) To require an account of partnership affairs, but only in case the partnership
is dissolved, and such account shall cover the period from the date only of
the last account agreed to by all the partners.
4. What is considered as the extent of a partner’s interest in a partnership?

It is impossible to determine the extent of interest. Nothing is to be
considered as the share of a partner but his proportion of the residue or balance
after an account has been taken of the debts and credits.
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III. Problems
1. X, Y and Z are partners in a partnership which owns a parcel of land. May X

transfer his right as a partner to said property to Y?
It depends, a X’s right in specific partnership property is not assignable
except in connection with the assignment of rights of all the partners in the same
property.
2. Same partnership. X is liable to W, creditor, who obtained a court

judgement against X for a sum of money. What remedy is given by law to W
for the satisfaction of his credit against X?
If X is insolvent, W can ask the same court that X’s interest in the
partnership be attached or levied upon for the payment of his debt.
3. Same problem. What may the other partners, Y and Z, do to protect the
interest of the partnership?
The other partners Y and Z may redeem or purchase the interest of X, the
debtor-partner, before the foreclosure sale or before the redemption period fixed
by the court without dissolving the partnership.
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OBLIGATIONS OF THE PARTNERS WITH REGARD TO THIRD PERSONS
I. Definitions
1. Pro rata liability
– Pro rata liability is the proportionate distribution of liability.
2. Subsidiary liability
– Subsidiary liability is where the partners become liable only after all the
partnership assets have been exhausted.
3. Equitable interest or title
– Equitable interest or title is one not duly recognized by law but in equity
alone; it is a right or interest in property which is imperfect and
unenforceable at law but which under well-recognized equitable principles
should and is convertible into a legal right or title.
4. Estoppel
– Estoppel is a bar which precludes a person from denying or asserting
anything to the contrary of that which has, in contemplation of law, been
established as the truth, either by the acts of judicial or legislative officers
or by his own deed or representation, either expressed or implied.
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II. Discussions
1. May a partnership continue to use in its firms name the name of a
partner who has died?
No because the Supreme Court has ruled that a partnership cannot
continue to use in its firm names of deceased partners for such use will run
counter to Article 1815. Article 30(5) ordains that a partenmership is dissolved
by the death of any partner.
2. In what cases are partners solidarily liable with the partnership to third
persons?
Article 1824 states that all partners are liable solidarily with the
partnership for everything chargeable to the partnership under Articles 1822
and 1823.
3. Can W who is not a partner in a partnership be held liable as a partner?

Explain.
Yes, because according to the first paragraph of Article 1825, a person
who is not a partner in a partnership may be held liable to a third party when
that person represents, or consents to another representing, that he or she is
a partner.
4. Give the rule governing the liability of a partner for partnership contract.
Article 1816 lays down the rule that the partners, including the
industrial partner, are liable to creditors of the partnership for the obligations
contracted by a partner in the name and for the account of the partnership.
The debts and obligations of the partnership are, in substance, also the debts
and obligations of each individual member of the firm. Their individual liability
to creditors is pro rata and subsidiary.
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III. Problems
1. X, Y, and Z are partners engaged in the grocery business. Each
contributed ₱50,000. It was stipulated that the liability of X shall not
exceed his capital contribution. After partnership assets have been
exhausted, the partnership has an unpaid balance of ₱12,000 in favor of
W. Settle the rights of the parties.
– A stipulation among partners contrary to pro rata and subsidiary liability is
void and no effect insofar as it affects the risk of third persons. W can still
recover ₱4,000 each from the partners as their stipulation cannot
adversely affect him. However, X is entitled to credit from Y and Z for the
amount ₱4,000 paid by him to W. X, however, cannot recover his
contribution of ₱50,000.
2. Same partnership. Is the sale of the automobile of the partnership by X

who is the manager of the partnership binding on the partnership?
– It depends; an act of a partner which is apparently for the carrying on of
the business of the partnership in the usual way does not bind the
partnership unless authorized by the other partners.
3. Same partnership. X and Y, controlling partners, after informing Z,

agreed to reduce the debt of W to the partnership from ₱10,000 to
₱9,000 otherwise W would not pay any amount. May Z question the
reduction?
– It depends where Z may question the reduction. One or more but less than
all partners have no authority to enter into a compromise concerning a
partnership claim or liability. But in the absence of an agreement to the
contrary, all partners have equal rights in the management and conduct of
partnership business.
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4. Same partnership. Y and Z contributed ₱15,000 each to the partnership.

X was subsequently admitted as a partner with a contribution of
₱10,000. The partnership has an obligation of ₱45,000 in favor of W.
Compute the liability of the X, Y, and Z in case the obligation was
contracted.
(a) before X was admitted
(b) after X was admitted
(a) X is also liable to the obligation but up to his share in the

partnership property, unless there is a stipulation to the contrary.
(b) (b) All of them will be personally liable. Their capital contribution
amounts to ₱40, 000 versus ₱45, 000 liability, the difference of
₱5, 000 excess which will be the pro rata liability of the partners.
₱5000/3 = ₱1666.67
Y and Z - 15/40 of ₱5000= ₱1875 each;
X - 10/40 of ₱5000 = ₱1250
Y and Z will be liable for ₱208.33 each to D for the excess of

₱416.67 (₱1666.67-₱1250) to cover for X.
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CHAPTER 3
DISSOLUTION AND WINDING UP
I. Definitions
1. Dissolution
– Article 1828 defines dissolution as a 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 a business. It represents the demise of
a business.
2. Termination
– Termination is that point in time when all partnership affairs are completely
wound up and finally settled. It signifies the end of the partnership life.
3. Knowledge of a fact
– As defined by the Uniform Partnership Act, a person has knowledge of a fact
not only when he has actual knowledge thereof, but also when he has
knowledge of such other facts as in the circumstances show bad faith.
4. Notice of a fact
– A person has notice of a fact when the person who claims the benefit of the
notice; (a) states the fact to such person or (b) delivers through the mail or
by other means of communication, a written statement of the fact to such
person or to a proper person at his place of business or residence.
5. Assets of the Partnership
– Assets of the partnership are those partnership property (including goodwill)
and contribution of the partners necessary for the payment of all liabilities
and used in carrying on of the business.
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II. Discussions
1. Give the effect if the specific property to be contributed by a partner is
lost:
a. Before delivery
If the specific thing to be contributed by a partner is lost before delivery
then the partnership is dissolved because there is no contribution inasmuch as
the thing to be contributed cannot be substituted by another.
b. After delivery
If the specific thing to be contributed by a partner is lost after delivery,
the partnership is not dissolved, but it assumes the loss of the thing having
acquired ownership.
2. Enumerate the rights of a partner who has not caused the dissolution of a
partnership wrongfully when said dissolution is in violation of partnership
agreement.
Unless otherwise agreed, the rights of each partner in case of dissolution
without violation of the partnership agreement are as follows:
(a) To have the partnership property applied to discharge the liabilities of
the partnership.
(b) To have the surplus, if any, applied to pay in cash the net amount owing
to the respective partners.
3. Who are authorized to wind-up the affairs of a dissolved

partnership?
The following are authorized to wind up the affairs of the partnership:
a. The partners designated by the agreement
b. In the absence of such agreement, all the partners who have not
wrongfully dissolved the partnership
c. The legal representative of the last surviving partner (when all the
partners are already dead), not insolvent.
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4. Give the rights of an injured partner when a partnership is rescinded

or annulled on the ground of fraud or misrepresentation committed against
him.
The rights of the injured partners where the partnership contract is
rescinded on the ground of fraud or misrepresentation are as follows:
(a) Right of a lien on or retention of, the surplus of partnership property
after satisfying partnership liabilities for any sum of money paid or
contributed by him.
(b) Right to subrogation in place of partnership creditors after payment of
partnership liabilities.
(c) Right of indemnification by the guilty partner against all debts and
liabilities of the partnership.
5. Give at least four (4) grounds for the judicial dissolution of a

partnership.
(a) A partner has been declared insane in any judicial proceeding or is
shown to be of unsound mind.
(b) A partner becomes in any other way incapable of performing his part of
the partnership contract.
(c) A partner has been guilty of such conduct as tends to affect prejudicially
the carrying on of the business.
(d) The business of the partnership can only be carried on at a loss.
(e) Other circumstances render a dissolution equitable.
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III. Problems
Explain or state briefly the rule or reason for your answer:
1. X, Y, and Z are partners in a partnership which was dissolved by the

withdrawal of X. Y who was notified by Z of X’s withdrawal, entered into
new transaction with W in the name of the partnership.
(a) Is the partnership liable to W?
(b) Are X and Z liable to Y for their share of the liability?
(a) Yes. According to Article 1833, 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, the
dissolution being by the act of any partner, the acting partner had
knowledge of the dissolution. With that being said, the partnership is
liable to W because Y only had notice of the withdrawal, not knowledge.
(b) No, because X and Z are only liable for their share in the liability of the
partnership and not to Y.
2. Same partnership. X, acting for the partnership, bought a car from W which
car was being claimed by C. Y acquired knowledge of the claim of C.
Neither W nor Y informed X of the claim. C was able to recover the car. Is W
liable to the partnership under Article 1821?
It depends; W is not liable to the partnership if Y acquired such knowledge
after he became a partner. In this case, the knowledge of Y is the knowledge of
the partnership and it is reasonable to believe that he should have communicated
it to X (the acting partner). However, if Y acquired the knowledge before he
became partner, then there is neither a notice to nor knowledge of the
partnership and W will become liable to the partnership.
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3. Same partnership. The term of existence of the partnership expired.

This notwithstanding, X enters into a contract with W in the name of the
partnership.
(a) Is the partnership liable to W?
(b) What right, if any, is given to Y and Z?
(a) It depends; According to Article 1834, after dissolution, X can bind
the partnership if it is: (a) an act appropriate for winding up
partnership affairs or completing transaction unfinished at
dissolution; (b) by any transaction which would bind the
partnership if dissolution had not taken place. However, X cannot
bind the partnership after dissolution if: (a) the act is unlawful to
carry on the business; (b) the partner has become insolvent; (c)
where the partner had no authority to wind up partnership affairs
except by a transaction mentioned in Article 1834, paragraph 3.
(b) If the partnership is liable to W under Article 1834, Y and Z are
entitled to indemnity from X. Y and Z may also acquire all the
rights mentioned in Article 1834 about the power of a partner to
bind a dissolved partnership.
4. Same partnership. The partnership was dissolved. Assume the following

information: Partnership assets - ₱320,000; Advances by X to partnership -
₱20,000; Capital contribution of each partner - ₱30,000; Liability of
Partnership to M - ₱150,000.
Compute the share of each partner in the profits.
Partnership Assets ₱320,000
Less: Liability of Partnership (₱150,000)
Less: Advances by X (₱20,000)
Less: Capital Contribution (₱90,000)
Total ₱60,000
Divided by 3
Share of each partner ₱20,000
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5. Same example. Suppose the liability of the partnership to W is P335,000; Y

is indebted to C (separate creditor) for P15,000; Z is indebted to D (separate
creditor) for P10,000.
Separate property of Y and Z each amounts only to P20,000 and
P10,000, respectively; and advance by X to partnership ― P30,000.
Settle the accounts of the parties.
Partnership Assets ₱320,000

Less: Partnership liability to W (₱335,000)
Remaining Liability to W (₱15,000)
Divided by 3
Personal liability of each partner to W ₱5,000
Although Y and Z is liable to X for ₱10,000 each, separate creditors of Y and Z

have preference over separate property of Y and Z.
So, X gets only ₱5,000 from Y (₱20,000 -₱15,000).
Meanwhile, X gets nothing from Z (₱10,000- ₱10,000).
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CHAPTER 4
LIMITED PARTNERSHIP
I. Definitions
1. Limited partnership
– 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.
2. Substituted limited partner
– A substituted limited partner is a person admitted to all the rights of a
limited partner who has died or has assigned his interest in a partnership.
3. Presumption of general partnership
– A partnership transacting business is, prima facie, a general partnership.
(1) Those who seek to avail themselves of the protection accorded by law
to limited partnerships must show due compliance with statutory
requirements.
(2) The failure of limited partnership to extend its term when it expired and
to register it anew with the SEC has the effect of divesting the limited
partners of the privilege of limited liability.
4. Contributor
– Contributor is practically a stranger in the limited partnership whose liability is
limited to his interest in the firm without any right and power to participate in
the management and control of the business.
5. Preferred limited partner
– Preferred limited partner is the general and limited partners.
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II. Discussions
1. What are the characteristics of a limited partnership?
(1) A limited partnership is formed by compliance with the statutory
requirements
(2) One or more general partners control the business and are personally
liable to creditors
(3) One or more limited partners contribute to the capital and share in the
profits but do not participate in the management of the business and are
not personally liable for partnership obligations beyond their capital
contributions
(4) The limited partners may ask for the return of their capital contributions
under the conditions prescribes by law
(5) The partnership debts are paid out the common fund and the individual
properties of the general partners
2. Give the cases when a limited partner is liable as the general partner.
 Art. 1845. The contributions of a limited partner may be cash or other
property, but not services.
 Art. 1846. The surname of a limited partner shall not appear in the
partnership name unless: 1.) It is also the surname of a general partner;
Or 2.) Prior to the time when the limited partner became such, the
business had been carried on under a name in which his surname had
appeared. A limited partner whose surname appears in a partnership
name contrary to the provisions of the first paragraph is liable as a
general partner to partnership creditors who extend credit to the
partnership without actual knowledge that he is not a general partner.
 Art. 1852. Without prejudice to the provisions of article 1848, a person
who has contributed to the capital of the business conducted by a person
or partnership erroneously believing that he has become a limited partner
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in a limited partnership, is not, by reason of his exercise of the rights of a

limited partner, a general partner with the person or in the partnership
carrying on the business, or bound by the obligations of such person or
partnership; provided that on ascertaining the mistake he promptly
renounces his interest in the profits of the business or other
compensation by way of income.
 Art. 1853. A person may be a general partner and a limited partner in the
same partnership at the same time, provided that this fact shall be stated
in the certificate provided for in Art. 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.
3. Give at least four differences between a general partner and a limited

partner.
GENERAL LIMITED
Personally liable for partnership Liability extends only to his capital
obligations contributions
When manner of mgt. not agreed
upon, all gen partners have an equal No participation in management
right in the mgt. of the business
Contribute cash or property only, not
Contribute cash, property or industry
industry
Proper party to proceedings Not proper party to proceedings
by/against partnership by/against partnership
Interest not assignable w/o consent Interest is freely assignable
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1
of other partners
Name may appear in firm name Name must appear in firm name
Prohibition against engaging in No prohibition against engaging in
business business
Retirement, death, insolvency,
Does not have same effect; rights
insanity of
transferred to legal representative
gen partner dissolves partnership
4. What conditions must exist before the contribution of a limited partner

may be returned to him?
All liabilities of the partnership, except liabilities to general partners and
to limited partners on account of their contributions, have been paid or there
remains property of the partnership sufficient to pay them
5. Give at least four (4) for specific rights of a limited partner.

(1) To require that the partnership books be kept at the principal place of
business of the partnership
(2) To inspect and copy at a reasonable hour partnership books or any of
them
(3) To demand true and full information of all things affecting the partnership
(4) To demand a formal account of partnership affairs whenever
circumstances render it just and reasonable
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III. Problems
1. X, a limited partner in a partnership with Y and Z as general partners,
lawfully received the return of his contribution in the amount of P20,000,
the assets of the partnership are insufficient to pay the firm’s
indebtedness to W. State the liability of X if the claim of W arose:
(a) before X received his contribution
(b) after X received his contribution
(a) X is liable to the partnership whose claim arose before such return.
(b) The claim of X should be directed against the general partner.
2. Same partnership. X contributed property to the partnership. In case X

is entitled to a return of his contribution, has he the right to demand the
return of the same property?
It depends; X only has the right to demand and receive cash for such
his contribution. The exceptions are: a) when there is stipulation to the
contrary in the certificate or b) where all the partners consent to the return
other than in the form of cash.
3. Same partnership W, a partnership creditor, brought an action against

the partnership. May X be included as a party defendant?
It depends, Art. 1866. A contributor, unless he is a general partner, is

not a proper party to proceedings by or against a partnership, except where
the object is to enforce a limited partner’s right against or liability to the
partnership.
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4. After X, Y, and z executed and signed articles of limited partnership,

with X as limited partner, they entered into a contract with W which
contract created a partnership liability in excess of the total
contributions of the partners. Has W the right to go also after the
separate proper of X?
It depends, Art. 1844. Two or more persons desiring to form a limited
partnership shall:
(1) Sign and swear to a certificate, which shall state –
(a) The name of the partnership, adding thereto the word “Limited”;
(b) The character of the business;
(c) The location of the principal place of business;
(d) The name and place of residence of each member, general and
limited partners being respectively designated;
(e) The term for which the partnership is to exist;
(f) The amount of cash and a description of and the agreed value
of the other property contributed by each limited partner;
(g) The additional contributions, if any, to be made by each limited
partner and the times at which or events on the happening of
which they shall be made;
(h) The time, if agreed upon, when the contribution of each limited
partner is to be returned;
(i) The share of the profits or the other compensation by way of
income which each limited partner shall receive by reason of his
contribution;
(j) The right, if given, of a limited partner to substitute an assignee
as contributor in his place, and the terms and conditions of the
substitution;
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(k) The right, if given, of partners to admit additional limited

partners;
(l) he right, if given, of one or more of the limited partners to priority
over other limited partners, as to contributions or as to
compensation by way of income, and the nature of such priority;
(m)The right, if given, of the remaining general partner or partners
to continue the business on the death, retirement, civil
interdiction, insanity or insolvency of a general partner; and
(n) The right, if given, of a limited partner to demand and receive
property other than cash in return for his contribution.
5. Same partnership. Give the effect in case:

(a) Y dies
(b) X dies
(a) Art. 1860. The retirement, death, insolvency, insanity or civil

interdiction of a general partner dissolves the partnership, unless
the business is continued by the remaining general partners:
(1) Under a right so to do stated in the certificate, or
(2) With the consent of all members.
(b) Art. 1861. On the death of a limited partner his executor or
administrator shall have all the rights of a limited partner for the
purpose of settling his estate, and such power as the deceased had
to constitute his assignee a substituted limited partner. The estate
of a deceased limited partner shall liable for all his liabilities as a
limited partner.
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PART II:
PRIVATE CORPORATIONS
THE CORPORATION CODE
OF THE PHILIPPINES
32
TITLE I
GENERAL PROVISION
I. Definitions
1. Corporation
– Section 2 of the Corporation Code of the Philippines defines Corporation as
an artificial being created under the operation of law, having the right of
succession and the powers, attributes, and properties expressly authorized
by law or incident to its existence.
2. Fiction of corporate entity

– The doctrine that a corporation is a legal entity or a person in law, distinct
from the persons composing it, is a legal theory introduced for purposes of
convenience and to promote the ends of justice. However, this fiction cannot
be extended to a point not within its reason and purposes. (e.g when entity is
used as a cloak or to cover illegality)
3. Stock Corporation
– 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.
4. Capital Stock
– It is the amount fixed in the articles of incorporation , to be subscribed and
paid in by the shareholders , either in money or property, labor or services. It
represents the equity of the stockholders in the corporate assets.
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5. Outstanding Capital Stock

– It pertains to the portion of the capital stock which is issued and held by
persons other than the corporation itself. The Code defines the term as “ the
total shares of stock issued to subscribers or stockholders, whether fully or
partially paid, except treasury shares.
6. Cumulative Preferred Shares

– It is a share which entitles the holder not only to the payment of current
dividends but also to dividend in arrears.
7. Treasury Share
– Section 9 of the Corporation Code of the Philippines defined treasury shares
as shares of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation by purchase,
redemption, donation, or through some other lawful means. Such shares
may again be disposed off for a reasonable price fixed by the board of
directors.
8. Promoters
– Promoters are those 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. They lay the
groundwork for corporate existence.
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II. Discussions
1. Give at least four (4) distinctions between a corporation and a partnership.
Partnership and corporation is distinct from each other in many aspects such as
the following:
(a) Manner of creation - A partnership is created by mere agreement of the

parties, while a corporation is created by the operation of law.
(b) Number of Incorporators - A partnership may be organized by only two (2)
persons, while a corporation requires at least five (5) incorporators.
(c) Powers - 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 power s expressly
granted by law or implied from those granted or incident to its existence.
(d) Right of Succession - A partnership has no right of succession, while a
corporation has such right.
(e) Dissolution - A partnership may be dissolved at anu time by the will of any
or all of the partners, while a corporation can only be dissolved with the
consent of the State.
2. Distinguish share of stock from capital stock.
Share of stock is commonly used in a distributive sense to refer to the

stock in the hands of the stockholders. On the other hand, the term capital stock
is used in a collective sense to signify the whole body of share of stock in the
corporation.
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3. Give at least three (3) advantages and three (3) disadvantages of no par
value shares.
Advantages of no par value shares are as follows:

a. No par value shares are issued as fully paid and non-assessable.
b. Their price is flexible.
c. Low-priced stocks (most no par shares 0are low-priced) enjoy wider
distribution.
d. They tell no untruth concerning the value of the stockholders’
contribution
e. Stock dividends are more easily issued thereby simplifying accounting
procedure.
Meanwhile, the following are the disadvantages of no par value shares:
a. They legalize large issues of stock for property.
b. They conceal the money or property represented by the shares.
c. They promote issuance of watered stock.
d. There is lesser protection to creditors.
4. Who are the four (4) classes of persons composing a corporation? Identify
them.
The four classes of persons composing the corporations are:
a. Corporators - those who compose the corporation, such as stockholders
or members.
b. Incorporators - or those corporators mentioned in the articles of
incorporation as originally forming the corporation and who executed
and signed the articles of incorporation.
c. Stockholders - the owner of share of stock in a stock corporation.
d. Members - corporators of a corporation which has no stock capital stock
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5. Give at least three (3) advantages and three (3) disadvantages of a

business corporation.
The advantages of a business corporation are as follows:

a. The corporation has a legal capacity to act as a legal unit.
b. It has continuity of existence because of its non-dependence on the
lives of those who compose it.
c. Its credit is strengthened by such continuity of existence.
d. Its management is centralized in the board of directors.
e. The shareholder has limited liability.
f. The share of stock can be transferred without the consent of other
stockholders.
Meanwhile, the disadvantages are:
a. The corporation is relatively complicated in formation and management.
b. It entails relatively high cost of formation and operation.
c. Its credit is weakened by the limited liability of the stockholders.
d. There is ordinarily lack of personal element in view of the transferability
of shares.
e. The stockholders have little voice in the conduct of the business.
6. Illustrate a cumulative preferred share.
A cumulative preferred share is a share which entitles the holder to receive not
only on current dividends but also to dividend in arrears. For instance, a
company, after 5 years, declared a regular annual dividend. If the stockholder is
holding 20 cumulative preference share and is entitled to received P300 for the
20 shares: P50 each year or a total of P250 for 5 years (representing the
dividend in arrears) plus P50 for the current year.
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7. Give at least four (4) similarities between a corporation and a partnership.
A corporation and a partnership has several similarities including the following:

a. They both have a juridical personality separate and distinct from that of
the individuals composing it.
b. They can only act through their agents.
c. They are both an organization composed of an aggregate individual.
d. They both distribute its profits to those who contribute capital.
8. Distinguish share of stock from certificate of stock.
A share of stock represents the right of interest of a person in a corporation,

while certificate of stock is the written evidence of that right or interest. Also, the
former is incorporeal or intangible property while the latter is tangible. A share of
stock may be issued even if subscription is not fully paid except no par shares
and its situs (location) is deemed to be the State where the corporation has its
domicile, while the certificate of stock is issued if the subscription is fully paid and
its location may be at the place where it is located or at the domicile of the owner.
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III. Problems
1. Congress passed a proposed law creating a corporation to engage in
agricultural activities. Is the law valid?
It depends. A corporation expressly authorized to engage in agricultural
activities has the implied authority to buy agricultural lands because such
authority is reasonably appropriate to carry out its express authority. However,
the corporation has no power to engage in manufacturing cement because it is
not within the power impliedly or expressly granted by law or incidents to its
existence. Moreover, the corporation shall be governed by the provision of the
law or charter, either general law or special law, creating them or applicable to
them, otherwise it is not valid.
2. X, Inc. and Y, Inc. are sisters companies with the same set of officers. May
X be held liable for the obligations of Y?
It depends. Fiction of a corporate entity may be disregarded if a subsidiary
company is created by a parent company merely as an instrumentality, conduit or
agency of the latter especially if the stockholders or officers of the two
corporations are substantially the same or their system of operations is unified.
Thus, if X, Inc. and Y, Inc. will be considered as one only if one of them is being
regarded as part or instrumentality of the other and may be held liable for the
obligations of each other.
3. If the book value of the share of stock in a corporation is P100, is this

amount also its par value and market value?
It depends. There are times that the book value of a share is also equal to its
par value and market value but it seldom happen especially when the corporation
makes net profit/loss or the willing seller and buyer agreed at a price different
from the par and book value. Book value usually changes its value if there is a
39
net profit/loss. On the other hand, market value is the price that a willing seller
would sell and a willing buyer would buy and it is usually affected by the law of
demand and supply.
4. The article of incorporation provides that a particular class of shares shall

be deprived of the right to vote. Nevertheless, may they still entitled to
vote?
Yes. Under Section 6 of the Corporation Code of the Philippines, where the
articles of incorporation provide for non-voting shares in the case allowed by the
Code, the holders of such shares shall nevertheless be entitled to vote on the
following matters:
a. Amendment of the articles of incorporation.
b. Adoption and amendment of by-laws.
c. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property.
d. Incurring, creating, or increasing bonded indebtedness.
e. Increase or decrease of capital stock.
f. Merger or consolidation of the corporation with another corporation or
other corporations.
g. Investments of corporate funds in another corporation or business in
accordance with the Code.
h. Dissolution of the corporation.
5. A corporation issued redeemable shares in favor of S who informs the

corporation of his option to redeem the same as provided in the articles of
incorporation. Has C, a corporate director, the right to object?
It depends. According to Section 8 of the Code, C has the right to object
about the redemption if the corporation is insolvent or if such redemption would
cause insolvency to or inability to the corporation to meet its debts as they
40
mature. Also, the terms and conditions affecting the shares must be stated not
only in the articles of incorporation but also in the certificate of stock.
6. A corporation voted its treasury shares and received dividends thereon.

Can the corporation do these?
No, treasury shares have no voting rights as long as they remain in the
treasury, uncancelled and subject to reissue. It cannot be voted or be entitled to
vote for otherwise the directors could be able to perpetuate control of the
corporation. Moreover, treasury share is not entitled to dividends or assets because
dividends cannot be declared by a corporation itself as such distribution would be
like taking money or stock from one of its pockets and putting the same, in another,
which would be pointless.
7. The treasury shares were acquired by the corporation at P100 per share.
May the corporation sell them at only P50.00 per share?
It depends, treasury shares may be resold by the corporation at any price
the board of directors sees fit to accept, even less than par, provided such price
is reasonable. Thus, if they see P50.00 per share as reasonable then they can
sell it however the stockholders may rightfully complain if the price is lower than
reasonable.
8. A stockholder, dissatisfied with management of the corporation,

surrenders his certificate of stock and demands the return of the
subscription price paid by him. Can he rightfully do this?
No, one nature of a share of stock is that it does not constitute an
indebtedness of the corporation to the shareholders and are, therefore, not
credits. No action can be maintained against the corporation for the return of the
contributions of the shareholders.
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TITLE II
INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATION
I. Definitions
1. Articles of Incorporation
– A document prepared by the persons establishing the corporation and filed
with the Securities and Exchange Commission containing the matters
required by the Code.
2. De facto corporation
– A corporation which actually exists for all practical purposes as a corporation
but which has no legal right to corporate existence as against the State. It is
a corporation from the fact of its acting though not in law or of right a
corporation and one which had not complied with all the requirements to be a
de jure corporation but has complied sufficiently to be accorded corporate
status.
3. De jure corporation
– A corporation created in strict or substantial conformity with the mandatory
statutory requirements for incorporation and whose right to exists as a
corporation cannot be successfully questioned by any party even in a direct
proceeding for that purpose by State.
4. Collateral attack
– 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.
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II. Discussions
1. What are the requisites in the statement of the purpose or purposes for
which a corporation is formed?
The requisites are:

(a) Purpose/s must be lawful
(b) Purpose/s must be stated with sufficient clarity.
(c) Primary purpose must be stated.
(d) Purposes must be capable of being lawfully combined.
2. May individuals organize a corporation by mere agreement like in the

formation of a general partnership? Explain.
No, a corporation is created by the operation of law and not by mere

agreement of the incorporators. Also, Section 10 of Corporation Code of the
Philippines states that any number of natural persons not less than five (5) but
not more that fifteen (15), all of legal age and a majority of whom are residents of
Philippines, may form a private corporation for any lawful purposes. Each of the
incorporators in a stock corporation must own at least one (1) share of capital
stock.
3. How shall the 25% subscription requirement be computed where the capital
stock consists only of a par value shares?
When the capital stock consists only of par value shares, the minimum
subscription should be 25% of the amount of the authorized capital stock or 25%
of the aggregate value of all the shares of stock the corporation is authorized to
issue.
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4. What are the essentials for the existence of a de facto corporation?

It is essential to the existence of a de facto corporation that there be:
a. A valid law under which the corporation with powers assumed might
be incorporated.
b. A bona fide attempt to organize a corporation under such law.
c. Actual user or exercise in good faith of corporate powers conferred
upon it by law.
III. Problems
1. A corporation was continuously inoperative for three (3) years. Is the
corporation deemed dissolved?
It depends. Section 22 states that if a corporation does not formally

organize and commence the transaction of its business or the construction of its
works within two (2) years from the date of its incorporation, the corporate power
cease and the corporation shall be deemed dissolved. However, if a corporation
has commenced the transaction of its business but subsequently becomes
continuously inoperative for five (5) years, the same shall be a ground for the
suspension or revocation of its corporate franchise or certificate of incorporation.
2. Two (2) years before the expiration of the corporate term of existence, the
corporation applied with the Securities and Exchange Commission for
extension of said term. Under the law, can the extension be granted?
Yes, because applying for extension in Securities and Exchange

Commission two (2) years before expiration is allowed by the Code. According to
the Code, no extension can be made earlier than five (5) years prior to the
original or subsequent expiry date(s) unless there are justifiable reasons for an
earlier extension as may be determined by the Securities and Exchange
44
Commission. Although, the Revised Corporation Code of the Philippines says

that a corporation shall have a perpetual existence unless the corporation notifies
the commission that it elects to retain its specific corporate term pursuant to its
articles of incorporation.
3. Under Section 10, there must be at least five (5) incorporators in the
formation of a corporation. X organized a corporation together with A, B,
C, and D. All the shares are admittedly owned by X who register four (4)
shares in the name of A, B, C, and D. Is this a violation of the mandatory
requirement of minimum number of incorporators?
No. A person with mere legal title is qualified to become an incorporator.

The law permits a scheme by which all the shares are owned by a single
individual, the latter may incorporate provided he associates with him, at least
nominally, the number of persons required by the law. Therefore, there is no
violation of the mandatory requirement of minimum number of incorporators.
4. Under Section 13, at least 25% of the authorized capital stock must be
subscribed and at least 25% of the subscription must be paid-up but the
paid-up capital must not be less than P5,000. Can this requirement be
complied where the authorized capital stock of the corporation is only
₱20,000?
Yes, subscribed ₱20,000 to have a paid-up capital of ₱5,000. Also, they can
subscribe an amount lower than ₱20,000 provided that the paid-up capital must
still not be less than to ₱5,000. However, the Revised Corporation Code of the
Philippines, Section 12, declares that there is no longer a minimum amount
prescribed for both subscribed and paid-up capital stock.
45
TITLE III
BOARD OF DIRECTORS/TRUSTEES/OFFICERS
I. Definitions
1. Quorum
– Quorum is such number of the membership of a collective body as is
competent to transact its business or do any other corporate act.
2. Cumulative voting for one candidate
– A method of voting where a stockholder is allowed to concentrate his votes
and give one candidate as many votes as the number of directors to be
elected multiplied by the number of his shares.
3. Cumulative voting by distribution
– A method of voting where a stockholder may cumulate his shares by
multiplying also the number of his shares by the number of directors to be
elected and distribute the same among as many candidates as he shall see
fit.
4. Corporate opportunity doctrine
– Under corporate opportunity doctrine, a director, who, by virtue of his office,
acquires for himself a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of such corporation, is
guilty of disloyalty and should therefore account to the corporation for all
such profits by refunding the same, notwithstanding that he risked his funds
in the venture.
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II. Discussions
1. State the qualifications prescribed by the Corporation Code for directors

and trustees for stock and non-stock corporations.
In a stock corporation, the qualifications of directors are as follows:

(a) Every director must own at least one (1) share of the 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.
(d) A majority of the directors must be residents of the Philippines.
Meanwhile, trustees of non-stock corporation must be members in

good standing thereof and like in stock corporations, a majority of them
must be residents of the Philippines.
2. How shall the directors/trustees exercise their powers in order to bind the
corporation? Give the reasons for the rule.
The directors or trustees can bind the corporation only by action taken at a
board meeting. This rule seems to rest upon two (2) reasons:
(a) A meeting is necessary in order that any action may be adopted only
after full discussion.
(b) As agents of the corporation managing its affairs, directors/trustees
have no power other than as a board.
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3. Illustrate straight voting as a method in the election of directors.
In a straight voting, every stockholder may vote such number of shares for
as many persons as there are directors to be elected. For example, A owns 50
shares of stock in a corporation. If there are 5 directors to be elected, then A is
entitled to 250 votes. He may give the 5 candidates he wants to be elected 50
votes each.
4. Illustrate voting in a non-stock corporation in the election of trustees.
Unless otherwise provided in articles of incorporation or by-laws, members

of non-stock corporations may cast as many votes as there are trustees to be
elected but may not cast more than one (1) vote for one candidate. For instance,
if there are five (5) trustees to be elected in a non-stock corporation then a
member is only entitled of give one (1) vote for each candidates he wants to be
elected.
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III. Problems
1. A contract was entered into the name of the corporation with the
unanimous approval of all the stockholders. Is the contract binding on the
corporation?
No. The stockholders elect a board of directors to oversee the management
and operation of the corporation. They are not agents of the corporation; they
cannot bind it by their acts. 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 within the scope of its charter which do not require
consent and approval of stakeholders.
2. X, a director in a corporation, is recorded in the book of the corporation as

owner of one (1) share of stock. X admits that the true owner is Y, its
President. Is X qualified to ba a director?
No, the general rule is that the person who holds the legal title to the stock
is qualified to be a director. The fact that X admits that the true owner of the
share is Y means that the legal title is still on Y. The Code only allowed a person
to be a stockholder if the legal title is on him/her even if the beneficial owner is
another person. With this being proven, the Code strictly prohibits a person to be
a director if he/she do not own at least one (1) share of stock.
3. A vacancy occurs in the board of directors, further reducing the number

from 11 to 6 members. Who is empowered to free the vacancy, the
stockholders or the incumbent directors?
It depends. Any vacancy may be filled by a stockholder if:
(a) The vacancy results from the removal by the stockholders or the
expiration of term
49
(b) The vacancy occurs other than by removal or expiration, such as

death, resignation, abandonment, or disqualification, if the
remaining director does not constitute a quorum for the purpose of
filling the vacancy.
(c) The vacancy may be filled by the remaining directors but the board
refers the matter to the stockholders.
(d) The vacancy is created by reason of an increase in the number of
directors.
However, vacancy can also be filled by the members of the board if, still
constituting a quorum, at least the majority of them are empowered to fill any
vacancy occurring in the board other than by removal by stockholders or by
expiration of term. It is to note that board has no power to fill vacancy by reason
of increase in number of directors.
4. X was elected director in a corporation. The other directors who supported

his election, assured him a monthly compensation of P50,000. In fact, they
approved a resolution granting him the compensation. Is X entitled to the
compensation?
It depends. Section 30 states that in the absence of any provision in the by-
laws fixing their compensation, the directors shall not receive any compensation
except for reasonable per diems. However, X may be entitled of compensation
by the vote of the stockholders representing at least majority of the outstanding
capital stock at a regular or special meeting but the yearly compensation must
not exceed ten percent (10%) of the net income before tax. Thus, in order for X
to be entitled of monthly compensation of P50,000, provided that the
compensation was already granted to X by vote of stockholders, the 10% of the
net income before tax must be P600,000 or below.
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TITLE IV
POWERS OF CORPORATION
I. Definitions
1. Implied powers
– Implied powers are powers which are reasonably necessary to exercise the
express powers and to accomplish or carry out the purposes for which the
corporation was formed
2. Incidental power
– Incidental power are powers which a corporation can exercise by the mere
fact of its being a corporation or powers which are necessary
to corporate existence and are, therefore, impliedly granted.
3. Right of pre-emption
– Right of pre-emption is a principle which states that whenever the capital
stock of a corporation is increased and new shares of stock are issued, the
new issue must be offered first to the stockholders who are such at the time
the increase was made in proportion to their existing shareholdings and on
equal terms with other holders of the original stocks before subscriptions are
received from the general public.
4. Dividends
– Dividend is a part or portion of the profits of a corporation set aside, declared
and ordered by the directors to be paid ratably to the stockholders on
demand or at a fixed time.
5. Retained earning
– The retained earnings of a corporation is the difference between the total
present value of its assets after deducting losses and liabilities and the
amount of its capital stock.
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II. Discussions
1. What are the ways for increasing (decreasing) the authorized capital
stock?
There are three ways by which the authorized capital stock may be
increased or decreased:
(1) by increasing or decreasing the number of shares authorized to be
issued without increasing or decreasing the par value thereof
(2) by increasing or decreasing the par value of each share without
increasing or decreasing the number thereof.
(3) by increasing or decreasing both the number of shares authorized to
be issued and the par value thereof
2. What do you understand by the trust fund doctrine

Trust fund doctrine is a principle of judicial invention which says that
corporate assets are held as a trust fund for the benefit of shareholders and
creditors and that the corporate officers have a fiduciary duty to deal with
them properly. The subscribed capital stock of the corporation is a trust fund
for the payment of debts of the corporation which the creditors have the right
to look up to satisfy their credits.
3. Distinguish between ultra vires act from illegal act.

Ultra vires acts are acts which are beyond the conferred powers of a
corporation or the purposes for which it is created. It is not necessarily illegal.
On the contrary, they may be lawful, moral and even trustworthy. While illegal
corporate acts are contrary to law, morals, good customs, public order, or
public policy which, and therefore per se illicit.
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4. What is the difference as to effect between the declaration of cash

dividend and that of stock dividend?
When a corporation issues cash dividend, the assets of the corporation
diminish by the same amount paid out and correspondingly, the property of
the individual stockholders increases, while the effect of declaration of stock
dividend is the capitalization of surplus or transfer of such surplus to the
capital fund of the corporation that adds nothing and takes nothing from the
corporation.
5. Compare the relative powers of a corporation and a private individual or

an ordinary partnership.
Under the doctrine of limited capacity adopted by the corporation law
(Sec.2), a corporation has only such powers as are expressly granted and
those that are necessarily implied or incidental to its existence. So, a
corporation does not have the power to do all acts not expressly or impliedly
prohibited. On the other hand, in an ordinary partnership, an individual has
absolute right to fully use, enjoy and dispose his properties, to perform all acts
and to make all contracts without any restriction except when they are
forbidden by the law.
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III. Problems
1. X subscribed to 100 shares of stock in a corporation which declared a
cash dividend. The dividend received by X is based only on the 70
shares fully paid by him. Has X the right to insist on the payment of
dividends corresponding to 100 shares?
Yes, X has the right to insist on the payment of dividends
corresponding to his total subscription of 100 shares even if only 70 shares
has been paid up by hi.. As a general rule, the participation of each
stockholder in the earnings of the corporation is based on his total
subscription and not the amount paid by him. The reason is that a
stockholder’s entire subscription represents his holdings in the company for
which he pays interest on any unpaid portion.
2. X, Y, and Z each owns 10% of the capital stock of a corporation. X

exercised his pre-emptive right to new shares while Y offered his
corresponding new shares to Z who purchased the same, thereby
increasing Z’s proportionate holdings. Has X a ground for complaint?
No, X has no ground for complaint as long as his 10% interest is not
reduced. According to Section 38, if the shares corresponding to one
stockholder are not subscribed or purchased by him within the fixed period for
the exercise of pre-emptive rights, it does not follow that said shares should
again be offered on a pro rata basis to stockholders who took advantage of
their right of pre-emption. This is because as long as they exercise their pre-
emptive rights, their relative and proportionate voting strength in the
corporation will not be affected adversely. Even if the shares mentioned are
purchased by only some of them.
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3. Suppose the original capital stock of a corporation is divided into

100,000 shares which were all offered for subscription. Only 60,000
shares were subscribed including 12,000 shares by X. Is X entitled to
pre-emption in case the remaining unissued 40,000 shares are again
offered for subscription?
No, X is not entitled to pre-emption with respect to the remaining
40,000 unissued shares. But where the number of shares initially offered for
subscription was only 60,000, then X may exercise his pre-emptive rights, in
case the remaining 40,000 shares are subsequently offered to subscription.
4. The corporation has surplus profits amounting to more than 100% of its
paid-up capital stock. It has not declared dividends for the last five (5)
years. May the corporation be compelled by the Securities and
Exchange Commission to declare dividends to its stockholders?
It depends. Stock corporations are prohibited from retaining surplus
profits in excess of 100% of their paid-in capital stock, except: (1) when
justified by definite corporate expansion projects or programs approved by the
board of directors; or (2) when the corporation is prohibited under any loan
agreement with financial institutions or creditors, whether local or foreign,
from declaring dividends without their consent, and such consent has not yet
been secured; or (3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation, such as
when there is need for special reserve for probable contingencies
5. A corporation borrowed money for the purpose of paying dividends. Is

this legal?
It depends. As a rule, dividends cannot be declared out of borrowed
money, for borrowed money is not profits; but money may be borrowed
temporarily for the purpose of paying dividends, if the corporation has used its
surplus assets to make improvements for which it might have borrowed
money.
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TITLE V
BY-LAWS
I. Definitions
Define by-laws.
– By-laws are the rules and guidelines adopted by the stockholders of a
corporation for the internal government and its members.
II. Discussions
1. What are the elements of valid by-laws?
The elements of valid by-laws are:
(1) They must not be contrary to existing laws and inconsistent with the
Code.
(2) They must not be contrary to morals and public policy.
(3) They must not impair obligations of contract.
(4) They must be general and uniform in their operation and not directed
against particular individuals.
(5) They must be consistent with the articles of incorporation.
(6) They must be reasonable.
2. Distinguish articles of incorporation and by-law.

(1) The articles of incorporation constitute the charter law of the
corporation while bylaws are merely rules and regulations adopted
by the corporation.
(2) The former is executed before incorporation by the incorporators,
while the latter usually after incorporation by the stockholders or
members.
(3) The filing of the former is a condition precedent to corporate
existence, while the filing of the latter is a condition subsequent.
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3. Why is it necessary that every corporation adopt a code of by-laws?
Bylaws set forth the rules and procedures that govern the operation of
your corporation, its officers, and directors. The outside world expects a
corporation to have Bylaws; banks, credit companies, and the IRS expect a
corporation to have Bylaws. The adoption of Bylaws indicates that your
corporation takes its corporate responsibilities seriously. Bylaws provide broad
and day-to-day guidance in running your corporation. When you adopt Bylaws
you have addressed various key issues for the operation of your corporation.
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III. Problems
1. X entered into a contract with a corporation. In a suit against the
corporation, its lawyer raises the defense that the contract was in
violation of its by-laws. Is this defense tenable?
No, this defense is not tenable. As to third persons, the weight of
authority is that they are not also bound by the by-laws of a corporation
except only when they have knowledge of its provisions either actually or
constructively.
2. Can the by-laws of a corporation provide for the place of meetings of

stockholders?
No. According to Section 47, 1st paragraph, No. 1, while the place of
directors’ or trustees’ meetings may be held at the place determined in the by-
laws, the stockholders’ or members’ meetings must always be held at the city
or municipality where the principal office of the corporation is located or where
practicable in the principal office of the corporation.
3. The authority given to the board of directors to amend its by-laws was
revoked in a meeting of stockholders without previous notice that such
matter could be acted upon in the meeting. Is the revocation valid?
Yes, the revocation is valid. The revocation is valid notwithstanding
that no previous notice was given to stockholders or members of the intention
to propose such revocation.
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TITLE VI
MEETINGS
I. Definitions
1. Regular meeting of stockholders or members
– Regular meetings of stockholders or members are those held annually on a
date fixed in the by-laws, or if not so fixed, on any date after April of every
year as determined by the board of directors or trustees.
2. Voting trust agreement
– Voting trust agreement is an agreement in writing whereby one or more
stockholders of a stock corporation may create a voting trust for the purpose
of conferring upon a trustee or trustee the right to vote and other rights
pertaining to the shares for a period not exceeding that fixed by the Code and
upon the terms and conditions stated in the agreement.
3. Representative voting
– Representative voting is where a stockholder or member may vote, directly or
indirectly, through a representative. Section 55 authorizes executors,
administrators, receivers, or other legal representatives to attend and vote in
behalf of the stockholders or members under their administration without
need of any written proxy.
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II. Discussions
1. Give the requisites for a valid meeting of stockholders or members.
The requisites that must be complied in order that there will be a valid
meeting of stockholders or members are:
(1) It must be held at the proper place;
(2) It must be held at the stated date and at the appointed time or at a
reasonable time thereafter;
(3) It must be called by the proper person;
(4) There must be previous notice and;
(5) There must be a quorum.
2. What are the three (3) meanings of the term “proxy”?
(1) Proxy designates the formal written authority given by the owner or holder
of the stock, who has a right to vote it, or by a member, as a principal to
exercise the voting rights of the former.
(2) It is also used to apply to the holder of the authority or the person
authorized by an absent stockholder or member to vote for him at a
stockholders’ or members’ meeting.
(3) The term is also applied to refer to the instrument which evidences the
authority of the agent
3. Give at least three (3) distinctions between proxy and voting trust
agreement.
(1) The proxy has no legal title to the shares of the stockholder giving the
agency, while a trustee acquires legal title to the shares of the transferring
stockholder;
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(2) A proxy, unless coupled with interest, is revocable at any time, while
voting trust agreement, if validly executed is irrevocable;
(3) A proxy votes only in the absence of the owner of the stock, while a
trustee can vote and exercise all the rights of the transferring stockholder
even when the latter is present and;
(4) A proxy is usually of shorter duration than a voting trust agreement,
although under the law the maximum duration of both cannot exceed five
(5) years at any one time.
(5) A proxy does not have a right of inspection of corporate books, while a
trustee has such right.
III. Problems
1. A meeting of stockholders was improperly called and held. The

business transacted at the meeting was questioned. What arguments
can be raise to uphold its validity?
Under Section 51 (par.2.), all proceedings had and any business

transacted at any meeting of stockholders or members shall be valid even if
the meeting be improperly held or called provided the following requisites are
present:
(1) That the proceedings had and the business transacted are within the
power or authority of the corporation, that is, they are not ultra vires;
(2) That all the stockholders or members of the corporation are present or
represented at the meeting.
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2. After the existence of a quorum has been determined in a meeting of

stockholders, a number of them left the meeting, thereby leaving less
than a quorum. Is the majority vote of those present sufficient to validly
decide a matter properly presented?
It depends. Once a quorum is present, the a majority vote, in the

absence of express provision in the by-laws to the contrary and unless the
vote of a greater number is required by law, is sufficient to decide any
question properly presented. All the stockholders are bound by the result of
such a vote and, this, even notwithstanding the withdrawal (after the
existence of a quorum has been determined or declared) of enough
shareholders (or members) to leave less than a quorum. A minority group
cannot prevent corporate action by walking out.
3. X pledged his shares of stock to Y. As between them, who has the right
to attend and vote at meetings of stockholders?
As between X and Y, is the one who has the right to attend and vote at
meetings of stockholders because he remains as the owner of the stock
pledged or mortgaged unless Y is given by X such right in writing the right to
attend and vote at meetings of stockholders.
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TITLE VII
STOCKS AND STOCKHOLDERS
I. Definitions
1. Derivative suit
– One brought by one or more stockholders or members in the name and on
behalf of the corporation to redress wrongs committed against it or to protect
or vindicate corporate rights, whenever the officials of the corporation refuse
to sue or are the ones to be sued or hold control of the corporation.
2. Watered stock
– Watered stock is a stock issued for no value at all or for a value less than its
equivalent either in cash, property, services or stock dividends.
3. Call
– A declaration officially made by a corporation usually expressed in the form
of a resolution of the board of directors requiring the payment of all or a
certain prescribed portion of a subscriber’s stock subscription.
4. Highest bidder
– The person offering at the sale “to pay the full amount of the balance on the
subscription together with accrued interest, cost of advertisement and
expenses of sale, for the smallest number of shares or fraction of a share.”
5. Certificate of stock
– A written instrument signed by the proper officer of a corporation stating or
acknowledging that the person named therein is the owner of a designated
number of shares of its stock.
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II. Discussions
1. What are the different modes by which shares may be issued?

(1) By subscription, before and after incorporation, to original, unissued stock
(2) By sale of treasury stock after incorporation for money, property, or service
(3) By subscription to new stocks, when all the original stocks have been
issued and the amount of the capital stock increased
(4) By making a stock dividend
2. Classify the liabilities that may be incurred by a stockholder.

(a) Liability to the corporation for unpaid subscription
(b) Liability to the corporation for interest on unpaid subscription
(c) Liability to creditors of the corporation on unpaid subscription
(d) Liability for water stock
(e) Liability for dividends unlawfully paid
(f) Liability for failure to create corporation
3. How is participation in a corporation acquired?

In stock corporation, a person may become a shareholder:
(1) By subscription contract with an existing corporation for the
acquisition of unissued shares
(2) By purchase from the corporation of treasury shares
(3) By transfer from a previous stockholder of the outstanding shares
or existing subscription to shares
In a non-stock corporation, membership is acquired by contract with the

corporation the modes of entering into which vary according to the charter and
by-laws of the particular corporation.
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4. What are the grounds for recovery of stock unlawfully sold for
delinquency?
The ground for the recovery of stock unlawfully sold for delinquency
 irregularity or defect in the notice of sale
 Irregularity or defect in the sale itself of the delinquent stock.
5. When is the bringing of a representative suit by a group of stockholders

allowed? Cite example when the method is used.
The bringing of a representative suit by a group of stockholders allowed

when a wrong is committed against a group of stockholders, a stockholder may
bring a suit in behalf of himself and all other stockholders who are similarly
situated.
III. Problems
1. A corporation issued shares with a par value of P20. Subsequently, the

corporation purchased the shares at par value. If the same shares are
sold by the corporation for only P15 per share is the officer who
affected the sale be held liable for the difference or the “water” in the
stock?
No, the subscriber is liable for the difference of P5, not the officer. The
issue is not void, but the agreement that the shares be paid for less than its
par or issued value is illegal and void and cannot be enforced.
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2. X subscribed for 100 shares of stock in a corporation. He has paid only

for 70 shares. May a certificate of stock be issued for the 70 shares?
No, a certificate of stock cannot be issued unless X pays the full amount of
his subscription together with interests and expenses if any is due.
3. X sold his shares of stock to Y. The transfer was not registered with the
corporation. What would be the effects of the non-registration insofar as
the corporation is concerned?
It is invalid insofar as the corporation is concerned except when notice is
given to the corporation for purposes of registration:
(a) The transferor has the right to vote and be voted for, and has the
right to participate in any meeting
(b) The transferor has the right to dividends as against the corporation
but the transferor, as the nominal owner of the hare, is the trustee
for the benefit of the real owner.
4. In the same example, has Z, a corporate creditor, the right to enforce the
liability of X?
Yes, Z has the right to enforce the liability of X because X is still liable to
the corporation. The transfer of stock by a shareholder does not relieve him
from liability to corporate creditors for unpaid subscription until the transfer is
consummated by being registered in the books of the corporation.
5. In the same example, is X liable to pay interest on the unpaid

subscription?
It depends. X shall be liable to the corporation for interest from the date of
subscription, but only if so required by the by-laws.
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Title VIII
CORPORATE BOOKS AND RECORDS
I. Definitions
In connection with the right of inspection of corporate books accorded to a
stockholder, what is meant by the term “reasonable hours”?
In connection with the right of inspection of corporate books accorded to a
stockholder, reasonable hours must be understood to mean reasonable hours on
business days throughout the year and not merely during same arbitrary period of
a few days chosen by directors for ten days prior to the annual meeting of the year.
II. Discussions
1. What books and records are required by law to be kept by corporations?
Under the Corporation Code, section 74 requires every private
corporation, stock or non-stock, to keep books and records at its principal office
as follows:
 A record of all business transactions
 By minutes of all meetings of stockholders or members
 Minutes of all meetings of directors or trustees
 Stock and transfer book, in the case of stock corporations
Under other laws, corporations must keep other books and records
required by special laws. They may also keep such optional records and
subsidiary books as the needs of their business may require.
2. What should the annual financial report of the operations of a corporation

include?
The annual financial report of the operations of a corporation includes the
fund furnished by shareholders, borrowings and the profits and stock dividends.
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III. Problems
1. X, stockholder, requests that he be allowed to inspect certain corporate

records giving a proper purpose for the exercise of the right. Can the
corporation refuse on the allegation that it suspects that X has interior or
improper intentions?
No, a corporation may only refuse to inspect if X has improperly used

information secured through any prior examination of the records or minutes of
such corporation or of any other corporation, or was not acting in good faith or
for legitimate purpose in making his demand.
2. In the same example, the inspection will be conducted by L, a lawyer,

who is, not a stockholder of the corporation, without the presence of X.
Can this be done?
Yes, the right of inspection may be exercised by L, a lawyer, either with or

without the attendance of X, stockholder, otherwise, the right would be
unavailing in many instances.
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Title IX
Merger and Consolidation
I. Definitions
1. Merger
– Method in which two or more corporation unite, one corporation which
remains in being, absorbing or merging in itself the other which disappears
as a separate corporation.
2. Consolidation
– Method in which two or more corporation unites, giving rise to a new
corporate body and dissolving the constituent corporations as separate
corporations.
II. Discussions
1. Illustrate consolidation as a form of corporate combination.
Two or more corporation unite, giving rise to a new corporate body and
dissolving the constituent corporations as separate corporations.
2. Illustrate lease of assets as a form of corporate combination.
A corporation, without being dissolved, leases its property to another

corporation for which the lessor merely receives rental paid by the lessee. This
is usually practiced by railroad and transportation companies. The lease of
assets is similar to the sale of assets except than under a lease nothing passes
except the right to use the property leased.
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III. Problems
1. X, Inc. sold all its assets to Y, Inc. give the effects of such sale on the
existence of X, Inc. and the liability of Y, Inc. for the debts of X, Inc.
In a strict legal sense, the mere sale of all X, Inc.’s property and the
distribution of its assets do not work dissolution X Inc. inasmuch as possession
of property is not essential to corporate existence. Therefore, where one
corporation sells or transfer all its assets to another corporation, Y, Inc. is not
liable for the debts and liabilities of X Inc. But if in the agreement, a new
corporation expressly acquired the assets and properties, and assumed the
obligations and liabilities of X Inc. which it succeeded, Y Inc. cannot excuse
itself from said obligations and liabilities on the argument that said two
corporations are distinct and separate.
2. In case of merger or consolidation, has Z, a corporate creditor, the right

to object to the same?
No, as long as the procedure rests on the corporation and the purpose of
the inspection is legitimate and related to being a stockholder.
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TITLE X
APPRAISAL RIGHT
I. Definitions
What is meant by appraisal right of a stockholder?
Appraisal right of a stockholder refers to the right to demand payment of the
fair value of his shares, after dissenting from a proposed corporate action involving
a fundamental change in the charter or articles of incorporation in the cases
provided by law.
II. Discussions
1. Give three (3) instances when appraisal right is available to stockholder.
Section 81 of the Corporation Code of the Philippines gave three instances
when appraisal right is available to stockholders, they are as follows:
(a) In case any amendment to the articles of incorporation has the effect of
changing or restricting the rights of any stockholders or class of shares,
or of authorizing preferences in any respect superior to those of
outstanding shares of any class, or of extending or shortening the term
of corporate existence.
(b) In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets
as provided in the Code.
(c) In case of merger or consolidation.
2. In what cases will a corporation bear the cost and expenses of appraisal?
The corporation shall bear the cost and expenses of appraisal in the
following instances:
(a) Where the price which the corporation offered to pay the dissenting
stockholder is lower than the fair value as determined by the appraisers
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named by them; or
(b) Where an action is filed by the dissenting stockholder to recover such

fair value and the refusal of the stockholder to receive payment is
found by the court to be justified.
III. Problems
1. X, stockholder, with appraisal right, demands payment of the fair value of
his shares. May X continue to exercise the right as stockholders pending
payment?
It depends. Section 83 of the Code mentioned that once the dissenting
stockholder demands payment of the fair value of his shares then all the rights
accruing to such shares including voting and dividend rights shall be suspended
and he shall be entitled to receive payment of the fair value of his shares as
agreed between him and the corporation or determined by appraisers chosen
by him. However, if he is still not paid within 30 days after the award, his voting
and dividend rights shall be restored until payment of his shares.
2. May X withdraw from his decision to demand payment of his shares? Give
the effect if it is found that X is not entitled to the appraisal right.
It depends. Section 84 of the Code states that, “No demand for payment
under this Title may be withdrawn unless the corporation consents thereto.”If,
however, such demand for payment is withdrawn by X with consent of
corporation or the proposed corporate action is abandoned by the corporation or
disapproved by Securities and Exchange Commission (SEC) where such
approval is necessary then the right of X to be paid of the fair value shall cease
and his status as stockholder shall be restored. The effect is just the same when
SEC found out that X is not entitled of appraisal right.
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TITLE XI
NON-STOCK CORPORATION
I. Definitions
Define a (ordinary) non-stock corporation.
Section 87 of the Corporation Code of the Philippines defines a non-stock

corporation as an ordinary non-stock corporation formed for any of the purposes
mentioned in Section 88 such as for charitable religious, educational, professional,
cultural, fraternal, recreational, literary, scientific, social, civic service purposes etc.
Also, it is a corporation where no part of its income is distributable as dividends and
such income, whenever necessary or proper, should be used for the furtherance of
the purpose/s for which it is organized.
II. Discussions
Give at least five (5) rules that are applicable only to non-stock corporation.
There are rules that are only applicable to non-stock corporation, some of them
are as follows:
a. No part of its income is distributable as dividend to the members.
b. It cannot engage in business with the object of making profit.
c. The right to vote of members may be limited, broadened or even denied
in the articles of incorporation or the by-laws.
d. Each member shall be entitled to only one vote in the election of
trustees unless cumulative voting is authorized in the articles of
incorporation or the by-laws.
e. Voting by mail or other similar means may be authorized.
f. The number of trustees may be more than fifteen (15).
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III. Problem
Z, Inc. is a non-stock corporation. May it use its funds for profit purposes?
It depends. A non-stock corporation may not lawfully engage in any

business activity for profit as it would run counter to its very nature as a non-
profit entity. However, it may invest its accumulated funds for profit purposes.
Thus, it may subscribe to the capital stock of a corporation or invest in
commercial papers such as money markets instruments but such power must
be included in articles of incorporation.
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TITLE XII
CLOSE CORPORATIONS
I. Definitions
Define a close corporation.
A close corporation is a corporation in which the stock is held in few hands, or in

few families, and which stock is not at all or only dealt in buying and selling. All of
the issued stocks shall be held by a number of persons not exceeding 20 and shall
be subject to one or more restrictions on transfer. Any of its stock shall not be listed
in any stock exchange or in a public offering.
II. Discussions
1. What conditions are prescribed by law for the validity of restrictions on the
right to transfer shares in a close corporation?
Section 98 of the Corporation Code of the Philippines imposes two (2)

conditions for the validity of restrictions on the right to transfer shares.
a. Such restrictions must appear in the articles of incorporation or in the

by-laws, as well as in stock certificate, otherwise, they shall not be
binding on any purchaser thereof in good faith.
b. They shall not be more onerous than granting the existing stockholders
or corporation the right of first refusal or option to purchase the shares
with such reasonable terms, condition and period stated therein. Thus, it
may be invalid if the purchase price is very much below the fair market
value and if the purchaser fails to purchase within the period stated, the
transferring stockholder may sell his shares to any third person.
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2. Why is there a need for restriction on stock transfer in close corporations?

A close corporation, being formed by persons who know each other well,
ownership and management are usually vested in the same people unlike in a
widely-held corporations. They would thus be wary about any stranger coming
into business and there may be reasons for keeping out strangers such as lack of
trust and confidence. That’s why it is oftentimes reasonable, and at times
imperative, for stockholders to protect themselves from future conflict by placing
restrictions on the right of each one of them to transfer his shares to outsider.
III. Problems
1. Z, Inc. Is a close corporation. No meeting has been held to elect directors
and all the officers were appointed by the stockholders. Is this allowed by
law?
It depends. The articles of incorporation of a close corporation may provide
that the business of the corporation shall be managed by the stockholders of the
corporation rather than by a board of directors. So long as this provision
continues in effect, no meeting of stockholders need be called to elect directors
provided the stockholders of the corporation shall be deemed to be directors for
the purpose of applying the provisions of the Code unless the context clearly
requires otherwise. The stockholders of the corporation shall be subject to all
liabilities of directors.
2. Has X, a stockholder, in Z, Inc., the right to withdraw from the corporation

for any personal reason?
It depends. The right of a stockholder to withdraw may be exercised “for any
reason” provided that the corporation has sufficient assets to cover its liabilities
exclusive of capital stock.
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TITLE XIII
SPECIAL CORPORATIONS (Educational & Religious)
I. Definitions
1. Educational corporation
– An educational corporation is a stock or non-stock corporation organized to
provide facilities for teaching or instruction. Such corporations normally
maintain a regular faculty and curriculum and normally have a regular
organized body of pupils or students, or attendance at the place where the
educational activities are regularly carried on.
2. Religious corporation
– A religious corporation has been defined as a corporation composed entirely
of spiritual persons and which is organized for the furtherance of a religion or
for perpetuating the rights of the church or for the administration of church or
religious work or property.
II. Discussions
1. Give at least four (4) rules applicable only to non-stock educational
corporations.
(a) The number of trustees shall not be less than five (5) nor more than
fifteen (15);
(b) It shall be in multiples of five (5), i.e., their number shall be five (5), ten
(10), or fifteen (15);
(c) Unless otherwise provided in the articles of incorporation or the by-laws,
the terms of office of the trustees shall be staggered with one (l)-year
interval;
(d) Trustees subsequently elected shall have a term of five (5) years;
(e) The powers and authority of trustees shall be defined in the by-laws.
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2. What are the classes of religious corporations? How are they formed?
(1) A corporation sole is incorporated by one person and consists of one

member or corporator only and his successors, such as a bishop. Under
Section 110, it may be formed by the chief archbishop, bishop, priest,
minister, rabbi or other presiding elder of a religious denomination, sect
or church for the purpose of administering and managing, as trustee, the
affairs, property and temporalities of such religious denomination, sect or
church.
(2) Religious society is incorporated by an aggregate of persons. Under
Section 116, any religious society or religious order, or any diocese,
synod, or district organization of any religious denomination, sect or
church, unless forbidden by the rules of the latter or by competent
authority may, upon consent and/or by an affirmative vote at a meeting
called for the purpose, of 2/ 3 of its membership, incorporate for the
administration or management of its temporalities, affairs and property
by filing with the Securities and Exchange Commission.
78
III. Problems
1. A religious society or order decided to incorporate for the management
of its affairs. After filing with the Securities and Exchange Commission
its articles of incorporation, but before its approval, the society began to
operate as a corporation. Is this a violation of law?
No, the religious society can operate as a corporation even without the
SEC approval. For a religious society to incorporate, the law does not
expressly require the approval by the Securities and Exchange Commission
of the articles of incorporation which is a condition for incorporation in the
case of educational corporations.
2. A corporation sole purchased real estate for its charitable and

educational purposes. Now, it decides to sell it. Is the corporation sole
free to dispose of the property?
It depends. As stated in Section 113, any corporation sole may
purchase and hold real estate and personal property for its church, charitable,
benevolent or educational purposes, and may receive bequests or gifts for
such purposes. The real estate property may be sold or mortgaged by
obtaining an order for the purpose from the Court of First Instance of the
province where the property is situated. upon proof made to the satisfaction of
the court that notice of the application for leave to mortgage or sell has been
given by publication or otherwise in such manner and for such time as said
court may have directed, and that it is to the interest of the corporation that
leave to mortgage or sell should be granted.
79
TITLE XIV
DISSOLUTION
I. Definitions
1. Dissolution
– The term dissolution, as applied to a corporation, signifies the extinguishment
of its franchise to be a corporation and the termination of its corporate
existence.
2. Liquidation
– Liquidation, as applied to a corporation, means the winding up of the affairs of
the corporation by reducing its assets in money, settling with creditors and
debtors, and apportioning the amount of profit and loss.
II. Discussions
1. What are the voluntary methods for dissolving a corporation?
(a) by the vote of the board of directors/trustees and the

stockholders/members where no creditors are affected (Sec.118.);
(b) by judgment of the Securities and Exchange Commission after hearing
of petition for voluntary dissolution where creditors are affected (Sec.
119.);
(c) by amending the articles of incorporation to shorten the corporate term
(Sec. 120.) or;
(d) In the case of a corporation sole, by submitting to the Securities and
Exchange Commission a verified declaration of dissolution for
approval. (Sec. 115.)
80
2. Give the two (2) legal steps involved in the dissolution of a corporation.
Dissolution of a corporation involves two legal steps:
(1) The termination of the corporate existence at least as far as the right to
go on doing ordinary business is concerned and;
(2) The winding up of its affairs, the payment of its debts, and the
distribution of its assets among the shareholders or members and
other persons interested. After winding up, the existence of the
corporation is terminated for all purposes.
III. Problems
1. Z, Inc. is dissolved.
(a) The board of directors approved a resolution authorizing the
payment by the corporation of its debts under a contract. Is the
resolution valid?
(b) After the lapse of the three (3) year winding-up period, what
remedies, if any, are available to a corporate creditor to recover the
debts of the corporation?
(a) It depends. Provided in Section 122, Z, Inc. shall nevertheless

continue as a body corporate for three (3) years after the time
when it would have been so dissolved, for the purpose of
prosecuting and defending suits by or against it and enabling it to
settle and close its affairs, to dispose of and convey its property
and to distribute its assets, but not for the purpose of continuing
the business for which it was established.
81
(b) As the law grants it a period of three (years after the time when it
would have been so dissolved within which to wind-up affairs, the
claims by and against it not presented and settled within that
period become unenforceable as there exists no longer a
corporate entity against which they can be enforced. It is to be
noted that there is nothing in Section 122 which bars an action for
the recovery of the debts of the corporation against the liquidator
thereof after the lapse of 3-year winding up period.
2. The directors and executive officers of Z, Inc. decided to hold a meeting

at Boracay Resort. They all died in a plane crash. They own the majority
capital stock. Is Z, Inc. deemed dissolved?
No, Z, Inc. is not deemed dissolved, for the reason that the death of
the directors and executives officers does not in itself work a dissolution of the
corporation or operate as a surrender of the corporate franchise. Although the
proper officers may be necessary to enable the body to act, yet they are not
essential to its validity.
82
TITLE XV
FOREIGN CORPORATIONS
I. Definitions
1. Foreign corporation
– Foreign Corporation is a corporation created by or under the laws of another
state or country.
2. Incorporation test
– A rule that considers a corporation to be resident in the country in which it
is incorporated. Under the incorporation test, a corporation organized under
the laws of the Philippines is a domestic corporation with respect to the
Philippines and a foreign corporation with reference to any other state.
II. Discussions
1. What are the objectives of laws regulating foreign corporations?
(a) To place them on an equality with domestic corporations
(b) To subject them to inspection so that their condition may be known
(c) To protect the residents of the State doing business with them by
subjecting them to the courts of the State.
2. Give at least three acts constituting “engaging or transacting business”

and at least three acts that are not included in the term.
Acts included:
 Soliciting orders, purchases, and service contracts
 Opening offices, whether called “liaison” offices or branches
 Appointing representatives or distributors who are domiciled in the
Philippines or who, in any calendar year, stay in the Philippines for
a period or periods totalling 180 days or more.
83
Acts not included:

 A mere investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business
 The exercise of rights as such investors
 Having a nominee director or officer to represent its interests in such
corporation
 Appointing a representative or distributor domiciled in the Philippines
which transacts business in its own name and for its own account
III. Problems
1. F, a foreign corporation, transacts business in the Philippines without
license. May it sue and be sued? What is the purpose of the law in
requiring a license?
F, a foreign corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any valid cause of action
recognized under Philippine laws. The purpose of the law in requiring license is
to permit persons to avoid contracts made with such foreign corporations.
2. Same example, except that the foreign corporation is not doing business
in the Philippines but it entered into a contract with a Filipino
manufacturer for the importation by the latter of certain capital
equipment. May it maintain a suit in our courts for the enforcement of the
contract?
Yes, F corporation not transacting business in the Philippines may
maintain an action, even if it has no license. The implication of the law is that it
was never the purpose of the legislature to exclude a foreign corporation which
happens to obtain an isolated order for business from the Philippines from
receiving redress Philippine courts and thus, in effect, permit persons to avoid
contracts made with such foreign corporation.
84
TITLE XVI
MISCELLANEOUS PROVISIONS
I. Definitions
1. Outstanding capital stock

– Outstanding capital stock means the total shares of stock issued under
binding subscription agreement to subscribers or stockholders, whether or
not fully or partially paid, except treasury shares.
2. Vistorial power
– Vistorial power or right of visitation is the power of the State through the
proper governmental agency to examine the business affairs, administration
and condition of corporations.
II. Discussions
1. State the nature purpose and scope of the visitorial power vested in the
State through the proper governmental agency.
(1) Nature - it is a public right as distinguished from the right of inspection of

the stockholder or member which is merely a private right existing in
virtue of his stock ownership.
(2) Purposes - to supervise and control the management of corporations
and keep them within the limits of their legitimate powers
(3) Scope - it extends to any corporation transacting business in the
Philippines even, therefore, to corporations created by special laws and
foreign corporations.
85
2. The term “outstanding capital stock” broader than subscribed capital

stock. Explain.
An outstanding share of stock is necessarily issued but an issued share

may not have the status of an outstanding share such as treasury shares. To be
considered outstanding, the share of stock must be held by persons other than
the corporation itself.
III. Problems
1. X, subscribes to shares in a corporation, offering to acquire 100 shares
with payment tendered. Can he be considered a stockholder of the
corporation?
It depends because a subscription to shares in a corporation does not

constitute the subscriber a stockholder until its acceptance of the subscription.
2. Z, Inc. committed a violation of a provision of the Corporation Code

expressly imposing a specific penalty for the violation in question. May the
corporation be still penalized or sanctioned?
Yes, Z Inc. will be penalized and after notice and hearing, the corporation
will be dissolved in appropriate proceedings before the SEC provided that such
dissolution shall not preclude the institution of appropriate action against the
director, trustee or officer of the corporation responsible for said violation and that
nothing in the Sec. 144 shall be construed to repeal the other causes for
dissolution of a corporation.
86
END

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Republic of the Philippines

BATANGAS STATE UNIVERSITY

Bagui, Edward Glenn L.

PART II: PRIVATE CORPORATIONS

A partnership is characterized as a preparatory contract in the sense that

b. Explain and illustrate: a partnership is a juridical person.

(1) As a debt by instalments or otherwise

d. What is the importance of giving publicity to the articles of partnership?

e. Give the effects where a partnership is formed for an unlawful purpose.

c. Same partnership. Among the purpose of the partnership is the

d. Same partnership. The partnership was orally formed without the

e. N donated a condominium unit to X, Y and Z who agreed among

2. State the five (5) obligations of a partner with respect to property he

4. Why is appraisal of the value of the goods or property contributed by a

5. State the liability of a partner if he fails or delays his obligation with

1. X, a partner in a partnership, upon arriving from abroad, demands a

Yes because according to Article 1809, an example under No. 4:

2. Same partnership. The partnership is engaged in the grocery business.

3. Same partnership. X is appointed manager in the articles of partnership.

4. Same partnership. The liabilities of the partners are as follows: X -

2. What rights are not acquired by an assignee or transferee of a partner who

3. What are the only rights acquired by said assignee or transferee?

4. What is considered as the extent of a partner’s interest in a partnership?

1. X, Y and Z are partners in a partnership which owns a parcel of land. May X

2. Same partnership. X is liable to W, creditor, who obtained a court

3. Can W who is not a partner in a partnership be held liable as a partner?

2. Same partnership. Is the sale of the automobile of the partnership by X

3. Same partnership. X and Y, controlling partners, after informing Z,

4. Same partnership. Y and Z contributed ₱15,000 each to the partnership.

(a) X is also liable to the obligation but up to his share in the

Y and Z will be liable for ₱208.33 each to D for the excess of

3. Who are authorized to wind-up the affairs of a dissolved

4. Give the rights of an injured partner when a partnership is rescinded

5. Give at least four (4) grounds for the judicial dissolution of a

1. X, Y, and Z are partners in a partnership which was dissolved by the

3. Same partnership. The term of existence of the partnership expired.

4. Same partnership. The partnership was dissolved. Assume the following

5. Same example. Suppose the liability of the partnership to W is P335,000; Y

Settle the accounts of the parties.

Partnership Assets ₱320,000

Although Y and Z is liable to X for ₱10,000 each, separate creditors of Y and Z

in a limited partnership, is not, by reason of his exercise of the rights of a

3. Give at least four differences between a general partner and a limited

4. What conditions must exist before the contribution of a limited partner

5. Give at least four (4) for specific rights of a limited partner.

2. Same partnership. X contributed property to the partnership. In case X

3. Same partnership W, a partnership creditor, brought an action against

It depends, Art. 1866. A contributor, unless he is a general partner, is

4. After X, Y, and z executed and signed articles of limited partnership,

(k) The right, if given, of partners to admit additional limited

5. Same partnership. Give the effect in case:

(a) Art. 1860. The retirement, death, insolvency, insanity or civil

2. Fiction of corporate entity

5. Outstanding Capital Stock

6. Cumulative Preferred Shares

1. Give at least four (4) distinctions between a corporation and a partnership.

(a) Manner of creation - A partnership is created by mere agreement of the

2. Distinguish share of stock from capital stock.

Share of stock is commonly used in a distributive sense to refer to the

Advantages of no par value shares are as follows:

5. Give at least three (3) advantages and three (3) disadvantages of a

The advantages of a business corporation are as follows: