Professional Documents
Culture Documents
Law On Partnerships and Corporation
Law On Partnerships and Corporation
1
3. The sharing of gross returns does not partnership, they become subject to
of itself establish a partnership, whether liabilities of partners (doctrine of
or not the persons sharing them have a estoppel).Whether or not the parties call
joint or common right or interest in any their relationship or believe it to be a
property from which the returns are partnership is immaterial. Thus, with the
derived. exception of partnership by estoppel, a
partnership cannot exist as to third persons if
4. The receipt by a person of a share of the no contract of partnership has been entered
profits of a business is prima facie into between the parties themselves.
evidence that he is a partner in the
business, but no such inference shall be Co-ownership or co-possession
drawn if such profits were received in There is co-ownership whenever the
payment: ownership of an undivided thing or right
belongs to different persons.
a. As a debt by installments or
otherwise. Clear intent to derive profits from
operation of business
b. As wages of an employee or rent to Co-ownership does not of itself establish the
a landlord. existence of a partnership, although it is one
of its essential elements. This is true even if
c. As an annuity to a widow or profits are derived from the joint ownership.
representative of a deceased partner. The profits must be derived from the
operation of business by the members
d. As interest on a loan, though the of the association and not merely from
amount of payment vary with the property ownership. The law does not imply
profits of the business. a partnership between co-owners because of
the fact that they develop or operate a
e. As the consideration for the sale of a common property, since they may rightfully
goodwill of a business or other do this by virtue of their respective titles.
property by installments or There must be a clear intent to form a
otherwise. partnership.
Art. 1773. A contract of partnership is void, Since partnership has juridical personality of
whenever immovable property is contributed its own, it may acquire immovable property
thereto, if an inventory of said property is in its own name. Title so acquired can
not made, signed by the parties, and attached be conveyed only in the partnership name.
to the public instrument. Partnership with
contribution of immovable property Art. 1775. Associations and societies,
whose articles are kept secret among the
Where immovable property contributed, members, and wherein any one of the
failure to comply w/ the following members may contract in his own name with
requisites will render the partnership third persons, shall have no juridical
contract void: personality, and shall be governed by the
1. The contract must be in a public provisions relating to co-ownership. Secret
instrument; partnerships without juridical personality
2. An inventory of the property contributed
must be made, signed by the parties, and Partnership relation is created only by the
attached to the public instrument. Art. voluntary agreement of the partners. It is
1773 is intended primarily to protect 3 rd essential that the partners are fully informed
persons. W/ regard to 3rdpersons, a de not only of the agreement but of all matters
facto partnership or partnership by affecting the partnership. Secret partnerships
estoppel may exist. There is nothing to are not by nature partnerships. Secret
prevent the court from considering the partnerships shall be governed by the
partnership agreement an ordinary provisions relating to co- ownership.
contract from which the parties’ rights
and obligations to each other may be Importance of giving publicity to articles
inferred and enforced. of partnership
It is essential that the arts of partnership be
When inventory is not required given publicity for the protection not only of
An inventory is required only whenever the members themselves but also 3rd persons
immovable property is contributed. If not from fraud and deceit. A member who
contributed or if personal property, no transacts business for the secret partnership
inventory required. in his own name becomes personally bound
to 3rd persons unaware of the existence of
Importance of making inventory of real such association. Partnership liability
property in a p a r t n e r s h i p may still result,
An inventory is very important in however, in cases of estoppel.
a partnership to how much is due from each
partner to complete his share in the common Art. 1776. As to its object, a partnership is
fund and how much is due to each of them either universal or particular. As regards the
in case of liquidation. The execution of a liability of the partners, a partnership may be
public instrument of partnership would be general or limited. Classifications of
useless if there is no partnership
As to extent of its subject matter not avowed or made known to the public by
1. Universal partnership. (Art. 1777) any of the partners.
a. Universal partnership of all present Open or notorious partnership: one whose
property. (Art. 1778) existence is avowed or made known to the
b. Universal partnership of profits. public by the members of the firm.
(Art. 1780)
2. Particular partnership. (Art. 1783) As to purpose
Commercial or trading partnership: one
As to liability of the partners formed or the transaction of business.
General partnership: one consisting of
general partners who are liable pro rata and Professional or non-trading partnership: one
subsidiary and sometimes solidarily w/ their formed for the exercise of a profession.
separate property for partnership debts.
Kinds of partners
Limited partnership: one formed by two or Under the Civil Code
more persons having as members one or 1. Capitalist partner: one who contributes
more general partners and one or more money or property to the common fund.
limited partners, the latter not being 2. Industrial partner: one who contributes
personally liable for the obligations of the only his industry or personal service.
partnership. 3. General partner: one whose liability to
3rd persons extends to his separate
As to duration property.
Partnership at will: one in w/c no time is 4. Limited partner: one whose liability to
specified and is not formed for a particular 3rd persons is limited to his capital
undertaking or venture and w/c may be contribution.
terminated at any time by mutual agreement 5. Managing partner: one who manages the
of the partners, or by the will of any one entity.
partner alone; or one for a fixed term or 6. Liquidating partner: one who takes
particular undertaking w/c is continued after charge of the winding up of partnership
the end of the term or undertaking w/o affairs upon dissolution.
express agreement. 7. Partner by estoppel: one who is not
Partnership with a fixed term: one w/c the really a partner but is liable as a partner
term for w/c the partnership is to exist is for the protection of innocent 3rd
fixed or agreed upon or one formed for a persons. He is one represented as being
particular undertaking. a partner but who is not so between the
partners themselves.
As to the legality of its existence 8. Continuing partner: one who continues
De jure partnership: one w/c has complied the business of a partnership after it has
w/ all the legal requirements for been dissolved by reason of the
its establishment. admission of a new partner, or the
De facto partnership: one w/c has failed to retirement, death or expulsion of one or
comply w/ all the legal requirements for its more partners.
establishment. 9. Surviving partner: one who remains
after a partnership has been dissolved by
As to representation to others the death of any partner.
Ordinary or real partnership: one w/c 10. Subpartner: one who, not being
actually exists among the partners and also a member of the partnership, contracts
as to 3rd persons. w/ a partner w/reference to the latter’s
Ostensible partnership or partnership or share in the partnership.
partnership by estoppel: one w/c in reality is
not a partnership, but is considered a Other classifications
partnership only in relation to those who, by 1. Ostensible partner: one who takes active
their conduct or admission, are precluded to part and known to the public as a
deny or disprove its existence. partner.
2. Secret partner: one who takes active part
As to publicity in the business but is not known to be a
Secret partnership: one wherein the partner by outside parties nor held
existence of certain persons as partners is
out as a partner by the other partners. He Property w/c belonged to each of them at the
is an actual partner. time of the constitution of the partnership;
3. Silent partner: one who does not take Profits w/c they may acquire from the
any active part in the business although property contributed.
he may be known to be a partner.
4. Dormant partner: one who does not take Contribution of future property
active part in the business and is not General rule: future properties cannot be
known or held out as a partner. He contributed. The very essence of the contract
would be both a silent and a secret of partnership that the properties contributed
partner. be included in the partnership requires the
5. Original partner: one who is a member contribution of things determinate. The
of the partnership from the time of its position of a partner is like that of a donor,
organization. and donations cannot comprehend future
6. Incoming partner: a person lately, or property. Thus, property subsequently
about to be, taken into an existing acquired by 1.inheritance; 2. Legacy; or 3.
partnership as a member. Donation cannot be included by stipulation
7. Retiring partner: one withdrawn from except the fruits thereof. Hence, any
the partnership; a withdrawing partner. stipulation including property so acquired is
Art. 1777. A universal partnership may void. Profits from other sources (not from
refer to all the present property or to all properties contributed) will become
the profits. common property only is there’s a
stipulation.
Art. 1778. A partnership of all present
property is that in which the partners Art. 1780. A universal partnership of profits
contribute all the property which actually comprises all that the partners may acquire
belongs to them to a common fund, with the by their industry or work during
intention of dividing the same among the existence of the partnership. Movable or
themselves, as well as all the profits they immovable property which each of the
may acquire therewith. partners may possess at the time of the
celebration of the contract shall continue to
Art. 1779. In a universal partnership of all pertain exclusively to each, only the usufruct
present property, the property which belongs passing to the partnership.
to each of the partners at the time of the
constitution of the partnership becomes the Universal partnership of profits explained
common property of all the partners, as well A universal partnership of profits is one w/c
as all the profits which they may acquire comprises all that the partners may acquire
there with. A stipulation for the common by their industry or work during the
enjoyment of any other profits may also be existence of the partnership and the
made; but the property which the partners usufruct of movable or immovable property
may acquire subsequently by inheritance, w/c each of the partners may possess at the
legacy or donation cannot be included in time of the celebration of the contract.
such stipulation, except the fruits thereof.
Ownership of present and future property
Universal partnership of all present The partners retain their ownership over
property explained their present and future property. What
A universal partnership of profits is one w/c passes to the partnership are the profits or
comprises all that the partners may acquire income and the use or usufruct of the same.
by their industry or work during the Consequently, upon dissolution, such
existence of the partnership and the usufruct property is returned to the partners who own
of movable or immovable property w/c each it.
of the partners may possess at the time of
the celebration of the contract. In this kind Profits acquired through chance
of partnership, the following become the Since the law only speaks of profits w/c
common property of all the partners: the partners may acquire by their industry or
work, profits acquired purely by chance are
not included.
Art. 1783. A particular partnership has for
Fruits of property subsequently acquired its object determinate things, their use or
Fruits of property subsequently acquired by fruits, or a specific undertaking, or the
the partners do not belong to exercise of a profession or vocation.
the partnership. Such profits, however, may
be included by express stipulation. Particular partnership explained
A particular partnership is one w/c is neither
Art. 1781. Articles of universal a universal partnership of present property
partnership, entered into without nor a universal partnership of profits. The
specification of its nature, only constitute a fundamental difference between a universal
universal partnership of profits. partnership and a particular partnership lies
in the scope of their subject matter or object.
Presumption in favor of universal In the former, the object is vague and
partnership of profits indefinite, contemplating a general business
Reason for presumption: universal w/ some degree of continuity, while in the
partnership of profits imposes less latter, it is limited and well-defined, being
obligations on the partners, since they confined to an undertaking of a
preserve the ownership of their separate single, temporary, or ad hoc nature.
property.
Business of partnership need not be
Art. 1782. Persons who are prohibited from continuing in nature
giving each other any donation or advantage The carrying on of a business of a
cannot enter into a universal partnership. continuing nature is not essential to
Limitations upon the right to form a constitute a partnership. An agreement to
partnership undertake a particular piece of work or a
single transaction or a limited number of
Persons who are prohibited by law to give transactions and immediately divide the
donations cannot enter into a universal resulting profits would seemt o fall w/in the
partnership for the reason that each of the meaning of the term “partnership” as used in
partners virtually makes a donation. To the law.
allow it would be permitting them to do
indirectly what the law expressly prohibits. Rule under American law
A partnership formed in violation of this The above is not true under the Uniform
article is null and void. Consequently, no Partnership Act w/c does not include joint
legal personality is acquired. A husband and ventures w/c exists for a single transaction
wife, however, may enter into a particular or a limited number of transactions.
partnership or be members thereof. Relevant
provisions: Joint venture
While a joint venture is not a formal
Art. 87: Donations between spouses during partnership in the legal or technical sense,
marriage void, except moderate gifts on both are governed, subject to certain
occasion of family rejoicing. Also applies qualifications, practically by the same rules
to those living together as husband and wife or principles of partnership. This is logical
w/o valid marriage. since in a joint venture, like
Art. 739: The following donations are void: in a partnership, there is a community of
a. Those made between persons who are interest in the business and a mutual right of
guilty of adultery or concubinage at the time control and an agreement to share jointly in
of the donation (no need for profits and losses.
conviction; preponderance of evidence only
required); Corporation as a partner
b. Those made between persons found guilty While under the Philippine Civil Code, a
of the same criminal offense, joint venture is a form of partnership w/ a
inconsideration thereof; legal personality separate and distinct from
c.Those made to a public officer or his wife, the parties composing it, and should thus be
descendants and ascendants, by reason of his governed by the law of partnership, the
office. Supreme Court has recognized the
distinction between these two business
forms, and has held that although a have contributed it up to actual delivery
corporation cannot enter into a partnership without necessity of any demand;
contract, it may, however, engage in a joint 4. Shall preserve said properties with the
venture if the nature of the venture is diligence of a good father of a family
authorized by its charter. pending their delivery to the partnership;
5. And shall indemnify the partnership for
Art. 1784. A partnership begins from the any damage caused it by the retention of
moment of the execution of the contract, said properties or by the delay in their
unless it is otherwise stipulated. (1679) contribution.
Art. 1785. When a contract for a fixed term Art. 1787. When the capital or part thereof
or particular undertaking is continued after which a partner is bound to contribute
the termination of such term or particular consists of goods, their appraisal must be
undertaking without any express agreement, made in the manner prescribed in the
the rights and duties of the partners remains contract of partnership, and in the absence of
the same as they were at such termination, stipulation, it shall be made by experts
so far as is consistent with a partnership at chosen by the partners, and according to
will. current prices, the subsequent changes
thereof being for the account of the
A continuation of the business by the partnership.
partners or such of them as habitually acted
therein during the term, without any Art. 1788. A partner who has undertaken to
settlement or liquidation of the partnership contribute a sum of money and fails to do so
affairs, is prima facie evidence of a becomes a debtor for the interest and
continuation of the partnership. damages from the time he should have
complied with his obligation.
Partnership at will is one in which no term
of existence has been fixed and which may The same rule applies to any amount he may
be terminated at the will of any partners. have taken from the partnership coffers, and
his liability shall begin from the time he
Art. 1786. Every partner is a debtor of the converted the amount to is own use.
partnership for whatever he may have
promised to contribute thereto. Liability of partner for estafa
Failure to return the money taken, there is
He shall also be bound for warranty in case the element of fraudulent appropriation of
of eviction with regard to specific and the money delivered to a partner with
determinate things which he may have specific instructions for the use of the
contributed to the partnership, in the same partnership, then estafa is committed under
cases and in the same manner as the vendor the Revised Penal Code.
is bound with respect to the vendee. He shall
also be liable for the fruits thereof from the Art. 1789. An industrial partner cannot
time they should have been delivered, engage in any business for himself,
without the need of any demand. UNLESS the partnership expressly permits
him to do so; and if he should do so, the
Obligations of partners to contribute: capitalist partners may either exclude him
1. Shall deliver at the beginning of the from the firm or avail themselves of the
partnership or, if a different date has benefits which he may have obtained in
been agreed upon, at the stipulated time violation of this provision, with a right to
the properties he agreed to contribute; damages in either case.
2. Shall answer for eviction, in case the
partnership is deprived of the ownership Industrial partner is one who contributes
of any specific property he contributed; his industry or labor in the partnership.
3. Shall answer to the partnership for the
fruits of the properties whose delivery Industrial partner barred from engaging
he delayed from the date he should in business
To prevent any conflict of interest between compensate them with the profits and
the industrial and the partnership, and to benefits which he may have earned for the
insure faithful compliance by said partner partnership by his industry. However, the
with his prestation. courts may equitably lessen this
responsibility if through the partner’s
Art. 1790. Unless there is a stipulation to extraordinary efforts in other activities of the
the contrary, the partners shall contribute partnership, unusual profits have been
equal shares to the capital of the partnership. realized.
Art. 1791. If there is no agreement to the Partner liable for damages caused the
contrary, in case of an imminent loss of the partnership
business of the partnership, any partner who Art. 1794 follows the general rule of
refuses to contribute an additional share to contracts that where a person is at fault in
the capital, except an industrial partner, to the fulfillment of his obligations he shall be
save the venture, shall be obliged to sell his liable for the payment of damages. The
interest to the other partners. partner’s fault, however, must be determined
in accordance with the circumstances of
Art. 1792. If a partner authorized to manage person, time and place.
collects a demandable sum, which was owed
to him in his own name, from a person who Liquidation necessary to ascertain
owned the partnership another sum also damages
demandable, the sum thus collected shall be It is first necessary that a liquidation of the
applied to the two credits in proportion to business thereof be made to the end that the
their amounts, even though he may have profits and losses may be known and the
given a receipt for his own credit only; but causes of the latter and the responsibility of
should he have given it for the account of the defendant as well as the damages which
the partnership credit, the amount shall be each partner may have suffered, may be
fully applied to the latter. determined.
The provisions of this article are understood Art. 1795. The risk of specific and
to be without prejudice to the right granted determinate things, which are not fungible,
to the debtor by Art. 1252, but only if the contributed to the partnership so that only
personal credit of the partner should be more their use and fruits may be for the common
onerous to him. benefit, shall be borne by the partner who
owns them.
Requisites:
1. Two existing debts If the things contributed are fungible, or
2. Both debts must be demandable cannot be kept without deteriorating, or if
3. The one who collected the debt is a they were contributed to be sold, the risk
partner who is authorized to manage and shall be borne by the partnership. In the
is actually managing the partnership absence of stipulation, the risk of things
brought and appraised in the inventory, shall
Art. 1793. A partner who has received, in also be borne by the partnership, and in such
whole or in part, his share of a partnership case the claim shall be limited to the value at
credit, when the other partners have not which they were appraised.
collected theirs, shall be obliged, if the
debtor should thereafter become insolvent, Risk of Specific and determinate things
to bring to the partnership capital what he The risk of specific and determinate things
received even though he may have given which are not fungible, like a boat, only the
receipt for his share only. use of which is contributed, shall be borne
by the partner as the ownership thereof is
Art. 1794. Every partner is responsible to not transferred to the partnership. This
the partnership for damages suffered by it follows the general rule that the thing
through his fault, and he cannot perished with the owner.
Duty begins during the formation Art. 1808. The Capitalist partners cannot
of partnership engage for their own account in any
Principle of good faith applies not only operation, which is of the kind of business in
during partnership but during the which the partnership is engaged, unless
negotiations leading to the formation of the there is a stipulation to the contrary. Any
partnership. Also, a person who agreed w/ capitalist partner violating this prohibition
another to form a partnership has the shall bring to the common funds any profit
obligation to account for commissions and accruing to him from his transactions, and
discounts received in acquiring property for shall personally bear all the losses.
the future partnership.
Prohibition against partner engaging the
Duty continues even after the dissolution business
of the partnership Prohibition relative – Prohibition against
Duty of partner to act w/ utmost good faith capitalist partner to engage in business is
towards his co-partners continues relative, unlike the industrial partner who is
throughout the entire life of the partnership absolutely prohibited from engaging in any
even after dissolution for whatever reason or business for himself. Capitalist partner is
whatever means, until the relationship is only prohibited from engaging for his own
terminated, account in any operation which is the same
as or similar to the business in which the
partnership is engaged and which is Art. 1810. The property rights of a partner
competitive w/ said business are:
VIOLATION – Obligation to bring to 1. His rights in specific partnership
common fund any profits derived and in property;
case of losses, he shall bear them alone.
Partners, however, by stipulation may permit 2. His interest in the partnership;
it. The law permits him to carry on a
business not connected or competing with 3. His right to participate in the
that of the partnership. Law is silent on management, extent of property rights of
whether he can engage in same line of a partner.
business for the account of another.
Prohibition still applies because of fiduciary Principal Rights
position imposing duties of utmost good 1. Rights in specific partner property;
faith. He may not carry on any other 2. Interest in partnership;
business in rivalry w/ the partnership. 3. Right to participate in management.
Reason for prohibition RELATED RIGHTS
Fiduciary nature of relationship imposes 1. Right to reimbursement for amounts
obligation of utmost good faith. Rule advanced to partnership and to
prevents use of info obtained in course indemnification for risks inconsequence
of transaction of partnership business or of management (art. 1796).
because of connection w/ firm regarding 2. Right of access and inspection of
business secrets and clientele of firm to its partnership books (art. 1805).
prejudice. 3. Right to true and full information of all
things affecting partnership (art. 1806).
Art. 1809. Any partner shall have the right 4. Right to formal account of partnership
to a formal account as partnership affairs: affairs under certain circumstances (art.
1809).
1. If he is wrongfully excluded from the 5. Right to have partnership dissolved also
partnership business or possession of its under certain conditions (arts. 1830-
property by his co-partner; 1831).
2. If the right exists under the terms of any Partnership property and
agreement; partnership capital
distinguished
3. Provided by article 1807;
4. Apartnerwillfullyorpersistently
commits a breach of the partnership
place if more than one) at which the
Art. 1833. Where the dissolution is caused partnership business was regularly
by the act, death or insolvency of a partner, carried on.
each partner is liable to his co-partners for
his share of any liability created by any The liability of a partner under the first
partner acting for the partnership as if the paragraph, No. 2, shall be satisfied out of
partnership had not been dissolved unless: partnership assets alone when such partner
had been prior to dissolution:
1. The dissolution being by act of any
partner, the partner acting for the 1. Unknown as a partner to the person with
partnership had knowledge of the whom the contract is made.
dissolution.
2. So far unknown and inactive in
2. The dissolution being by the death or partnership affairs that the business
insolvency of a partner, the partner reputation of the partnership could not
acting for the partnership had be said to have been in any degree due
knowledge or notice of the death or to his connection with it.
insolvency.
The partnership is in no case bound by any
General Rule act of a partner after dissolution:
If the cause of dissolution is the death, act,
or insolvency of a partner, authority of a 1. Where the partnership is dissolved
partner to bind ceases upon the knowledge because it is unlawful to carry on the
of the dissolution. business, unless the act is appropriate
for winding up partnership affairs.
If dissolution is caused by act of one of
parties, co-partners are also liable to 2. Where the partner has become insolvent.
contribute towards a liability as if no
dissolution has happened, provided that 3. Where the partner has no authority to
there is no notice or the partner does not wind up partnership affairs; except by a
have knowledge of the dissolution. transaction with one who —
Art. 1834. After dissolution, a partner can a. Had extended credit to the
bind the partnership, except as provided in partnership prior to dissolution and
the third paragraph of this article: had no knowledge or notice of his
want of authority.
1. By any act appropriate for winding up
partnership affairs or completing b. Had not extended credit to the
transactions unfinished at dissolution. partnership prior to dissolution, and,
having no knowledge or notice of
2. By any transaction which would bind his want of authority, the fact of his
the partnership if dissolution had not want of authority has not been
taken place, provided the other party to advertised in the manner provided
the transaction: for advertising the fact of
dissolution in the first paragraph,
a. Had extended credit to the No. 2 (b).
partnership prior to dissolution and
had no knowledge or notice of the Nothing in this article shall affect the
dissolution. liability under article 1825 of any person
who after dissolution represents himself or
b. Though he had not so extended consents to another representing him as a
credit, had nevertheless known of partner in a partnership engaged in carrying
the partnership prior to dissolution, on business.
and, having no knowledge or notice
of dissolution, the fact of dissolution General Rule
had not been advertised in a Dissolution terminates the authority of the
newspaper of general circulation in partners to bind partnership.
the place (or in each
Exceptions assignee, upon cause shown, may obtain
Any act appropriate for winding-up winding up by the court.
partnership affairs or completing
transactions unfinished at dissolution Who may wind up Partnership Affairs?
Partner designated in the agreement.
If third persons that transacted had no actual In absence of agreement, the part that did no
knowledge of the dissolution. wrongfully dissolved the partnership.
*Persons extending credit prior to
dissolution are entitled to notice of If all partners died, the legal representative
dissolution. If they had no notice or of the last surviving partner provided that
knowledge of dissolution, they may hold the partner is not insolvent.
the retired partner for obligations made by
continuing partners after dissolution. Winding up of a dissolved partnership
may be done
Art. 1835. The dissolution of the partnership Extrajudicially by the partners themselves.
does not of itself discharge the existing Judicially under the control of a competent
liability of any partner. court.
*Managing partner or winding-up partner
A partner is discharged from any existing has the right to sell firm property even after
liability upon dissolution of the partnership the life of the partnership has expired.
by an agreement to that effect between
himself, the partnership creditor and the Art. 1837. When dissolution is caused in
person or partnership continuing the any way, except in contravention of the
business; and such agreement may be partnership agreement, each partner, as
inferred from the course of dealing between against his co-partners and all persons
the creditor having knowledge of the claiming through them in respect of their
dissolution and the person or partnership interests in the partnership, unless otherwise
continuing the business. agreed, may have the partnership property
applied to discharge its liabilities, and the
The individual property of a deceased surplus applied to pay in cash the net
partner shall be liable for all obligations of amount owing to the respective partners. But
the partnership incurred while he was a if dissolution is caused by expulsion of a
partner, but subject to the prior payment of partner, bona fide under the partnership
his separate debts. agreement and if the expelled partner is
discharged from all partnership liabilities,
General Rule either by payment or agreement under the
Dissolution of a partnership does not itself second paragraph of article 1835, he shall
discharge the existing liability of any receive in cash only the net amount due him
partner. from the partnership.
Exception
A partner can be discharged from any When dissolution is caused in contravention
existing liability upon dissolution of the of the partnership agreement the rights of the
partnership provided that there is an partners shall be as follows:
agreement between the partnership creditor
and the person or partners continuing the 1. Each partner who has not caused
business. dissolution wrongfully shall have:
*Individual properties of the deceased
partner shall be liable to all obligations of a. All the rights specified in the first
the partnership made while he was a partner. paragraph of this article.
Art. 1836. Unless otherwise agreed, the b. The right, as against each partner
partners who have not wrongfully dissolved who has caused the dissolution
the partnership or the legal representative of wrongfully, to damages breach of
the last surviving partner, not insolvent, has the agreement.
the right to wind up the partnership affairs,
provided, however, that any partner, his 2. The partners who have not caused the
legal representative or his dissolution wrongfully, if they all
desire
to continue the business in the same
name either by themselves or jointly If the partnership was dissolved in
with others, may do so, during the contravention of the agreement
agreed term for the partnership and for 1. The remaining partners have the right to
that purpose may possess the partnership sell partnership property to pay the
property, provided they secure the partnership’s liabilities and the surplus
payment by bond approved by the court, is distributed to the remaining partners
or pay any partner who has caused the as well.
dissolution wrongfully, the value of his 2. As against the guilty partner for the
interest in the partnership at the dissolution of the partnership, the
dissolution, less any damages remaining partners have the right to
recoverable under the second paragraph, recover damages for breach.
No. 1 (b) of this article, and in like 3. The remaining partners may also
manner indemnify him against all continue the business up to end of the
present or future partnership liabilities. stipulated term of the partnership.
3. A partner who has caused the Art. 1838. Where a partnership contract is
dissolution wrongfully shall have: rescinded on the ground of the fraud or
misrepresentation of one of the parties
a. If the business is not continued thereto, the party entitled to rescind is,
under the provisions of the second without prejudice to any other right, entitled:
paragraph, No. 2, all the rights of a
partner under the first paragraph, 1. To a lien on, or right of retention of, the
subject to liability for damages in surplus of the partnership property after
the second paragraph, No. 1 (b), of satisfying the partnership liabilities to
this article. third persons for any sum of money
paid by him for the purchase of an
b. If the business is continued under interest in the partnership and for any
the second paragraph, No. 2, of this capital or advances contributed by him.
article, the right as against his co-
partners and all claiming through 2. To stand, after all liabilities to third
them in respect of their interests in persons have been satisfied, in the place
the partnership, to have the value of of the creditors of the partnership for
his interest in the partnership, less any payments made by him in respect of
any damage caused to his co- the partnership liabilities.
partners by the dissolution,
ascertained and paid to him in cash, 3. To be indemnified by the person guilty
or the payment secured by a bond of the fraud or making the representation
approved by the court, and to be against all debts and liabilities of the
released from all existing liabilities partnership.
of the partnership; but in
ascertaining the value of the Right of partner to rescind contract of
partner's interest the value of the partnership
good-will of the business shall not If one is induced by fraud or
be considered. misrepresentation to become a partner, the
contract is voidable. If the contract is
Rights of partners upon dissolution annulled, the injured party is entitled to
1. Dissolution is caused without violation restitution. Here, the fraud or
of the agreement. misrepresentation vitiates consent. However,
2. In contravention of the agreement. until the partnership contract is annulled by
a proper action in court, the partnership
If partnership is dissolved without relations exist and the defrauded
violation of the agreement partner is liable for all obligations to third
1. All partners may have the property sold persons.
for payment of partnership liabilities. 1. Right of injured partner where
2. If there is surplus, after paying the partnership contract rescinded
liabilities of the firm, it shall be given in
cash to the partners.
2. Right of retention of partnership 7. The individual property of a deceased
property partner shall be liable for the
3. Right to be subrogated in place of contributions specified in No. 4.
creditors of partnership
4. Right to be indemnified by the guilty 8. When partnership property and the
partner against all liabilities of the individual properties of the partners are
partnership. in possession of a court for distribution,
partnership creditors shall have priority
Art. 1839. In settling accounts between the on partnership property and separate
partners after dissolution, the following rules creditors on individual property, saving
shall be observed, subject to any agreement the rights of lien or secured creditors.
to the contrary:
9. Where a partner has become insolvent or
1. The assets of the partnership are: his estate is insolvent, the claims against
his separate property shall rank in the
a. The partnership property. following order:
1. When any new partner is admitted into When the business of a partnership after
an existing partnership, or when any dissolution is continued under any
partner retires and assigns (or the conditions set forth in this article the
representative of the deceased partner creditors of the dissolved partnership, as
assigns) his rights in partnership against the separate creditors of the retiring
property to two or more of the partners, or deceased partner or the representative of
or to one or more of the partners and the deceased partner, have a prior right to
one or more third persons, if the any claim of the retired partner or the
business is continued without representative of the deceased partner
liquidation of the partnership affairs. against the person or partnership continuing
the business, on account of the retired or
2. When all but one partner retire and deceased partner's interest in the dissolved
assign (or the representative of a partnership or on account of any
deceased partner assigns) their rights in consideration promised for such interest or
partnership property to the remaining for his right in partnership property.
partner, who continues the business
without liquidation of partnership Nothing in this article shall be held to
affairs, either alone or with others. modify any right of creditors to set aside any
assignment on the ground of fraud.
3. When any partner retires or dies and the
business of the dissolved partnership is The use by the person or partnership
continued as set forth in Nos. 1 and 2 of continuing the business of the partnership
this article, with the consent of the name, or the name of a deceased partner as
retired partners or the representative of part thereof, shall not of itself make the
the deceased partner, but without any individual property of the deceased partner
assignment of his right in partnership liable for any debts contracted by such
property. person or partnership.
Art. 1841. When any partner retires or dies, Right to demand an accounting of
and the business is continued under any of partnership affairs must be directed
the conditions set forth in the preceding against
article, or in article 1837, second paragraph, 1. Winding-up partners
No. 2, without any settlement of accounts as 2. Surviving partners
between him or his estate and the person or 3. The person the partnership continuing
partnership continuing the business, unless the business
otherwise agreed, he or his legal
representative as against such person or Art. 1843. A limited partnership is one
partnership may have the value of his formed by two or more persons under the
interest at the date of dissolution provisions of the following article, having as
ascertained, and shall receive as an ordinary members one or more general partners and
creditor an amount equal to the value of his one or more limited partners. The limited
interest in the dissolved partnership with partners as such shall not be bound by the
interest, or, at his option or at the option of obligations of the partnership.
his legal representative, in lieu of interest,
the profits attributable to the use of his right General partner Limited partner
in the property of the dissolved partnership; Personally liable for Liability extends
Provided, That the creditors of the dissolved partnership only to his capital
partnership as against the separate creditors, obligations contribution.
or the representative of the retired or
deceased partner, shall have priority on any Have equal right in No share in
claim arising under this article, as provided management of management of
partnership partnership.
article 1840, third paragraph.
May contribute May contribute
Rights of retiring of properties of money, property or money and property
deceased, partner when business industry
continued Proper party to Not proper party to
To have the value of the interest of the proceedings proceedings
retiring partner or deceased partner in the Interest cannot be Interest is assignable
partnership determined as of the date of assigned to make with assignee
dissolution. new partner acquiring all rights
of
To receive thereafter, as an ordinary the limited partner
creditor, an amount equal to the value of his His name may Name not included
share in the dissolved partnership with appear in the firm in firm name
interest, or, at his option, in place of interest, name
the profits attributable to the use of his right. Prohibited from No prohibition
engaging in a
General Rule business like
When partner retires from the partnership,
partnership’s
he is entitled to the payment of what may be
His retirement, His retirement,
due to him after liquidation.
insolvency and insolvency and
Exception
death dissolves the death does not
No liquidation needed when there is
partnership dissolve the
settlement as to what retiring partner shall
partnership
receive.
Art. 1844. Two or more persons desiring to m. The right, if given, of the remaining
form a limited partnership shall: general partner or partners to
continue the business on the death,
1. Sign and swear to a certificate, which retirement, civil interdiction,
shall state — insanity or insolvency of a general
partner.
a. The name of the partnership, adding
thereto the word "Limited". n. The right, if given, of a limited
partner to demand and receive
b. The character of the business. property other than cash in return
for his contribution.
c. The location of the principal place
of business. 2. File for record the certificate in the
Office of the Securities and Exchange
d. The name and place of residence of Commission.
each member, general and limited
partners being respectively A limited partnership is formed if there has
designated. been substantial compliance in good faith
with the foregoing requirements.
e. The term for which the partnership
is to exist. Qualifications of limited partnership
f. The amount of cash and a 1. The partners must sign and swear to a
description of and the agreed value certificate of limited partnership
of the other property contributed by 2. Must file for record the certificate in the
each limited partner. office of the Securities and Exchange
Commission
g. The additional contributions, if any,
to be made by each limited partner Art. 1845. The contributions of a limited
and the times at which or events on partner may be cash or property, but not
the happening of which they shall be services.
made.
Limited partners can only contribute money
h. The time, if agreed upon, when the and property and cannot contribute services
contribution of each limited partner to the partnership to protect persons dealing
is to be returned. with the firms with frauds.
i. The share of the profits or the other Art. 1846. The surname of a limited partner
compensation by way of income shall not appear in the partnership name
which each limited partner shall unless:
receive by reason of his
contribution. 1. It is also the surname of a general
partner.
j. The right, if given, of a limited
partner to substitute an assignee as 2. Prior to the time when the limited
contributor in his place, and the partner became such, the business has
terms and conditions of the been carried on under a name in which
substitution. his surname appeared.
k. The right, if given, of the partners to A limited partner whose surname appears in
admit additional limited partners. a partnership name contrary to the
provisions of the first paragraph is liable as
a general partner to partnership creditors A limited partner is excluded from any
who extend credit to the partnership without active voice in the control of the affairs of
actual knowledge that he is not a general the firm.
partner. Limited partner cannot perform acts of
administration
Limited partner’s surname is not Limited partners may not perform any act of
included in the firm name provided these administration with respect to the interests of
circumstances the partnership, not even in the capacity of
1. If the surname of general partner is the agents of the managing partners.
same with limited partner’s ART. 1849. After the formation of a limited
2. If the limited partner’s surname was partnership, additional limited partners may
included and was carried on the new be admitted upon filling an amendment to
partnership the original certificate in accordance with
*If the limited partner’s surname was the requirements of Article 1865.
included in the firm name, he is liable as a
general partner. The writing to amend a certificate
1. Shall conform to the requirements of
Art. 1847. If the certificate contains a false Article 1844 as far as necessary to set
statement, one who suffers loss by reliance forth clearly the change in the certificate
on such statement may hold liable any party which it is desired to make.
to the certificate who knew the statement to 2. Be signed and sworn to by all members,
be false: and an amendment substituting a limited
partner.
1. At the time he signed the certificate. ART. 1850. A general partner shall all have
the rights and powers and be subject to all
2. Subsequently, but within a sufficient the restrictions and liabilities of a partner in
time before the statement was relied a partnership without limited partners.
upon to enable him to cancel or amend However, without the written consent or
the certificate, or to file a petition for its ratification of the specific act by all the
cancellation or amendment as provided limited partners, a general partner or all of
in article 1865. the general partners have no authority to:
ART. 1857. A limited partner shall not Conditions of a limited partner entitled to
receive from a general partner or out of return of his contribution
partnership property any part of his 1. All liabilities of the partnership have
contributions until: been paid or there are assets sufficient to
pay partnership liabilities.
1. All liabilities of the partnership, except 2. The consent of all the partners is
liabilities to general partners and to obtained.
limited partners on account of their 3. The certificate is cancelled or so
contributions, have been paid or there amended as to set forth the withdrawal
remains property of the partnership or reduction of the contribution.
sufficient to pay them.
When limited partner may demand return
2. The consent of all members is had, 1. The partnership is dissolved
unless the return of the contribution may 2. The date specified for its return has
be rightfully demanded under the arrived
provisions of the second paragraph. 3. If no term is specified, after six months’
notice in writing to all other partners.
3. The certificate is cancelled or so
amended as to set forth the withdrawal Limited partner to receive cash
or reduction. It will be noted that the limited partner has a
right to demand and receive cash only in
Subject to the provisions of the first return for his contribution even when he
paragraph, a limited partner may rightfully contributed property.
demand the return of his contribution:
ART. 1858. A limited partner is liable to the
1. On the dissolution of a partnership. partnership:
2. When the date specified in the 1. For the difference between his
certificate for its return has arrived. contribution as actually made and that
stated in the certificate as having been
3. After he has given six months’ notice in made.
writing to all other members, if no time
is specified in the certificate, either for 2. For any unpaid contribution which he
agreed in the certificate to make in the
future at the time and on the return of his contribution, to which his
conditions stated in the certificate. assignor would otherwise be entitled.
A limited partner holds a trustee for the An assignee shall have the right to become a
partnership: substituted partner if all the members
1. Specific property stated in the certificate consent thereto or if the assignor, being
as contributed by him, but which was thereunto empowered by the certificate,
not contributed or which has been gives the assignee that right.
wrongfully returned.
An assignee becomes a substituted limited
2. Money or other property wrongfully partner when the certificate is appropriately
paid or conveyed to him on account of amended in accordance with Article 1865.
his contribution.
The substituted limited partner has all the
The liabilities of a limited partners as set rights and powers, and is subject to all the
forth in this article can be waived or restrictions and liabilities of his assignor,
compromised only by the consent of all except those liabilities of which he was
members; but a waiver or compromise shall ignorant at the time he became a limited
not affect the right of a creditor of a partner and which could not be ascertained
partnership who extended credit or whose for the certificate.
claim arose after the filling and before a
cancellation or amendment of the certificate, The substitution of the assignee as a limited
to enforce such liabilities. partner does not release the assignor from
liability to the partnership, under article
When a contributor has rightfully received 1847 and 1858.
the return in whole or in part of the capital
of his contribution, he is nevertheless liable Limited partner’s interest assignable
to the partnership for any sum, not in excess A limited partner’s interest in the
of such return with interest, necessary to
partnership is assignable. The assignee,
discharge its liabilities to all creditors who
extended credit or whose claims arose however, of a limited partner’s interest does
before such return. not necessarily become a substituted limited
partner.
Limited partner liable to partnership for
sum returned ART. 1860. The retirement, death,
A limited partner whose contribution has insolvency, insanity or civil interdiction of a
been rightfully returned is still liable to the general partner dissolves the partnership,
partnership for an amount not in excess of unless the business is continued by the
the sum returned plus interest as may be remaining general partners:
necessary to pay the claims of persons who
extended credit or whose claims arose 1. Under a right so to do stated in the
before the return. certificate.
ART. 1859. A limited partner’s interest is 2. With the consent of all members.
assignable.
It must be observed that the death, etc., of a
A substitute limited partner is a person general partner dissolves the partnership
admitted to all the rights of a limited partner while the death of a limited partner does not
who has died or has assigned his interest in a cause the dissolution of the firm, unless
partnership. there is only one limited partner.
An assignee, who does not become a ART. 1861. On the death of a limited
substituted limited partner, has no right to partner his executor or administrator shall
require any information or account of the have all the rights of a limited partner for the
partnership transactions or to inspect the purpose of settling his estate, and such
partnership books; he is only entitled to power as the deceased had to constitute his
receive the share of the profits or other assignee a substituted limited partner.
compensation by way of income, or the
contribution respectively, in proportion to
The estate of a deceased limited partner the respective amounts of such claims.
shall be liable for all his liabilities as a
limited partner. Art. 1864. The certificate shall be cancelled
when the partnership is dissolved or all
ART. 1862. On due application to a court of limited partners cease to be such.
competent jurisdiction by any creditor of a A certificate shall be amended when:
limited partner, the court may charge the
interest of the indebted limited partner with 1. There is a change in the name of the
payment of the unsatisfied amount of such partnership or in the amount or character
claim, and may appoint a receiver, and make of the contribution of any limited
all other orders, directions, and inquiries partner.
which the circumstances of the case may
require. 2. A person is substituted as a limited
partner.
The interest may be redeemed with the
separate property of any general partner, but 3. An additional limited partner is
may not be redeemed with partnership admitted.
property.
4. A person is admitted as a general
The remedies conferred by the first partner.
paragraph shall not be deemed exclusive of
others which may exist. 5. A general partner retires, dies, becomes
insolvent or insane, or is sentenced to
ART. 1863. In settling accounts after civil interdiction and the business is
dissolution the liabilities of the partnership continued under article 1860.
shall be entitled to payment in the following
order: 6. There is a change in the character of the
1. Those to creditors, in the order of business of the partnership.
priority as provided by law, except those
to limited partners on account of their 7. There is a false or erroneous statement
contributions, and to general partners. in the certificate.
3. Those to limited partners in respect to 9. A time is fixed for the dissolution of the
the capital of their contributions. partnership, or the return of a
contribution, no time having been
4. Those to general partners other than for specified in the certificate.
capital and profits.
10. The members desire to make a change in
5. Those to general partners in respect to any other statement in the certificate in
profits. order that it shall accurately represent
the agreement among them.
6. Those to general partners in respect to
capital. Art. 1865. The writing to amend a
certificate shall:
Subject to any statement in the certificate or
to subsequent agreement, limited partners 1. Conform to the requirements of article
share in the partnership assets in respect to 1844 as far as necessary to set forth
their claims for capital, and in respect to clearly the change in the certificate
their claims for profit or for compensation which it is desired to make.
by way of income on their
2. Be signed and sworn to by all members,
and an amendment substituting a
limited partner or adding a limited or Art. 1866. A contributor, unless he is a
general partner shall be signed also by general partner, is not a proper party to
the member to be substituted or added, proceedings by or against a partnership,
and when a limited partner is to be except where the object is to enforce a
substituted, the amendment shall also be limited partner's right against or liability to
signed by the assigning limited partner. the partnership.
The writing to cancel a certificate shall be Art. 1867. A limited partnership formed
signed by all members. under the law prior to the effectivity of this
Code, may become a limited partnership
A person desiring the cancellation or under this Chapter by complying with the
amendment of a certificate, if any person provisions of article 1844, provided the
designated in the first and second paragraphs certificate sets forth:
as a person who must execute the writing
refuses to do so, may petition the court to 1. The amount of the original contribution
order a cancellation or amendment thereof. of each limited partner, and the time
when the contribution was made.
If the court finds that the petitioner has a
right to have the writing executed by a 2. That the property of the partnership
person who refuses to do so, it shall order exceeds the amount sufficient to
the Office of the Securities and Exchange discharge its liabilities to persons not
Commission where the certificate is claiming as general or limited partners
recorded, to record the cancellation or by an amount greater than the sum of the
amendment of the certificate; and when the contributions of its limited partners.
certificate is to be amended, the court shall A limited partnership formed under the law
also cause to be filed for record in said prior to the effectivity of this Code, until or
office a certified copy of its decree setting unless it becomes a limited partnership
forth the amendment. under this Chapter, shall continue to be
governed by the provisions of the old law.
A certificate is amended or cancelled when
there is filed for record in the Office of the CORPORATIONS
Securities and Exchange Commission, TITLE I - GENERAL
where the certificate is recorded: PROVISIONS DEFINITIONS
AND CLASSIFICATIONS
1. A writing in accordance with the
provisions of the first or second Sec. 1. Title of the Code. – This Code shall
paragraph. be known as “The Corporation Coder of the
Philippines”.
2. A certified copy of the order of the court
in accordance with the provisions of the Sec. 2. Corporation defined. - A corporation
fourth paragraph. is an artificial being created by operation of
law having the right of succession and the
3. After the certificate is duly amended in powers, attributes and properties expressly
accordance with this article, the authorized by law or incident to its
amended certified shall thereafter be for existence.
all purposes the certificate provided for
in this Chapter. Definition
A corporation is an artificial being created
A certificate is considered cancelled by operation of law having the right of
or amended when there is filed for succession and the powers, attributes and
record properties expressly authorized by law or
1. A writing to amend the certificate; or incident to its existence.
2. A certified copy of the order of the court
in the event of an unjustified refusal of a Attributes
partner to sign the writing. 1. It is an artificial being.
2. It is created by operation of law.
3. It has the right of succession.
4. It has only the powers, attributes and partnership.
properties expressly authorized by law Right of No right of Possesses
or incident to its existence. Succession succession right of
succession
Similarities between a partnership and a Extent of Partners Stockholders
corporation Liability to (except are liable only
1. Juridical personality separate and Third Persons limited to the extent of
distinct from the individuals composing partners) are their
it. liable investments
2. Act only through its agents. personally as represented
and by the shares
3. Composed of an aggregate of
subsidiarily subscribed by
individuals. for them.
4. Distribute profits to those who partnership
contribute to capital. debts to
5. May be organized only when there is a third
law authorizing it. persons.
6. Subject to income tax.
Transferability A partner A stockholder
of interest cannot has the right to
Distinctions between a partnership and a transfer transfer his
corporation interestso as shares without
to make a the
Point of partner prior consent
Partnership Corporation
Comparison without the of the other
Manner of By mere By law or consent of stockholders.
Creation agreement operation of all other
of the law existing
parties partners.
Number of By a Requires at Term of May be May not be
Parties minimum of least five (5) existence established formed for a
two (2) incorporators for any term in excess
persons
period of of 50 years
Commence- Generally From the date time extendible to
ment of from the of the stipulated by not more than
Juridical moment of issuance of the 50 years.
Personality execution of the certificate partners.
the contract of
incorporation Firm name A limited A corporation
of the partnership may adopt a
Securities and is required firm name
Exchange to add the provided it is
Commission word ‘Ltd. not identical
(SEC) ’ to its name. or deceptively
similar to any
Powers May Can exercise registered firm
exercise only the name or
powers powers contrary to
authorized expressly existing laws.
by partners granted by
provided the law or Dissolution May be May only be
same are incident to its dissolved at dissolved with
not contrary existence. any time by the consent of
to law, the will of the state.
morals, good any or all
customs, partners.
public policy Governing Civil Code Corporation
or public Laws Code
order.
Advantages of a corporate form of
business organizations
Management When it is It is vested in
1. The capacity to hold property, to
not agreed the board of
upon, each directors or contract, to sue and be sued as a legal
partner is an trustees. unit or distinct entity.
agent of the 2. Exemption of shareholders from
individual liability.
3. Continuity of existence in spite of death 2. Quasi-public – are entities engaged in
or changes of members. rendering basic services of such public
4. Transferability of shares. importance as to entitle them to certain
5. Centralized management under a board privileges like eminent domain or use of
of directors. public property. Eg. Electric, gas, water
6. Standardized methods of organization, and telephone companies.
management and finance for the 3. Government-owned or controlled – are
protection of shareholders and creditors entities organized by the government or
under statutory regulations. corporations of which the government is
a majority stockholder. Eg. Philippine
Disadvantages of a corporate form of Air Lines
business organizations 4. Domestic – one incorporated under
1. The limited liability of the stockholders Philippine laws.
serves to limit the credit available to the 5. Foreign – one formed, organized, or
corporation. existing under any laws other than those
2. The transferability of shares permits the of the Philippines.
uniting of incompatible and conflicting 6. Corporation aggregate – one composed
interests in one enterprise. of more than one member or corporator.
3. The minority stockholders are usually 7. Corporation sole – consists of one
subservient to the wishes of the member or corporator and his
majority. successors.
4. In big corporations, the stockholders’ 8. Religious corporations, sole or
voting rights have become largely aggregate – organized, either as sole or
theoretical because of widespread aggregate, to administer properties of
ownership, lukewarmness and the church.
disinterest in management, inertia, and 9. Ecclesiastical – organized for religious
inaccessible meeting places. purposes.
5. In large corporations, management and 10. Lay – organized for a purpose other than
control has been separated from religious
ownership. 11. Eleemosynary – organized for charitable
6. By and large corporations are subject to purposes.
governmental restrictions, controls, and 12. Civil – are those than ecclesiastical and
report requirements not imposed on eleemosynary, whether public or private.
other forms of business organizations. 13. Close – one wherein all the outstanding
7. Corporate sphere of activity is limited in stock is owned by the persons who are
the transaction of its business to the state active in management and conduct of
of the organization. the business.
8. The corporate form involves “double 14. Open – one in which all the members or
taxation” on corporation income. corporations have a vote in the election
of the directors and other officers.
Sec. 3. Classes of corporations. – 15. Multi-national – one having been
Corporations formed or organized under this created or organized in one state
Code may be stock or non-stock conducts business or activities across
corporations. Corporations which have national boundaries and but subject to
capital stock divided into shares and are the legal sanctions of the countries in
authorized to distribute to the holders of which they operate.
such shares dividends or allotments of the 16. Non-profit – organized without
surplus profits on the basis of shares held are contemplation of gains, profits or
stock corporations. All other corporations dividends to their members on invested
are non-stock corporations. capital.
17. De Jure – one created in strict or
Other kinds of corporations substantial conformity with the statutory
1. Quasi-corporations – from the word requirements for incorporation and
“quasi”, meaning “as if”, are entities whose right to exist as a corporation
that are not absolutely corporations but cannot be successfully
are considered as if they were. Eg.
Public boards created by law
attacked even in a direct proceeding for 2. The formulation of business and
that purpose by the State. financial plans.
3. Assembling the enterprise by
Sec. 4. Corporations created by special negotiations and obtaining some control
laws or charters. – Corporations created by over the subject matter by option or
special laws or charters shall be governed contracts made on behalf of the
primarily by the provisions of the special proposed corporation or on his own
law or charter creating them or applicable to credit.
them, supplemented by the provisions of this 4. The making of arrangements for
Code, insofar as they are applicable. financing the enterprise and the
floatation of securities.
Sec. 5. Corporators and incorporators, 5. Arrange tactful and painless methods for
stockholders, and members. – Corporators getting his own reward for the task of
are those who compose a corporation, promotion out of the prospective
whether as stockholders or members. investors and for reimbursement for his
Incorporators are those stockholders or expenses, contracts, and services
members mentioned in the articles of without frightening away those who are
incorporation as originally forming and expected to provide the funds.
composing the corporation and who are
signatories thereof. General rule: A corporation is not bound by
any agreement made by a promoter.
Corporators in a stock corporation are called Exception to the rule: Unless and until the
stock-holders or shareholders. Corporators corporation approves the agreement.
in a non-stock corporation are called
members. Sec. 6. Classification of shares. – The
shares of stock of stock corporations may be
Components of a Corporation divided into classes or series of shares, or
1. Corporators – are those who composed a both, any of which classes or series of shares
corporation, whether as stockholders of may have such rights, privileges or
members. The term includes restrictions as may be stated in the articles of
incorporators, stockholders or members. incorporation: Provided, That no share may
2. Incorporators – are those stockholders or be deprived of voting rights except those
members mentioned in the articles of classified and issued as “preferred” or
incorporation as originally forming and “redeemable” shares, unless otherwise
composing the corporation and who are provided in this Code: Provided, further,
signatories thereof. That there shall always be a class or series of
3. Stockholders or shareholders – are those shares which have complete voting rights.
corporators in a stock corporation. Any or all of the shares or series of shares
4. Members – are those corporators in a may have a par value or have no par value as
non-stock corporation. may be provided for in the articles of
5. Promoters – is a self-constituted incorporation: Provided, however, That
organizer who finds an enterprise or banks, trust companies, insurance
venture and helps to attract investors, companies, public utilities, and building and
form a corporation and launch it in loan associations shall not be permitted to
business, all with a view to promotion issue no-par value shares of stock.
profits.
Preferred shares of stock issued by any
Promotion – is the act of procuring the corporation may be given preference in the
initial finances and the making of all distribution of the assets of the corporation
preparations necessary to launch a in case of liquidation and in the distribution
corporation. of dividends, or such other preferences as
may be stated in the articles of incorporation
Activities of a promoter which are not violative of the provisions of
1. The discovery and investigation of a this Code: Provided, That preferred shares
promising business opportunity. of stock may be issued only with a stated par
value. The board of directors, where
authorized in the articles of incorporation,
may fix the terms and
conditions of preferred shares of stock or 8. Dissolution of the corporation.
any series thereof: Provided, That such
terms and conditions shall be effective upon Except as provided in the immediately
the filing of a certificate thereof with the preceding paragraph, the vote necessary to
Securities and Exchange Commission. approve a particular corporate act as
provided in this Code shall be deemed to
Shares of capital stock issued without par refer only to stocks with voting rights.
value shall be deemed fully paid and non-
assessable and the holder of such shares Definition
shall not be liable to the corporation or to its A “stock” or share of stock is one of the
creditors in respect thereto: Provided; That units into which the capital stock has been
shares without par value may not be issued divided. It represents the interest or right
for a consideration less than the value of five that the holder of the stock or stockholder
(P5.00) pesos per share: Provided, further, has in the corporation.
That the entire consideration received by the
corporation for its no-par value shares shall A stock certificate certifies that one is a
be treated as capital and shall not be holder or owner of a certain number of
available for distribution as dividends. shares of stock in the corporation. It is a
mere documentary evidence of the holder’s
A corporation may, furthermore, classify its ownership of shares and a convenient
shares for the purpose of insuring instrument for the transfer of title.
compliance with constitutional or legal
requirements. Classes or series of shares of stock subject
to restrictions
Except as otherwise provided in the articles 1. Shares shall not be deprived of voting
of incorporation and stated in the certificate rights except preferred or redeemable
of stock, each share shall be equal in all shares but non-voting shares must still
respects to every other share. be entitles to vote on matters specified
Where the articles of incorporation provide in the last paragraph of Section 6 like
for non-voting shares in the cases allowed matters relating to amendment of the
by this Code, the holders of such shares articles of incorporation and dissolution
shall nevertheless be entitled to vote on the of the corporation.
following matters: 2. Where non-voting shares are provided
for there must always be a class or series
1. Amendment of the articles of of shares with complete voting rights.
incorporation. 3. Banks, trust companies, insurance
companies, public utilities, and building
2. Adoption and amendment of by-laws. and loan associations shall not be
permitted to issue no-par value shares of
3. Sale, lease, exchange, mortgage, pledge stock.
or other disposition of all or 4. Preferred shares of stock which may be
substantially all of the corporate given preference in the distribution of
property. assets in case of liquidation and
distribution of dividends or other
4. Incurring, creating or increasing bonded preferences may be issued only with
indebtedness. stated par value.
5. The terms and conditions of preferred
5. Increase or decrease of capital stock. shares or series thereof may be fixed by
the board of directors only when
6. Merger or consolidation of the authorized by the articles of
corporation with another corporation or incorporation the effectivity thereof shall
other corporations. be reckoned from the filing of certificate
with the SEC.
7. Investment of corporate funds in another 6. Shares without par value may not be
corporation or business in accordance issued for a consideration less than the
with this Code. value of five (P5.00) pesos per share.
7. Unless otherwise provided by law the 4. Incurring, creating or increasing bonded
rights, privileges or restrictions on indebtedness;
classes or series of shares must be stated 5. Increase or decrease of capital stock;
in the articles of incorporation and in the 6. Merger or consolidation of the
stock certificates. corporation with another corporation or
other corporations;
Classes or series of shares 7. Investment of corporate funds in another
1. Voting and Non-Voting Shares; corporation of business in accordance
General rule: Every member of a non- with the Corporation Code; and
stock corporation and every legal owner 8. Dissolution of the corporation.
of shares in a stock corporation, has a
right to be present and vote at all Sec. 7. Founders’ shares. – Founders'
corporate meetings. shares classified as such in the articles of
Exception to the rule: Unless there is a incorporation may be given certain rights
stipulation in contrary. and privileges not enjoyed by the owners of
2. Par Value and No-Par Value Shares other stocks, provided that where the
Par value is the given fixed or definite exclusive right to vote and be voted for in
value of a share in the articles of the election of directors is granted, it must
incorporation. be for a limited period not to exceed five (5)
3. Common and Preferred Shares. years subject to the approval of the
Preferred shares of stock may be: (a) Securities and Exchange Commission. The
preferred as to assets; (b) preferred as to five-year period shall commence from the
dividends. Preferred as to dividends may date of the aforesaid approval by the
either be cumulative or non- cumulative, Securities and Exchange Commission.
or participating or non- participating
4. Promotion Shares – are such stocks Definition
issued to those who may originally own Founders’ shares, generally common stock,
the mining ground or valuable rights are given to the founders or promoters of a
connected therewith, in consideration of corporation in payment of money expended
their deeding the same to the mining or services rendered in the promotion of it.
company when the company is
incorporated, or it may mean such stock Sec. 8. Redeemable shares. – Redeemable
as is issued to promoters. shares may be issued by the corporation
5. Shares of Escrow – are shares subject to when expressly so provided in the articles
an escrow agreement, that is, an of incorporation. They may be purchased or
agreement under which the shares are taken up by the corporation upon the
deposited by the grantor or his agent expiration of a fixed period, regardless of
with a third person, to be delivered by the existence of unrestricted retained
the depositary to the vendee or earnings in the books of the corporation, and
subscriber only upon the happening of upon such other terms and conditions as may
certain conditions. be stated in the articles of incorporation,
6. Founder’s Shares; which terms and conditions must also be
7. Redeemable “Callable” Shares; stated in the certificate of stock representing
8. Treasury Shares; said shares.
9. Other shares classified to comply with
constitutional or legal requirements. Definition
Redeemable (“Callable”) shares of stock
Instances when non-voting shares may which are usually preferred are frequently
vote issued subject to redemption at the option of
1. Amendment of the articles of either the corporation, the stockholder, or
incorporation; both, at a definite price representing
2. Adoption and amendment of by-laws; premium above the amount originally paid.
3. Sale, lease, exchange, mortgage, pledge
or other disposition of all or Sinking fund refers to a fund set-up by the
substantially all of the corporate corporation where cash is gradually set aside
property; in order to accumulate the amount necessary
to meet the redemption price of
redeemable shares of specified dates in the extension as may be determined by the
future. Securities and Exchange Commission.
Sec. 9. Treasury shares. - Treasury shares Sec. 12. Minimum capital stock required of
are shares of stock which have been issued stock corporations. – Stock corporations
and fully paid for, but subsequently incorporated under this Code shall not be
reacquired by the issuing corporation by required to have any minimum authorized
purchase, redemption, donation or through capital stock except as otherwise
some other lawful means. Such shares may specifically provided for by special law, and
again be disposed of for a reasonable price subject to the provisions of the following
fixed by the board of directors. (n) section.
Estoppel – It is preclusion, which prevent a Sec. 23. The board of directors or trustees.
man from denying a fact in consequences of – Unless otherwise provided in this Code,
his own previous act, allegations, or denial the corporate powers of all corporation
formed under this Code shall be exercised ,
all business conducted and all property of 3. Domestic air carrier, the directing head
such corporations controlled and held by the or 2/3 of the board of directors and other
board of directors or trustees to be elected managing officers shall be citizens of
from among the holders of stock, or where the Philippines.
there is no stock, from among the members 4. Registered investments companies, the
of the corporation, who shall hold office for directors thereof must be Filipino
one (1) year and until their successors are citizen.
elected and qualified. 5. Private development banks, all the
members of the board of directors shall
Every director must own at least one (1) be citizen of the Philippines.
share of the capital stock of the corporation 6. In case of financing corporation, at least
of which he is a director, which share shall 2/3 of all members of the board of
stand in his name on the books of the directors shall be citizen of the
corporation. Any director who ceases to be Philippines.
the owner of at least one (1) share of the
capital stock of the corporation of which he Sec. 24. Election of directors or trustees. –
is the director shall thereby cease to be a At all elections of directors or trustees, there
director. Trustees of non-stock corporations must be present, either in person or by
must be members thereof. A majority of the representative authorized to act by written
directors or trustees of all corporations proxy, the owners of the majority of the
organized under this Code must be residents outstanding capital stock, or if there be no
of the Philippines. capital stock, a majority of the members
entitled to vote. The election must be by
Qualifications of directors ballot if requested by any voting stockholder
1. He must own at least one (1) share of or member. In stock corporations, every
the capital stock of the corporation in his stockholder entitled to vote shall have the
name. right to vote in person or by proxy the
2. Majority of the directors must be a number of shares of stock standing, at the
resident citizen of the Philippines. time fixed in the by-laws, in his own name
3. A director must not have been convicted on the stock books of the corporation, or
by final judgement of an offense where the by-laws are silent, at the time of
punishable by imprisonment exceeding the election; and said shareholder may vote
six (6) years or a violation of the such number of shares for as many persons
provisions of the Corporation Code as there are directors to be elected or he may
committed within five (5) years prior to cumulate said shares and give one candidate
the date of election or appointment. as many votes as the number of directors to
be elected multiplied by the number of his
The directors, once elected, become the shares shall equal, or he may distribute them
representatives of the corporation itself, not on the same principle among as many
its stockholders. The directors of a non- candidate as he shall see fit; Provided, That
stock corporation are required to be the total number of votes cast by him shall
members thereof and like stock corporations not exceed the numbers of shares owned by
“majority of the directors and trustees of all him as shown in the books of the
corporations organized under the corporation multiplied by the whole number
Corporation Code must be residents citizen of directors to be elected: Provided,
of the Philippines”. There are some special however, that no delinquent stocks shall be
corporation not organized with the voted. Unless otherwise provided in the
Corporation Code where directors are articles of incorporation, or in the by- laws,
required to be citizens of the Philippines. members of corporation which have no
They are as follows: capital stock may cast as many votes as
1. Bank and banking institution, at least there are trustees to be elected but may not
2/3 of the members of the board of cast more than one vote for one candidate.
directors shall be citizen of the Candidates receiving the highest number of
Philippines. votes shall be declared elected. Any meeting
2. Rural banks, every member of the board of the stockholders or members called for an
of directors shall be citizens of the election may adjourn from day to day or
Philippines. from time to
time but not sine die or definitely if, for any Sec. 25. Corporate officers, quorum. –
reason, no election is held, or if there are not Immediately after their election, the
present or represented by proxy, at the directors of a corporation must formally
meeting, the owners of the majority of the organized by the election of a president, who
outstanding capital stock, or if there be no shall be a director, a treasurer who may or
capital stock, a majority of the members may not be a director, a secretary who shall
entitled to vote. be a resident citizen of the Philippines, and
such other officers as may be provided for in
Methods of voting the by-laws. Any two (2) or more positions
The voting methods which may be resorted may be held concurrently by the same
to by a voting stockholder are as follows: person, except that no one shall act as
1. Straight voting. president and secretary or as president and
2. Cumulative voting for one candidate. treasurer at the same time.
3. Cumulative voting by distribution.
The directors or trustees and officers to be
Example of Straight Voting elected shall perform the duties enjoined on
A owns 100 shares of stock in X them by law and by the by-laws of the
corporation. During the meeting for the corporation. Unless the articles of
purpose of electing five directors, he may incorporation or the by-laws provide form a
cast his vote by giving each of the five greater majority, a majority of the number of
candidates 100 votes, hence, he distribute directors or trustees as fixed in the articles of
equally his vote without preference or incorporation shall constitute a quorum for
discrimination. the transaction of corporate business, and
every decision of at least a majority of the
Example of Cumulative voting for one directors or trustees present at a meeting at
candidate which there is a quorum shall be valid as a
In the preceding illustration, if A owns 100 corporate act , except for the election of the
voting shares and there are five directors to officers which shall require the vote of a
be elected, A is entitled to 500 votes which majority of all the members of the board.
he may “cumulate” by giving it to candidate Qualification of corporate officer
Z alone. 1. President. He must be a director.
Example of Cumulative voting by 2. Treasurer. He may or may not be a
distribution director.
As in the same example above, if A 3. Secretary. He must be a resident and
owns citizen of the Philippines
100 voting shares, and there are five 4. Other officers provided for in the by-
directors to be elected, A is entitled to 500 laws.
votes which he may distribute to candidate
Y and Z giving the former 300 and the latter Three levels of corporate control
200 provided that the total number of votes 1. The board of director which is
cast by him does not exceed 500 votes. responsible for the corporate policies
and the general management of the
Voting of sequestered shares of stock business affairs of the corporation.
It has been held that the “Presidential 2. The officers, who in theory execute the
Commission on Good Government may policies lay down by the board , but in
properly exercise the prerogative to vote practice often have wide latitude in
sequestered stock of corporation, granted to determining the course of business
it by the President of the Philippines xxx operations.
pending the outcome of proceeding to 3. Stockholders who like amendments of
determine the ownership of sequestered the articles of incorporation.
shares of stock. xxx Substitution of
directors is not be done without reason or Teleconferencing of Board Members
rhyme, and undertaken only when essential In the Philippines, teleconferencing and
to prevent disappearance or wastage of videoconferencing of members of board of
corporate property, and always under such directors of private corporation is a reality,
circumstance as assure that replacements are in light of the Republic Act No. 8792.The
truly processed of competence, experience Securities and Exchange Commission issued
and probity.
SEC Memorandum Circular No. 15, on has authority to act in his stead, and to
November 30, 2001, providing the perform the duties of the office.
guidelines to be complied with related to
such conferences. Thus, the court agrees Secretary
with the RTC that persons in the Philippines A secretary must be a resident citizen of the
may have a teleconference with a group of Philippines. It is generally its duty to make
persons in South Korea relating to business and keep corporate records; to make proper
transactions or corporate governance. entries of the votes, resolution and
proceedings of the shareholders and
Directors and officers distinguished directors in the management of the
The officers of a corporation, unlike the corporation, and of all other matters required
directors, are true agent of the corporation. to be entered in the records. The secretary is
Each officer may bind the corporation by his the ministerial officer who cannot bind the
individual acts within the actual or apparent corporation unless he is authorized to do so.
scope of authority. On the other hand, a
director has no authority to act for the Treasurer
corporation. The treasurer of the corporation “may or
may not be a director”. He is the proper
Authority of corporate officers officer and the only proper officer in the
The corporation transact its business through absence of express provision to the contrary,
its officers or agents. An officer’s power as to receive and keep the money of the
an agent of the corporation must be sought corporation and to disburse them as he may
from the statute, charter, and the by-laws or be authorized.
in a delegation of authority to such officers,
from the acts of board of directors, formally Other officers
expressed or implied from a habit or custom The by-laws of the corporation may
of doing business. provide for such other officers and agent as
may be necessary and convenient
Chairman of the Board considering the nature and needs of the
A chairman of the board of directors must business. Their compensation is provided for
himself director be a director of the by the by-laws and the board of directors in
corporation. His duty as presiding officer is a suitable manner.
not an executive one. It has been suggested
that he well be given advisory duties in Quorum – signifies the number of persons
determining executive salaries, bonus plans belonging to a corporation required to
and pensions, determining dividend policy, transact business.
selecting auditors, and dealing questions
with labor and company policy. Section 25 of the Corporation Code requires
more people than a simple majority to form
President a quorum. If no such defining number is
The president must be a director of the determined, a quorum is a simple majority.
corporation. The powers of the president of
a corporation are vested in him by law or the Directors cannot vote by proxy
by-laws; otherwise, he has no power over The directors cannot vote by proxy but must
the corporate property and business than has personally present, and act by themselves.
any other director. However, he may be
given actual authority to make particular Sec. 26. Report of election of directors,
contracts, or to execute conveyances, trustees and officers. – Within thirty (30)
borrow money, execute mortgages, and do days after the election of the officers,
other acts, by the charter, the by-laws, trustees and directors of the corporation, the
resolutions of directors or their informal secretary, or any other officer of the
acquiescence. corporation shall submit to the Securities
and Exchange Commission, the names,
Vice- President nationalities and residences of the directors,
In the absence of the president, or if the trustees and officers elected.
office of the president becomes vacant, as a
rule, the vice president elected and
appointed by the shareholders or directors
Should a director, trustee or officer die, for the purpose, and in either case, after
resign or in any manner cease to hold office, previous notice to stockholders or members
his heirs in case of his death, the secretary or of the corporation of the intention to propose
any other officer of the corporation, or the such removal at the meeting. A special
director, trustee or officer himself, shall meeting of the stockholders or members of
immediately report such fact to the the corporation for the purpose of removal
Securities and Exchange Commission. of directors or trustees, or any of them, must
be called by the secretary on order of the
Sec. 27. Disqualification of directors, president or on the written demand of the
trustees or officers. – No person convicted stockholders representing or holding at least
by final judgement of an offense punishable a majority of the outstanding capital stock,
by imprisonment for a period exceeding six or, if it be a non-stock corporation, on the
(6) years, or a violation of this Code, written demand of a majority of the
committed within five (5) years prior to the members entitled to vote. Should the
date of his election or appointment, shall secretary failed to refuse to call the special
qualify as a director, trustee or officer of any meeting upon such demand, or fail or refuse
corporation. to give the notice, or if there is no secretary,
the call for the meeting may be addressed
Sec. 27 of the Corporation Code is an directly to the stockholders or members of
additional safeguard that only upright and any by any stockholder or member of the
honest individuals be entrusted with corporation signing the demand. Notice of
management of the corporate affairs. the time and place of such meeting, as well
as the intention to propose such removal,
A director of a cooperative who is must be given by publication or by written
subsequently elected as member of the notice as prescribed in this Code. The
Sangguniang Panglungsod (City Council) vacancy resulting from removal pursuant to
becomes automatically disqualified from this section may be filled by election at the
continuing as such director by virtue of the same meeting without further notice, or at
clear mandate of PD No. 269 providing that any regular or at any special meeting called
except for “barrio captains and councillors” for the purpose after giving notice as
elective officials are ineligible to become prescribed in this Code. Removal may be
officers and/or directors of any cooperative. with or without cause: Provided, That
removal without cause may not be used to
The SEC ruled that firms engage in wholly deprived minority stockholders or members
or partially nationalized activities, aliens are of the right of representation to which they
banned from being appointed to may be entitled under Section 24 of this
management position such as president, Code.
vice-president, treasurer, auditor, secretary,
etc. of said companies. However, they can Directors or trustee may be removed even
be elected directors in preparation to their without cause
allowable participation or share in the The legislative policy is that the
capital of such activities, in accordance with shareholders shall be the ultimate masters,
the Commonwealth Act No. 108, as not the directors. The shareholders should be
amended by PD 715, otherwise known as clothed with the power of judging the
the Anti- Dummy Law. competency and fitness of the directors and
of choosing a board that will carry out of
Sec. 28. Removal of director or trustees. – their business policy.
Any director or trustee of the corporation
may be removed from office by a vote of the Directors representing minority may not be
stockholders holding or representing at least removed without cause. The power to
two- thirds (2/3) of the outstanding capital removed director or trustee even without
stock, or if the corporation be a non- stock cause given to shareholders or members may
corporation , by a vote of at least two- thirds not be used to deprived minority
(2/3) of the members entitled to vote: shareholders or members of the right of
Provided, That such removal shall take representation to which they may be entitled
place either at a regular meeting of the under Section 24 of the Corporation Code.
corporation or at the special meeting called Cumulative voting of
directors in a stock corporation is mandatory majority of the outstanding capital stock at a
and cannot be dispensed with in the by-laws. regular or special stockholders’ meeting. In
Being a statutory right, the stockholders no case shall the total yearly compensation
cannot be deprived of the use of cumulative of directors, as such directors, exceed ten
voting. percent (10%) of the net income before
income tax of the corporation during the
May the result of the duly held election of preceding year.
directors be altered by mere agreement of
the directors? Sec. 31. Liability of directors, trustees or
The Securities and Exchange Commission officers. – Directors or trustees who
ruled that: “An agreement by which director willfully and knowingly vote for or assent to
is reposed in any body except majority of patently unlawful acts of the corporation or
stockholders is in violation of ‘public who are guilty of gross negligence or bad
policy’ and ‘enforceable’ ”. faith in directing the affairs of the
corporation or acquire any personal or
The Securities and Exchange Commission pecuniary interest in conflict with their duty
has jurisdiction or authority to “hear and as such directors, or trustees shall be liable
decide cases” involving controversies in the jointly and severally for all damages
election or appointments of directors, resulting therefrom suffered by the
trustees, officers or managers of such corporation, its stockholders or members
corporations, partnerships or associations. and other persons.
Controversy concerning removal of directors
or trustees may also be heard by the SEC. When a director, trustee or officer attempts
to acquire or acquires, in violation of his
Sec. 29. Vacancies in the office of director duty, any interest adverse to the corporation
or trustee. – Any vacancy occurring in the in respect of any matter which has been
board of directors or trustees other than by reposed in him in confidence, as to which
removal by the stockholders or members or equity imposes a disability upon him to deal
by expiration of term, may be filled by the in his own behalf, he shall be liable as a
vote of at least a majority of the remaining trustee for the corporation and must account
directors or trustees, if still constituting a for the profits which otherwise would have
quorum; otherwise, said vacancies must be accrued to the corporation.
filled by the stockholders in a regular or
special meeting called for that purpose. A Directors are trustees
director or trustee so elected to fill the It is well-stated rule in corporate law that
vacancy shall be elected only for the directors of corporations are trustees and are
unexpired term of his predecessor in office. required to act in the utmost good faith.
Any directorship or trusteeship to be filled Liability of corporate directors and
by reason of an increase in the number of officers for illegal dismissal of employees
directors or trustees shall be filled only by In cases of illegal dismissal, corporate
an election at a regular or at a special directors and officers are solidarily liable
meeting of stockholders or members duly with the corporation, where terminations of
called for the purpose, or in the same employment are done with malice or in bad
meeting authorizing the increase of directors faith. (Acesite Corp. vs. NLRC, G.R. No.
or trustees if so stated in the notice of the 152308, January 26, 2005, 449 SCRA 360)
meeting.
Sec. 32. Dealings of directors, trustees or
Sec. 30. Compensation of directors. – In the officers with the corporation. – A contract
absence of any provision in the by-laws of the corporation with one or more of its
fixing their compensation, the directors shall directors or trustees or officers is
not receive any compensation, as such voidable, at the option of such
directors, except for reasonable per diems: corporation, unless all the conditions are
Provided, however, That any such present:
compensation (other than pier diems) may
be granted to directors by the vote of the 1. That the presence of such director or
stockholders representing at least a trustee in the board meeting in which
the contract was approved was not
necessary to constitute a quorum for with such officers or agents. (Yao Ka Sin
such meeting. Trading vs. Court of Appeals, G.R. No.
53820, June 15, 1992, citing Francisco vs.
2. That the vote of such director or GSIS, 7 SCRA 577)
trustee was not necessary for the
approval of the contract. Corporate president presumed to have
authority
3. That the contract is fair and As a strict rule, the corporate president has
reasonable under the circumstances. no inherent power to act for the corporation,
slowly giving way to realization that such
4. That in the case of an officer, the officer has certain limited powers in the
contract with the officer has been transaction of the usual and ordinary
previously authorized by the Board of business of the corporation. In the absence
Directors. of agreement or by law provision to the
contrary, the president is presumed to have
Where any of the first two conditions set the authority to act within the domain of the
forth in the preceding paragraph is general of his or her usual duties. (People’s
absent, in the case of a contract with a Aircargo, and Warehousing Co., Inc. vs.
director or trustee, such contract may be Court of Appeals, G.R. No. 117847, Oct. 7,
ratified by the vote of the stockholders 1998)
representing at least two-thirds (2/3) of
the outstanding capital stock or of two- Sec. 33. Contracts between corporations
thirds (2/3) of the members in a meeting with interlocking directors. – Except in
called for the purpose: Provided, That full cases of fraud, and provided the contract is
disclosure of the adverse interest of the fair and reasonable under the circumstances,
directors or trustees involved is made at a contract between two or more corporations
such meeting: Provided, however, That the having interlocking directors shall not be
contract is fair and reasonable under the invalidated on that ground alone; Provided,
circumstances. That if the interest of the interlocking
director in one corporation or corporations is
Director disqualified to vote if he has merely nominal, he shall be subject to the
personal interest provisions of the preceding section insofar
A director is disqualified to vote at a as the latter corporation or corporations are
meeting of the board if he has any personal concerned.
interest in a matter before the board; in such Stockholdings exceeding twenty
case, his vote cannot be counted in making percent (20%) of the outstanding capital
up a quorum. stock shall be considered substantial for
purposes of interlocking directors.
Disclosure of adverse interest by director
It has been held that in dealing with their Interlocking directors – Interlocking
corporation the directors must make full directors are persons who serve as member
disclosure of all relevant facts or the of the board of directors of two or more
transaction is voidable. The failure of a competing corporations or corporations
director to inform his fellow directors of his engaged in practically the same kind of
adverse bargaining position and other business.
material circumstances should be seriously
considered and inspected by the courts as Effect of Corporate contracts with
manner on the fairness and good faith of the interlocking directors
transaction and whether it is just and Interlocking directors of corporations does
reasonable as to the corporation. not make a contract between or among the
corporations void and of no effect provided
Exceptions in Signing contract without there in no fraud and reasonable under the
authority of Board of Directors is void circumstances.
If a private corporation intentionally or
negligently clothed its officers or agents Sec. 34. Disloyalty of a director. – Where a
with apparent power to perform acts of it, director, by virtue of his office, acquires for
the corporation will be estopped to deny that himself a business opportunity which
such apparent authority is real, as to
innocent third persons dealing in good faith
should belong to the corporation, thereby majority vote of the board, except with
obtaining profits to the prejudice of such respect to: (1) approval of any action for
corporation, he must account to the latter for which shareholders’ approval is also
all such profits by refunding the same, required; (2) the filling of vacancies in the
unless his act has been ratified by a vote of board; (3) the amendment or repeal of by-
the stockholders owning or representing at laws or the adoption of new by-laws; (4) the
least two-thirds (2/3) of the outstanding amendment or repeal of any resolution of the
capital stock. This provision shall be board which by it express terms is not so
applicable notwithstanding the fact that the amenable or repealable; and (5) a
director risked his own funds in the venture. distribution of cash dividends to the
shareholders.
Duties of directors Sec. 36. Corporate powers and
Directors owe a three-fold duty to the capacity. – Every corporation incorporated
corporation. First, they must be obedient; under this Code has the power and capacity:
they owe a duty to keep within the powers
of the corporation as well as within those of 1. To sue and be sued in its corporation
the board of directors. Second, they must be name.
diligent; they owe a duty to exercise
reasonable care and prudence. The third 2. Of succession by its corporate name for
duty owing by directors is that of individual the period of time stated in the articles
loyalty. of incorporation and the certificate of
incorporation.
Concept of “corporate or business
opportunity.” 3. To adopt and use a corporate seal.
The doctrine of “corporate opportunity” is
but one phase of the cardinal rule of 4. To amend its articles of incorporation in
undivided loyalty on the part of the accordance with the provisions of this
fiduciaries. If there is a presented to a code.
corporate officer or director a business 5. To adopt by-laws, not contrary to law,
opportunity which the corporation is morals, or public policy, and to amend
financially able to undertake, is from its or repeal the same in accordance with
nature, in the line of the corporation’s this Code.
business and is of practical advantage to it,
is one in which the corporation will be 6. In case of stock corporations, to issue or
brought into conflict with that of his sell stocks to subscribers and to sell
corporation, the law will not permit him to treasury stocks in accordance with the
seize the opportunity for himself. provisions of this code; and to admit
members to the corporation if it be a
Director is a fiduciary. non-stock corporation.
He who is in such fiduciary position cannot
serve himself first and his cestuis 7. To purchase, receive, take or grant, hold,
(beneficiary) second. He cannot manipulate convey, sell, lease, pledge, mortgage
the affairs of his corporation to their and otherwise deal with such real and
disadvantage and in disregard of the personal property, including securities
standards of common decency. He cannot by and bonds of other corporations, as the
the intervention of a corporate entity violate transaction of the lawful business of the
the ancient principle against serving two corporation may be reasonably and
masters. necessarily require, subject to the
limitations prescribed by law and the
Sec. 35. Executive Committee. – The by- Constitution.
laws of a corporation may create an
executive committee, composed of not less 8. To enter into with other corporations
than three members of the board, to be merger or consolidation as provided in
appointed by the board. Said committee may this code.
act, by majority vote of all its members, on
such specific matters within the competence 9. To make reasonable donations,
of the board, as may be delegated to it in the including those for the public welfare or
by-laws or on a
for hospital, charitable, cultural, or trustees and ratified at a meeting by the
scientific, civic, or similar purposes: stockholders representing at least two- thirds
Provided, That no corporation, domestic (2/3) of the outstanding capital stock or by at
or foreign, shall give donations in aid of least two-thirds (2/3) of the members in case
any political party or candidate or for of non-stock corporations. Written notice of
purposes of partisan political activity. proposed action and of the time and place of
the meeting shall be addressed to each
10. To establish pension, retirement, and stockholder or member at his place of
other plans for the benefit of its residence as shown on the books of the
directors, trustees, officers and corporation and deposited to the addressee
employees. in the post office with postage prepaid, or
served personally: Provided, That in case of
11. To exercise such other powers as may extension of corporate term, any dissenting
be essential or necessary to carry out its stockholder may exercise his appraisal right
purpose or purposes as stated in its under the conditions provided in this Code.
articles of incorporation.
Extension of corporate term limited to 50
Powers of a corporation years
A corporation has such powers, and such The corporate term may be extended for
powers only, as are conferred upon it by law periods not exceeding 50 years in any single
or by its agreement. Powers may be instance as provided by section 11 of the
conferred upon a corporation: Corporation Code. No extension can be
1. Expressly. made earlier than 5 years prior to the
2. Impliedly, because they are incidental to original or subsequent expiry date(s) unless
corporate existence. there are justifiable reasons for an earlier
3. Impliedly, because they are necessary or extension as determined by the SEC.
proper in order to exercise the powers
expressly conferred. Corporation cannot extend expired term.
A corporation cannot extend its life by
General express powers amendment of its articles of incorporation
Section 36 of the Corporation Code effected during the three-year statutory
enumerates the general and express powers period for liquidation when its original term
of corporations. of existence had already expired.
7. The vote authorizing the increase or Bonds – Bonds are in form and effect
diminution of the capital stock, or the similar to promissory notes, secured by
incurring, creating or increasing of any mortgage or trust deed upon specified
bonded indebtedness. property of the debtor corporation.
b) Set up and
register with the SEC stockholder
its stock and Address
transfer book. Nationality
No. of shares
c) File its by-laws subscribed
with the Amt. subscribed
Commission. by each
Within 15 days from Submit a statement Shall be made for
end of 3 months of sources and inspection.
from registration application of funds Within 5 days Submit list of
certified by an before the date of stockholders/memb
independent CPA. annual meeting ers entitled to vote as
a) Within 105 days i) If paid-up capital > of a date prior to
after the end of its P50,000, file a copy the meeting.
fiscal year of BS and P&L
statement. The SEC must be notified of any:
1. Change or transfer of address.
ii) If paid-up capital 2. Any investment of corporate funds in
< P50,000, same as any of the secondary purposes of the
(i) and certified corporation by filing a copy of the
under oath by the resolution approved by 2/3 of the
Treasurer or any subscribed capital stock entitled to vote
responsible officer. authorizing the BoD to invest in any of
b) Within 45 days Certified under oath the secondary purposes.
by the Treasurer or
Sec. 76. Plan of merger or consolidation. –
any responsible
Two or more corporations may merge into a
officer.
single corporation which shall be one
Within 30 days from Submit: constituent corporations or may consolidate
the date of annual 1) General into a new single corporation which shall be
meeting information sheet consolidated corporation.
for the fiscal year.
The board of directors or trustees of each
2) Minutes of corporation, party to the merger or
meeting of consolidation, shall approve a plan of
stockholders/memb merger or consolidation setting forth the
ers electing the BoD following:
certified by the
Secretary and 1. The names of the corporations
subscribed and proposing to merge or consolidate,
sworn to before a hereinafter referred to as the constituent
notary public. corporations.
1. All the corporation's issued stock of all The articles of incorporation of a close
classes, exclusive of treasury shares, corporation may provide that the business of
the corporation shall be managed by the
stockholders of the corporation rather than identity and personality of each shareholder
by a board of directors. So long as this are important to his associates, so that
provision continues in effect: although they may consider their business as
corporation in their dealings with third
1. No meeting of stockholders need be persons, among themselves the stockholders
called to elect directors. act and feel as partners.”
2. Unless the context clearly requires Entities which may not be organized as
otherwise, the stockholders of the close corporations
corporation shall be deemed to be Mining or oil companies
directors for the purpose of applying the Stock exchanges
provisions of this Code.
Banks
Insurance companies
3. The stockholders of the corporation
shall be subject to all liabilities of Public utilities
directors. Educational institutions
Corporations declared to be vested
The articles of incorporation may likewise with public interest
provide that all officers or employees or that
specified officers or employees shall be Stockholders authorized to manage close
elected or appointed by the stockholders, corporations
instead of by the board of directors. As a rule, management of stock corporation
is normally given to board of directors or
Requisites of Close Corporation trustees. However, the Corporation Code
Within the meaning of a close corporation provides: “The articles of incorporation of a
under the Corporation Code the following close corporation may provide that the
are its attributes: business of the corporation shall be
1. Its stockholders are limited not managed by the stockholders of the
exceeding 20 persons. corporation rather than by a board of
2. Its shares of stock are subject to one or directors.” Also, “The articles of
more restrictions on transfer. incorporation may likewise provide that all
3. Its shares of stock are not listed in any officers or employees or that specified
stock exchange. officers or employees shall be elected or
appointed by the stockholders, instead of by
Salient Feature of Close Corporations the board of directors.”
1. It has only a few stockholders, who if
not related by blood or marriage, know Sec. 98. Validity of restrictions on transfer
each other well and are aware of each of shares. – Restrictions on the right to
other’s business skills. transfer shares must appear in the articles of
2. All or more of them are active in the incorporation and in the by-laws as well as
corporate business, either as directors, in the certificate of stock; otherwise, the
officers or as key men in management. same shall not be binding on any purchaser
3. The stocks of the corporation are not thereof in good faith. Said restrictions shall
listed on the exchange nor is there not be more onerous than granting the
trading in them outside the stock market. existing stockholders or the corporation the
*It would seem that base on these option to purchase the shares of the
features many corporations in the transferring stockholder with such
Philippines would be close reasonable terms, conditions or period stated
corporations. therein. If upon the expiration of said period,
the existing stockholders or the corporation
Reasons for formation of close fails to exercise the option to purchase, the
corporations transferring stockholder may sell his shares
“The existence of close corporations can be to any third person.
attributed to the desire of intimate groups of
business associates to obtain the advantages Sec. 99. Effects of issuance or transfer of
of a corporate organization, like that of stock in breach of qualifying conditions. –
limited liability. However, the 1. If stock of a close corporation is issued
or transferred to any person who is not
entitled under any provision of the
articles of incorporation to be a holder 6. The term "transfer", as used in this
of record of its stock, and if the section, is not limited to a transfer for
certificate for such stock conspicuously value.
shows the qualifications of the persons
entitled to be holders of record thereof, 7. The provisions of this section shall not
such person is conclusively presumed to impair any right which the transferee
have notice of the fact of his ineligibility may have to rescind the transfer or to
to be a stockholder. recover under any applicable warranty,
express or implied.
2. If the articles of incorporation of a close
corporation states the number of Restrictions on transfer of shares of stock
persons, not exceeding twenty (20), who The corporation may provide in its articles
are entitled to be holders of record of its of incorporation, in its by-laws as well as in
stock, and if the certificate for such the certificate of stock restrictions on the
stock conspicuously states such number, right of stockholders to transfer their shares
and if the issuance or transfer of stock to of stocks. If not so provided as aforesaid the
any person would cause the stock to be same “shall not be binding on any
held by more than such number of purchaser thereof in good faith.” Charter
persons, the person to whom such stock restrictions on the transfer of shares are
is issued or transferred is conclusively binding on all who become shareholders, as
presumed to have notice of this fact. they become parties to the charter contract
and take their shares subject to it.
3. If a stock certificate of any close Considerable latitude allowed
corporation conspicuously shows a incorporators and shareholders in
restriction on transfer of stock of the imposing transfer
corporation, the transferee of the stock is restrictions in the articles of incorporation
conclusively presumed to have notice of and they will not usually be declared
the fact that he has acquired stock in against public policy unless palpably
violation of the restriction, if such unreasonable under the circumstances.
acquisition violates the restriction.
“Stock in the corporation is not merely
4. Whenever any person to whom stock of property. It also creates a personal relation
a close corporation has been issued or analogous otherwise than technically to a
transferred has, or is conclusively partnership. There seems to be no greater
presumed under this section to have, objection to retaining the right of choosing
notice either (a) that he is a person not one’s associates in a corporation than in a
eligible to be a holder of stock of the firm.”
corporation, or (b) that transfer of stock
to him would cause the stock of the Reasons for restriction on shares of stock
corporation to be held by more than the In a close corporation, the identity of the
number of persons permitted by its other stockholders is important to each; the
articles of incorporation to hold stock of incorporators have confidence in one
the corporation, or (c) that the transfer another which they may not have in an
of stock is in violation of a restriction on outsider. Furthermore, the incorporators may
transfer of stock, the corporation may, at feel that the success of the enterprise
its option, refuse to register the transfer depends upon the retention of the
of stock in the name of the transferee. personnel who formed it, or they may be
manufacturing under secret processes
5. The provisions of subsection (4) shall which they do not want outsiders to learn. In
not applicable if the transfer of stock, the family corporation it is often the desire
though contrary to subsections (1), (2) of he father to pass the corporation to his son
of (3), has been consented to by all the without interference from other outside the
stockholders of the close corporation, or family. Any one of these factors may induce
if the close corporation has amended its the incorporators to attempt to restrict the
articles of incorporation in accordance transfer of stock.
with this Title.
Effect of the transfer of stock in breach of
qualifying conditions
Unless “consented to by all the stockholders operation of the business and affairs of a
or if the close corporation has amended its close corporation, the stockholders shall
articles of incorporation,” a transfer of be held to strict fiduciary duties to each
shares of stock in breach of qualifying other and among themselves. Said
conditions would justify the corporation stockholders shall be personally liable
through the corporate secretary to refuse to for corporate torts unless the corporation
register the transfer of stock. Such transfer has obtained reasonably adequate
need not be for value, hence it may be the liability insurance.
result of a donation.
Effect of the Stockholders’ agreement
Sec. 100. Agreements by stockholders. – before and after formation of corporation
1. Agreements by and among stockholders Stockholders’ agreements before and after
executed before the formation and formation and organization of the
organization of a close corporation, corporation survive incorporation and shall
signed by all stockholders, shall survive be valid and binding for as long as they are
the incorporation of such corporation not inconsistent with the articles of
and shall continue to be valid and incorporation. Agreements made prior to
binding between and among such incorporation require fairly literal
stockholders, if such be their intent, to performance. There must be an actual
the extent that such agreements are not contractual relation. Given such relation, the
inconsistent with the articles of pre-incorporators are promoters and may
incorporation, irrespective of where the arrange agreements to form and manage the
provisions of such agreements are corporation.
contained, except those required by this
Title to be embodied in said articles of Sec. 101. When board meeting is
incorporation. unnecessary or improperly held. – Unless
the by-laws provide otherwise, any action by
2. An agreement between two or more the directors of a close corporation without a
stockholders, if in writing and signed by meeting shall nevertheless be deemed valid
the parties thereto, may provide that in if:
exercising any voting rights, the shares
held by them shall be voted as therein 1. Before or after such action is taken,
provided, or as they may agree, or as written consent thereto is signed by all
determined in accordance with a the directors.
procedure agreed upon by them.
3. No provision in any written agreement 2. All the stockholders have actual or
signed by the stockholders, relating to implied knowledge of the action and
any phase of the corporate affairs, shall make no prompt objection thereto in
be invalidated as between the parties on writing.
the ground that its effect is to make
them partners among themselves. 3. The directors are accustomed to take
informal action with the express or
4. A written agreement among some or all implied acquiescence of all the
of the stockholders in a close stockholders.
corporation shall not be invalidated on
the ground that it so relates to the 4. All the directors have express or implied
conduct of the business and affairs of knowledge of the action in question and
the corporation as to restrict or interfere none of them makes prompt objection
with the discretion or powers of the thereto in writing.
board of directors: Provided, That such
agreement shall impose on the If a director's meeting is held without proper
stockholders who are parties thereto the call or notice, an action taken therein within
liabilities for managerial acts imposed the corporate powers is deemed ratified by a
by this Code on directors. director who failed to attend, unless he
promptly files his written objection with the
5. To the extent that the stockholders are secretary of the corporation after having
actively engaged in the management or knowledge thereof.
Sec. 102. Pre-emptive right in close unnecessary or even if improperly held
corporations. - The pre-emptive right of would be valid. The by-laws, however, may
stockholders in close corporations shall provided otherwise or a stockholder may file
extend to all stock to be issued, including his written objection in writing after having
reissuance of treasury shares, whether for knowledge of the action taken by the
money, property or personal services, or in directors.
payment of corporate debts, unless the
articles of incorporation provide otherwise. Pre-emptive right in close corporations;
Issuance of new Stock
Exceptions in Section 39, not applicable A stockholder in a close corporation has a
It is submitted that in a close corporation, right to purchase his pro rata share of the
the exceptions provided in Sec 39 are not new stock. If the pre-emptive right is
applicable. The first exception mentioned violated he can sue the corporation for
therein regarding the shares issued in damages, enjoin the stock issue, obtain an
compliance with laws requiring stock order permitting him to subscribe, or obtain
offerings or minimum stock ownership by cancellation of the issue. But even where the
the public cannot by its very nature refer to a stockholder’s pre-emptive right is preserved.
close corporation. The pre-emptive right of The right may be inadequate as a protective
shareholders in close corporation is thus devise for the stockholder in a close
broadened to include all issues without any corporation because the lack of a market for
exception, unless of course, restricted by the his stock leaves him with the alternatives of
articles of incorporation and printed in the investing more capital or having the value of
stock certificates. It may be mentioned his stock diluted.
however, that any prior waiver of pre-
emptive right must be expressly provided for Sec. 104. Deadlocks. - Notwithstanding any
in the articles of incorporation and not in an contrary provision in the articles of
ordinary agreement executed by the parties. incorporation or by-laws or agreement of
This rule however, would not militate stockholders of a close corporation, if the
against the unanimous agreement of all the directors or stockholders are so divided
stockholders. respecting the management of the
corporation's business and affairs that the
Sec. 103. Amendment of articles of votes required for any corporate action
incorporation. – Any amendment to the cannot be obtained, with the consequence
articles of incorporation which seeks to that the business and affairs of the
delete or remove any provision required by corporation can no longer be conducted to
this Title to be contained in the articles of the advantage of the stockholders generally,
incorporation or to reduce a quorum or the Securities and Exchange Commission,
voting requirement stated in said articles of upon written petition by any stockholder,
incorporation shall not be valid or effective shall have the power to arbitrate the dispute.
unless approved by the affirmative vote of at In the exercise of such power, the
least two-thirds (2/3) of the outstanding Commission shall have authority to make
capital stock, whether with or without voting such order as it deems appropriate,
rights, or of such greater proportion of including an order:
shares as may be specifically provided in the
articles of incorporation for amending, 1. Canceling or altering any provision
deleting or removing any of the aforesaid contained in the articles of
provisions, at a meeting duly called for the incorporation, by-laws, or any
purpose. stockholder's agreement.
Rule and Exceptions when board meeting 2. Canceling, altering or enjoining any
unnecessary resolution or act of the corporation or its
General Rule: the directors of a corporation board of directors, stockholders, or
cannot act individually or separately in order officers.
to bind the corporation. They must act as a
board at a meeting duly called for the 3. Directing or prohibiting any act of the
purpose. corporation or its board of directors,
Exception: Section 101. It enumerates the stockholders, officers, or other persons
instances when a board at a meeting is party to the action.
4. Requiring the purchase at their fair provided either for directorial disputes or for
value of shares of any stockholder, stockholder disputes. Although there are
either by the corporation regardless of some disadvantages of arbitration
the availability of unrestricted retained proceedings, nevertheless, the advantages of
earnings in its books, or by the other arbitration, in saving both money and hard
stockholders. feelings, would seem to outweigh the
disadvantages in most cases.
5. Appointing a provisional director.
Provisional director and SEC supervised
6. Dissolving the corporation. management
In accordance with Section 104, the SEC
7. Granting such other relief as the may in case of deadlocks in the close
circumstances may warrant. corporation appoint a provisional director.
“A provisional director shall be an
A provisional director shall be an impartial impartial person who is neither a stock-
person who is neither a stockholder nor a holder nor a creditor of the corporation and
creditor of the corporation or of any whose other qualifications, may be
subsidiary or affiliate of the corporation, and determined by the SEC.”
whose further qualifications, if any, may be
determined by the Commission. A Under Section 2 (Pres Decree No. 1653), the
provisional director is not a receiver of the SEC has the power “to create and appoint a
corporation and does not have the title and management committee, board, or body to
powers of a custodian or receiver. A undertake the management of corporations,
provisional director shall have all the rights partnership or other associations in
and powers of a duly elected director of the appropriate cases wherein there is imminent
corporation, including the right to notice of danger or dissipation, loss or wastage or
and to vote at meetings of directors, until destruction of assets or other properties or
such time as he shall be removed by order of paralization of business operations of such
the Commission or by all the stockholders. corporations or entities prejudicial to the
His compensation shall be determined by interest of the minority, party-litigants or the
agreement between him and the corporation general public.”
subject to approval of the Commission,
which may fix his compensation in the Sec. 105. Withdrawal of stockholder or
absence of agreement or in the event of dissolution of corporation. – In addition
disagreement between the provisional and without prejudice to other rights and
director and the corporation. remedies available to a stockholder under
this Title, any stockholder of a close
Deadlock – Deadlock signifies a standstill in corporation may, for any reason, compel the
the management of the corporate affairs said corporation to purchase his shares at
resulting from the evenly divide action of their fair value, which shall not be less than
directors or stockholders in a close their par or issued value, when the
corporation. corporation has sufficient assets in its books
to cover its debts and liabilities exclusive of
In the event of deadlocks SEC may capital stock: Provided, That any
arbitrate stockholder of a close corporation may, by
In the event of a deadlock in a close written petition to the Securities and
corporation, the SEC has the power to Exchange Commission, compel the
arbitrate the deadlock “upon written petition dissolution of such corporation whenever
of any stockholder.” In close corporations any of acts of the directors, officers or those
that are subject to a checks and balances in control of the corporation is illegal, or
system because of control devices there are fraudulent, or dishonest, or oppressive or
bound to be deadlocks, and some steps must unfairly prejudicial to the corporation or
be taken to cope with them. Many of the any stockholder, or whenever corporate
problems that arise can be settled by assets are being misapplied or wasted.
arbitration, Arbitration (the determination of
a matter of difference between contending • Appraisal rights in regular corporations
parties) may be can be opted by the dissenting stockholder
only in cases where the fundamental
change in the corporate structure or or other institutions of learning shall, as
operations is involved, whereas a soon as organized, so classify themselves
stockholder of a close corporation may, for that the term of office of one-fifth (1/5) of
any reason, compel the said coporation to their number shall expire every year.
purchase his shares at their par value, when Trustees thereafter elected to fill vacancies,
the corporation has sufficient assets in its occurring before the expiration of a
books to cover his debts and liabilities particular term, shall hold office only for the
exclusive of capital stock. ( In Appraisal unexpired period. Trustees elected thereafter
right, fair value of shares is given but in to fill vacancies caused by expiration of term
Withdrawal Right, the fair value cannot be shall hold office for five
less than the par or issued value of the (5) years. A majority of the trustees shall
shares; In Appraisal right, there must be constitute a quorum for the transaction of
present unrestricted retained earnings in the business. The powers and authority of
books of the corporation) trustees shall be defined in the by-laws.
EDUCATIONAL CORPORATIONS
For Educational corporations, where the
trustees should be divided into multiples of
five. So you should have five, ten or fifteen
trustees if they are organized as non-stock
corporation. And unless otherwise provided
in the articles of incorporation or by-laws,
the terms of the trustees should be five
years, and every year only one fifth (1/5) is
elected, again to provide for continuity in
policies. But you can provide that they will
be all elected instead for a term of one year,
everybody has to be elected.
How formed?
Sec. 111. Articles of incorporation. – In
order to become a corporation sole, the chief
archbishop, bishop, priest, minister, rabbi or
presiding elder of any religious
denomination, sect or church must file with
the Securities and Exchange Commission
articles of incorporation setting forth the
following:
ivil tribunals, then a church member who is expelled from the membership by the church authorities, or a priest or minister who is by them
5, Nov.28, 2004 to Ferrer and Ferrer Law Office re term of existence of religious corporation.
dissolve
corporation sole or a corporation aggregate. As such, the the that
law intends juridical
religious entity. For may exist perp
organizations
dissolution to be effective “[t]he
requirements mandated by the
Corporation Code should have been
strictly complied with.” Vesagas v.
Court of Appeals, 371 SCRA 509, 516
(2002).
A corporation cannot extend its life by
amendment of its articles of
incorporation effected during the three-
year statutory period for liquidation
when its original term of existence had
DISSOLUTION
already expired, as the same would
Dissolution of a corporation is the
constitute new business. Alhambra
extinguishment of the franchise of a
Cigar & Cigarette Manufacturing
corporation and termination of its corporate
Company, Inc. v. SEC, 24 SCRA 269
existence.
(1968).
When the period of corporate life
Modes of Dissolution:
expires, the corporation ceases to be a
1. Voluntary Dissolution
body corporate for the purpose of
2. Involuntary Dissolution
continuing the business for which it was
3. Shortening of term
organized. PNB v. Court of First
4. Expiration of term (JRS at 311) Instance of Rizal, Pasig, Br. XXI, 209
5. Failure to organize and commence SCRA 294 (1992).
business within two years from the date
of issuance of certificate of
incorporation
6. Legislative Dissolution (CLV’s CLR at
936)
Effects of Dissolution:
1. Transfer of Legal title to corporate
property.
2. The corporation ceases as a body
corporate to continue the business for
which it was established.
3. Continuation of a body corporation (the
corporation continues as a body
corporate for 3 years for purposes of
winding up or liquidation).
4. After the expiration of the 3 year
winding up period, the corporation
ceases to exist for all purposes. (JRS at
314).
Republic Act No. 5455. Regulates the entry Presidential Decree No. 151 allows citizens
of foreign investments whenever foreign of the Philippines or corporations which
equity participation exceeds 30 percent of have acquired lands of the public domain or
the capital stock. which or any other law, to enter into service
contracts for financial, technical,
Under Republic Act no. 5455 “doing management or other forms of assistance
business includes”: with any foreign person or entity whenever
a. Soliciting orders, purchases, service and wherever such contracts are vital to
contracts, opening offices whether achieve sound and more expeditious
called liaison offices or branches. exploration, development, exploitation or
b. Appointing representatives or utilization of such lands owned, held or
distributors who are domiciled in the controlled by such citizens or corporations.
Philippines or who in any calendar year
stay in the Philippines for a period or Section 127. Who may be a resident agent.
periods totalling one hundred eighty – A resident agent may be either an
days or more. individual residing in the Philippines or a
c. Participating in the management, domestic corporation lawfully transacting
supervision, or control of any domestic business in the Philippines: Provided, That
business firm, entity, or corporation in in the case of an individual, he must be of
the Philippines. good moral character and of sound financial
d. Any other act or acts that imply a standing.
continuity of commercial dealings or
arrangements, and contemplates to that Section 128. Resident agent; service of
extent the performance of acts or works, process. – The Securities and Exchange
or the exercise of some of the function Commission shall require as a condition
normally incident to, and in progressive precedent to the issuance of the license to
prosecution of, commercial gain or of transact business in the Philippines by any
the purpose and object of the business foreign corporation that such corporation file
organization. with the Securities and Exchange
Commission a written power of attorney
The Board of Investments requires license designating some person who must be a
not only of corporations organized abroad resident of the Philippines, on whom any
but also of domestic corporations, if more summons and other legal processes may be
than 40% of its voting shares are owned and served in all actions or other legal
held by aliens or more than 30% of its total proceedings against such corporation, and
capitalization is in the hands of aliens. consenting that service upon such resident
agent shall be admitted and held as valid as
Guidelines for issuance of certificate of if served upon the duly authorized officers
authority to do business under BOI (Rep. of the foreign corporation at its home office.
Act No.5455) Any such foreign corporation shall
likewise execute and file with the Securities Section 129. Law applicable. – Any foreign
and Exchange Commission an agreement or corporation lawfully doing business in the
stipulation, executed by the proper Philippines shall be bound by all laws, rules
authorities of said corporation, in form and and regulations applicable to domestic
substance as follows: corporations of the same class, except such
only as provide for the creation, formation,
“The (name of foreign corporation) does organization or dissolution of corporations
hereby stipulate and agree, in consideration or those which fix the relations, liabilities,
of its being granted by the Securities and responsibilities, or duties of stockholders,
Exchange Commission a license to transact members, or officers of corporations to each
business in the Philippines, that if at any other or to the corporation.
time said corporation shall cease to transact
business in the Philippines, or shall be Licensed foreign corporations lawfully
without any resident agent in the Philippines doing business in the Philippines shall be
on whom any summons or other legal subject to our laws just like domestic
processes may be served, then in any action corporations of the same class.
or proceeding arising out of any business or
transaction which occurred in the Philippine laws will not apply when it refers
Philippines, service of any summons or to the creation, formation, organization or
other legal process may be made upon the dissolution of corporations or such as fux the
Securities and Exchange Commission and relations, liabilities, responsibilities, or
that such service shall have the same force duties of stockholders, members, or officers
and effect as if made upon the duly- of corporations to each other or to the
authorized officers of the corporation at its corporation.
home office.”
Section 130. Amendments to articles of
Whenever such service of summons or other incorporation or by-laws of foreign
process shall be made upon the Securities corporations. – Whenever the articles of
and Exchange Commission, the Commission incorporation or by-laws of a foreign
shall, within ten (10) days thereafter, corporation authorized to transact business
transmit by mail a copy of such summons or in the Philippines are amended, such foreign
other legal process to the corporation at its corporation shall, within sixty (60) days
home or principal office. The sending of after the amendment becomes effective, file
such copy by the Commission shall be with the Securities and Exchange
necessary part of and shall complete such Commission, and in the proper cases with
service. All expenses incurred by the the appropriate government agency, a duly
Commission for such service shall be paid in authenticated copy of the articles of
advance by the party at whose instance the incorporation or by-laws, as amended,
service is made. indicating clearly in capital letters or by
In case of a change of address of the resident underscoring the change or changes made,
agent, it shall be his or its duty to duly certified by the authorized official or
immediately notify in writing the Securities officials of the country or state of
and Exchange Commission of the new incorporation. The filing thereof shall not of
address. itself enlarge or alter the purpose or
purposes for which such corporation is
The SEC shall require as a condition authorized to transact business in the
precedent to the issuance of the license to Philippines.
transact business in the Philippines by any
foreign corporation that such corporation Section 131. Amended license. – A foreign
file with the SEC, a written power of corporation authorized to transact business
attorney designating some person who must in the Philippines shall obtain an amended
be a resident of the Philippines, on whom license in the event it changes its corporate
any summons and other legal processes may name, or desires to pursue in the Philippines
be served in all actions or other legal other or additional purposes, by submitting
proceedings against such corporation. an application therefor to the Securities and
Exchange Commission, favorably endorsed
by the appropriate government agency in the
proper cases.
Section 132. Merger or consolidation Section 133. Doing business without a
involving a foreign corporation licensed in license. – No foreign corporation transacting
the Philippines. – One or more foreign business in the Philippines without a license,
corporations authorized to transact business or its successors or assigns, shall be
in the Philippines may merge or consolidate permitted to maintain or intervene in any
with any domestic corporation or action, suit or proceeding in any court or
corporations if such is permitted under administrative agency of the Philippines; but
Philippine laws and by the law of its such corporation may be sued or proceeded
incorporation: Provided, That the against before Philippine courts or
requirements on merger or consolidation as administrative tribunals on any valid cause
provided in this Code are followed. of action recognized under Philippine laws.
6. Failure to pay any and all taxes, imposts, 3. The petition for withdrawal of license
assessments or penalties, if any, lawfully has been published once a week for
due to the Philippine Government or any three (3) consecutive weeks in a
of its agencies or political subdivisions. newspaper of general circulation in the
Philippines.
7. Transacting business in the Philippines
outside of the purpose or purposes for Sec. 137. Outstanding capital stock
which such corporation is authorized defined. – The term "outstanding capital
under its license. stock", as used in this Code, means the total
shares of stock issued under binding
8. Transacting business in the Philippines subscription agreements to subscribers or
as agent of or acting for and in behalf of stockholders, whether or not fully or
any foreign corporation or entity not partially paid, except treasury shares.
duly licensed to do business in the
Philippines. Sec. 138. Designation of governing boards.
– The provisions of specific provisions of
9. Any other ground as would render it this Code to the contrary notwithstanding,
unfit to transact business in the non-stock or special corporations may,
Philippines. through their articles of incorporation or
their by-laws, designate their governing
Sec. 135. Issuance of certificate of boards by any name other than as board of
revocation. – Upon the revocation of any trustees.
such license to transact business in the
Philippines, the Securities and Exchange Sec. 139. Incorporation and other fees. –
Commission shall issue a corresponding The Securities and Exchange Commission is
certificate of revocation, furnishing a copy hereby authorized to collect and receive fees
thereof to the appropriate government as authorized by law or by rules and
agency in the proper cases. The Securities regulations promulgated by the Commission.
and Exchange Commission shall also mail to
the corporation at its registered office in the Sec. 140. Stock ownership in certain
Philippines a notice of such revocation corporations. – Pursuant to the duties
accompanied by a copy of the certificate of specified by Article XIV of the Constitution,
revocation. the National Economic and Development
Authority shall, from time to time, make a
Sec. 136. Withdrawal of foreign determination of whether the corporate
corporations. – Subject to existing laws and vehicle has been used by any corporation or
regulations, a foreign corporation licensed to by business or industry to frustrate the
transact business in the Philippines may be provisions thereof or of applicable laws, and
allowed to withdraw from the Philippines by shall submit to the Batasang Pambansa,
filing a petition for withdrawal of license. whenever deemed necessary, a report of its
No certificate of withdrawal shall be issued findings, including recommendations for
by the Securities and Exchange Commission their prevention or correction.
unless all the following requirements are Maximum limits may be set by the Batasang
met: Pambansa for stockholdings in corporations
declared by it to be vested with a public
interest pursuant to the provisions of this
section, belonging to individuals or groups
of individuals related to each other by Sec. 143. Rule making power of the
consanguinity or affinity or by close Securities and Exchange Commission. –
business interests, or whenever it is The Securities and Exchange Commission
necessary to achieve national objectives, shall have the power and authority to
prevent illegal monopolies or combinations implement the provisions of this Code, and
in restraint or trade, or to implement national to promulgate rules and regulations
economic policies declared in laws, rules reasonably necessary to enable it to perform
and regulations designed to promote the its duties hereunder, particularly in the
general welfare and foster economic prevention of fraud and abuses on the part of
development. the controlling stockholders, members,
directors, trustees or officers.
In recommending to the Batasang Pambansa
corporations, business or industries to be Sec. 144. Violations of the Code. –
declared vested with a public interest and in Violations of any of the provisions of this
formulating proposals for limitations on Code or its amendments not otherwise
stock ownership, the National Economic and specifically penalized therein shall be
Development Authority shall consider the punished by a fine of not less than one
type and nature of the industry, the size of thousand (P1,000.00) pesos but not more
the enterprise, the economies of scale, the than ten thousand (P10,000.00) pesos or by
geographic location, the extent of Filipino imprisonment for not less than thirty (30)
ownership, the labor intensity of the activity, days but not more than five (5) years, or
the export potential, as well as other factors both, in the discretion of the court. If the
which are germane to the realization and violation is committed by a corporation, the
promotion of business and industry. same may, after notice and hearing, be
dissolved in appropriate proceedings before
Sec. 141. Annual report or corporations. – the Securities and Exchange Commission:
Every corporation, domestic or foreign, Provided, That such dissolution shall not
lawfully doing business in the Philippines preclude the institution of appropriate action
shall submit to the Securities and Exchange against the director, trustee or officer of the
Commission an annual report of its corporation responsible for said violation:
operations, together with a financial Provided, further, That nothing
statement of its assets and liabilities, in this section shall be construed to repeal
certified by any independent certified public the other causes for dissolution of a
accountant in appropriate cases, covering the corporation provided in this Code.
preceding fiscal year and such other
requirements as the Securities and Exchange Sec. 145. Amendment or repeal. – No right
Commission may require. Such report shall or remedy in favor of or against any
be submitted within such period as may be corporation, its stockholders, members,
prescribed by the Securities and Exchange directors, trustees, or officers, nor any
Commission. liability incurred by any such corporation,
stockholders, members, directors, trustees,
Sec. 142. Confidential nature of or officers, shall be removed or impaired
examination results. – All interrogatories either by the subsequent dissolution of said
propounded by the Securities and Exchange corporation or by any subsequent
Commission and the answers thereto, as amendment or repeal of this Code or of any
well as the results of any examination made part thereof.
by the Commission or by any other official
authorized by law to make an examination Sec. 146. Repealing clause. – Except as
of the operations, books and records of any expressly provided by this Code, all laws or
corporation, shall be kept strictly parts thereof inconsistent with any provision
confidential, except insofar as the law may of this Code shall be deemed repealed.
require the same to be made public or where
such interrogatories, answers or results are Sec. 147. Separability of provisions. –
necessary to be presented as evidence before Should any provision of this Code or any
any court. part thereof be declared invalid or
unconstitutional, the other provisions, so
far as they are separable, shall remain in
force.