Partnership Law

Revised Corporation Code

Partnership
Credits: projectjurispudence & Ateneo Civil Summer Review
*ML – Memorize the line

General provisions
ML 1 The general rule is that there is a partnership when there is an agreement to (1)
contribute money, property, or industry and (2) there is an intent to divide profits
among contracting parties. Unless, a contrary is proved such as universal partnership
having partners who are husband and wife or is that the object is void, therefore,
there is no partnership
ML 2 Essential requisites of partnership contract
1. Valid contract
2. Contribution of money, property, or industry to a common fund
3. Organized for gain or profit
4. Existence of lawful object or purpose established for the benefit of interest of
every partner
ML 3 Characteristics of partnership contract
1. Consensual – perfected by mere consent
2. Commutative – equivalence in contribution
3. Nominate – has a name in law
4. Onerous – there must be a contribution
5. Preparatory – contract for preparation of another
6. Bilateral – entered by two or more person
7. Principal – does not depend on another contract
ML 4 Classification of partnership
1. Object
a. Universal partnership
i. All present property, no future property is contributed, the asset
contributed and any profit derived from the use of the same belong
to the partnership
ii. All profit, profit derived from the use of asset belong to the
partnership and partners may rightfully claim what he has
contributed because the right to the same is retained
b. Particular partnership
The object is determinate
2. Liability

1 |B e s t n o o k i t
 a. General
b. Limited
3. Duration
a. Partnership at will
b. Partnership with a fixed term
c. Partnership for a particular undertaking
4. Representation to third persons
a. Ordinary
b. By estoppel
5. Legality of existence
a. De jure
b. De facto
ML 5 Kinds of partner
1. Contribution
a. Capitalist
b. Industrial
c. Capitalist-industrial
2. Liability
a. General
b. Limited
3. Management
a. Managing
b. Silent
c. Liquidating
4. Third persons
a. Ostensible
b. Secret
c. Dormant
5. Membership
a. Real
b. By estoppel
6. Continuing the business after dissolution
a. Continuing
b. Discontinuing
7. Nature of membership
a. Original
b. Incoming
c. Retiring
8. State of survivorship
a. Surviving
b. Deceased

2 |B e s t n o o k i t
 9. Effect of expulsion
a. Expelled
b. Expelling
10. Value of contribution
a. Majority
b. Nominal
Obligations of partners among themselves
ML 6 Promised contribution, obligation to deliver his contribution
1. To contribute at the beginning of partnership or at specified date the money,
property, or industry the partner promised to contribute (Art 1786)
2. To answer for eviction in case the partnership is deprived of the determinate
property contributed (Art 1786)
3. To answer for partnership for the fruits of the property the contribution of which
he delayed, from the date they should have been contributed up to the time of
actual delivery (Art 1786)
4. To preserve the said property with the diligence of a good father to a family
pending delivery to partnership (Art 1163)
5. To indemnify partnership for any damage caused to it by the retention of
property or by the delay in its contribution (Art 1788 and Art 1170)
ML 7 Effect of failure to contribute property promised
1. Partners becomes ipso jure a debtor of the partnership even in absence of
demand (Art 1169)
2. Remedy is not rescission but specific performance with damages
ML 8 Fiduciary duty – partner’s relation is on the basis of trust and confidence, thus a
partner cannot:
1. Directly or indirectly use the partnership asset for his own benefit
2. Carry on the business for his own private advantage
3. Take profit clandestinely
4. Obtain for himself that he should have obtained for the partnership
5. Carry on another business in competition of partnership (applicable only to
capitalist partner that does not manage the business)
6. Avail himself of knowledge or information which may be properly regarded as
the property of the partnership
ML 9 Prohibition against engaging in competitive business
1. Industrial partner cannot engage in another business unless expressly permits
him to do so
Consequences of violation:
i. Be excluded from the partnership
ii. Capitalist partner can avail the benefit industrial partner derived from the
business he engaged in

3 |B e s t n o o k i t
 iii. Capitalist partners have the right to file an action for damages
2. Capitalist partner cannot engage in business with same line of business of
partnership for his own account, unless there is a stipulation to the contrary
i. May be required to bring to the common fund the profits he derived
from other business
ii. Shall personally bear the losses
iii. May be ousted from partnership, especially if there was warning
ML 10 Capitalist partners must contribute additional capital in case of imminent loss
and refusal to do so shall create an obligation to his part to sell his interest to the
other partners, requisites to incur a partner to sell his interest
1. There is an imminent loss
2. Majority of the partners are on the opinion that an additional contribution to the
common fund would save the business
3. Capitalist partner refuses deliberately to contribute unless financially unable
4. There is no agreement to the contrary
ML 11 Collection of debt whose creditor is both managing partner and partnership
1. Apply the sum collected to 2 credits in proportion to their amounts
2. If he received it for the account of partnership, the whole sum shall be applied to
partnership credit
Requisites
1. There exist 2 debts, one for a partner and one for the partnership
2. Both debts are demandable
3. Partner who collects is authorized to manage
ML 12 Partner who receive share of partnership credit
He is obliged to bring to the partnership what he has received even though he may
have given receipt for his share only
Requisites
1. Partner has received in whole or in part, his share of the partnership credit
2. Other partners have not collected their shares
3. Partnership debtor has become insolvent
ML 13 Who bears the risk of loss of things contributed
1. Specific and determinate things which are not fungible where only the use is
contributed – partner
2. Specific and determinate things which ownership is transferred to the
partnership – partnership
3. Fungible things – partnership
4. Things contributed to be sold – partnership
5. Things brought and appraised in the inventory – partnership
ML 14 A stipulation to exclude one or more partners from share in the profits and
losses is void, however, one or more of the partners may assume all the losses

4 |B e s t n o o k i t
 because as to them this should be allowed but as to third persons such stipulation
may be properly declared void
ML 15 Rights and obligations with respect to management
1. Partner appointed as manager in AoP
i. His power is irrevocable without just and lawful cause, revocable when
he is in bad faith
a. Vote of partners representing controlling interest necessary to revoke
the power
2. Partner appointed as manager after constitution of partnership
i. Power is revocable any time for any cause
3. 2 or more partners entrusted with management without specification of duties
or stipulation that each shall not act without other’s consent
i. Each may execute all acts of administration
a. In case of opposition, decision of majority shall prevail
b. In case of tie, decision of partners owning controlling interest shall
prevail
4. Stipulated that none of the managing partners shall act without the consent of
others
i. Concurrence of all shall be necessary for the validity of acts
a. Absence or disability of any one cannot be alleged
b. Unless, there is an imminent danger of grave or irreparable injury to
the partnership
5. Manner of management not agreed upon
i. All partners are agents of partnership
ii. Unanimous consent required for alteration of immovable property
a. If refusal of partner is manifestly prejudicial to interest of partnership
court intervention may be sought
ML 16 Other rights or obligations
1. Right to associate another person with him in his share without consent of other
partners
2. Right to inspect or copy partnership books at any reasonable time
3. Right to a formal account as to partnership affairs:
a. If he is wrongfully excluded from partnership business or possession of its
property by his copartners
b. If right exist under term of any agreement
c. As provided under Art 1807
d. Whenever under circumstances render it just and reasonable
4. Duty to render on demand true and full information affecting partnership to any
partner or legal representative of any deceased partner or of any partner under
legal disability
5. Duty to account the partnership as fiduciary

5 |B e s t n o o k i t
Proprietary rights of partners
ML 17 Partner as to his interest
a. Can be assigned
b. Can be attached
c. Can be subject to legal support
ML 18 Partner as to his specific property contributed
a. Cannot be assigned
b. Cannot be attached
c. Cannot be subject to legal support
Obligations of partners with regard to third persons
ML 19 Every partnership has a firm name in order to sue and be sued, any persons who
include their name even if they are not partners shall be liable as a partner
ML 20 All partners shall be liable for contractual obligations of the partnership with
their property, after all partnership assets have been exhausted, pro rata and
subsidiary
ML 21 Admission or representation made by any partner concerning the partnership
affairs within scope of his authority is evidence against partnership
ML 22 Notice to partner relating to partnership affairs is notice to partnership except in
case of fraud, (1) knowledge of partner acting in particular matter acquired as a
partner, (2) knowledge of the partner acting in the particular matter then present to
his mind, and (3) knowledge of any other partner who reasonably could and should
have communicated it to the acting partner
ML 23 Partners and partnership are solidary liable to third persons for the partner’s
torts or breach of trust
ML 24 Liability of incoming partner is limited to his share in the partnership property for
existing obligations and his separate property for subsequent obligations
ML 25 Creditors of partnership preferred in partnership property and may attach
partner’s share in partnership assets
ML 26 Every partner is an agent of partnership
ML 27 Power of partner as agent of partnership
1. Bind the partnership even lack of authority except when third person has
knowledge of lack of authority
i. Acts for carrying on in the usual way the business of partnership or the
ordinary course
2. Does not bind the partnership unless agent partner has authority
i. Acts which is not apparently for the carrying of business in the usual way
ii. Acts of strict dominion or ownership
iii. Assign partnership property in trust for creditors
iv. Dispose of goodwill of business

6 |B e s t n o o k i t
 v. Do an act which would make it impossible to carry on the usual way of
business
vi. Confess a judgement
vii. Enter into compromise concerning a partnership claim or liability
viii. Submit partnership claim or liability to arbitration
ix. Renounce claim of partnership
3. Partnership not liable to third persons having actual or presumptive knowledge
of the restrictions
i. Acts in contravention of a restriction on authority
ML 28 Effects of conveyance of real property belonging to partnership
1. Title in partnership name, conveyance in partnership name
i. Conveyance passes title but partnership can recover if:
a. Conveyance was not in the usual way of business
b. Buyer had knowledge of lack of authority
2. Title in partnership name, conveyance in partner’s name
i. Conveyance does not pass title but only equitable interest unless:
a. Conveyance was not in the usual way of business
b. Buyer had knowledge of lack of authority
3. Title in name of one or more but not all partners, conveyance in name of partner
or partners in whose name title stands
i. Conveyance passes title but partnership can recover if:
a. Conveyance was not in the usual way of business
b. Buyer has a knowledge of lack of authority
4. Title in name of one, more, or all partners or third person in trust for
partnership, conveyance executed in partnership name if in name of partners
i. Conveyance will only pass equitable interest
5. Title in name of all partners, conveyance in name of all partners
i. Conveyance will pass the title
ML 29 Partner by estoppel is either directly represents himself to third person as a
partner in an existing partnership or in a non-existing partnership or indirectly
represents himself by consenting to another representing him as partner in an
existing or non-existing partnership
ML 30 Elements to establish liability on ground of estoppel
1. Defendant represented himself as partner or represented by others as such and
not denied or refuted by defendant
2. Plaintiff relied on such representation
3. Statement of defendant not refuted
ML 31 Liabilities in estoppel
1. All partners consented to representation – partnership is liable because it is
partnership by estoppel and not partner by estoppel

7 |B e s t n o o k i t
 2. No existing partnership and all those represented consented or not all partners
of existing partnership consents to representation – person who represented
himself and all those who made representation is liable pro rata or jointly
3. No existing partnership and not all represented consented and none of partners
in existing partnership consented – person who represented himself is liable and
those who made or consented to the representation is separately liable
ML 32 Conditions of assignment of interest
1. Made in good faith
2. For fair consideration
3. After a fair and complete disclosure of all-important information as to its value
ML 33 Rights of assignee
1. Get whatever assignor would have obtained
2. Avail usual remedies in case of fraud in management
3. Ask for annulment of contract of assignment if he was induced to join through
any of the vices of consent
4. Demand an accounting only in case of dissolution
Responsibility of partnership to partners
ML 34 Refund plus interest accumulated in case of loan and advances made by partner
to partnership other than contribution
ML 35 Answer for obligations partner may have contracted in good faith in the interest
of the partnership business
ML 36 Answer for risks in consequence of its management
Causes of dissolution
ML 37 Without violation of agreement between partners
a. Termination of term or particular undertaking – the fixed term has expired or
object has been achieved
b. Express will of one of the partners in good faith – applicable to partnership at
will
c. Express will of all partners who have not assigned their interest or charged them
for their separate debts – either before or after termination of a fixed term or
particular undertaking
d. Bona fide expulsion of any partner from the business in accordance with power
conferred by the agreement
ML 38 Contravention of agreement between partners – circumstances that do not
permit a dissolution under any other provision of this article
ML 39 Any event which makes it unlawful for business to be carried on or for the
members to carry it on for the partnership
ML 40 Loss of specific thing promised by partner before its delivery
ML 41 Death of any partner

8 |B e s t n o o k i t
 ML 42 Insolvency of partner or partnership
ML 43 Civil interdiction of any partner
ML 44 Decree of court
1. Partner declared insane by a judicial proceeding or shown to be unsound mind
2. Incapacity of partner to perform his part of partnership contract
3. Partner guilty of conduct prejudicial to business of partnership
4. Willful or persistent breach of partnership agreement or conduct which makes it
reasonably impracticable to carry on the business with him
5. Business can only be carried at a loss
6. Other circumstances which render dissolution equitable
Effects of dissolution
Authority to bind partnership
ML 45 The general rule is authority to bind the partnership is terminated
ML 46 The exception if such binding authority is necessary to wind up partnership
affairs or complete transaction not finished
ML 47 Qualification to exception, with respect to partners
a. Authority to bind the partnership by a new contract is immediately terminated
when dissolution is not due to act, death, or insolvency of a partner
b. If due to act, death, or insolvency, partners are liable to the contract as if the
partnership did not dissolve, when the following concurs:
i. If cause is act of partner, contracting or agent partner must have
knowledge of such dissolution
ii. If cause by death or insolvency, contracting or agent partner must have
knowledge or notice
ML 48 Qualification to exception, with respect to persons not partners
a. Partner continues to bind partnership even if after dissolution in following cases
(1) Transaction in connection to winding up partnership affairs or completing
transactions unfinished
(2) Transactions which would have bind the partnership if not dissolved, when
obligee:
(a) Situation1
i. Had extended credit to partnership prior to dissolution
ii. Had no knowledge or notice of dissolution
(b) Situation 3
i. Did not extent credit to partnership
ii. Had known partnership prior to dissolution
iii. Had no knowledge or notice of dissolution or fact of dissolution
not advertised in newspaper of general circulation in the place
where partnership is regularly carried on

9 |B e s t n o o k i t
 b. Partner cannot bind the partnership anymore after dissolution
(1) Where dissolution is due to unlawfulness to carry on with business except
winding up
(2) Where partner has become insolvent
(3) Where partner unauthorized to wind up except by with one who:
(a) Situation 1
i. Had extended credit to partnership prior to dissolution
ii. Had no knowledge or notice of dissolution
(b) Situation 3
i. Did not extent credit to partnership
ii. Had known partnership prior to dissolution
iii. Had no knowledge or notice of dissolution or fact of dissolution
not advertised in newspaper of general circulation in the place
where partnership is regularly carried on
Order of application of assets
ML 49 Partnership creditors
ML 50 Partners as creditors
ML 51 Partners as investors – return of capital
ML 52 Partners as investors – share of profits
Order of application of assets (limited partnership)
ML 53 Partnership creditors, including those debts owing to limited partners
ML 54 Limited partners – share of profits
ML 55 Limited partners – return of capital
ML 56 General partner as creditors
ML 57 General partners – share of profits
ML 58 General partners – return of capital

RCC
ML 59 The Grandfather Rule is a stricter or more stringent test than the control test
when it comes to determining compliance with the minimum Filipino equity
requirement among corporations. The Grandfather Rule determines the actual
Filipino ownership and control in a corporation by tracing both the direct and
indirect shareholdings in the corporation. In other words, if the shares of stock of
the immediate investor corporation is in turn held and controlled by another
corporation, then we must look into the citizenship of the individual stockholders of
the latter corporation. In other words, if there are layers of intervening corporations
investing in a Filipinized venture, we must delve into the citizenship of the individual
stockholders of each corporation.

10 |B e s t n o o k i t
 ML 60 GR 171626 – corporation is a juridical personality separate and distinct from
those acting for and in its behalf and, in general, from people comprising it
ML 61 GR 142936 – corporate veil is pierced when corporation is just an alter ego of a
person or another corporation to perpetuate fraud
ML 62 Concept Builders v. NLRC – application of doctrine of piercing corporate veil
1. Stock ownership by one of both corporators
2. Identity of directors and officers
3. Manner of keeping corporate books and records
4. Methods of conducting business
ML 63 Supreme Court has pieced the corporate veil in following instances (strict)
1. To ward off a judgment credit
2. To avoid inclusion of corporate assets as part of estate of the decedent
3. To escape liability arising from a debt
4. To perpetuate fraud and/or confuse legitimate issues
5. To promote or to shield unfair objectives
6. To cover up an otherwise blatant violation of the prohibition against forum-
shopping
ML 64 As a rule, a corporation has a personality distinct from its stockholders, and is
not affected by the personal rights, obligations and transactions of the latter. This
general rule also applies between a parent company and subsidiary. However, the
veil of corporate fiction may be pierced when it is used as a shield to further an end
subversive of justice, or for purposes that could not have been intended by law that
created it or to defeat public convenience, justify wrong, protect fraud or defend
crime or to perpetuate fraud or confuse legitimate issues or to circumvent the law
or perpetuate deception or as an alter ego, adjunct or business conduit for the sole
benefit of the stockholders.
ML 65 Main classification of corporations, stock and nonstock
ML 66 Other classifications
1. Composition
a. Sole
b. Aggregate
2. Religious or not
a. Ecclesiastical
b. Lay
3. Charitable or not
a. Eleemosynary
b. Civil
4. Laws of incorporation
a. Foreign
b. Domestic
5. Legal right to corporate existence

11 |B e s t n o o k i t
 a. De jure
b. De facto
c. By estoppel
d. By prescription
6. Open to public or not
a. Open
b. Close
7. Management and control
a. Parent
b. Subsidiary
8. Purpose
a. Public
b. Private
c. GOCC
d. Quasi-public
ML 67 GR 155650 – Congress has no power to create GOCC with special charters unless
they are made to comply with two conditions of common good and economic
viability, GOCC is usually a stock corporation like private corporation for being an
economic vehicle
ML 68 Prime examples of GOCC are:
1. Land Bank of the Philippines
2. Development Bank of the Philippines
3. Philippine Crop Insurance Corporation
4. Philippine International Trading Corporation
5. Philippine National Bank
ML 69 Examples of public corporations are provinces, cities, municipalities, and
barangays
ML 70 Examples of private corporations are GOCC and quasi-public corporations
ML 71 Private corporation is created with respect to general law which is RCC while
government corporation is created with a special law such as GOCC with special law
ML 72 GR 169836 – a corporation where having invested capital but not divided into
shares is not a stock corporation, a corporation where one part of its annual gross
income is distributed to a party ceased to become a nonstock corporation, a
corporation which is not a stock or nonstock is not GOCC, therefore a public utility
ML 73 A de facto corporation is a defectively organized corporation, which has all the
powers and liabilities of a de jure corporation and, except as to the State, has a
juridical personality distinct and separate from its shareholders, provided that the
following requisites are concurrently present:
(a) That there is an apparently valid statute under which the corporation with its
purposes may be formed;

12 |B e s t n o o k i t
 (b) That there has been colorable compliance with the legal requirements in good
faith; and
(c) That there has been use of corporate powers, i.e., the transaction of business in
some way as if it were a corporation.
A corporation which has no defect in legal requirements is a de jure corporation.
ML 74 A corporation was created by a special law. later, the law creating it was
declared invalid. may such corporation claim to be a de facto corporation? – No,
such a corporation created by an invalid special law cannot claim to be a de facto
corporation for two reasons:
(a) First, an invalid law creates no office, confers no rights and imposes no
obligation. It is not a source of anything because it is void.
(b) Second, for there to be a de facto corporation, there must be an apparently
valid statute under which the corporation with its purposes may be formed.
ML 75 A stock corporation is one whose capital stock is divided into shares and whose
articles of incorporation allows it to distribute dividends. A non-stock corporation is
one which lacks either of the two requirements of a stock corporation.
ML 76 Based on the Constitution and statutes such as the Anti-Dummy Law, the
following are nationalized corporations:
[a] Banking institutions;
[b] Finance institutions;
[c] Public utilities;
[d] Those engaged in the disposition, development and utilization of natural
resources;
[e] Fishing companies;
[f] Shipping companies;
[g] Construction companies;
[h] Those dealing with geothermal energy;
[i] Retail companies;
[j] Mass media;
[k] Advertising;
[l] Educational institutions;
[m] Those engaged in the rice and corn industries;
[n] Those engaged in the tax-free cottage industry; and
[o] Those dealing with atomic energy.
ML 77 Components of corporation
a. Corporators
b. Incorporators
c. Stockholders
d. Members
ML 78 Three other components

13 |B e s t n o o k i t
 a. Promoters
b. Subscribers
c. Underwriter
ML 79 Doctrine of equality of shares – each share is equal in rights and liabilities unless
AoI and certificate of stock provides
ML 80 Capital stocks – authorized, subscribed, outstanding, paid-up, unissued, and legal
ML 81 Classes of shares in general – par value or no par, voting or nonvoting, common
or preferred, promotion, share in escrow, convertible, founder, redeemable, and
treasury
ML 82 Voting shares – common stock, authorized, and outstanding
ML 83 Nonvoting shares – preferred and redeemable
ML 84 All classes of shares may it be voting or not have the rights to vote in the
following instances
1. Amendment of AoI
2. Adoption or amendment of bylaws
3. Disposition of all or substantially all asset
4. Incurring, creating, or increasing indebtedness
5. Merger or consolidation
6. Increase or decrease authorized stock
7. Investment of corporate funds
8. Dissolution
ML 85 GR 51765 – redemption may not be made where the corporation is insolvent or
such redemption will cause insolvency
ML 86 Watered stock contemplates the original issuance and not related to treasure
shares
ML 87 Corporation by estoppel – persons involved shall be liable as general partners for
all liabilities and damages
ML 88 GR 125221 – there is no corporation by estoppel to be applied between persons
involved in a corporation, it has to be with relation to third persons, likewise, there
is no association if unregistered with SEC
ML 89 Power of board directors, BOD – management and shareholders – ownership
ML 90 Obligations of directors and officers
In general, directors and officers are bound by the trust fund doctrine which states
that the governing officers of the corporation hold in trust the funds of the
corporation in trust for the benefit of the stockholders. Hence, specifically, directors
and officers have the obligation to maintain loyalty, obedience and diligence to the
corporation.
According to the Corporation Code, directors and trustees shall be jointly and
severally liable for all damages suffered by the corporation, shareholders or third
persons as a result of gross negligence or bad faith in directing the affairs of the

14 |B e s t n o o k i t
 corporation or as a result of personal or pecuniary conflict of interest with their
duties as directors or trusties.
If a director, trustee or officer attempt to acquire or acquires any interest adverse to
the corporation's interest, in violation of his duty or when equity disallows him to
deal with himself, he shall be liable as trustee for the corporation and must account
for the profits which otherwise would have accrued to the corporation.
ML 91 GR 153413 – members of BOD or BOT are characterized to have fiduciary
character, director may appoint officers, as well as, discharge them
ML 92 Level of control – BOD, corporate polices and general management, and may
delegate function to officer – officers, execute BOD policies – Shareholders, residual
power over fundamental corporate changes
ML 93 Qualifications of directors or trustees
1. Must owned at least one share
2. Share must be registered in his name
3. Must continuously own at least one share during his term
4. Majority of directors must be resident of the Philippines
5. Must be a member (trustees)
ML 94 Independent directors – free from any businesses or other relationship and
independent from management – must be elected by shareholders – constitutes
20% of the board
ML 95 Requirement to have independent directors – when vested with public interest
1. Section 17.2 of SRC – corporation with at least 50 million pesos asset and at least
200 shareholders, each holds at least 100 shares
2. Nationalized corporation industry
3. Other that is determined by SEC vested with public interest
ML 96 Compliance officer – when vested with public interest
ML 97 Quorum – general rule is that majority of the board constitutes a quorum for
business transaction and every decision shall be valid as corporate act if voted by the
majority or 50% + 1, unless election of officers, except that the bylaws provide a
higher requirement to validate a quorum
ML 98 Disqualification of director, trustees, or officer – 5 years prior to election, person
is convicted by final judgment of an offense punishable by imprisonment exceeding
6 years for violating RCC and SRC or person is found administratively liable for any
offense involving fraudulent acts – may by a Philippine court or by foreign court
ML 99 Removal of directors or trustees – only by shareholders or members, with or
without just cause provided that it will not deprive the minority of the right of
representation – the SEC may remove a director or trustees upon motu proprio that
there are disqualifications
ML 100 Business judgement rule – courts will not interfere with the decisions
made by the governing board as regards the internal affairs of the corporation

15 |B e s t n o o k i t
 unless such acts are so unconscionable and oppressive as to amount to a wanton
destruction of the rights of the minority shareholders, let alone illegal.
ML 101 Doctrine of corporate opportunity – where a director, by virtue of his
office, acquires for himself a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of such corporation: A
director shall refund to the corporation all the profits he realizes on a business
opportunity which: [a] the corporation is financially able to undertake; [b] from its
nature, is in line with corporation's business and is of practical advantage to it; and [
c] the corporation has an interest or a reasonable expectancy.
ML 102 Interlocking directors – board member of two different corporations –
the general rule is that a contract between two or more corporations with
interlocking directors shall not be invalidated on that ground alone, except when
board member’s interest om one corporation is substantial and nominal on another;
his vote shall not be necessary as those mentioned in Section 31 in the corporation
which he has nominal interest – provided that the contract is not fraudulent and for
fair and reasonable cause
ML 103 Generally, corporate agents are not solidarily liable with the corporation
because of the doctrine of separate corporate personality – it is hornbook principle
that personal liability of corporate directors, trustees or officers attaches only when:
[a] they assent to a patently unlawful act of the corporation, or when they are guilty
of bad faith or gross negligence in directing its affairs, or when there is a conflict of
interest resulting in damages to the corporation, its stockholders or other persons;
[b] they consent to the issuance of watered down stocks or when, having knowledge
of such issuance, do not forthwith file with the corporate secretary their written
objection; [c] they agree to hold themselves personally and solidarily liable with the
corporation; or [d] they are made by specific provision of law personally answerable
for their corporate action.
ML 104 Self-dealing corporate agents are those [a] who have pecuniary interest
in the a transaction or contract that the corporation is entering into and [b] whose
affirmative vote is material to the realization or approval of such transaction,
contract or project.
ML 105 A contract of the corporation with one or more of its directors or
trustees, officers or their spouses and relatives within fourth civil degree of
consanguinity or affinity
ML 106 A contract of the corporation with one or more of its directors or trustees
is voidable, at the option of such corporation.
Such contract is valid if all of the following conditions are present:
[a] That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such meeting;
[b] That the vote of such director or trustee was not necessary for the approval of
the contract;

16 |B e s t n o o k i t
 [c] That the contract is fair and reasonable under the circumstances; and
[d] That in case of an officer, the contract has been previously authorized by the
BOD.
In the absence of the [a] and [b] above, there may be ratification by stockholders
representing at least 2/3 of the outstanding capital stock or at least 2/3 of the
members in a meeting called for the purpose voted to ratify the contract after full
disclosure of such adverse interest in said meeting.
ML 107 In the broad sense, a corporation has the following powers:
[a] Those expressly granted or authorized by law and its charter or articles of
incorporation;
[b] Those impliedly granted or authorized by law as are reasonable necessary to
carry out its express powers; and
[c] Those incidental to its existence.
In the narrow sense, a corporation has the following express powers (those
expressly granted by law):
[a] Power to extend or shorten its corporate term;
[b] Power to increase or decrease its capital stock;
[c] Power to incur, create or increase bonded indebtedness;
[d] Power to deny pre-emptive rights;
[e] Power to sell or dispose of corporate assets;
[f] Power to acquire own shares;
[g] Power to invest corporate funds in another corporation or business or for any
other purpose;
[h] Power to declare dividends; and
[i] Power to enter into management contracts.
ML 108 Power to extend or shorten corporate existence – requirements:
approval by majority of the board and ratification by stockholders by 2/3 vote
ML 109 Power to increase or decrease capital stock, incur, create, or increase
bonded indebtedness – requirements:
1. Written notice of proposed action given to shareholders
2. No decrease of capital stock if prejudicing on corporate creditors
3. Approval by a majority of board
4. Ratification by 2/3 vote of stockholders
5. Certificate must be signed by majority of directors and countersigned by
chairperson and secretary of the meeting
6. Approval thereof by SEC
7. Treasurer affidavit showing the 25-25 rule
ML 110 Power to deny pre-emptive rights – cases:
GR L-56655 – preemptive rights is recognized only with respect to new issues of
shares, and not respect to additional shares issued originally authorized

17 |B e s t n o o k i t
 GR L-60502 – power to issue shares of stock in a stock corporation is lodged in
the board and no stockholder’s meeting is required because additional issuance
of shares does not need the approval of stockholders
GR 138343 – a suit to enforce preemptive rights is not a derivative suit because it
is done on behalf of shareholders and not on the corporations, wherefore,
derivative suit is for the benefit of the corporation
ML 111 Sale or disposition of corporate assets – should not prejudice the rights of
creditors of the assignor, thus the acquisition of such assets by assignee is an
acquisition of liabilities of the assignor – implied doctrine, trust fund doctrine –
requirements:
1. Written notice of proposed action given to the shareholders
2. Approval of majority of the board
3. Ratification by 2/3 vote of the shareholders
4. Any dissenting holder may exercise appraisal right
ML 112 Power to acquire own shares – cases:
1. Eliminate fractional shares arising out of stock dividend – in the presence of
unrestricted retained earnings or URE
2. Collect or compromise indebtedness to the corporation arising out of unpaid
subscription – in the presence of URE
3. Pay dissenting shareholder and withdrawing – in the presence of URE
4. Acquire treasury shares – in the presence of URE
5. Redeemable shares – whether there is URE or not
6. Effect decrease of capital stock – in the presence of URE
7. In close corporation, when there is a deadlock in management – whether there is
URE or not
ML 113 SEC has the jurisdiction to investigate whether a corporation has URE to
cover the payment
ML 114 GR 77860 – creditors of corporation have the right to assume that so long
as there are outstanding debts and liabilities, the BOD will not use the assets to
purchase own stock
ML 115 Trust fund doctrine is a principle of judicial invention which says that
corporate assets are held as a trust fund for the benefit of shareholders and
creditors and that the corporate officers have a fiduciary duty to deal with them
properly
ML 116 In a nutshell, unrestricted retained earnings are surplus profits which
have not yet been earmarked for a project or transaction. More specifically, they are
earnings which have not been allocated for any managerial, contractual or legal
purpose and which are free for distribution to stockholders as dividends
ML 117 Power to invest corporate funds in other corporation or business or for
any other purpose – requisites:
1. Accomplish primary purpose:

18 |B e s t n o o k i t
 a. Approval of majority of board
b. Approval of shareholders is not necessary
2. Accomplish other purpose
a. Approval of board by majority vote
b. Ratification by 2/3 vote of shareholder
c. Written notice of proposed action given to shareholder
d. Any dissenting holder may exercise appraisal right
e. Ratification must be held at shareholder’s meeting
ML 118 As a general rule, the declaration of dividends is a business judgment
which is lodged in the governing board. By way of exception, the articles of
incorporation may provide that such declaration is required every year – it may also
happen that the corporation's unrestricted retained earnings would exceed 100% of
its paid-in capital stock every year. In such a case, each year this happens, the board
may be compelled to so declared except:
[a] When justified by definite corporate expansion projects or programs approved by
the board of directors; or
[b] When the corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring dividends without
its/his consent, and such consent has not yet been secured; or
[c] When it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for special
reserve for probable contingencies
ML 119 Broadly, the following items cannot be used for dividend distribution:
[a] Earnings allocated for managerial purposes;
[b] Earnings allocated for contractual purposes; and
[c] Earnings allocated for legal purposes.
Specifically, the dividends cannot be distributed from the corporation's capital. It
should be from actual and bona fide earnings. Revaluation surplus, reduction surplus
and treasury share also cannot be used as items for dividend distribution – in
addition to this, considerations received from the issuance of no-par value shares
form part of the capital and cannot be distributed as dividends.
ML 120 An ultra vires act is one done by the corporation outside of its purpose –
in other words, it is an act not supported by the purpose clause in the articles of
corporation
ML 121 A by-laws is the internal rules of the corporation. It is the list of policies
for the corporation's internal business – the requisites for its validity are:
[a] It must not be contrary to law, public policy or morals;
[b] It must not be inconsistent with the articles of incorporation;
[c] It must be general and uniform in its effect or applicable to all alike or those
similarly situated;

19 |B e s t n o o k i t
 [d] It must not impair the obligations of contracts or vested rights; and
[c] It must be reasonable.
ML 122 By-laws become effective and binding only upon approval of the
Securities and Exchange Commission (SEC) – also, all the elements for its validity
must be present; otherwise, it cannot bind anyone – it must be noted, however, that
by-laws are mere internal rules and are subordinate to the articles of incorporation
ML 123 A voting trust agreement results in the separation of the voting rights of a
stockholder from his other rights such as the right to receive dividends and other
rights to which a stockholder may be entitled until the liquidation of the
corporation. It is the trustee of the shares who acquires legal title to the shares
under the voting trust agreement and thus entitled to the right to vote and the right
to be elected as board of directors while the trustor‐stockholder has the beneficial
title which includes the right to receive dividends (Lee vs. CA 205 SCRA 752)
ML 124 Doctrine of equality of shares – where the articles of incorporation do not
provide for any distinction of the shares of stock, all shares issued by the corporation
are presumed to be equal and enjoy the same rights and privileges and are also
subject to the same liabilities
ML 125 Watered stock – a stock issued in exchange for cash, property, share,
stock dividends, or services lesser than its par value
ML 126 Certificate of stock – it is a paper representation or tangible evidence of
the stock itself and of various interests therein (Tan v. SEC, G.R. No. 95696, Mar. 3,
1992)
ML 127 A derivative suit is a remedy under common law available to any
stockholder in case where corporate directors have committed a breach of trust or
fraud, negligence or ultra vires acts which have caused directly injury to the
corporation and indirect injury to the stockholders and in case the governing board
is unwilling or unable to institute an action to redress the wrong – the requisites are:
[a] The party bring the suit should be a shareholder at the time the act or
transaction complained of took place;
[b] He has exhausted all intra-corporate remedies; and
[c] The cause of action actually belong to the corporation, not to the stockholder.
In addition to the above, the act complained of must not be covered by the
stockholder's appraisal right
ML 128 When certificate of stock may be issued?
[a] The certificate must be signed by the president or vice‐president, countersigned
by the secretary or assistant secretary;
[b] The certificate must be sealed with the seal of the corporation;
[c] The certificate must be delivered;
[d] The par value as to par value shares, or full subscription as to no par value shares
must be fully paid, the basis of which is the doctrine of indivisibility of subscription;
and

20 |B e s t n o o k i t
 [e] The original certificate must be surrendered where the person requesting the
issuance of a certificate is a transferee from the stockholder.
Of the five above, the short answer is [d]. The subscription must be fully-paid before
the issuance of a certificate of stock
ML 129 Basic rights of shareholder –
[a] To manage the corporation by vote;
[b] To enter into voting trust agreements;
[c] To receive dividends and to compel declaration;
[d] To transfer shares and to compel registration;
[e] To be issued stock certificates;
[f] To exercise pre-emptive rights;
[g] To exercise appraisal rights;
[h] To file a derivative suit;
[i] To recover shares of stock unlawfully sold for delinquency;
[j] To inspect books;
[k] To be furnished the most recent financial statements;
[l] To be issued a new certificate in case of loss or destruction;
[m] To have the corporation dissolved;
[n] To participate in the distribution of assets upon dissolution; and
[o] In case of close corporations, to petition the SEC to arbitrate in the event of
deadlock.
ML 130 Obligations of stockholder –
[a] To pay the balance of his unpaid subscription/s;
[b] To pay interest on his unpaid subscriptions according to the by-laws or the
contract;
[c] To pay creditors of the corporation with respect to his unpaid subscription based
on the Trust Fund Doctrine;
[d] To pay for the water in his stocks;
[e] In case of corporation by estoppel, to be liable as a general partner; and
[f] In case of close corporations, to be personally liable for torts if he actively
participates in the management of the corporation.
ML 131 Appraisal right –
It is the right to withdraw from the corporation and demand payment of the fair
value of the shares after dissenting from certain corporate acts involving
fundamental changes in corporate structure. The amount paid to the stockholder is
the fair value of his shares as of the day prior to the date on which the vote was
taken, excluding any appreciation or depreciation in anticipation of the corporate
action
The following are instances when it may be exercised:
[a] Extension or reduction or corporate term;
[b] Amendment to Articles of Incorporation which involves change in the rights of

21 |B e s t n o o k i t
 stockholders, authorize preferences superior to those stockholders, or restrict the
right of any stockholder;
[c] Investment of corporate funds in another business or purpose;
[d] Sale or disposal of all or substantially all assets of the corporation; and
[e] Merger or consolidation.
ML 132 Enforce payments of subscription – there are three available remedies:
(a) call (to action) by resolution of the governing board and sale of delinquent
shares; and (b) judicial action via a collection suit
ML 133 Procedure of delinquency sale –
[a] If there is due date, no need for a call by the board. If there is none, there must
be a board resolution declaring the unpaid subscription due on a specified date;
[b] Personal notice or notice by registered mail must be sent and addressed to the
concerned stockholder;
[c] If he fails to pay within 30 days from call or due date, the unpaid shares shall be
subjected to delinquency sale;
[d] Board resolution ordering the sale must be issued stating the amount, date, time
and place of sale;
[e] The sale shall be made no earlier than 30 days but not later than 60 days from
date of delinquency;
[f] Note of sale with a copy of the board resolution shall be send to every delinquent
shareholder in person or by mail;
[g] Publication of notice of sale for 2 consecutive weeks;
[h] Sale to the bidder who offered the full amount of the balance of subscription
including all costs for the smallest number of shares;
[i] Registration in the name of the winning bidder and issuance of certificate under
his name;
[j] Remaining (paid) shares shall be credited to the delinquent shareholder; and
[k] If there is no bidder, the corporation may purchase and pay for the shares
ML 134 No delinquent stock shall be voted for or be entitled to vote or to
representation at any stockholder’s meeting, nor shall the holder thereof be entitled
to any of the rights of a stockholder except the right to dividends in accordance with
the provisions of this Code, until and unless he pays the amount due on his
subscription with accrued interest, and the costs and expenses of advertisement, if
any. Any cash dividends due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses, while stock dividends shall be
withheld from the delinquent stockholder until his unpaid subscription is fully paid.
Holders of subscribed shares not fully paid which are not delinquent shall have all
the rights of a stockholder.
ML 135 Merger and consolidation – merger happen when a corporation absorbs
another. On the other hand, consolidation occurs when two or more corporations
form one new corporation. In the first, one corporation survives. In the second, all

22 |B e s t n o o k i t
 constituent corporations are dissolved. In the first, no new corporation is created. In
the second, a single, new corporation emerges. In the first, assets and liabilities are
acquired by the surviving corporation. In the second, they are transferred to the new
corporation.
ML 136 Corporation by estoppel – a corporation by estoppel is a legal device to
protect the corporation or third persons from deceit or fraud in dealings. Hence,
despite lack of registration of the corporation, the law treats those who purport to
act as a corporation liable as a corporation. On the other hand, subsequent
compliance with legal requirements for incorporation makes the corporation one de
facto prior to such compliance.
ML 137 Dissolution – extinguishment of the franchise of a corporation and the
termination of its corporate existence
ML 138 Dissolution may be voluntary or involuntary – cases

1. If voluntary and there are no creditors affected, it is done by filing a resolution

approved by the board and the stockholders with the SEC. This resolution must
authorize dissolution and it must be certified and countersigned.
2. If voluntary and there are creditors affected, by filing a verified petition for
dissolution with the SEC.
3. Voluntarily, there may also be a dissolution by shortening the corporate term.
This is done by amendment.
4. Voluntarily, in the case of corporate soles, mere filing of a declaration of
dissolution by the presiding elder.
5. Voluntarily, by merger or consolidation.
6. Voluntarily, by expiration of corporate term without extension. Note that, under
the new law, there is no perpetual corporate existence.
7. Involuntarily, the following are modes of dissolution:
[a] By expiration but with failure to extend;
[b] Failure to organize and commence;
[c] Continuous inoperation and delinquency for more than 2 years;
[d] Legislative dissolution; and
[e] Dissolution by the SEC.
ML 139 Doing a business – cases
1. Under the Continuity Test, doing business implies a continuity of commercial
dealings and arrangements, or performance of acts normally incidental to the
purpose and object of the organization.
2. Under the Substance Test, a foreign corporation is doing business in the country
if it is continuing the body or substance of the enterprise of business for which it
was organized.
3. Under the contract test, a foreign corporation is doing business in the Philippines
if the contracts entered into by the foreign corporation or by an agent acting

23 |B e s t n o o k i t
 under the control and direction of the foreign corporation are consummated in
the Philippines.
4. Under statutory definition, doing business means:
(1) Soliciting orders, service contracts, or opening offices;
(2) Appointing representatives, distributors domiciled in the Philippines or who
stay for a period or periods totaling 180 days or more;
(3) Participating in the management, supervision, or control of any domestic
business, firm, entity, or corporation in the Philippines; or
(4) Any act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to some extent the performance of acts or
works or the exercise of some functions, normally incident to and in progressive
prosecution of the purpose and object of its organization.
5. According to the Supreme Court, it relates to “business activities… not only
casual, but so systematic and regular as to manifest continuity and permanence
of activity to constitute doing business here…” To constitute doing business in
the Philippines, the activity should involve profitmaking.
ML 140 Close corporation – one whose articles of incorporation provide that:
[a] All issued stock, exclusive of treasury shares, shall be held by persons not
exceeding 20;
[b] All issued stock shall be subject to one or more specified restrictions on transfer;
and
[c] The corporation shall not list in any stock exchange or make any public offering of
any of its stock of any class.
Notwithstanding the foregoing, a corporation shall not be deemed a close
corporation when at least 2/3 of its voting stock or voting rights is owned or
controlled by another corporation which is not a close corporation.
Any corporation may be incorporated as a close incorporation, except:
[a] Mining or oil companies;
[b] Stock exchanges;
[c] Banks;
[d] Insurance companies;
[e] Public utilities;
[f] Educational institutions; and
[g] Corporations declared to be vested with public interest.
ML 141 The unused contributions of members cannot be offset against the
balance of receivables because this would amount to distribution of the capital of
the corporation. Members of a non‐stock corporation are not entitled to distribution
of capital. They are only entitled to distribution of capital upon dissolution when it is
provided for in the articles of incorporation or by‐laws.

24 |B e s t n o o k i t