CORPORATION LAW
structure of the shareholder corporation.
Nationality of Corporation
Control Test
Absent any doubt, the Control Test shall be used in
determining the nationality of a corporation specially in
cases where foreign ownership restrictions apply.
Cases where CT is strictly applied:
1. Exploitation of natural resources (60%)
2. Public Utilities (60%)
3. Mass Media (100%)
4. Advertising industry (70%)
5. Any industry or activity where foreign ownership
is prohibited or restricted under the Foreign
Investment Negative List.
Thus, for purposes of determining compliance with the
constitutional or statutory ownership, the required
percentage of Filipino ownership shall be applied to both
the
(a) total number of outstanding shares of stock
entitled to vote in the election of directors; and
(b) the total number of outstanding shares of
stock, whether or not entitled to vote. (Gamboa
Ruling)
Grandfather Rule
The Grandfather Rule is a method of determining the
nationality of a corporation, which is owned in part by
another corporation, by breaking down the equity
The percentage of shares held by the second corporation
in the first is multiplied by the latter’s own Filipino
equity, and the product of these percentages is
determined to be the ultimate Filipino ownership of the
subsidiary corporation.
Hence, it is only when there is doubt, based on the
Control Test, that the Grandfather Rule is applied:
1. If the subject corporation’s Filipino equity falls
below the threshold 60%, the corporation is
immediately considered foreign-owned, in which
case, the need to resort to the Grandfather Rule
disappears.
2. If a corporation that complies with the 60-40
Filipino to foreign equity requirement, it can be
considered a Filipino corporation, and if there is
no doubt as to who has the “beneficial ownership”
and “control” of the corporation, there is no need
for the application of the Grandfather Rule.
Shares
Only Preferred and Redeemable shares may be deprived
voting right.
Exception: These redeemable and preferred shares, when
such voting rights are denied, shall nevertheless be
entitled to vote on the following fundamental matters:
D - A(2) S I (3) M
1. Amendment of the Articles of Incorporation
2. Adoption and amendment of by-laws
3. Sale, lease, exchange, other disposition of all or
substantially all of the corporate property
4. Incurring, creating or increasing bonded indebtedness
5. Increase or decrease of capital stock
6. Merger and consolidation
7. Investment of corporate funds in another corporation
or business
8. Dissolution of the corporation
Redeemable shares – are shares which may be
purchased by the corporation from the holders of such
shares upon the expiration of a fixed period, regardless of
the existence of unrestricted retained earnings in the
books of the corporation.
Limitations
1. Redeemable shares may be issued only when
expressly provided for in the AOI [Sec. 8].
2. The terms and conditions affecting said shares
must be stated both in the AOI and in the
certificate of stock [Sec. 8].
3. Redeemable shares may be deprived of voting
rights in the AOI. [Sec. 6]
4. The corporation is required to maintain a sinking
fund to answer for redemption price if the
corporation is required to redeem. [SEC-OGC
Opinion No. 07-03]
5. The redeemable shares are deemed retired upon
redemption, unless otherwise provided in the AOI
(i.e., if the AOI allows for reissuance of such
shares). [SEC Rules Governing Redeemable and
Treasury Shares, 26 April 1982]
6. Unrestricted retained earnings are NOT
necessary before shares can be redeemed, but
there must be sufficient assets to pay the creditors
and to answer for operations. [Republic Planters
Banks v. Agana, G.R. No. 51765 (1997)]
7. Redemption cannot be made if such redemption
will result in insolvency or inability of the
corporation to meet its obligations. [SEC Opinion,
24 Aug 1987]
Treasury Shares – are shares which have been issued and
fully paid for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation or
through some other lawful means. Such shares may
again be disposed of for a reasonable price fixed by the
BOD.
Shares may be reacquired without impairing the
corporate trust fund. Reacquisition of shares is allowed,
provided the corporation will use assets up to the extent
of its unrestricted retained earnings.
Note: When treasury shares are sold below its par or
issued value, there can be no watering of stock because
such watering of stock contemplates an original issuance
of shares. Reacquisition of the corporation is not
included.

Steps in incorporation
1. Promotion stage
2. Drafting of AOI
3. Filing of AOI before the SEC; Payment of Fees
4. Examination of AOI; Approval or Rejection of SEC
 Grounds for Rejection:
o AOI not in substantially in
accordance with the form prescribed
o Purpose is patently unconstitutional,
illegal, immoral or contrary to law
o The certification regarding to the
amount of capital stock paid or
subscribed is false
o Required percentage of ownership
has not been complied with.
5. Issuance of Certificate of Incorporation
Trust Fund Doctrine
The Trust Fund Doctrine states that the capital stock,
properties and other assets of a corporation are regarded
as equity in trust for the payment of corporate creditors.
Effects of the trust fund doctrine
1. Dividends must never impair the subscribed capital
stock and must only be declared out of unrestricted
retained earnings (URE). [Philippine Trust Co. v.Rivera,
G.R. No. L-19761 (1923)]
2. Subscription commitments cannot be condoned or
remitted.
3. The corporation cannot buy its own shares using the
subscribed capital as the consideration therefore.
 XPN:
1. Redeemable shares may be acquired
even without surplus profit for as long
as it will not result to the insolvency of
the corporation.
2. In cases that the corporation conveys its
stocks in payment of a Debt; or
3. In a Close corporation, a stockholder
may demand the payment of the fair
value of shares regardless of existence of
retained earnings for as long as it will
not result to the insolvency of the
corporation
4. Rescission of a subscription agreement
is not allowed since it will effectively
result in the unauthorized distribution
of the capital assets and property of the
corporation
Exceptions to the Trust Fund Doctrine --- When
Distribution of Corporate Capital is Allowed
1. Amendment of the AOI to reduce the authorized
capital stock,
2. Purchase of redeemable shares by the corporation,
regardless of the existence of unrestricted retained
earnings, and
3. Dissolution and eventual liquidation of the
corporation.

The creditors of a corporation have the right to assume
that so long as there are debts and liabilities, the BOD
will not use corporate assets to purchase its own shares
of stock or to declare dividends to its stockholders when
the corporation is insolvent. [Steinberg v. Velasco, G.R.
No. L-30460 (1929)]
The scope of the doctrine when the corporation is
insolvent also encompasses other property and assets
generally regarded in equity as a trust fund for the
payment of corporate debts.
How corporate power are exercised
I. By Shareholder:
Corporate Acts Requiring All (Voting and Non-
Voting) Shareholders’ Approval
General Rule: Vote necessary to approve a
particular corporate act as provided in this Code
shall be deemed to refer only to stocks with voting
rights [Sec. 6]
Exceptions: Voting and non-voting shares shall be
entitled to vote in the following cases:
1. Amendment of AOI
2. Adoption and amendment of by laws
3. Sale, lease, mortgage or other disposition of
substantially all of corporate assets
4. Incur, create or increase of bonded
indebtedness
5. Increase or decrease of capital stock
6. Merger or consolidation
7. Investment of funds to other corporation for
any purpose other than the primary purpose
for which it was organized.
8. Dissolution
Corporate Acts Requiring Voting Shareholders’
Approval (only)
1. Declaration of dividends
2. Management contracts
3. Fixing the consideration of No-Par share
4. Fixing the compensation of Directors
II. By the Board of Directors
Unless otherwise provided in this Code, the board
of directors or trustees shall exercise the corporate
powers, conduct all business, and control all
properties of the corporation. [Sec. 22]
Majority vote of the Board is needed in the
exercise of the ff. powers:
1. Filling of vacancies in the board.
 Xpn: if the same is due to the removal by
stockholders or members or by expiration
of the term.
2. Extension or shortening of the corporation
3. Increase or decrease of capital stock or creation
of bonded indebtedness
 4. Sale or other disposition of all or substantially
all assets
5. Acquisition of its own shares.
6. Investment of corporate funds in any
corporation for any purpose other than the
primary purpose
7. Declaration of cash, property, and stock
dividends
8. Entering into management contracts
 But 2/3 vote of OCS is required if 1) a SH
representing the same interest of both the
managing and managed corporations own more
than 1/3 of the total outstanding capital stock or
2) majority of directors in both corporations are
the same
9. Amendment of AOI
10. Amendment of by-laws
11. Approval of the plan of merger or
consolidation
12. Dissolution
NB: those which are bold is not found in the
shareholder’s right
III. By the Corporate Officers
Authority of corporate officers
A person dealing with a corporate officer is put on
inquiry as to the scope of the latter’s authority, but
an innocent person cannot be prejudiced if he had
the right to presume under the circumstances the
authority of the acting officers.
Specific powers that have No Appraisal Right
1. Power to incur, create, increase bonded
indebtedness
2. Power to shorten corporate term
3. Power to acquire own shares
4. Power to declare dividends
5. Power to enter into management contract
NB: these are all specific powers found exclusively for
the BOD, except the bonded indebtedness one.
Fundamental Rights of a Stockholder (FU-VIP-SMR)
1. Direct or indirect participation in management
[Sec. 6]
2. Voting rights [Sec. 6]
3. Right to remove directors [Sec. 27]
4. Proprietary rights (D-SP[2]AT)
a. Right to dividends [Sec. 42 and 70]
b. Appraisal rights [Sec. 80]
c. Right to issuance of stock certificate for
fully paid shares [Sec. 63]
d. Proportionate participation in the
distribution of assets in liquidation [Sec.
139]
e. Right to transfer of stocks in corporate
books [Sec. 62]
 f. Pre-emptive right [Sec. 38]
5. Right to inspect books and records [Sec.73]
6. Right to be furnished with the most recent
financial statements/reports [Sec. 73]
7. Right to recover stocks unlawfully sold for
delinquent payment of subscription [Sec. 68]
8. Right to file individual suit, representative suit
and derivative suits
Right to Vote
I. By Majority Vote (MARC[2]-V)
i. Power to enter into management
contract
ii. Amendment of by laws
iii. Revocation of delegation to the BOD
of the power to amend or repeal or
adopt by laws.
iv. Granting compensation other than
per diems to directors
v. Fixing the consideration for no-par
shares
vi. Voluntary dissolution of a where creditors are affected
corporation where no creditors are
affected
vii. Calling a meeting to remove
directors or trustees
II. By 2/3 vote
i. Removal of directors or trustees
ii. Amendment of AOI
iii. Delegating the power to amend or
repeal by-laws or adopt new by laws
iv. Extending/shortening corporate
term
v. Increasing/decreasing capital stock
vi. Issuance of shares not subject to pre-
emptive right
vii. Sale/disposition of all or
substantially all of corporate assets
viii. Investment in another corporation
ix. Stock dividend declaration
x. Power to enter into management
contract (only as an exception)
xi. Ratifying acts of disloyalty of a
director
xii. Ratifying contracts with respect to
dealings with director/trustees
xiii. Stock dividend declaration
xiv. Plan of merger/consolidation
xv. Plan of distribution of assets in non-
stock corporation
xvi. Incorporation of religious society
xvii. Voluntary dissolution of corporation
Stocks and Stockholders
Subscription Contract – any contract for the acquisition of
unissued stock in an existing corporation or a corporation
still to be formed.
 Pursuant to the Trust fund Doctrine, a corporation
has no legal capacity to release an original
subscriber to its capital stock from the obligation
 of paying for his shares, in whole, or in part,
without a valuable consideration.
Pre-Incorporation Subscription (PIS)
A subscription of a corporation still has to be formed
shall be IRREVOCABLE for a period of at least 6
months from the date of subscription. XPN:
1. All of the other subscriber consent to the
revocation
2. The corporation fails to incorporate within the
same period.
No PIS may revoked after the articles of
incorporation are submitted to the SEC.
Stocks shall not be issued for a consideration less than the
par or issued price thereof.
Shares of stock shall not be issued in exchange for
promissory notes or for future service.
Certificate of Stock – a written instrument signed by the
proper officer of a corporation stating or acknowledging
that the person named in the document is the owner of a
designated number of shares of its stock.
 The same is merely a tangible evidence of
ownership of shares of stock.
 Shares of stock so issued are personal property
and may be transferred by the delivery of the
certificate/s indorsed but the owner.
 No transfer shall be valid, except as between the
parties, until the transfer is recorded in the books
of the corporation
 No unpaid shares of stock shall be transferrable in
the books of the corporation.
 Thus, the minimum requisites for a valid transfer
of stocks: (DER)
1. There must be delivery of the stock
certificate
2. The certificate must be endorsed by the
owner or his attorney-in-fact or other
persons legally authorized to make the
transfer.
3. To be valid against 3rd persons, the
transfer must be recorded in the books
of the corporation.
 In transferring stock, the secretary of a corporation
acts in purely ministerial capacity. Thus, such act
maybe compelled by mandamus.
 Transfer that is not recorded on the Stock and
Transfer Book of the corporation is non-existent as
far as the corporation is concerned. So, until the
registration is effected, the transferee is not a
stockholder but an outsider.
 If the shares of stock which is 50% unpaid is
transferred, the transferee shall be liable for the
payment of the remaining 50% but without
prejudice to his right to recover from the
transferor.
 Endorsement need not be specifically in favor if
the purchaser, it may be endorsement in blank.
Indivisibility of Subscription – no certificate of stock shall
be issued to the subscriber until the full amount of the
subscription together with interest and expenses, if any,
has been paid.
 The payment is then pro-rated among all of the
shares, so that no one share is fully paid.
Liability of Directors for Watered Stock
Watered Stock – stocks issued for a consideration less
than its par or issued value or for a consideration other
than cash, valued in excess if its fair value.
 Any director who consents to the issuance or
having knowledge of the insufficient
consideration, does not file a written objection
with the Cor Sec shall be solidary liable with the
SH concerned to the corporation or its creditors for
the difference between the value received at the
time of the issuance of stock and the par or issued
value of the same.
Delinquent Sale
The BOD may, by resolution, order the sale of the
delinquent stock which shall not be less than 30 days nor
more than 60 days from the date the stocks become
delinquent.
Unless the delinquent SH pays the balance due, said
delinquent stocks shall be sold at a public auction to such
bidder which shall offer to pay the full amount.
Should there be no bidders, the corporation may bid for
the same and the total amount shall be credited as fully
paid. Title to all the shares of stock covered by the
subscription shall be vested in the corporation as treasury
shares and may be disposed of by the corporation with
the provisions of the law.
Delinquent stock cannot:
1. Be voted for
2. Be entitled to vote
3. Be represented at any stockholder’s meeting
4. Be counted for purposes of quorum
5. Be entitled to any of the rights of a SH.
 XPN: right to dividends
 Cash dividends shall be applied to
the unpaid balance on the
subscription
 Stock dividends shall be withheld
from the delinquent SH until he is
fully paid.
On the contrary, holder of sotck of shares not fully paid
but NOT delinquent is entitled to rights of SH.
 Thus, when an SH subscribed to 10k shares,
however only paying 25% of the subscription.
When no call was made on the unpaid
subscription, he is entitled to vote to the total
shares subscribed since there was no call yet thus,
he is not delinquent yet.
Stock and Transfer Book
A corporation must also keep a stock and transfer book,
which shall contain:
1. A record of all stocks in the names of the
stockholders alphabetically arranged
2. The installments paid and unpaid on all stocks for
which subscription has been made, the date
thereof, by and to whim made.
STB shall be kept in the principal office of the corporation
or on the office of the stock transfer agent and shall be
open for inspection by any director or stockholder at
reasonable hours on business day.
An injunction and a writ of PI filed by a corporation is
generally unavailable to prevent stockholders from
exercising their right to inspect.
Take note, an heir of a deceased SH has no right to
inspect the books. The stocks must be distributed first in
the estate proceedings, and the transfer be recorded in
the STB.
Effect of refusal of on the part of the Corporation on the
Right to Inspect
Such officer shall be liable to such director, trustee, SH or
member for damages, and in addition, shall be guilty of
an offense which shall be punishable under Section 161
(violation of duty to maintain records, to allow their
inspection or reproduction) of this Code.
If refusal is due to a resolution or order of the BOD/BOT,
the liability will attach to those director/trustees who
voted for such refusal.
XPN: if such person demanding to examine:
1. Has improperly used the information secured.
2. Was not acting in good faith or for a legitimate
purpose in the making the demand
3. Is a competitor
If the Corporation denies or does not act on a demand for
inspection and/or reproduction, the aggrieved party may
report such denial to the SEC.
Merger and Consolidation
Merger – union whereby one corporation absorbs one or
more existing corporations, and the absorbing
corporation survives and continues the combined
business. (A+B=A)
Consolidation – the union of two or more existing
corporations to form a new corporation. (A+B=C)
The surviving or consolidated corporation assumes,
automatically, the liabilities of the dissolved corporation.
Step
1. BOD/BOT of each corporation shall approve, by
majority vote of each, a plan of merger or
consolidation.
2. Submission of plan to stockholders or members of
each corporation for approval
o Voting requirement: affirmative vote of SH
representing at least 2/3 of OCS of each
corporation or at least 2/3 of members
o Voting requirement for amendment to the
plan of merger/consolidation – majority
vote of respective boards and ratified by SH
representing 2/3 of OCS or 2/3 members.
o Right of Appraisal of dissenting SH shall be
respected, but if after the approval of SH of
such plan, the BOD decides to abandon the
plan, the right of appraisal extinguishes.
3. Execution of the formal agreement, referred to as
the articles of merger or consolidation, by the
corporate officers of each constituent corporation.
o The articles of incorporation is signed by
president or VP and certified by the
secretary.
4. Submission of the said articles or merger or
consolidation to the SEC for approval.
o In case of merger or consolidation of bank,
banking institution, loan assoc, trust
companies, insurance companies, public
utilities, educational institutions and other
special corporations governed by special
laws, the favorable recommendation of the
appropriate government agency shall be
first obtained.
5. If, upon investigation, the SEC has reason to
believe that the proposed merger or consolidation
is contrary to or inconsistent with the provisions
of this Code or existing laws, it shall set a hearing
to give the corporations concerned the
opportunity to be heard. Notices shall be sent 2
weeks before the hearing.
6. Issuance by SEC of a certificate of
merger/consolidation approving the articles and
plan of merger or consolidation, at which time
such merger or consolidation shall take effect.
De Facto Merger
A de facto merger can be pursued by one corporation
acquiring all or substantially all of the properties of
another corporation in exchange of shares of stock of the
acquiring corporation.
So, what happens now to the employees of the
constituent corporations?
 The SC said that the acquisition of all assets,
interest and liabilities of the absorbed corporation
necessarily includes the right and obligations of
the absorbed corporation.
 Consequently, the surviving corporation becomes
bound by the employment contracts entered into
by the absorbed corporation. These employment
contracts are not terminated. They subsist unless
their termination is allowed by law.
 Despite the change in shareholder, there is
actually no change in the juridical entity and
therefore existing employees cannot automatically
be considered as separated.
Appraisal Right
The right means that a SH who dissented and voted
against the proposed corporate action, may choose to get
out of the corporation by demanding payment of the fair
market value of his shares.
When the right may be exercised:
1. In case of amendment to the AOI has the effect of
changing or restricting the rights of any
stockholder or class of shares, or of authorizing
preferences in any respect superior to those of
outstanding shares of any class, or of extending or
shortening the term of corporate existence
2. In case of sale, lease, exchange, transfer, mortgage,
pledge, or other disposition of all or substantially
all of the corporate property and assets as
provided by the code.
3. In case of merger or consolidation
4. In case of investment of corporate funds for any
purpose other than the primary purpose of the
corporation. ‘
Appraisal right is a statutory grant which could not be
removed by mere amendment in the AOI.
How the Right is Exercised and its Implications
 A written demand on the corporation for the
payment of the fair market value of the shares
shall be submitted by the dissenting stockholder
who votes against a proposed action, within 40
days from the day the vote was taken
 If the withdrawing SH and the corporation cannot
agree on the fair value of the shares, within 60
days from the approval of corporate action, the
same shall be determined by the and appraised by
3 disinterested persons. One chosen by SH, one
chosen by corp, the last one chosen by the two
previously chosen.
 No payment shall be made to any dissenting SH
unless the corporation has URE to cover such
payment. (Trust Fund Doctrine)
 All rights accruing to the withdrawing SH shall be
suspended from the time of the demand of
payment, except the right of the SH to receive the
payment of the fair value of the shares.
 Within 10 days after the demand of payment, the
dissenting SH shall submit the certificate of stock.
Failure to do so shall, at the option of the
corporation, terminate the rights.
 If the proposed action is implemented, the
corporation shall pay the SH, upon surrender of
the certificate of stock.
 If the dissenting SH not paid, within 30 days after
the awards, the voting and dividend rights shall
immediately be restored.
 In case the share is transferred after dissenting, the
transferee cannot exercise such right since the
same can only be exercised by the SH who
dissented to the particular corporate action.
Non-Stock Corporation
A non-stock corporation is one where no part of its
income is distributable as dividends to its members,
trustees, or officers. Any profit which a NSC may obtain
incidental to its operation shall, whenever necessary and
proper, be used for the furtherance of the purpose or
purposes for which the corporation was organized.
Membership in a NSC and all rights arising therefrom are
personal and non-transferrable, unless the AOI or by-
laws otherwise provides.
Membership: Right to Vote
Right to vote may be limited, broadened or denied to the
extent specified in the articles of incorporation or the
bylaws.
Unless, so broadened or denied, each member, regardless
of class, shall be entitled to 1 vote.
Manner:
1. In person
2. Unless otherwise provided by AOI or bylaws, by
proxy
3. Remote Communication or in absentia.
Termination of Membership
Membership shall be terminated in the manner and for
the causes provided in the AOI or the by-laws.
Election and Term of Trustees
The number of trustees shall be fixed in the AOI or by
laws which may or may not be 15. They shall hold office
for not more than 3 years until their successors are
elected and qualified.
Trustees elected to fill the vacancies occurring before the
expiration of a particular term shall hold office only for
the unexpired period.
Rules on Distribution of Assets
The assets of a NSC undergoing the process of
dissolution for reasons other than those set forth in Sec
139 shall be applied and distributed as follows:
1. All liabilities and obligation of the corporation
shall be paid.
2. Assets held by the corporation upon a condition
requiring return, transfer, or conveyance, and
which a condition occurs by reason of dissolution,
shall be returned, transferred or conveyed.
3. Assets received and held by the corporation
subject to limitations permitting their use only for
charitable, religious, benevolent, educational or
similar purpose, but not held upon a condition
requiring return, transfer or conveyance by reason
of the dissolution, shall be transferred or conveyed
to 1 or more organizers engaged in activities in the
PH substantially similar to those dissolving
corporation.
4. Assets other than those mentioned in the
preceeding paragraphs, if any, shall be distributed
 in accordance with the provisions of the AOI or by
laws.
5. In any other case, assets may be distributed to
such persons, societies, organizations or
corporations, w/n organized for profits, as may be
specified in a plan of distribution.
Plan of Distribution of Assets
A plan providing for the distribution of assets, consistent
with the provisions of this title, may be adopted by a
NSC in the process of dissolution in the ff manner:
A. The BOT shall, by majority vote, adopt a
resolution recommending a plan of distribution
and directing the submission thereof to a vote at a
regular or special meeting of members.
B. Each member entitled to vote shall be given a
written notice setting forth the proposed plan of
distribution.
C. Such plan of distribution may be adopted upon
approval of at least 2/3 the members having
voting rights present or represented by proxy at
such meeting.
Close Corporation
A close corporation is one who the AOI provides that:
 All the corporation’s issued stock of all classes,
exclusive of treasury shares, shall be held of
record by not more than a specified number of
persons, not exceeding 20.
 All the issued stock of all classes shall be subject to
1 or more specified restrictions on transfer
permitted by this time
 The corporation shall not list in any stock
exchange or make any public offering of its stocks
of any class.
A corporation is not closed when at least 2/3 of its voting
stock is owned by another corporation which is not
closed corporation.
Corporation now allowed to be closed:
1. Mining or oil companies
2. Stock exchange
3. Bank
4. Insurance companies
5. Educational institutions
6. Corporation declared to be vested with public
interest
To be considered CC, Courts must look into the AOI to
find the provision expressly stating:
1. The number of SH does not exceed 20
2. A preemption of shares is restricted in favor of any
SH or of the corporation
3. Listing to any stock exchange is prohibited.
Restriction on Transfer of Shares
To be valid and binding on any purchaser in good faith,
the restriction must appear in the AOI, by laws, as well as
in the certificate of stock.
Effects of Issuance or Transfer of Stock in breach of
Qualifying Conditions
Whenever a person to whom stock of a close corporation
has been issued or transferred has or is conclusively
presumed to have notice of:
1. His ineligibility to be a SH
2. That the transfers of stock would cause the stock
of the corporation to be held by more than the
number of persons permitted under the AOI
3. That the transfer violates a restriction on transfer
of stock, and that the corporation has the option to
refuse to register the transfer in the name of the
transferee
Abovementioned does not apply is the SH of the CC
consents to the transfer or that the AOI of the CC has
been amended.
Agreements by SH
Agreements duly signed and executed by and among all
SH before the formation and organization of a CC shall
survive the incorporation and shall continue to be valid
and binding between such SH, if such be their intent.
When a Board Meeting is Unnecessary or Improperly
Held
Unless the by law provide otherwise, any action taken by
the directors of a CC without a meeting properly called
and with due notice shall nevertheless be deemed valid:
1. Before and after such action, a written consent
thereto is signed by all directors
2. All the SH have actual or implied knowledge if the
action and make no prompt objection in writing.
3. The directors are accustomed to take informal
action with the express or implied acquiescence of
all stockholders.
4. All the directors have knowledge of the act and
none of the have written objection over such act.
Preemptive Right
Preemptive Right of SH in CC shall extend to all stock to
be issued, including reissuance of treasury shares,
whether for money, property, or personal services, or in
payment of corporate debts, unless the AOI provide
otherwise.
Amendment of AOI
Any amendment to the AOI which seeks to delete or
remove any provision required by law, or to reduce a
quorum of voting requirement as stated in AOI shall
require the affirmative vote of at least 2/3 of OCS, with
or without voting rights
Deadlocks
If the directors or SH are so divided on the management
of the corporation’s business, the SEC, upon written
petition by any SH, shall the power to arbitrate.
A Provisional Director may be appointed as well. He
shall be an impartial person who is neither a SH nor a
creditor of the corporation or any of its subsidies.
Withdrawal of SH or Dissolution of Corporation
Any SH of a CC may, for any reason, compel the
corporation to purchase shares held at fair value, which
shall not be less than the par or the issue value, when the
corporation has sufficient assets in its books to cover its
debts and liabilities exclusive of capital stock.
Any SH of a CC may, by written petition to the SEC,
compel the dissolution of the such corporation whenever:
1. Any acts of the directors, officers, or those in
control of the corporation are illegal, fraudulent,
dishonest, oppressive or unfairly prejudicial to the
corporation or any SH.
2. Corporate Assets are being misapplied or wasted.
Special Corporations
A. Education Corporations
Board of Trustees
Trustees of EI organized as NSC shall not be less than 5
nor more than 15, provided that the number of trustees
shall be in multiplies of 5.
Trustees shall hold office for 5 years, it shall be in a way
that every year the term of office of 1/5 of the trustees
shall be expire. So every vacancies filled shall hold an
office of 5 years.
B. Religious Corporations
Classes of Religious Corporation
1. Corporation Sole
 Incorporated by 1 or more persons
 Formed by chief archbishop, bishop, priest
and etc for the purpose of administering
and managing, as trustee, the affair,
property and temporalities of any religious
denomination sect or church.
 Regardless of nationality, can acquire real
property by way of sale or donation for its
church, charitable, benevolent or
educational purposes.
 Such may sell or mortgage RP held by it by
obtaining order from the RTC of the
province where the property is located.
2. Religious Societies
  Formed by more than 1 person, may upon
written consent and/or by an affirmative
vote at a meeting called for such purpose of
at least 2/3 of its membership, incorporate
for the administration of its temporalities or
for the management of its affairs, properties
and estate.
Dissolution
A CS may be dissolved and its affairs settled voluntarily
by submitting to the SEC a verified declaration of
dissolution.
Upon the approval of the declaration of dissolution by
the SEC, the corporation shall cease to carry on its
operations except for the purpose of winding up on its
affairs.
Can a CS be converted to Corporation Aggregate bay
mere amendment? Yes, it is possible.
One Person Corporation
The real reason for allowing OPC is to give him control,
especially when his business is still in the early stages.
Nature
OPC is a corporation with only 1 SH. Only a natural
person, trust, or an estate may for an OPC.
OPC has a perpetual term. However, in case of trust or
estate, the term is coterminous with the existence of the
trust or estate.
Foreign national may put up OPC, subject to the
applicable capital requirement and constitutional and
statutory restrictions on foreign participation in certain
investment areas or activities.
An OPC shall not be require to have a minimum
authorized capital stock except as otherwise provide by
special law.
Not allowed to form OPC:
1. Bank
2. Quasi Bank
3. Pre-Need
4. Trust
5. Insurance
6. Public and public listed companies
7. Non-chartered GOCC
8. Natural Person who is licensed to exercise a
profession for the purpose of organizing such
profession except as provided by law.
OPC is require to file AOI, but not required to submit by-
laws.
OPC shall indicate the letters OPC either below or at the
end of its corporate name.
The single SH shall be the sole director and president of
the OPC.
Within 15 days from the issuance of its certificate of
incorporation, the OPC shall appoint its treasurer,
corporate secretary and other officers as it may deem
necessary, and notify the SEC thereof within 5 days from
such appointment.
The single stockholder may not be appointed as secretary
but may assume the role of treasurer. The
stockholder/treasurer shall give a bond to the SEC. the
bond shall be renewed every 2 years.
One of the special functions of Secretary is to notify the
SEC of the death of the single SH, that is why the
secretary and single SH cannot be one person, within 5
days from the occurrence.
Nominee and Alternate Nominee
The SH shall designate a nominee and an alternate
nominee. The nominee shall, in the event of the single
stockholder’s death or incapacity take place of the SH as
director and manage the corporation.
A written consent of the nominee and alternate nominee
shall be attached to the application for incorporation.
In case of death or permanent incapacity of SH, the term
of the nominee shall be until the legal heirs are
determined and the heirs have designated one of them to
be the SH.
Reportorial Requirement
1. Annual financial statement
2. Report containing explanations or comments by
the president on any adverse remark of the
auditor in the latter’s report
3. Disclosure of all self-dealings and related party
transactions entered into between the OPC and
SH.
Failure to submit the same shall place the corporation
under delinquent status.
A sole SH claiming limited liability has the burden of
affirmatively showing that the OCP was adequately
financed.
 Where the SH cannot prove that the
property of the OCP is independent of the
SH personal property, the SH is jointly and
severally liable for the debts and other
liabilities of the OPC.
 Doctrine of Piercing the Veil applies with
equal force in OCP.
When a single SH acquires all the stocks of an ordinary
corporation, the latter may apply for conversion in to an
OPC. Upon approval, the SEC shall issue a certificate of
filing of amended articles of incorporation.
Dissolutions
The corporation ceases to be a juridical person and
consequently can no longer continue transacting with
busiess.
However, for the purpose only of winding up its affairs
and liquidating its assets, its corporate existence
continues for a period of 3 years from the dissolution.
Methods:
I. Voluntary
a. Where no creditors are affected
 Voting requirement: majority of the
BOD/BOT AND by a resolution
adopted by the affirmative vote of the
SH owning at least majority of the OCS
or majority of members in a meeting
held for such purpose
 The dissolution shall take effect only
upon the issuance of certificate of
dissolution by the SEC
 Favorable recommendation of
appropriate government agency for
dissolution of:
o Banks
o Banking and Quasi Banking
Institutions
o Preneed
o Insurance and trust companies
o Non-stock savings and loan
associations
o Pawnshops
o And other financial
intermediaries
b. Where creditors are affected
o Voting Requirement: signed by
majority of the BOD/BOT PLUS
affirmative vote of SH
representing at least 2/3 of the
OCS or at least 2/3 of the
members at a meeting called for
its purpose.
o The verified petition shall include
a list of all the creditors
o There will be a period given tfor
objections, after 5 days of such
period, the objections will be
heard and tried by the SEC.
o The dissolution shall take effect
only after the issuance of the SEC
of the certificate of dissolution
c. Dissolution by shortening corporate terms
o Dissolution may be affected by
amending the AOI to shorten the
corporate term.
o A copy of the amended AOI shall
be submitted to the SEC.
o Upon expiration of the corporate
term, dissolution shall
automatically take effect on the
day following the last day of the
corporate term stated in the AOI,
without the need of the issuance
 of SEC of a certificate
dissolution.
Withdrawal of Request and Petition for Dissolution:
1. Withdrawal of request for dissolution shall be
made in writing, duly verified by any
incorporator, director, trustee, SH or member and
signed by the same number of incorporators,
directors, trustees, SH or member. The same shall
be submitted within 15 from the receipt of the SEC
of the request for dissolution.
2. Withdrawal of petition of dissolution shall be in
form of a motion and similar in substance with the
withdrawal of request for dissolution but shall be
verified and filed prior to publication of order
setting the deadline for filing objections to the
petitions.
II. Involuntary Dissolution
SEC may motu proprio or upon filing of verified
complaint by any party dissolve the corporation.
Grounds:
a. Non-use of corporate charter under Sec. 21
b. Continuous inoperation of a corporation
under Sec. 21
c. Upon receipt of a lawful court order
dissolving the corporation
of d. Upon finding by final judgement that the
corporation procured its incorporation
through fraud
e. Upon finding by final judgement that the
corporation:
i. Was created for the purpose of
committing securities violation and
etc.
ii. Committed or aided in the
commission of securities violations,
smuggling, tax evasions, money
laundering or graft and corrupt
practices and the SH knew the same
iii. Repeatedly and knowingly tolerated
the commission of graft and corrupt
practices or other fraudulent or
illegal acts by its directors, trustees,
officers or employees.
If the corporation is dissolved by final judgement based
on (e) hereof, its assets after payment with its liabilities
shall, upon petition of the SEC, be forfeited in favor of
the national government. Without prejudice to the rights
of innocent SH or employees for services rendered.
Despite the dissolution, the parties in an intra-corporate
dispute are still corporate actors. The dissolution does
not automatically convert the parties into total strangers
or change their intra-corporate relationships.
Liquidation
It is the process of settling the affairs of said corporation,
which consists of adjusting the debts and claims, that is,
of collecting all that is due the corporation, the settlement
and adjustment of claims against the it and payment of
its just debts.
Liquidation Period lasts for 3 years from dissolution. In
case of Banks, the liquidation period of the same is 6
months only.
The winding up may be undertaken by the corporation
itself, through the BOD or by its BOT to whom are the
assets conveyed for liquidation, or by a receiver
appointed by the SEC upon its decree dissolving the
corporation.
Now, at any time during said 3 years, the corporation is
authorized and empowered to convey all of its property
to trustees for the benefit of SH, members, creditors and
other interested persons.
The law provides that conveyance must be made to the
trustees within 3-year period, but did not say that the
completion of the liquidation be within the 3-year period
as well.
After payment of all corporate debts and liabilities, the
remaining assets must be distributed to the SH in
proportion of interest in the corporation. This share is
called liquidating dividend.
However, in case the SH, or member is unknown or
cannot be found, the share shall be escheated in favor of
the government.
As a rule, a SH cannot get back any of his invested capital
until dissolution and liquidation, xpn:
1. Decrease of capital stock
2. As otherwise allowed by the code.
Foreign Corporation
One formed, organized or existing under laws other than
those in the PH and those allow Filipino citizen and
corporation to do business in its own country or State.
“Doing Business” implies a continuity of commercial
dealings and arrangements and contemplates, to that
extent, the performance of acts or works of the exercise of
some of the functions normally incident to its purpose.
On this note, a corporation is required to procure a
license only if it is doing business.
To constitute “doing business” the activity undertaken in
the Ph should involve profit-making.
Doing business does not seem to include:
1. Mere investment as a SH by a foreign entity in
domestic corporation
2. Nor having a nominee director or officer to
represent its interests in such corporation
 3. Nor appointing a representative or distributor
domiciled in the PH which transacts business in its
own and for its own account
The SC discussed the 2 general tests to determine w/n a
foreign corporation can be considered as “doing
business” in the PH.
1. Substance test – W/n the FC is continuing the
body of the business or enterprise for which it was
organized or w/n it has substantially retired from
it and turned it over to another.
2. Continuity test – implies the continuity of
commercial dealings and arrangements, and
contemplates, to that extent, the performance of
acts or works of the exercise of some of the
functions normally incident thereto.
Application of a License
The FC shall submit a copy of its AOI and by laws
certified according to the law and translation to the
official language of the PH.
Attached to the application for license shall be a
certificate under oath duly executed by authorized
official or officials of the jurisdiction of its incorporation,
attesting to the fact:
1. That the laws of the country or state of the
applicant allow Filipinos and Filipino corporations
to do business therein, and
2. The applicant is an existing corporation in good
standing.
Upon issuance of the license, such FC may commence to
transact business in the PH and continue to do so for as
long as it retains its authority to act as corporation.
Resident Agent
A RA may either be an individual residing in the PH or
DC lawfully transacting business in the PH.
Qualifications:
1. Individual resident agent must be of good moral
character and of sound financial standing
2. DC who will act as a resident agent must likewise
provide for proof of good moral standing.
Service Process on RA
As a condition to the issuance of license, the FC shall file
with the SEC a written power of attorney designating a
person who must be a resident, on whom the summons
and other legal processes may be served.
Amendment of AOI
Within 60 days from the effectivity of the AOI, the FC
shall file with the SEC a duly authenticated copy of the
amended articles.
Amended License
The FC shall obtain amended license in the event if
change in the corporate name, or desire to pursue other
or additional purpose.
Merger of Consolidation
Within 60 days from the effectivity of merger or
consolidation, the FC shall file with the SEC a copy of
the articles of consolidation or merger duly authenticated
by proper officials of the country or state under whose
laws the merger was effected
Provided, If the absorbed corporation is also a FC doing
business in the PH, the same shall submit a withdrawal
of license.
Doing business without license
Effect: shall not be permitted to maintain or intervene in
a suit or proceedings in a court in the PH. But the FC may
be sued against before PH court.
Revocation of License
The grounds in Sec. 152 does not automatically revoke
the license.
The SEC will issue certificate of revocation.
Withdrawal of FC
Requisites: (by filing a petition)
1. All claims which have accrued in the PH have
been paid
2. All taxes, or any lawfully due assessment to the
PH govt is paid
3. The petition for withdrawal of license has been
published in 3 consecutive weeks.
Derivative Suit
The law makes the corporate directors or officers liable
for the damages suffered by the corporation in violation
of its fiduciary duties.
The real party in interest is the corporation, and the suing
SH is mere nominal party. He is suing in behalf of the
corporation.
Requisites:
1. He was a SH or member at the time the acts or
transactions subject to the suit occurred or at the
time the action was filed
2. He exerted all reasonable efforts (exhaustion of
remedies in the AOI, by laws and etc) and alleges
the same with particularity in the complaint.
3. No appraisal rights are available for the acts
4. The suit is not a nuisance suit.
The suit is brought in the name of the corporation. The
judgement must be made binding upon the corporation
in order that the corporation may get the benefit of the
suit.
Topics to review:
Directors, and officers
Filling up vacancies
Elections
PARTNERSHIP
Partnership is a contract where two or more persons bind
themselves to contribute to a common fund, a) money, b)
property, c) industry, with the intention of dividing the
profits among themselves.
 The partnership may exist even before the
common fund is created. It may not come from
the partners; it may be borrowed from third
person. It can be in form of credit or industry.
 There must be valid contract.
GR: Any person capacitated may enter in to a
partnership, as long as he is not:
1. Suffering from civil interdiction
2. Minors
3. Insane or demented person
4. Deaf-mutes who do not know how to write
5. Incompetents who are under guardianship
XPN: Capacitated persons may not enter into a contract
of partnership if:
1. They are prohibited from giving donations (void
donations)
a. Made between persons who were guilty of
adultery or concubinage at the time of the
donation
b. Made between persons found guilty of the
offense
c. Made to public officers or his wife,
descendants or ascendants for the reason of
office
d. Every donation between spouses during
marriage
2. Corporation cannot enter into a partnership in the
absence of statute or charter. (public corporation)
 Corporations established under the RCC has the
power and capacity to enter into partnership, joint
venture.
 In universal partnership of all present property
does not include properties that partners may
acquire subsequently by inheritance, legacy or
donation.
o The fruits may be included by stipulation.
o Same rule applies to other after-acquired
properties
 If the articles of universal partnership does not
specify the kind, the partnership will be
considered one of all the profits.
 The effect of unlawful object of the contract shall
be confiscation of profits and instruments, tools
and processes in favor of the government
o This shall not include contributions of the
partners unless the same are instruments or
tools of crime.
 There is no prescribed form for the contract of
partnership but the same shall be subject to
1771,1772 and 1773 and statute of fraud:
o Where immovable property or real right are
contributed to the partnership, a public
instrument shall be necessary.
 An inventory of the property, signed
by the parties shall be attached to the
public instrument
 Otherwise, the contract of
partnership is void.
o Every contract of partnership having a
capital of 3k or more, in money or property,
shall appear in a public instrument.
 The instrument must be recorded in
the office of SEC
 Failure to comply shall not affect the
liability of the partnership and the
members thereof of third persons.
 Attributes to remember
o Weak personality – partnership is deemed
to have a weak personality since it may be
dissolved without need to go through a
formal dissolution process
o Mutual Agency – all partners are
considered agents and whatever they do
alone shall bind the partnership
o Delectus Personae – one selects his partners
on the basis of their personal qualification
and qualitie. This is the reason for the
mutual agency rule.
o Partners burdened with unlimited liablity.
 Co-ownership and co-possession do not of itself
establish a partnership, even when there is sharing
of profit in the use of the property
o Xpn – co-ownership of inherited properties
is automatically converted into
unregistered partnership the moment said
common properties and/or the income
derived are used in a common fund with
intent of profit.
 Partnership by Estoppel
 o (a) He is liable as though he were a partner
when –
1. There is an existing partnership;
2. All the partners consented to the
representation; and
3. A partnership liability results.
(b) He is liable jointly and pro rata (as
though he were a partner in fact) with those
who consented to the representation when:
1. There is an existing partnership
but not all the partners consented; or
2. There is no existing partnership
and all those represented as partners
consented to the representation.
(c) He is liable separately when:
1. There is an existing partnership
but none of the partners consented;
or
2. There is no existing partnership
and not all of those represented as
partners consented to the
representation.
 GPP are not taxable, income tax are imposed on
the partners themselves in their individual
capacity
o But GPPs are still required to file income
tax returns
 Revocation of Power by Managing Partner
o General Rule: Power is irrevocable without
just or lawful cause.
o The powers of the managing partner may
be revoked:
 If appointed in the articles of
partnership, when:
 There is lawful cause
 Partners representing the
controlling interest revoke
such power
 If appointed after the constitution of
the partnership, at any time and for
any cause.
 When there are two or more managing partners
appointed
o Each one may separately execute all acts of
administration.
o If any of them opposes the acts of the
others, the decision of the majority prevails.
o In case of a tie, the partners owning the
controlling interest will decide. [Art. 1801,
NCC]
 In case of Irreconcilable deadlock, those who
voted against shall prevail, the same having been
entered into without authority.
 Management when manner not agreed upon
o Partners are subjected to mutual agency
o Any important alteration in the immovable
property requires unanimity, if alteration is
necessary for the preservation of the
property, however, consent of others is not
required.
 o If refusal is manifestly prejudicial to the
partnership, court intervention should be
sought.
o Consent need not be expressed.
Rights and Obligation of the Partnership
1. Right to contribution, right to warranty
 Every partner is presumed to be the debtor of
the partnership for whatever he may have
promised to contribute
 Failure to contribute? The partner is ipso jure a
debtor if the partnership even in the absence of
demand.
 When contribution is goods, the amount
thereof must be determined by proper
appraisal of the value.
 In case a specific and determinate thing, there
should be warranty against eviction, and to
deliver to the partnership the fruits of the
property contributed, without the need for
demand.
 Any partner who refuses to contribute an
additional share to the capital, except
industrial partner, to save the venture shall be
obliged to sell his interest to the other partners,
unless there is agreement to the contrary.
o The refusing capitalist partner should
have refused not for the reason of
financial inability.
2. Right to have the sums applied pro rata
 A managing partner who collects a
demandable sum owed to him from a person
who also owes the partnership, shall apply the
sum pro rata to both credits. (to him and the
corporation.)
3. Right to be compensated
 Every partner is responsible to the partnership
for damages suffered by it through his fault.
 He cannot compensate the damages with the
profits and benefits which he may have earned
in his industry
4. Right to Accounting of the Profits received
without the Consent of other Partners
5. Obligation to Reimburse Partners
Obligations of Partners among Themselves
1. Right to Associate another in share
 This refers to the contract of subpartnership
 The associate shall not be admitted into the
partnership without the consent of all the other
partner.
2. Right to Inspect Partnership Books
 Exercised at any reasonable hour. This means
reasonable business days throughout the year.
 Includes having a obtaining a copy of the same.
3. Right to Formal Account
 As a general rule, this right only accrues upon
dissolution of the partnership
 Xpn:
a. If he is wrongfully excluded from the
partnership business or possession of its
property by his co-partners
b. If the right exists under the terms of any
agreement
c. If, without his consent, a partner has
derived profits from any transaction
connected with the formation, conduct, or
liquidation of the partnership or from any
use of partnership property
d. Whenever other circumstances render it just
and reasonable
4. Property Rights of Partners
 Property rights of a partner are:
o Right to a specific partnership property
o Interest in the partnership
o Right to participate in the management
 Assignment of Interest – does not dissolve the
partnership and does not entitle the assignee
to:
o Interfere in the management or
administration of the partnership
business or affairs (it would in effect
allow a third party to participate in the
affair of the partnership)
o Require information or account of
partnership or
o Inspect partnership books
 It merely entitles the assignee to:
o Receive profits to which the assigning
partner was entitled
o In case of fraud in management, entitles
himself of the usual remedies
o In case of dissolution: 1) receive his
assignor’s interest, 2) require an
accounting from the date only of the last
account agreed to by all the partners.
5. Right to be Reimbursed by the Partnership
 The provision is meant to grant to every
partner the right to demand from the
partnership reimbursement of advances made
on behalf of the partnership business
 The same is not applicable when there is no
other money than that contributed as capital is
involved.
6. Right to Ask for Dissolution
7. Obligation to Render True and Full Information
 The provision is meant to grant to every
partner the right to demand from the
partnership reimbursement of advances made
on behalf of the partnership business
8. Obligation to Account and Act as Trustee
 General Rule: The partner cannot use or apply
exclusively to his own benefit partnership
 assets or results of the knowledge or
information gained by him as a partner to the
detriment of the partnership.
 XPN: If the taking by the partner is with the
consent of all other partners.
9. Obligation not to Engage in Another Business
FOR INDUSTRIAL PARTNERS
 General rule: An industrial partner cannot
engage in business for himself. Should he do
so, the capitalist partners, as well as industrial
partners may either: Exclude him from the
firm; or Avail themselves of the benefit which
he may have obtained with a right to damages.
[de Leon]
 Exception: He may engage in business for
himself when the partnership expressly
permits him to do so. [Art. 1789, NCC]
 Remedy of the other partners – The other
partners have the remedy of either excluding
the erring partner from the firm or of availing
themselves of the benefits which he may have
obtained.
 An action for specific performance to compel
the partner to perform the promised work is
not available as a remedy because this will
amount to involuntary servitude.
FOR CAPITALIST PARTNERS
 General Rule: For a capitalist partner, the
prohibition on engaging in another business
extends only to any operation which is of the
same or similar kind of business in which the
partnership is engaged
 Exception: Unless there is a stipulation to the
contrary.
 If the capitalist partner violates this
prohibition, he shall:
(1) Bring to the common funds any
profits accruing to him from his
transactions; and
(2) Personally bear all the losses.
10. Obligation to Share in the Profits/Losses
 They shall be distributed in conformity with
the agreement.
 If only the share in profits has been stipulated,
the share in the losses shall be in the same
proportion.
 In the absence of any stipulation:
(a) The share in the profits of the capitalist
partners shall be in proportion to their
contributions.
(b) The losses shall be borne by the capitalist
partners, also in proportion to the
contributions.
(c) The share of the industrial partners in the
profits is that share as may be just and
equitable. If he also contributed capital, he
will receive a share of the profits in
proportion to his contribution; and
(d) The industrial partner, who did not
contribute capital, is not liable for losses.
  A stipulation excluding one or more partners property by a partner in the ordinary course of
from any share in the profits or losses is void, business
expn industrial partner who did not contribute
capital assets. 3. Liability of Partners for Partnership Contracts
 But this does not exempt the industrial partner  Acts apparently for the carrying on the
from liability insofar as third persons are usual business
concerned. o Binds the partnership
o He may recover what he gave to 3rd o Xpn:
person from other partners since he is  No authority to act
exempted by law from losses.  Person whom he deals has
knowledge
Obligations of Partnership/Partners to Third Persons  Acts not apparently for carrying on of the
usual business
1. Operate under a firm name o Does not bind the partnership
 Those who not being a member of the o Xpn – partnership authorized him to
partnership, include their names in the firm do so.
shall be subject to liability of a partner.  Acts of strict Dominion
o One or some of partners have no
2. Liability for Partnership Debts authority to do the acts of strict
 Upon exhaustion of its assets, all partners are dominion
liable pro rata with all their property. Any o XPN:
partner may enter into a separate obligation to  Authorized by all the partners
perform a partnership contract  Other partners have
 GR: partners are liable subsidiarily abandoned the business
 XPN: third person who transacted with the  Acts in contravention of a Restriction
partnership can hold the partners solidary o Does not bind the partnership to
liable for the whole obligation if the case falls person having knowledge of the
under 1822 or 1823. restriction
 The provisions refer to wrongful acts or
omission and misapplication of money or 4. Liability for Admission of a Partner
  An admission or representation by any partner
may be used as evidence against the
partnership when:
a. It concerns partnership affairs; and
b. Such affairs are within the scope of his
authority
5. Liability for Wrongful Acts of a Partner
 Partnership is solidary liable with the partner
who causes loss or injury to any person not a
partner.
o In the ordinary course of business
o Not in the ordinary course of business
but authorized.
6. Liability for Misapplication of Money
7. Liability in case of Partnership by Estoppel
8. Liability of Incoming Partner
 Article 1826 provides that incoming partner is
liable for liabilities incurred before his
admission provided that the same shall be paid
out of partnership properties unless otherwise
stipulated.
9. Liability with regard to personal creditors of
partners
Dissolution and Winding Up
 When the partners continue the partnership
after the expiration of the term without making
a new agreement, the firm becomes a
partnership at will.
Causes of dissolution
1. Without violation of the agreement of between
partners
o This involves the expiration of term, express
will of one partner who acts in good faith in
case no definite term is provided, or expulsion
of a partner.
2. In contravention of Agreement between the
Partners
o If the cause is not justified or no cause was
given, withdrawing partner is liable for
damages.
3. By Operation of Law
a. Any event which makes it unlawful for that
business of the partnership to be carried on
b. Specific thing which a partner had
promised to contribute, perishes before
delivery
c. By death of a partner
d. Insolvency of a partner
e. Civil interdiction of a partner
4. By Decree of Court
 a. A partner has been declared insane
b. Partner becomes incapable of performing
his part in the partnership contract
 Incapacity should be lasting
c. Partner guilty of such conduct as tends to
affect prejudicially the carrying on of the
business
d. Partner willfully or persistently commits a
breach of the partnership agreement
e. Business of the partnership can only be
carried on at a loss.
f. Other circumstance render dissolution
equitable.
Limited Partnership
 A limited partner may be a general partner at
the same time.
 Such fact must be stated in the certificate
for record
 Limited partner is liable for the partnership if
he contributes services instead of only money
or property
 Limited Partner is liable as a General partner
when:
o His surname appears in the partnership
name (with certain exception)
o He takes part in the control of the
business
o The certificate contains false statement
of which he knows and which was
relied upon, resulting in loss.

 A partnership formed by two or more persons

having members: one or more general partner
and one or more limited partner
 Limited partners contribute capital and share
in the profit but is not be bound by the
partnership obligations.
 Death of LP does not dissolve the partnership.
 Partners must sign and swear to a certificate in
compliance with art 1833 and file a certificate
for record in the SEC.
 Must include the word “limited” or LTD.
 Must not include the name of the limited
partner, unless the same is also the surname of
a general partner.
INSURANCE

Insurance – a contract by which one party, for a

consideration that is usually paid in money, either in a
lump sum or at a different times during the continuance
of risk, promises to make a certain payment, usually of
money, upon the destruction or injury of something in
which the other party has an interest.

No particular form is required for a contract of insurance.

Elements: C[2]R[2}IM
1. Cause
2. Consideration
3. Risk of loss or damage
4. Risk-distributing Scheme
5. Insurable Interest
6. Meeting of minds

Under the code, the following are void:

1. Stipulation in a policy for the payment of loss
whether the person injured has no interest in the
property insured
2. Stipulation that the policy received as proof of
such interest

Take note: insurable interest is not required in industrial

life insurance.

Characteristics:
1. Consensual
 2. Aleatory b. CN shall be valid and binding not more
3. Voluntary than 60 days from the date of the issuance
4. Executory and unilateral but synallagmatic c. No separate premium for the CN
5. Conditional d. CN may be cancelled by either party upon
6. Contract of adhesion prior notice to the other of at least 7 days
7. Personal contract e. Policy should be issued within 60 days
8. Uberrimae fides from the issuance of the cover note
f. 60 days may be extended upon written
For specific kind of Insurance Contract: approval of the Insurance Commission
1. For non-life insurance – a contract of non-life
insurance is a contract of indemnity and only Grounds for Cancellation of Non-Life Insurance: (with
entitled to recover the amount of actual loss prior notice to the insured)
sustained. 1. Non-payment of premium
 GR: only non-life insurance policy or property 2. Conviction of crime out of acts increasing the
insurance contracts are contracts of indemnity. hazard of the insured.
Life insurance are not contract of indemnity 3. Fraud or material misrepresentation
since the value of life is immeasurable. 4. Willful or reckless acts or omissions increasing the
 XPN: where the basis of the insurable interest risk insured against
of the policy owner on the life of the insured is 5. Physical changes in the property insured making
a commercial relationship, then such contract is it uninsurable
a contract of indemnity. 6. Discovery of other insurance coverage the makes
2. For life insurance – are generally assignable or the total insurance in excess of the value of the
transferrable, like property insurance as they are property insured.
in the nature of property. 7. Determination of by the Insurance Commission

Cover Note – person who wish to be insured may get

protection before the perfection of the contract (or upon
notice of approval of the application) by securing a cover Requisites for the cancellation:
note. Subject to the ff rules: 1. Prior notice of cancellation to the insured
a. CN shall be issued or renewed only upon 2. Notice be based on the occurrence after effective
prior approval of the Insurance date of the policy of one or more of the grounds
Commission mentioned.
 3. Notice in writing, mailed, or delivered to the
named insured at the address shown in the policy
4. Must state the grounds on which the cancellation
is based.
Beneficiary
 In case the beneficiary is excluded being a person
specified in Article 739 (void donations), the
policy is still binding, the estate of the insured
shall receive the proceeds.
 In property insurance, the beneficiary must have
an insurable interest over the property
 The designation of beneficiary is revocable unless
the right to revoke is expressly waived in the
policy.
o If the designation is irrevocable, the
beneficiary may pay the premium if the
insured fails to pay the same.
o The consent of the irrevocable beneficiary is
needed if there is an intention to add
beneficiary.
 Innocent spouse is allowed to revoke the
designation of husband as irrevocable beneficiary
after legal separation
Transfer of Policy
 Policy may be transferred in life insurance, but not
in property insurance.
 Property insurance, need consent of the insurer .
Classes:
1. Marine Insurance
 Concerned with the perils of the property in, or
incidental to transit.
 Loan on bottomry – loan obtained for the value
of the vessel on a voyage
o The amount of insurable interest is the
difference between the amount of the
loan and the value of the boat. Thus, if
the amount of the loan does not cover
the total value of the of boat, the owner
can still insure the boat.
 Loan on Respondentia – loan obtained as a
security for the value of the cargo
 Two kinds of perils:
o Peril of the sea
o Peril of the ship
 Rule on All Risk Covered:
o GR: in the absence of a stipulation, the
risk insured against are only perils of
the sea.
o Xpn: however, in an all-risk policy, all
risk are covered.
o Burden rest to the insurer to prove that
the loss in caused by the risk included.
 Constructive Total Loss – on in which the loss,
although not actually total, is of such character
that the insured is entitled, if he thinks fit, to
treat it as total by abandonment.
As when CTL exists:
 o English Rule: when the subject matter,
while still existent, is so damaged as to
not to be worth, when repaired, the cost
of the repairs
o American Rule: when it is so damaged
that the cost of the repairs would exceed
½ of the value of the thing insured. (50%
Rule)
o Philippine Rule: the insured may not
abandon thing insured unless the loss or
damage is more than the ¾ of its value.
o Freightage cannot be abandoned unless
the ship is also abandoned
 Abandonment – act of the insured by which, after
the constructive total loss, he relinquished his
interest over the thing insured. Subject to the
following conditions:
o Abandonment must not be partial nor
conditional
o Must be made within reasonable time
after the receipt of reliable information
of the loss.
o Abandonment made by giving notice to
the insurer, which may be done, orally
or in writing.
o Must be absolute and total
 No notice is required in actual total loss
 Effect of abandonment:
o Transfer by the insured of his interest to the
insurer. With all the chances of recovery
and indemnity
o If a marine insurer pays for a loss as if it
were an actual total loss, he is entitled to
whatever may remain of the thing insured,
or its proceeds or salvage, as if there had
been a formal abandonment
o Upon an abandonment, acts done in good
faith by those who were agents of the
insured in respect to the thing insured,
subsequent to the loss, are at the risk of the
insurer, and for his benefit
 Average
o Extraordinary or accidental expense
uncured during the voyage for the
preservation of the vessel and cargo from
the time it is loaded and the voyage
commenced until it ends and the cargo is
unloaded.
Kinds
o General average
 Includes damages and expenses
which are deliberately caused by the
master of the vessel or upon his
authority, in order to save the vessel,
her cargo, or both at the same time
from a real and known risk.
 The loss is borne by all the owners of
the interests involved, who are pro
tanto obliged to give proportionate
contributions to make up for such
loss
o Particular average
  Includes damages and expenses
which have not inured to the
common benefit and profit of all
 The loss is suffered alone by the
owner of the cargo or of the vessel.
o To claim general average contribution:
1. There must be common danger to
the vessel or cargo
2. The sacrifice must be for the
common safety or benefit of all
3. It must be successful
4. Expenses and damages shall be
incurred after taking proper legal
steps and authority.
o An example of particular average loss
would be wages of the crew when the
vessel is detained by reason of force
majure.
 Warranties in Marine Insurance
o Implied Warranty of Seaworthiness
 In Time Policy, ship should be
SW at the commencement of
every voyage it undertakes
during that time.
 In case of Cargo Policy, the ship
should be SW at the
commencement of each particular
voyage.
o Implied Warranty Against Improper
Deviation
XPN:
Caused by the circumstances
over which the master or the
owner of the ship has any control.
 When necessary, to comply with
a warranty, or to avoid a peril,
w/n the peril is insured against
 When made in GF, and upon
reasonable grounds of belief in its
necessity to avoid peril
 When made in GF, for the
purpose of saving human life or
relieving another vessel in
distress.
o Implied Warranty of Proper
Documentation
2. Fire Insurance
 Includes loss by:
1. Fire
2. Lightning
3. Windstorm
4. Tornado
5. Earthquake; and
6. Other allied risks, when such risks are
covered by extension to fire insurance
policies or under separate policies.
 Presence of heat, steam or smoke is evidence of
fire, but taken by itself will not prove the
existence of fire.
 Risk
o Risk assumed by the insurer is the loss
and damage caused by hostile fire
 o The policy should not be construed to
protect the insured from injury
consequent upon his negligent use or
management of fire, so long as it burns
in the place it ought to be.
 Alterations in Use or Condition
o Entitles the insurer to rescind the
contract if such alteration:
 Increases the risk
 Was made without the consent of
the insurer, by means within the
control of the insured.
 Measure of indemnity
o Open Policy – only the expense
necessary to replace the thing lost or
injured in the condition it was at the
time the injury will be paid.
o Valued Policy – parties are bound by
agreed valuation, in the absence of fraud
or mistake.
o Parties may provide for an option-to-
rebuild clause concerning the repairing,
rebuilding and etc of the building and
structure.
3. Casualty Insurance
 Covering loss or liability arising from accident
or mishap
 This includes, but not limited to:
1. Employer’s liability insurance
2. CMVLI
3. Plate Glass Insurance
4. Burglary and Theft Insurance
5. Other similar kinds of insurance.
 Division:
o Liability Insurance – against specified
perils which may give rise to liability on
the part of the insured
o Indemnity Insurance – against specified
perils affecting persons. May be brought
by the insured for loss actually
sustained and paid by him.
 No Action Clause
o Requirement in CI which provides that
a suit must first be instituted, and a final
judgement be first obtained against the
insured before the person injured can
recover the policy.
o NAC cannot prevail over the ROC
provisions which ae aimed at avoiding
multiplicity of suits.
4. Suretyship
 is an agreement whereby a party, the surety,
guarantees the performance by another party,
called the principal obligor, of an obligation or
undertaking in favor of a third party called the
obligee.
 It shall be deemed an insurance contract if the
surety’s main business is that of the surety, and
not merely incidental to any other legitimate
business or activity.
  Evidenced by a document called surety bond.
In turn, the obligor executes an indemnity
agreement in favor of insurer.
 The liability of the surety under the bond, is
joint and several, or solidary.
5. Life Insurance
 An insurance on human lives and insurance
appertaining thereto or connected therewith.
 The ff shall be life insurance
o Contract or undertaking for the
payment of annuities
 Including payment of lump sums
under a retirement program
where a life insurance company
manages or acts as a trustee for
such retirement program
o Every contract of pledge for the
payment of endowments or annuities.
 Risk
o Death or Survival
 Suicide – if committed after 2
years from the date of the policy’s
issuance or its last reinstatement
unless the policy provides for a
shorter term. (any period
extending the 2 year period is
void)
 If committed in state of insanity,
regardless of the date of the
commission, unless suicide is an
excepted peril.
 Incontestability clause – In Sun
Life of Canada (Philippines), Inc.
v. Sibya, a more recent case, the
Supreme Court decided that the
death of the insured within the
two-year period will render the
right of the insurer to rescind the
policy nugatory or without effect.
 So the insurer is given 2 year
period to contest the policy by
reason of fraud,
misrepresentation or concealment
6. Microinsurance
 Is a financial product or service that meets the
risk protection needs of the poor.
7. CMVLI
 Policy of insurance to indemnify the death,
bodily injury, and/or damage to property of a
third-party or passenger arising from the use of
motor vehicle.
 It is a requisite for registration or renewal of
registration of a motor vehicle by every land
transportation operator or owner.
 The liability of the insurer is direct and
primary so the insurer need not wait for final
judgement in the criminal case to be liable.
 The claimants/victim may be passenger or
third party.
 The following clauses are relevant to CMVLI
 o Authorized Driver Clause – the driver,
other than the insured owner, must be
duly licensed to drive the motor vehicle,
otherwise the insurer is excused from
liability
o Theft Clause – is a stipulation including
theft as one of the risks.
o No Fault Clause - provision required in
every compulsory motor vehicle liability
insurance regarding claims for death or
injury to a passenger or third party on a
liability insurance policy covering the
vehicle.
 Any claim for death or injury to any passenger
or third party shall be paid without the
necessity of proving fault or negligence of any
kind, provided the total indemnity in respect of
any person shall not exceed P15,000.
8. Compulsory Insurance Coverage for Agency-
Hired Workers
 Insurance mechanism made available by the
law to provide insurance protection for OFW.
Variable Contracts – insurance that is linked with
investment.
Insurable Interest
 The existence of an insurable interest gives a
person the legal right to insure the subject
matter of the insurance.
 GR: Insurable Interest must be capable of
pecuniary estimation because the purpose of
insurance is to indemnify
 XPN: in insuring the life of a person, the
purpose is not to indemnify but act as an
investment or savings instrument.
Change in interest
 Does not void the contract but merely
suspends the same until the things is vested to
the same insured person.
 XPN:
o Life, health and accident insurance
o Change in the interest in the thing
insured after the occurrence of an injury
o Change in interest of one or more of
several things, separately insured by
one policy, does not affect the policy
o Change in the interest by will or
succession.
o Transfer of interest by one or several
partners, who are jointly insured, to the
others. This will avoid the policy only
to the partner transferring his interest
but not as to others
 o Automatic transfer of interest in cases in
which the policy is so framed that it will
inure to the benefit of whomsoever may
become the owner of the interest
insured during the circumstance of the
risk.
Insurable Interest in Life
 Insurable Interest in one’s own life
 unlimited interest w/n the benefit is for
himself or the other
 Life insurance may acquire to secure the life of:
a. Himself, spouse or children
b. Any person whom he wholly or in part
depends for education or support or whom
he has pecuniary interest
c. Any person under a legal obligation to him
for the payment of money, or respecting
property or services, of which death or
illness might delay or prevent the
performance
d. Of any person upon whose life any estate of
interest vested in him depends.
 In (a) mere relationship suffices, while in (b) (c)
and (d), there should be pecuniary estimation.
 A decree of legal separation of the spouse does not
remove the insurable interest of a spouse over the
other.
 The insurable interest of the creditor to the debtor
ceases upon full payment.
 Support need not be based on legal obligation to
support.
Insurable Interest over the Property
 Any interest therein and it may consist in:
o Existing interest
o An inchoate interest founded on an existing
interest
o Any expectancy coupled an existing
interest.
 Test – in general, a person has insurable interest
over the property, if he derives pecuniary benefit
from its preservation or prejudice by its
destruction w/n he has title in, lien upon, or
possession of the property.
 Estoppel cannot be invoked
 A person who has the mere right to possess the
property may insure the same for its full value and
in his own name, even if it is
 The heir has no insurable interest over the
property he will inherit.
 A purchaser of goods in a completed contract of
sale already acquires interest to the property
pending delivery.
 Mere hope and expectancy is not insurable, unless
it is founded on an actual right to the thing upon a
valid contract
 The insurable interest is limited up to the actual
value of interest thereto.
 Beneficiary must have an insurable interest over
the property.
  Transfer of property does not include the transfer
of the insurance policy.
Perfection of Insurance Contract
 Perfected by mere appeal
 There is offer when the insured submits an
application
 There is acceptance when the insurer approves the
application.
 The contract becomes effective upon payment of
premiums.
 GR: breach of warranty gives the insurer a
right to rescind the contract, except:
o Loss occurs before the time of
performance
o Performance becomes unlawful
o Performance becomes impossible
TRANSPO

Recission of Insurance Contract Test:

1. Concealment  Whether the undertaking is a part of the activity
 The matters concealed should be facts engaged in by the carrier that he has held out to
occurring before the time the policy becomes the general public as his business or occupation.
effective  Article 1732 does not distinguish between one
 GF not a defense. whose principal business activity is the carrying of
2. Representation persons or goods or both and one who does such
 Kinds: things as an ancillary activity.
o Affirmative
o Promissory Extraordinary Diligence
 Acceptance of Premium, will not stop the  In case of loss of effects of passengers or death or
insurer from rescinding the contract on the injuries to passengers, the common carrier is
ground of misrepresentation presumed to be at fault or have acted negligently
3. Warranty unless it can prove that it observed extraordinary
 Kinds diligence
o Affirmative  Breach: carrier may be held liable for breach of
o Promissory obligation through fraud or negligence, delay or
o Express any other manner that contravenes the tenor of the
o Implied obligation
  Effects of Delay:
o The carrier would still be liable even if the
damage was caused by fortuitous events
o The stipulation limiting liability of the
carrier is not operative
 In case of breach, the carrier is liable for actual and
compensatory damages.
o Moral Damages – generally not recoverable
in breach of contract unless:
 Death of a passenger
 Fraud, bad faith or gross negligence
Defense of Common Carrier
 Exercise of Extraordinary Diligence
 CC is liable for loss, destruction, or deterioration
of goods, unless due to: (EXCLUSIVE LIST)
1. Flood, storm, earthquake, lightning, or
other natural disaster or calamity
2. Acts of the public enemy in war, whether
international or civil
3. Acts or omission of the shipper or owner of
the goods
4. The character of the goods or defects on the
packing or in the containers
5. Order or act of competent public authority
6. Exercise of extraordinary diligence.
 Requisites for Fortuitous Event:
1. The cause or the failure of the debtor to
comply must be independent of human will
2. I must be impossible to foresee, or if it can
be foreseen, it must be impossible to avoid
3. The occurrence must be such character as to
render it impossible for debtor to fulfill his
obligation in a normal manner
4. The obligor must be free from any
participation in or the aggravation of the
injury resulting to the creditor.
 Contributory negligence will not exonerate the
carrier, it will only mitigate the liability.
Duration of Liability
 Goods – when they are unconditionally placed in
the possession of, and received by the carrier until
the same are delivered to the person who has right
to receive them
 Passengers – the carrier is bound to exercise
utmost diligence the moment the passenger
bought ticket and presents himself at the proper
place and in a proper manner to be transported.
o Passenger should have the intention of
boarding the CC
 Continuing offer rule – A public utility bus, once it
stops, is in effect making a continuous offer to bus
riders.
 All person who remains on the premises within a
reasonable time after leaving the conveyance are
to be deemed passengers.
Liability for Acts of Employees and Passengers
 CC are liable for the death of or injuries to
passengers through negligence or willful acts his
employees, although the latter may have acted
 beyond his authority or in violation of the orders
of the CC.
o This liability does not cease upon proof that
they exercised all the diligence of a good
father of the family in the selection and
supervision of their employees.
 Liability of CC for the personal violence of its
employees or agents upon its passengers extends
only to those acts which that the carrier could
foresee or avoid through the exercise of degree of
diligence
 CC is responsible for injuries suffered by a
passenger on account of willful acts or negligence
of other passenger or of stranger, if the CC’s
employees, through the exercise of DOAGFOAF,
could have prevented or stopped the act.
Warsaw Convention
 Limit of liability of Carrier
o Persons – 250,000 Francs
 Unless otherwise provided by
special contract
 If US is the place of origin,
destination or stopping place, the
limits is $75,000 inclusive of legal
fees and etc.
o Registered Baggage and of Cargo – 250
Francs per kilogram, Except:
 If the passenger or consignor has
made a special declaration of interest
in delivery at destination.
 Caused by willful misconduct of
owner
 Caused by gross negligence of owner
 Absence of baggage check
 Carrier did not issue ticket
 Waiver by carrier
o Objects of which the passengers take charge
themselves – 5000 francs
 Notice of Claim/Complaint – is mandatory or
condition precedent
o Baggage – 3 days
o Baggage – in case of delay of delivery,
within 14 days from the time the baggage
was placed at the disposal of the passenger
o Goods – 7 days from delivery
 Prescription – the case must be filed in court
within:
o 2 years from receipt in case of an action for
damage to passenger baggage
o If the action is for tort, the case may be filed
within 4 years.
PRE-NEED PLANS
 Pre-need company must always provide grace
period of at least 60 days within which to pay the
accrued installment
 The planholder shall be allowed a period of not
less than 2 years from the lapse of the grace period
wo reinstate the plan.
 The pre-need company shall give a written notice
to the plan holder that his plan will be cancelled if
not reinstated within 2 years.
o 2 notices:
 Within 30 days from the expiration
of the grace period
 Within 30 days from the expiration
of the reinstatement period.
o Failure to give the notices required shall
preclude the pre-need company from
treating the plan as cancelled.