U.P.

LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

BUSINESS
ORGANIZATIONS
COMMERCIAL LAW

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U.P. LAW BOC BUSINESS ORGANIZATIONS
A. PARTNERSHIPS
1. General Provisions
Definition
By the contract of partnership:
1. Two or more persons bind themselves to
contribute to a common fund:
a. money;
b. property; or
c. industry
2. With the intention of dividing the profits
among themselves.
Two or more persons may also form a
partnership for the exercise of a profession.
[Art. 1767, NCC]
Elements
According to Article 1767, the elements are as
follows:
1. Two or more persons bind themselves
to contribute money, property, or
industry to a common fund
Money – must be in legal tender.
Checks, drafts, promissory notes, and
other mercantile documents are not
money. There is no contribution of
money until they have been cashed.
[Art. 1249, NCC]
Property – may be real, personal,
corporeal, or incorporeal property.
Industry – means the active
cooperation, the work of the party
associated, which may be either
personal manual efforts or intellectual,
and for which he receives a share in the
profits (not salary) of the business.
Common Fund
The NCC requires the parties “bind themselves
to contribute” to a common fund. The
partnership may therefore exist even before the
common fund is created. The common fund
may not even come from the partners
themselves but may be borrowed from third
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persons. The form of the common fund may not
even be cash or property; it can be in the form
of credit or industry. [Lim Tong Lim v. Philippine
Fishing Gear, G.R. No. 136448 (1999)]
2. With the intention of dividing the profits
among themselves
Intention to Divide Profits
If the common fund’s work is “indispensable,
beneficial and economically useful to the
business” of the partners and the profit motive
is the primordial reason to establish the
partnership, even if there are no actual profits,
then there is partnership. [AFISCO v. CA, G.R.
No. 112675 (1999)]
Note: There must be a valid contract.
Additionally, a partnership contract must
comply with the necessary elements of a
contract under the Civil Code (cause, object,
and consideration).
Parties
General Rule: Any person capacitated to
contract may enter into a contract of
partnership.
The following persons CANNOT enter into a
contract of partnership:
a. Those suffering from civil interdiction;
b. Minors;
c. Insane or demented persons;
d. Deaf-mutes who do not know how to write;
e. Incompetents who are under guardianship.
Exceptions: The capacity of the following
persons to enter into a contract of partnership,
though capacitated to contract generally, are
limited:
a. Those who are prohibited from giving each
other any donation or advantage cannot
enter into a universal partnership [Article
1782];
Void donations:
1. Those made between persons who
were guilty of adultery or concubinage
at the time of the donation [Article 739,
NCC]
U.P. LAW BOC BUSINESS ORGANIZATIONS
2. Those made between persons found
guilty of the same criminal offense, in
consideration thereof [Article 739,
NCC]
3. Those made to a public officer or his
wife, descendants and ascendants, by
reason of his office [Article 739, NCC]
4. Every donation or grant of gratuitous
advantage, direct or indirect, between
the spouses during the marriage shall
be void, except moderate gifts, which
the spouses may give to each other on
the occasion of any family rejoicing.
The prohibition shall also apply to
persons living together as husband and
wife without a valid marriage. [Article
87, Family Code]
b. A corporation cannot enter into a
partnership in the absence of express
authorization by statute or charter.
[Mendiola v. CA, G.R. No. 159333 (2006)]
Under Sec. 35 of the Revised Corporation
Code (RCC), every corporation incorporated
under the RCC has the power and capacity to
enter into a partnership, joint venture,
merger, consolidation, or any other commercial
agreement with natural and juridical persons.
There is no prohibition against a partnership
being a partner in another partnership. [de
Leon]
Object
IN A UNIVERSAL PARTNERSHIP
A universal partnership may refer to:
1. All present property –
a. The partners contribute all the property
which belongs to them to a common
fund, with the intention of dividing the
same among themselves, as well as
the profits they may acquire therewith.
[Art. 1778, NCC]
b. The property contributed includes all
those belonging to the partners at the
time of the constitution of the
partnership.
c. A stipulation for the common
enjoyment of any other profits may also
be made. However, the property which
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the partners may acquire subsequently
by inheritance, legacy or donation
cannot be included in such stipulation,
except the fruits thereof. [Art. 1779,
NCC]
2. All the profits –
a. It comprises all that the partners may
acquire by their industry or work during
the existence of the partnership.
b. Only the usufruct over the property of
the partners passes to the partnership.
[Art. 1780, NCC]
When the articles of universal partnership do
not specify its nature (all present property or all
the profits), the partnership will be considered
as one only of all the profits. [Art. 1781, NCC]
Rule on After-Acquired Properties
Aside from the contributed properties, only the
profits of the contributed common property (no
other profits) are included. Thus, should a
partner subsequently acquire a property as
remuneration for his work, such property and
its fruits are not to be enjoyed by the universal
partnership of all present property. [Paras]
Properties subsequently acquired by
inheritance, legacy, or donation, cannot be
included in the stipulation but the fruits thereof
can be included in the stipulation.
IN A PARTICULAR PARTNERSHIP
A particular partnership has for its object
determinate things, their use or fruits, or a
specific undertaking, or the exercise of a
profession or vocation. [Art. 1783, NCC]
EFFECT WHEN THE OBJECT IS
UNLAWFUL
If the partnership has an unlawful object or
purpose:
1. The contract is void ab initio [Art. 1409(1),
NCC];
2. Once dissolved by judicial decree:
a. The profits shall be confiscated by
favor of the State;
b. The instruments or tools and proceeds
of the crime shall also be forfeited in
favor of the State [Art. 1770, NCC];
U.P. LAW BOC BUSINESS ORGANIZATIONS
3. The contributions of partners shall not be
confiscated unless they are instruments or
tools of the crime. [de Leon]
Form
No required form is necessary, but the contract
is subject to the provisions of Arts. 1771, 1772
and 1773, NCC and to the Statute of Frauds.
• Where immovable property or real rights
are contributed to the partnership, a
public instrument shall be necessary.
[Art. 1771, NCC]
- An inventory of said property, signed
by the parties, must be attached to
the public instrument;
- Otherwise, the contract of
partnership is void. [Art. 1773, NCC]
• Every contract of partnership having a
capital of P3,000 or more, in money or
property, shall appear in a public
instrument
- The instrument must be recorded in
the Office of the Securities and
Exchange Commission.
- Failure to comply with these
requirements shall not affect the
liability of the partnership and the
members thereof to third persons.
[Art. 1772, NCC]
Characteristics
Generally
1. Principal – does not depend on other
contracts;
2. Preparatory – entered as a means to an
end;
3. Commutative – undertaking of each one is
considered equal with others;
4. Consensual – perfected by mere consent;
5. Bilateral – entered by two or more persons;
6. Onerous – contributions have to be made,
and
7. Nominate – has a special designation in
law. [de Leon]
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Essential Attributes [Villanueva]
1. Informal/Consensual and Weak Juridical
Personality [Arts. 1771, 1785, 1830, NCC]
a. Generally, a partnership may be
constituted in any form;
b. The juridical personality of a
partnership is deemed weak since a
partnership may be dissolved without
need of going through a formal
dissolution process.
2. Mutual Agency [Arts. 1803, 1818, NCC]
a. All partners shall be considered agents
and whatever any one of them may do
alone shall bind the partnership;
b. Every partner is an agent of the
partnership for the purpose of its
business, and the act of every partner
binds the partnership.
3. Delectus Personae (Selection of Persons)
One selects his partners on the basis of
their personal qualifications and qualities. It
is for this reason that there is mutual
representation among the partners so that
the act of one is considered the act and
responsibility of the others as well.
[Bautista]
4. Partners Burdened with Unlimited Liability
[Arts. 1816, 1817, NCC]
Rules to determine existence
When the intent of the parties is clear, such
intent shall govern. When it does not clearly
appear, the following rules apply:
1. Persons who are not partners to each other
are not partners as to third persons, subject
to the provisions on partnership by
estoppel.
2. Co-ownership or co-possession does not
of itself establish a partnership, even when
there is sharing of profits in the use of the
property.
Exception: The co-ownership of inherited
properties is automatically converted into
an unregistered partnership the moment
said common properties and/or the income
U.P. LAW BOC BUSINESS ORGANIZATIONS
derived therefrom are used as a common
fund with intent to produce profits for the
heirs in proportion to their respective
shares in the inheritance as determined in
a project partition. [Ona v. CIR, G.R. L-
19342 (1972)]
3. Sharing of gross returns does not of itself
establish a partnership, even when the
parties have joint or common interest in any
property from which the returns are
derived.
4. The receipt by a person of a share in the
profits of a business is prima facie evidence
that he is a partner.
No such inference is drawn if the profits are
received in payment:
a. As a debt by installments or otherwise;
b. As wages of an employee or rent to a
landlord;
c. As an annuity to a widow or representative
of a deceased partner;
d. As interest on a loan, though the amount of
payment vary with the profits of the
business;
e. As the consideration for the sale of a
goodwill of a business or other property by
installments or otherwise. [Art. 1769, NCC]
Partnership Term
A partnership begins from the moment of the
execution of the contract, unless it is otherwise
stipulated. [Art. 1784]
As to period, a partnership may either be:
1. For a fixed term or particular undertaking;
or
2. At will, the formation and dissolution of
which depend on the mutual desire and
consent of the parties. Any one of the
partners may, at his sole pleasure, dictate
the dissolution of the partnership, even in
bad faith, subject to liability for damages.
[Ortega v. CA, G,R, No. 109248 (1995)]
A partnership term may be extended by:
1. Express renewal; or
2. Implied renewal, when these requisites
concur:
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a. The partnership is for a fixed term or
particular undertaking;
b. It is continued after the termination of
the fixed term or particular undertaking
without any express agreement. [Art.
1785, NCC]
Partnership by Estoppel
Estoppel – a bar which precludes a person
from denying or asserting anything contrary to
that which has been established as the truth by
his own deed or representation, either express
or implied. [de Leon]
A partner by estoppel is a person who, by
words spoken or written or by conduct: (1)
represents himself as a partner or (2) consents
to another representing him to anyone as a
partner –
a. In an existing partnership; or
b. With one or more persons not actual
partners [par. 1, Art. 1825, NCC].
LIABILITY OF A PARTNER BY ESTOPPEL
Personal Representation
a. A partner by estoppel is liable to any such
persons:
1. To whom such representation has
been made; and
2. Who has, on the faith of such
representation, given credit to the
actual or apparent partnership. [par. 1,
Art. 1825]
Public Representation
If he has made such representation or
consented to its being made in a public
manner, whether the representation has or has
not been (personally) made or communicated
to such persons so giving credit by or with his
knowledge:
1. When partnership liability results, he is
liable as though he were an actual
member of the partnership.
2. When no partnership liability results, he
is liable pro rata with the other persons,
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

if any, so consenting to the contract or 2. There is no existing partnership and all

representation. those represented as partners
3. When there are no such other persons, consented to the representation.
he is separately liable. [par. 1, Art. (c) He is liable separately when:
1825, NCC] 1. There is an existing partnership but
none of the partners consented; or
Effect on Existing Partnership or Other 2. There is no existing partnership and not
Persons not Actual Partners [par. 2, Art. all of those represented as partners
1825, NCC] consented to the representation.
Representation Effect
Note: Art 1825 does not create a partnership as
When a person has He is an agent of the between the alleged partners. The law only
been represented to persons consenting to considers them as partners and the association
be a partner (1) in an such representation: as a partnership insofar as it is favorable to
existing partnership, • To bind them to third persons. However, partnership liability is
or (2) with one or the same extent created only in favor of persons who on the
more persons not and in the same faith of such representation given credit to the
actual partners manner as partnership. [de Leon]
though he were a
partner in fact
Partnership as distinguished from
• With respect to
persons who rely
joint venture
upon the
representation. Partnership Joint venture
When all the A partnership act or
Operates with firm Operates without
members of the obligation results.
existing partnership name and legal firm name and legal
consent to the personality personality
representation
Generally relates to a
In all other cases The representation is continuing business of Usually limited to a
the joint obligation of
various transactions of single transaction
the person acting and
a certain kind
the persons
consenting to the
representation
A joint venture is an agreement between two
Nature of Liability parties to enter into a commercial undertaking.
Summarizing Article 1825, a partner by It may fall under a partnership with a limited
estoppel is liable in the following manner: purpose.
(a) He is liable as though he were a partner
when – Under Philippine law, a joint venture is a form
1. There is an existing partnership; of partnership and should thus be governed by
2. All the partners consented to the the laws of partnership. [Aurbach v. Sanitary
representation; and Wares Manufacturing Corp, G.R. No. 75875]
3. A partnership liability results.
(b) He is liable jointly and pro rata (as though Professional Partnership
he were a partner in fact) with those who
consented to the representation when: Definition
1. There is an existing partnership but not General professional partnerships — those
all the partners consented; or formed by persons for the sole purpose of
exercising their common profession, no part of

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the income of which is derived from engaging
in any trade or business. [Sec. 22(B), NIRC]
Distinction from an Ordinary Partnership
The distinction between a Partnership and a
General Professional Partnership (GPP) is
material in taxation.
• A GPP is NOT TAXABLE as an entity.
• The income tax is imposed not on the
professional partnership, which is tax
exempt, but on the partners themselves in
their individual capacity computed on their
distributive shares of partnership profits.”
[Tan v. Del Rosario, G.R. No. 109289
(1994)]
Requirement to File Income Tax Returns
GPPs are still required to file income tax
returns for the purposes of furnishing
information as to the share in the gains or
profits which each partner shall include in his
individual return. [RR 2-1998]
Management
In General
The property rights of a partner are:
(1) His rights in specific partnership property;
(2) His interest in the partnership; and
(3) His right to participate in the management
[Art. 1810, NCC]
Management of the partnership is primarily
governed by the agreement of the partners in
the articles of partnership.
It may be stipulated that the partnership will be
managed by:
1. All the partners; or
2. A number of partners appointed as
managers which may be appointed –
In the articles of partnership; or
After constitution of the partnership.
Scope of Powers of a Managing Partner
General rule: The partner designated as
manager in the articles may execute all acts of
administration, despite opposition by the other
partners.
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Exception: He cannot do so when he acts in
bad faith. [Art. 1800, NCC]
Revocation of Power by Managing Partner
General Rule: Power is irrevocable without
just or lawful cause.
The powers of the managing partner may be
revoked:
If appointed in the articles of partnership, when
—
a. There is just or lawful cause for
revocation; and
b. The partners representing the
controlling interest revoke such power.
If appointed after the constitution of the
partnership, at any time and for any cause. [Art.
1800, NCC]
Rationale: Such appointment is a mere
delegation of power, not founded on a change
of will on the part of the partners, the
appointment not being a condition of the
contract.
It is merely a simple contract of agency, which
may be revoked at any time.
Removal, however, should also be done by the
partners having the controlling interest. [de
Leon]
Managing by Two or More Partners
When there are two or more managing partners
appointed —
1. Each one may separately execute all acts
of administration.
2. If any of them opposes the acts of the
others, the decision of the majority prevails.
3. In case of a tie, the partners owning the
controlling interest will decide. [Art. 1801,
NCC]
Requisites for Applicability of Art. 1801:
a. Two or more partners have been appointed
as managers;
b. There is no specification of their respective
duties or no stipulation on how each one
will act; and
c. There is no stipulation that one of them
shall not act without the consent of all the
others. The right to oppose is not given to
U.P. LAW BOC BUSINESS ORGANIZATIONS
non-managers because in appointing their
other partners as managers, they have
stripped themselves of all participation in
the administration. [Paras]
The other managers, however, should
make the opposition before the acts
produce legal effects insofar as third
persons are concerned.
IRRECONCILABLE DEADLOCK
Those who vote against the contract shall
prevail, the same having been entered into
without authority. [de Leon]
Stipulation of Unanimity
General Rule: In case there is a stipulation that
none of the managing partners shall act without
the consent of others —
a. The concurrence of all is necessary for the
validity of the acts, and
b. The absence or disability of one cannot be
alleged.
Exception: Unless there is imminent danger of
grave or irreparable injury to the partnership.
[Art. 1802, NCC]
Management When Manner Not Agreed
Upon
When there is no agreement as to the manner
of management, the following rules apply:
1. All the partners are considered agents
(mutual agency). Whatever any one does
alone binds the partnership, unless there is
a timely opposition to the act, under Art.
1801, NCC.
2. Any important alteration in the immovable
property of the partnership, even if useful to
the partnership, requires unanimity. If the
alteration is necessary for the preservation
of the property, however, consent of the
others is not required. [Art. 1803, NCC; de
Leon]
If the refusal is manifestly prejudicial to the
partnership, court intervention may be sought.
[Art. 1803, NCC]
The consent need not be express. It may be
presumed from the fact of knowledge of the
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alteration without interposing any objection. [de
Leon]
Mutual Agency
In addition to the Art. 1801, NCC there is
effectively a mutual agency in the following
cases:
1. Partners can dispose of partnership
property even when in partnership name.
[Art. 1819, NCC]
2. An admission or representation made by
any partner concerning partnership affairs
is evidence against the partnership. [Art.
1820, NCC]
3. Notice to any partner of any matter relating
to partnership affairs is notice to the
partnership. [Art. 1821, NCC]
4. Wrongful act or omission of any partner
acting for partnership affairs makes the
partnership liable. [Art. 1822, NCC]
5. Partnership is bound to make good losses
for wrongful acts or misapplications of
partners. [Art. 1823, NCC]
2. Rights and obligations of
partnership and partners
Rights and obligations of the
partnership
a. Right to Contribution, Right to
Warranty
As a general rule, every partner is a debtor of
the partnership for whatever he may have
promised to contribute. [Art. 1786, NCC]
Contribution of Money or Property
With respect to contribution of money or
property, a partner is obliged to:
1. To contribute, at the beginning of the
partnership or at the stipulated time, the
money, property or industry which he
undertook to contribute;
Effect of failure to contribute: Makes the
partner ipso jure a debtor of the partnership
even in the absence of demand. The
remedy is not rescission but an action for
specific performance with damages and
U.P. LAW BOC BUSINESS ORGANIZATIONS
interest. [Sancho v. Lizarraga, G.R. L-
33580 (1931)]
Note: When contribution is in goods, the
amount thereof must be determined by
proper appraisal of the value thereof at the
time of contribution. [Art. 1787, NCC]
2. In case a specific and determinate thing is
to be contributed:
a. To warrant against eviction in the same
manner as a vendor; and
b. To deliver to the partnership the fruits
of the property promised to be
contributed, from the time they should
have been delivered, without need of
demand [Art. 1786, NCC];
3. In case a sum of money is to be
contributed, or in case he took any amount
from the partnership coffers, to indemnify
the partnership for:
a. Interest; and
b. Damages from the time he should have
complied with his obligation, or from the
time he converted the amount to his
own use, respectively. [Art. 1788, NCC]
4. To preserve the property with diligence of a
good father of a family pending delivery to
the partnership. [Art. 1163, NCC]
5. To indemnify for any interest and damages
caused by the retention of the property or
by delay in its obligation to contribute a sum
of money. [Art. 1788 and 1170, NCC]
Amount of Contribution
General rule: Partners are to contribute equal
shares to the capital of the partnership.
Exception:
When there is an agreement to the contrary,
the contribution shall follow such agreement
[Art. 1790, NCC].
Industrial partners, unless he has contributed
capital pursuant to an agreement to that effect.
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ADDITIONAL CAPITAL CONTRIBUTION
Requisites:
1. There is an imminent loss of the business
of the partnership;
2. The majority of the capitalist partners are of
the opinion that an additional contribution
to the common fund would save the
business;
3. The capitalist partner refuses deliberately
(not because of financial inability) to
contribute an additional share to the
capital; and
4. There is no agreement that even in case of
imminent loss of the business, the partners
are not obliged to contribute.
Any partner who refuses to contribute an
additional share to the capital, except an
industrial partner, to save the venture shall be
obliged to sell his interest to the other partners,
unless there is an agreement to the contrary.
[Art. 1791, NCC]
Contribution of Industry
An industrial partner is obliged to contribute his
industry at the stipulated time.
Right to Have Sums Applied Pro
Rata
General rule: A partner —
1. Authorized to manage;
2. Who collects a demandable sum owed to
him
a. In his own name;
b. From a person who also owes the
partnership a demandable sum,
is obliged to apply the sum collected to both
credits pro rata, even if he issued a receipt for
his own credit only. [Art. 1792, NCC]
Exceptions:
1. In case the receipt was issued for the
account of the partnership credit only,
however, the sum shall be applied to the
partnership credit alone.
2. When the debtor declares, pursuant to Art.
1252, NCC at the time of making the
payment, to which debt the sum must be
U.P. LAW BOC BUSINESS ORGANIZATIONS
applied, and if the personal credit of the
partner is more onerous to him, it shall be
so applied. [Art. 1792, NCC]
Requisites for Applicability of Art. 1792:
There exist at least two debts, one where the
collecting partner is creditor, and the other,
where the partnership is the creditor;
Both debts are demandable; and
The partner who collects is authorized to
manage and actually manages the partnership.
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 for the partnership by his industry.
• However, the courts may equitably lessen
this responsibility if through the partner's
extraordinary efforts in other activities of
the partnership, unusual profits have been
realized. [Art. 1794, NCC]
Set-Off of Liability
General rule: The liability for damages cannot
be set-off or compensated by profits or benefits
which the partner may have earned for the
partnership by his industry.
Rationale: The partner has the obligation to
secure the benefits for the partnership. As
such, the requirement for compensation that
the partner be both a creditor and a debtor of
the partnership at the same time, is not
complied with [Art. 1278, NCC; de Leon].
Exception: The court may equitably lessen the
liability if, through his extraordinary efforts in
other activities of the partnership, unusual
profits were realized [Art. 1794, NCC]. Note,
however, that there is still no compensation in
this case.
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Right to Accounting of Profits
Received without the Consent of the
Other Partners
Every partner must:
(1) Account to the partnership for any benefit;
and
(2) Hold as trustee for it any profits derived by
him without the consent of the other
partners from any transaction connected
with the formation, conduct, or liquidation of
the partnership or from any use by him of its
property. [Art. 1807, NCC]
Obligation to Reimburse Partners
The partnership shall be responsible to every
partner for:
1. The amounts he may have disbursed on
behalf of the partnership; and
2. The corresponding interest, from the time
the expenses are made;
3. The obligations the partner may have
contracted in good faith in the interest of
the partnership business; and
4. Risks in consequence of the partnership’s
management. [Art. 1796, NCC]
Obligations of the partners among
themselves
Right to Associate Another in Share
Every partner may associate another person
with him in his share, but the associate shall not
be admitted into the partnership without the
consent of all the other partners, even if the
partner having an associate should be a
manager. [Art. 1804, NCC]
This arrangement refers to a contract of
subpartnership, which is a partnership within a
partnership, distinct and separate from the
main partnership. It is considered a
modification of the original contract. [de Leon]
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Right to Inspect Partnership Books Property Rights of Partners

The partnership books shall be kept: In General

1. At a place agreed upon by the partners; The property rights of a partner are:
2. When there is no such agreement, at the (a) His rights in specific partnership property;
principal place of business of the (b) His interest in the partnership; and
partnership. (c) His right to participate in the management.
[Art. 1810, NCC]
Every partner shall, at any reasonable hour,
have access to and may inspect and copy any Property And Capital Distinguished
of them. [Art. 1805, NCC] Partnership
Partnership property
capital
Any reasonable hour means reasonable hours
on business days throughout the year. [Pardo Value varies with
With constant value
v. Lumber Co., G.R. No. L-22442 (1925)] market conditions

Right to Formal Account Includes only Includes the

General rule: The right to a formal account of
partnership affairs accrues only when the
partnership is dissolved.
Exceptions: In the special and unusual cases
mentioned in Article 1809, formal accounting
may be demanded by any partner even before
dissolution:
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. [Art. 1809, NCC]
As long as the partnership exists, any of the
partners may demand an accounting of the
partnership business. Prescription of the said
right starts to run only upon the dissolution of
the partnership when the final accounting is
done. [Emnace v. CA, G.R. 126334 (2001)]
actually contributed contributions and
and promised property acquired by
capital the partnership
Ownership of Certain Properties
The ownership of property used by the
partnership depends on the intention of the
parties, which may be drawn from an express
agreement or their conduct.
A partner may allow the property to be used by
the partnership without transfer of ownership,
contributing only the use or enjoyment thereof.
He may also hold title to partnership property,
without acquiring ownership thereof. [Art. 1819,
NCC]
Property acquired by a partner with partnership
funds is presumed to be partnership property.
The same presumption also arises when the
property is indicated in the partnership books
as partnership asset.
Other factors may be considered to determine
ownership of the property.
Rights in Specific Property
a. The partners have equal rights to possess
partnership property for partnership
purposes.
b. For other purposes, the consent of his
partners is necessary.

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

c. If the partner is excluded, he may ask for: partner without the consent of all other
1. Formal accounting [Art.1809, NCC]; or partners.
2. Dissolution by judicial decree
[Art.1831, NCC]. RISK OF LOSS OF THINGS CONTRIBUTED
d. A partner’s right in such property is not Who Bears the
Thing Contributed
assignable, except when all the partners Risk
assign their rights in the same property. Specific and
e. The right is not subject to attachment or determinate things Borne by the partner
execution, except on claim against the which are not because he remains
partnership. fungible; only the the owner of the
usufruct is things
In case of such attachment, the partners, or contributed
any of them, or the representatives of a Specific and
deceased partner, cannot claim any right determinate things
under the homestead or exemption laws. the ownership of Borne by the
f. The right is not subject to legal support which is partnership as owner
under Article 291. [Art. 1811, NCC] transferred to the
g. Contemplates tangible property. partnership
Partnership,
Interest In Partnership because use is
A partner’s interest in the partnership is his impossible without
share of the profits and surplus. [Art. 1812, Fungible things
the things being
NCC] consumed or
impaired
Assignment of Interest [Art. 1813, NCC] Partnership, for
Assignment by a partner of his whole interest there cannot be any
in the partnership, of itself: Things contributed doubt that the
a. Does not dissolve the partnership; or to be sold partnership was
b. Does not entitle the assignee to: intended to be the
1. Interfere in the management or owner
administration of the partnership Partnership,
business or affairs; because the
2. Require information or account of intention of the
partnership; or parties was to
3. Inspect the partnership books. Things brought contribute to the
and appraised in partnership the price
It merely entitles the assignee to: the inventory of the things
a. Receive the profits to which the assigning contributed with an
partner was entitled; appraisal in the
b. In case of fraud in management, avail inventory. There is
himself of the usual remedies provided by thus an implied sale.
law, such as dissolution [Art. 1831, NCC];
c. In case of dissolution: Note: The list presupposes delivery. Without
1. Receive his assignor’s interest; and delivery, the loss is borne by the partner.
2. Require an accounting from the date
only of the last account agreed to by all Right to be Reimbursed by the
the partners. [Art. 1813, NCC]. Partnership

Rationale: It would effectively allow a third party The partnership shall be responsible to every
to participate in the affairs of the partnership partner for:
and would basically have a stranger become a

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U.P. LAW BOC BUSINESS ORGANIZATIONS
(a) The amounts he may have disbursed on
behalf of the partnership; and
(b) The corresponding interest, from the time
the expenses are made;
(c) The obligations the partner may have
contracted in good faith in the interest of
the partnership business; and
(d) Risks in consequence of the partnership’s
management. [Art. 1796, NCC]
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. [Villanueva]
Article 1796 is not applicable when there is no
other money than that contributed as capital is
involved. [de Leon; Martinez v. Ong Pong Co,
G.R. No. 5236 (1910)]
Right to Ask for Dissolution [Arts.
1830(2) and 1831, NCC]
See Dissolution and Winding Up, infra.
Obligation to Render True and Full
Information
Partners shall render on demand true and full
information of all things affecting the
partnership to:
a. Any partner;
b. The legal representative of any
deceased partner; or
c. The legal representative of any partner
under legal disability [Art. 1806, NCC].
Even without demand, honesty demands the
giving of vital information, the refraining from all
kinds of concealment. [Paras]
By “information”, it is meant that which can be
used for partnership purposes, it is in the sense
of a property which the partnership has a
valuable right. [de Leon]
Obligation to Account and Act as
Trustee
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COMMERCIAL LAW
Every partner must:
(a) Account to the partnership for any benefit;
and
(b) Hold as trustee for it any profits derived by
him without the consent of the other
partners:
1. From any transaction connected with
the formation, conduct, or liquidation of
the partnership; or
2. From any use by him of its property.
[Art. 1807, NCC].
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. [de Leon]
Exception: If the taking by the partner is with
the consent of all other partners. [Lim Tanhu v.
Ramolete, G.R. L-40098 (1975)]
The duty to account continues until the
partnership relation is terminated. [de Leon]
This obligation exists even when he issued a
receipt for his share only [Art. 1793, NCC].
Rationale: In this case, the debt becomes a
bad debt. It would be unfair for the partner who
already collected not to share in the loss of the
other partners.
Credit collected after dissolution: The
collecting partner need not bring the same to
the partnership capital. Art. 1793 presupposes
that there exists partnership capital. Upon
dissolution of the partnership and the return to
each principal of what he contributed, the
community of interest between them
disappears altogether. [de Leon]
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
U.P. LAW BOC BUSINESS ORGANIZATIONS
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.
Reasons:
1. To prevent the industrial partner from
exploiting his services for his own personal
benefit without the permission of the firm.
2. To prevent conflict of interest and to ensure
compliance by said partner with his
prestation.
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. [Art. 1808,
NCC]
The test is the possibility of unfair
competition.
A partner occupies a fiduciary position with
respect to his co-partners imposing duties of
utmost good faith and he may not carry on any
other business in rivalry with the business of
Page 106 of 450
COMMERCIAL LAW
the partnership, whether in his own name or for
the account of another at the expense of the
partnership. [de Leon]
Obligation to Share in the
Profits/Losses
Rules for Distribution of Profits and Losses
The distribution of profits and losses shall be in
accordance with the following rules:
1. They shall be distributed in conformity with
the agreement.
2. If only the share in profits has been
stipulated, the share in the losses shall be
in the same proportion.
3. 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. [Art. 1797, NCC]
Exclusion Of Partner From Share
General rule: A stipulation excluding one or
more partners from any share in the profits or
losses is void. [Art. 1799, NCC]
Exception: A stipulation exempting an
industrial partner from losses is valid, since, if
the partnership fails to realize profits, he can no
longer withdraw his work or labor. [de Leon]
But this does not exempt the industrial partner
from liability insofar as third persons are
concerned. He may however, recover what he
has given to third persons from the other
partners, for he is exempted by law from
losses.
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Obligations of Nature of Individual Liability Subsidiary

partnership/partners to third General rule: The partners are liable
persons subsidiarily. It only arises upon exhaustion of
partnership assets. [Cia. Maritima v. Muñoz,
G.R. No. L-24796 (1907)]
Operate Under a Firm Name
Exceptions:
General rule: The partners may adopt any firm
1. A third person who transacted with the
name desired, which may or may not include
partnership can hold the partners solidarily
the name of one or more of the partners. [Art.
(rather than subsidiarily) liable for the
1815, NCC]
whole obligation if the case falls under
Articles 1822 or 1823. [Muñasque v. CA,
Note: Those who, not being members of the
G.R. L-39780 (1985)] The provisions refer
partnership, include their names in the firm
to wrongful acts or omission and
name, shall be subject to the liability of a
misapplication of money or property by a
partner. [Art. 1815, NCC]
partner in the ordinary course of business.
2. A person admitted as a partner into an
The partnership name shall contain the word
existing partnership is liable for all the
“Company” or “Co.”, except for professional
partnerships. [SEC Memo Circ No. 14-00] obligations of the partnership arising before
his admission, except that his liability shall
be satisfied only out of partnership
Exceptions:
property, unless there is a stipulation to the
1. They cannot use a name which is “identical
contrary. [Art. 1826, NCC] In other words,
or deceptively or confusingly similar one
he is not personally liable.
already protected by the Commission or a
sole proprietorship registered with the
Pro Rata
Department of Trade and Industry. [SEC
Memo Circ No. 14-00] The partners are liable pro rata. This liability is
not increased even when a partner:
2. The use of names of a deceased partner in
Has left the country and the payment of his
law firms is “permissible provided that the
share of the liability cannot be enforced; [Co-
firm indicates in all its communications that
Pitco v. Yulo, G.R. No. L-3146 (1907)] or
said partner is deceased”. [Rule 3.02, Code
of Professional Responsibility] His liability is condoned by the creditor. [Island
Sales v. United Pioneers, G.R. No. L-22493
(1975)]
Liability for Partnership Debts
Basis for Pro-rating
Liability of Partners for Partnership
Pro rata must be understood to mean equally
Contracts
or jointly and not its literal meaning.
The partnership is primarily liable for contracts
entered into:
After all partnership assets have been
1. In its name and for its account;
exhausted, pro-rating is based on the number
2. Under its signature; and
of partners and not on the amount of their
3. By a person authorized to act for it.
contributions to the common fund, subject to
adjustment among the partners. [de Leon]
Upon exhaustion of its assets, all partners are
liable pro rata with all their property. Any
Liability of an Industrial Partner
partner may enter into a separate obligation to
An industrial partner, who is not liable for
perform a partnership contract [Art. 1816,
losses, is not exempt from this liability (for
NCC].
partnership debts). However, he can recover
the amount he has paid from the capitalist
partners, unless there is a stipulation to the

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U.P. LAW BOC BUSINESS ORGANIZATIONS
contrary. [Cia. Maritima v. Muñoz, G.R. No. L-
24796 (1907)]
Stipulation against Individual Liability
Any stipulation against pro rata liability is:
Void against third persons; but
Valid among the partners. [Art.1817, NCC]
A stipulation which excludes one or more
partners from any share in the profits or loses
is void. [Art. 1799, NCC]
Reconciling Art. 1816 and Art. 1797
The exemption of the industrial partner to pay
losses relates exclusively to the settlement of
the partnership affairs among the partners
themselves, and has nothing to do with the
liabilities of the parties to third persons.
Art. 1816 refers to “liabilities” while Art. 1797
speaks of “losses”. There is therefore no
conflict between the two articles. [Nachura]
Liability of Partners for Partnership
Contracts
1. Acts apparently for the carrying on of
usual business
General rule: The partnership is liable for
any act of a partner which is apparently for
the carrying on of the usual business of the
partnership binds the latter, including the
execution of any instrument in the
partnership name.
Exception: The partnership is not bound
when the following concur:
(a) The partner has in fact no authority to
act; and
(b) The person with whom he deals has
knowledge of such fact [par. 1, Art.
1818, NCC].
2. Acts not apparently for carrying on of
the usual business
General rule: Acts of a partner which is not
apparently for carrying on of the usual
business does not bind the partnership.
Page 108 of 450
COMMERCIAL LAW
Exception: The partnership is bound if the
other partners authorized him to do the act.
[par. 2, Art. 1818, NCC]
3. Acts of Strict Dominion
General Rule: One or some of the partners
have no authority to do the following acts of
strict dominion:
a. Assign the partnership property in trust
for creditors or on the assignee’s
promise to pay the debts of the
partnership;
b. Dispose of the goodwill of the business;
c. Do any other act which makes it
impossible to carry on the ordinary
business of the partnership;
d. Confess a judgment;
e. Enter into a compromise concerning a
partnership claim or liability;
f. Submit a partnership claim or liability to
arbitration;
g. Renounce a claim of the partnership.
Exceptions:
They may do so if:
1. Authorized by all the partners; or
2. The other partners have abandoned the
business. [par. 3, Art. 1818, NCC]
4. Acts In Contravention of a Restriction
Any act of a partner in contravention of a
restriction on authority does not bind the
partnership to persons having knowledge
of the restriction. [par. 4, Art. 1818, NCC].
The partnership is not liable to third
persons having actual or presumptive
knowledge of the restrictions, whether or
not the acts are for apparently carrying on
in the usual business of the partnership. [de
Leon]
Conveyance of Partnership Real Property
(a) Title In Partnership Name
Any partner may convey the real property
in the name of the partnership. The
partnership can recover it, except when:
1) The act of the partner binds the
partnership, when he has authority to
U.P. LAW BOC BUSINESS ORGANIZATIONS
carry out the usual business of the
partnership, under par. 1, Art. 1818,
NCC; or
2) If not so authorized, the property has
been conveyed by the grantee, or a
person claiming under him, to a holder
for value and without knowledge that
the partner exceeded his authority.
[par. 1, Art. 1819, NCC]
A partner authorized to carry out the usual
business may convey, in his own name, the
equitable interest of the partnership. [par.
2, Art. 1819, NCC]
(b) Title in the Name Of Other Persons
Where the title is in the name of one or
more but not all the partners, and the
record does not disclose the right of the
partnership:
1) The partners having title may convey
title.
2) The partnership may recover it when
the partners conveying title have no
authority to carry on the usual business
of the partnership, unless the
purchaser or his assignee is:
i. A holder for value; and
ii. Without knowledge that the act
exceeded authority. [par. 4, Art.
1819, NCC].
Where the title is in the name of one or more or
all the partners, or in a third person in trust for
the partnership, a partner authorized to carry
on the usual business may convey equitable
title in the partnership name or in his own
name. [par. 4, Art. 1819, NCC]
Where the title is in the names of all the
partners, a conveyance executed by all of them
passes all the rights to the property. [par. 5, Art.
1819, NCC]
Liability for Admission by 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. [Art. 1820, NCC]
Page 109 of 450
COMMERCIAL LAW
Instances Where Knowledge of a Partner is
Considered Knowledge of the Partnership
a. Knowledge of the partner acting in the
particular matter –
a. Acquired while a partner; or
b. Then present to his mind;
b. Knowledge of any other partner who
reasonably could and should have
communicated it to the acting partner. [Art.
1821, NCC]
Liability for Wrongful Acts of a
Partner
The partnership is solidarily liable with the
partner who causes loss or injury to any
person not a partner, or incurs any penalty
through any wrongful act or omission:
a. In the ordinary course of the business of
the partnership; or
b. Not in such ordinary course of business,
but with the authority of his co-partners.
[Art. 1822, NCC]
Liability for Misapplication of Money
or Property
The partnership is liable for losses suffered by
a third person whose money or property was:
a. Received by a partner –
Acting within the scope of his apparent
authority; and
Misapplied it;
b. Received by the partnership –
In the course of its business; and
Misapplied by any partner while it is in
the custody of the partnership. [Art.
1823, NCC]
LIABILITY OF THE OTHER PARTNERS
UNDER ARTS. 1822 AND 1823, NCC
All partners are solidarily liable with the
partnership for its liabilities under Arts. 1822
and 1823. [Art. 1824, NCC]
This is without prejudice to the guilty partner
being liable to the other partners. However, as
far as third persons are concerned, the
partnership is answerable. [de Leon]
U.P. LAW BOC BUSINESS ORGANIZATIONS
Applicability of the Rule of Respondeat
Superior
The rule of respondeat superior (also called the
rule of vicarious liability) applies to the law of
partnership in the same manner as other rules
governing the agency relationship. [de Leon]
It is not only the partners who are liable in
solidum; it is also the partnership. [Art 1824,
NCC]
The injured party may proceed against the
partnership or any partner. [Paras]
The reason for the law’s imposition of wider
liability on the partnership with respect to torts
and breach of trust is based on public policy.
[de Leon]
Criminal Liability for Criminal Acts
A non-acting partner in a partnership engaged
in a lawful business is not criminally liable for
the criminal acts of another partner but he is
criminally liable if the partnership is involved in
an unlawful enterprise with his knowledge or
consent.
Partnership Liability
Does Not Extend to criminal liability where
the wrongdoing is regarded as individual in
character, i.e. embezzlement.
Extends to criminal liability where the crime
is statutory, especially where it involves fine or
imprisonment. [de Leon]
Liability in Case of Partnership by
Estoppel
See Partnership by Estoppel, supra.
Liability of an Incoming Partner
A person admitted as a partner is liable for
obligations incurred subsequent to his
admission as the other partners are liable. This
is because he is already part of the partnership.
As per Article 1826, the partner is liable for
obligations incurred before his admission, but
will be satisfied only out of the partnership
Page 110 of 450
COMMERCIAL LAW
property, unless otherwise stipulated that he
fully assumes such obligations.
Rationale
a. The new partner partakes of the benefits of
the partnership property and an already
established business.
b. He has every means of obtaining full
knowledge of the debts of the partnership
and remedies that amply protect his
interest. [de Leon]
Notice To Or Knowledge Of The Partnership
The following operate as notice to or
knowledge of the partnership:
a. Notice to any partner of any matter relating
to partnership affairs;
b. Knowledge of the partner acting in the
particular matter acquired while a partner;
c. Knowledge of the partner acting in the
particular matter then present to his mind;
or
d. Knowledge of any other partner who
reasonably could and should have
communicated it to the acting partner.
These do not apply in case of fraud on the
partnership committed by or with the consent
of the partner. [Art. 1821, NCC]
Preference of Partnership Creditors in
Partnership Property
With respect to partnership assets the
partnership creditors are entitled to priority of
payment. However, the private creditors of
each partner may ask the attachment and
public sale of the share of the latter in the
partnership assets as provided in Art. 1814,
NCC. [Art. 1827, NCC]
Property Preference:
a. Partnership Property – Partnership
creditors are preferred;
b. Partner’s Individual Property – Partner’s
individual creditors are preferred. [de Leon]
Remedy in Case of Insufficiency of Assets:
a. Partnership Creditor – After exhaustion of
partnership assets, the creditor may come
after the private property of the partners.
U.P. LAW BOC BUSINESS ORGANIZATIONS
b. Partner’s Individual Creditor – Ask for
attachment and public sale of the share of
the partner in the partnership assets. [de
Leon].
Liability with Regard to Personal
Creditors of Partners
Interest by Personal Creditors
General rule: Partnership creditors are
preferred over the personal creditors of the
partners as regards partnership property.
Exception: On due application by any
judgment creditor of a partner, a competent
court may:
a. Charge the interest of the partner for the
satisfaction of the judgment debt;
b. Appoint a receiver of the share of the
profits and of any other money due or to fall
due to the partner; and
c. Make all other orders, directions, accounts
and inquiries, which the debtor partner
might have made, or which the
circumstances may require. [par. 1, Art.
1814, NCC]
The interest charged may be redeemed before
foreclosure or, in case of sale directed by the
court, may be purchased without causing
dissolution:
a. With separate property, by one or more of
the partners; or
b. With partnership property, by one or more
of the partners, with consent of all, except
the debtor partner. [par. 2, Art. 1814, NCC]
3. Dissolution and Winding Up
Concepts
Dissolution – the change in the relation of the
partners caused by any partner ceasing to be
associated in the carrying on of the business. It
is different from the winding-up of the business.
[Art. 1828, NCC] It does not terminate the
partnership, which continues until the winding
up of partnership affairs is completed. [Art.
1829, NCC]
Page 111 of 450
COMMERCIAL LAW
Note: The dissolution of a partnership must not
be understood in the absolute and strict sense
so that at the termination of the object for which
it was created, the partnership is extinguished.
[Testate Estate of Mota v. Serra, G.R. No. L-
22825 (1925)]
Partnership Still Exists
The partnership, although dissolved, continues
to exist until its termination, at which time the
winding up of its affairs should have been
completed and the net partnership assets are
partitioned and distributed to the partners.
[Emnace v. CA, G.R. No. 126334 (2001)]
Winding up – the actual process of settling the
partnership business or affairs after
dissolution. It involves collection and
distribution of partnership assets, payment of
debts, and determination of the value of the
interest of the partners in the partnership.
Termination – the point in time when all
partnership affairs are completely wound up
and finally settled. It signifies the end of the
partnership life. [de Leon]
Causes of Dissolution
Without Violation of the Agreement
Between the Partners
1. By the termination of the definite term or
particular undertaking specified in the
agreement;
2. By the express will of any partner, who
must act in good faith, when no definite
term or particular is specified;
3. By the express will of all the partners who
have not assigned their interests or
suffered them to be charged for their
separate debts, either before or after the
termination of any specified term or
particular undertaking;
4. By the expulsion of any partner from the
business bona fide in accordance with such
a power conferred by the agreement
between the partners. [Art. 1830(1), NCC]
If, after the expiration of the definite term or
particular undertaking, the partners continue
U.P. LAW BOC BUSINESS ORGANIZATIONS
the partnership without making a new
agreement, the firm becomes a partnership at
will. [Art. 1785, NCC]
Any one of the partners may, at his sole
pleasure, dictate the dissolution of the
partnership at will. He must, however, act in
good faith, not that the attendance of bad faith
can prevent the dissolution of the partnership,
but that it can result in a liability for damages.
[Ortega v. CA, G.R. No. 109248 (1995)]
In Contravention of the Agreement
Between the Partners
Where circumstances do not permit dissolution
under any other provision of Art. 1830, NCC it
may also be dissolved by the express will of
any partner at any time.
Thus, even if there is a specified term, one
partner can cause its dissolution by expressly
withdrawing even before the expiration of the
period, with or without justifiable cause. If the
cause is not justified or no cause was given, the
withdrawing partner is liable for damages but in
no case can he be compelled to remain in the
firm [Rojas v. Maglana, G.R. No. 30616
(1990)].
By operation of Law
1. By any event which makes it unlawful for
the business of the partnership to be
carried on or for the members to carry it on
in partnership;
Note: If the business or object had been
unlawful from the very beginning, the firm
never had juridical personality. [Paras]
2. When a specific thing which a partner had
promised to contribute, perishes before
delivery, or by the loss of the thing, only the
use or enjoyment of which has been
contributed; the loss of a specific thing,
however, does not dissolve the corporation
after its ownership has already been
transferred to the partnership;
3. By the death of any partner;
Page 112 of 450
COMMERCIAL LAW
4. By the insolvency of any partner or of the
partnership;
5. Note: The insolvency of the partner or of
the partnership must be adjudged by the
court. [de Leon]
6. By the civil interdiction of any partner;
Civil interdiction deprives the offender
during the time of his sentence of the right
to manage his property and dispose such
property by any act or any conveyance
inter vivos. [Art. 34, RPC]
Ratio: One who is without capacity to
manage his own property should not be
allowed to manage partnership property.
[de Leon]
By Decree of Court
A partner may apply for dissolution in court
when:
1. A partner has been declared insane in any
judicial proceeding or is shown to be of
unsound mind;
Note: The partner may have been
previously declared insane in a judicial
proceeding; otherwise, his insanity must be
duly proved. It must materially affect the
capacity of the partner to perform his
contractual duties as such. [de Leon]
2. A partner becomes in any other way
incapable of performing his part of the
partnership contract;
Note: The incapacity must be lasting, from
which the prospect of recovery is remote.
[de Leon]
3. A partner has been guilty of such conduct
as tends to affect prejudicially the carrying
on of the business;
4. A partner willfully or persistently commits a
breach of the partnership agreement, or
otherwise so conducts himself in matters
U.P. LAW BOC BUSINESS ORGANIZATIONS
relating to the partnership business that it
is not reasonably practicable to carry on the
business in partnership with him;
Ratio: They defeat and materially affect
and obstruct the purpose of the
partnership. [de Leon]
5. The business of the partnership can only
be carried on at a loss;
Note: A court is authorized to decree
dissolution notwithstanding the partnership
has been making profits where it appears
at the time of the application that the
business can only be carried on at a loss.
[de Leon]
6. Other circumstances render a dissolution
equitable.
Reason for necessity of court decree: In the
instances mentioned in Art. 1831, the facts
may be so far open to dispute as to make
necessary judicial determination as to
dissolution, rather than allow them to be the
occasion for automatic dissolution by
operation of law. [de Leon]
A person who acquires the interest of a partner
may likewise apply:
1. After the termination of the specified term
or particular undertaking;
2. At any time if the partnership was a
partnership at will when the interest was
assigned or when the charging order was
issued.
Other Causes
1. When a new partner is admitted into an
existing partnership;
2. When any partner retires;
3. When the other partners assign their rights
to the sole remaining partner;
4. When all the partners assign their rights in
the partnership property to third persons.
[Art. 1840, NCC]
Page 113 of 450
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Effects of Dissolution
On Authority of the Partners
In general, upon dissolution, the authority of the
partners to represent the partnership is
confined only to acts necessary to:
1. Wind up partnership affairs; or
2. Complete transactions begun but not then
finished. [par. 1, Art. 1832, NCC]
With respect to partners
The authority of partners to act for the
partnership is terminated, with respect to
partners:
1. When the dissolution is not by the act,
insolvency or death of a partner; or
2. When the dissolution is by such act,
insolvency or death, when the partner
acting for the partnership has knowledge or
notice of the cause. [Art. 1832 and 1833,
NCC]
In other cases, each partner is still liable for his
share in the liability created by the partner
acting for the partnership. [Art. 1833, NCC]
With respect to third persons
With respect to persons not partners:
1. After dissolution, a partner can bind the
partnership by any act appropriate for –
a. Winding up partnership affairs; or
b. Completing transactions unfinished
at dissolution.
2. He can also bind it by any transaction
which would bind the partnership as if
dissolution had not taken place, provided
the other party to the transaction –
a. Had extended credit to the
partnership prior to dissolution and
had no knowledge or notice
thereof; or
b. Had not so extended credit but had
known of the partnership prior to
dissolution, and having no
knowledge or notice of dissolution,
the fact had not been advertised in
a newspaper of general circulation
in the place (or in each place if
more than one) at which the
U.P. LAW BOC BUSINESS ORGANIZATIONS
partnership business was regularly
carried on. [par. 1, Art. 1834, NCC]
Note the character of the notice required:
1. As to persons who extended credit to the
partnership prior to dissolution, notice must
be actual.
2. As to persons who merely knew of the
existence of the partnership, publication in
a newspaper of general circulation in the
place of business of the partnership is
sufficient.
On Liability for Transactions after
Dissolution
The liability of a partner, in general, is the same
as in ordinary contracts (pro rata and
subsidiary).
In the following cases, however, the liability
shall be satisfied out of the partnership assets
alone (i.e., there is no subsidiary liability):
1. When the partner had been, prior to the
dissolution, unknown as a partner to the
person with whom the contract is made;
2. When the partner had been, prior to the
dissolution, so far unknown or inactive in
partnership affairs that the business
reputation of the partnership could not be
said to have been in any degree due to his
connection with it. [Art. 1834, NCC]
Any act of a partner after dissolution in no case
binds the partnership in the following cases:
1. Where the partnership is dissolved
because it is unlawful to carry on the
business, unless the act is appropriate for
winding up partnership affairs;
2. Where the partner has become insolvent;
or
3. Where the partner has no authority to wind
up partnership affairs, except by a
transaction with one who –
a. Had extended credit to the
partnership prior to dissolution and
had no knowledge or notice of his
want of authority; or
b. Had not extended credit to the
partnership prior to dissolution and,
having no knowledge or notice of
Page 114 of 450
COMMERCIAL LAW
his want of authority, the fact of his
want of authority has not been
advertised. [Art. 1834, NCC]
Art. 1834, NCC does not affect the liability
under Art. 1825, NCC of any person who, after
dissolution, represents himself or consents to
another representing him as a partner in a
partnership engaged in carrying on business.
[Art. 1834, NCC]
On Liability for Contracts after
Dissolution by Specific Causes
General rule: A contract:
1. Entered into by a partner acting for the
partnership;
2. After dissolution by –
a. act,
b. death, or
c. insolvency of a partner,
Binds the other partners.
Exceptions:
1. The dissolution being by act of any partner,
the partner acting for the partnership had
knowledge of the dissolution; or
2. The dissolution being by death or
insolvency of a partner, the partner acting
for the partnership had knowledge or notice
of the death or insolvency. [Art. 1833, NCC]
On Existing Liability of Partners
General rule: Dissolution does not of itself
discharge the existing liability of any partner.
Exception: A partner may be relieved when
there is an agreement to that effect between:
1. Himself;
2. The partnership creditor; and
3. The person or partnership continuing the
business.
U.P. LAW BOC BUSINESS ORGANIZATIONS
Such agreement may be inferred from the
course of dealing between:
1. The creditor having knowledge of the
dissolution; and
2. The person or partnership continuing the
business.
In case of dissolution by death, the individual
property of a deceased partner is liable for
obligations of the partnership incurred while he
was a partner, after payment of his separate
debts. [Art.1835, NCC]
Winding Up Partners
Who May Wind Up
The following partners have the right to wind up
the partnership affairs:
1. Those designated in an agreement;
2. Those who have not wrongfully dissolved
the partnership; or
3. The legal representative of the last
surviving partner, who was not insolvent.
Any partner or his legal representative or
assignee may obtain winding up by the court,
upon cause shown [Art. 1836, NCC].
Manner of Winding Up
1. Extrajudicial, by the partners themselves;
or
2. Judicial, under the control and direction of
the proper court.
The action for liquidation of the partnership is
personal. The fact that sale of assets, including
real property, is involved does not change its
character, such sale being merely a necessary
incident of the liquidation of the partnership,
which should precede and/or is part of its
process of dissolution. [Claridades v.
Mercader, G.R. No. L-20341 (1966)]
Page 115 of 450
COMMERCIAL LAW
Rights of Partners in Case of
Dissolution
a. Dissolution Without Violation of the
Agreement
Each partner may have:
1. The partnership property applied to
discharge the partnership liabilities; and
2. The surplus applied in cash to the net
amount owing to the respective partners.
This is a right as against his co-partners and all
partners claiming through them in respect of
their interests in the partnership. It cannot be
availed if there is an agreement to the contrary.
[Art. 1837 (1), NCC]
Note: When dissolution is caused by expulsion,
the expelled partner may be discharged from
all partnership liability in the same manner as
above but he shall receive in cash only the net
amount due him from the partnership. [de
Leon]
Dissolution in Contravention of the
Agreement
PARTNER WHO DID NOT CAUSE THE
DISSOLUTION
The partners who did not cause the dissolution
wrongfully has the following rights:
1. To demand the right under par. 1, Art.
1837, NCC;
2. To be indemnified for damages for breach
of the agreement against the partner who
caused the dissolution wrongfully [Art.
1837(1), NCC];
3. To continue the business:
a. In the same name;
b. By themselves or jointly with others;
c. During the agreed term for the
partnership.
For the purpose of continuing the business, the
said partners may possess the partnership
property provided:
1. They secure the payment by bond
approved by the court; or
2. They pay any partner, who has caused the
dissolution wrongfully, the value of his
U.P. LAW BOC BUSINESS ORGANIZATIONS
interest in the partnership, less any
damages recoverable, and indemnity
against all present or future partnership
liabilities. [Art. 1837(2), NCC]
PARTNER WHO CAUSED THE
DISSOLUTION
The partner who caused the dissolution
wrongfully has the following rights:
1. If the business is not continued, all the
rights par. 1, Art. 1837, NCC, subject to
liability for damages;
2. If the business is continued, the right, as
against his co-partners and all claiming
through them, to:
a. Ascertainment, without considering
the value of the goodwill of the
business, and payment to him in
cash the value of his partnership
interest, less any damage, or have
the payment secured by a bond
approved by the court; and
b. Be released from all existing
liabilities of the partnership. [Art.
1837(3), NCC]
The goodwill of a business may be defined to
be the advantage which it has from its
establishment or from the patronage of its
customers, over and above the mere value of
its property and capital. The goodwill (which
includes the firm name) is part of the
partnership assets and may be subject of sale.
[de Leon]
Rights of Partners in Case of
Rescission
A partner, who is induced by fraud or
misrepresentation to become such partner,
may rescind the contract. Without prejudice to
any other right, he is entitled:
a. To a lien on, or right of retention of, the
surplus of the partnership property after
satisfying the partnership liabilities to third
persons for any sum of money paid by him
for the purchase of an interest in the
partnership and for any capital or advances
contributed by him;
b. To stand, after all liabilities to third persons
have been satisfied, in the place of the
Page 116 of 450
COMMERCIAL LAW
creditors of the partnership for any
payments made by him in respect of the
partnership liabilities; and
c. To be indemnified by the person guilty of
the fraud or making the representation
against all debts and liabilities of the
partnership [Art. 1838, NCC].
Nature of Fraud or Deceit
The fraud or deceit must be material or
substantial. Mere exaggerations of one partner
of the prospects of enterprises or of value of the
property which he has put into the firm as
capital is not ground for dissolution. [Pineda]
Settling of Accounts between
Partners
Subject to any agreement to the contrary, the
following rules shall be observed in settling
accounts between partners after dissolution.
Composition of Partnership Assets
1. The partnership property; and
2. The contributions of the partners
necessary for the payment of all the
liabilities. [Art. 1839(1), NCC]
In accordance with the subsidiary liability of the
partners, the partnership property shall be
applied first to satisfy any liability of the
partnership. [Art. 1839(3), NCC]
Amount of Contribution for
Liabilities
The rules for distribution of losses shall
determine the contributions of the partners.
[Art. 1839(4), NCC] As such:
1. The contribution shall be in conformity with
the agreement.
2. If only the share in profits has been
stipulated, the contribution shall be in the
same proportion.
3. In the absence of any stipulation, the
contribution shall be in proportion to the
capital contribution. [Art. 1797, NCC]
U.P. LAW BOC BUSINESS ORGANIZATIONS
Enforcement of Contribution
The following persons have the right to enforce
the contributions:
1. An assignee for the benefit of creditors;
2. Any person appointed by the court; or
3. To the extent of the amount which he has
paid in excess of his share of the
partnership liability, any partner or his legal
representative. [Art. 1839(5) and (6), NCC]
The individual property of a deceased partner
shall be liable for the contributions. [Art.
1839(7), NCC]
Order of Application of Assets
The partnership liabilities shall rank, in order of
payment, as follows:
1. Those owing to creditors other than
partners;
2. Those owing to partners other than for
capital and profits;
3. Those owing to partners in respect of
capital;
4. Those owing to partners in respect of
profits. [Art. 1839(2), NCC]
Doctrine of Marshaling of Assets
When partnership property and the individual
properties of the partners are in possession of
a court for distribution:
1. Partnership creditors have priority on
partnership property;
2. Separate creditors have priority on
individual property, saving the rights of lien
of secured creditors;
3. Anything left from either shall be applied to
satisfy the other. [Art. 1839(8), NCC]
Distribution of Property of Insolvent
Partner
Where:
1. A partner has become insolvent; or
2. His estate is insolvent,
The claims against his separate property shall
rank in the following order:
a. Those owing to separate creditors;
b. Those owing to partnership creditors;
Page 117 of 450
COMMERCIAL LAW
c. Those owing to partners by way of
contribution. [Art. 1839(9), NCC].
Rights of Creditors of Dissolved
Partnership
As Creditors of the New Partnership
In the following cases, creditors of the
dissolved partnership are also creditors of the
person or partnership continuing the business:
1. When the business is continued without
liquidation, and the cause of dissolution is
–
a. Admission of a new partner into the
existing partnership;
b. Retirement or death of any partner, and
his rights to partnership property are
assigned to [1] two or more of the
partners, or [2] one or more of the
partners and one or more third
persons;
c. Retirement of all but one partner, and
their rights to partnership property are
assigned to the remaining partner, who
continues the business, either alone or
with others;
d. Wrongful dissolution by any partner,
and the remaining partners continue
the business, either alone or with
others; or
e. Expulsion of a partner, and the
remaining partners continue the
business, either alone or with others.
2. When the cause of dissolution is the
retirement or death of any partner, and
business is continued with the consent of
the retired partner or the representative of
the deceased partner, without assignment
of their rights to partnership property.
3. When the cause of dissolution is the
assignment by all the partners or their
representatives of their rights in
partnership property to one or more third
persons who promise to pay the debts and
who continue the business of the
partnership. [par. 1, Art. 1840, NCC]
U.P. LAW BOC BUSINESS ORGANIZATIONS
Liability of A New Partner
The liability to the creditors of the dissolved
partnership of a new partner in the partnership
continuing the business shall be satisfied out
of the partnership property alone. However, he
may, through agreement, assume individual
liability. [par. 2, Art. 1840, NCC]
Priority of Creditors of Dissolved
Partnership
Creditors of the dissolved partnership have
prior right to any claim of the retired partner or
the representative of the deceased partner
against the person or partnership continuing
the business. [par. 3, Art. 1840, NCC]
This is without prejudice to the right of creditors
to set aside any assignment on the ground of
fraud. [par. 4, Art. 1840, NCC]
Ratio: Business will be hampered if outside
creditors are not given superior right. It will be
risky for them to deal with partnerships.
Moreover, if partners enjoy priority right, in the
natural order of things, they will prefer their own
interests to that of the outside creditors. Such
state will make it easy to defraud non-partner
creditors. [Pineda]
Rights of a Retired Partner or a
Representative of Deceased Partner
Unless otherwise agreed upon, when any
partner retires or dies, and the business is
continued without any settlement of accounts
as between him or his estate and the person or
partnership continuing the business, he or his
legal representative, as against such person or
partnership, subject to the prior rights of
creditors of the dissolved partnership:
a. May have the value of his interest at the
date of dissolution ascertained; and
b. Shall receive as an ordinary creditor –
1. An amount equal to the value of his
interest in the dissolved partnership
with interest; or
2. At his option or at the option of his legal
representative, in lieu of interest, the
profits attributable to the use of his right
Page 118 of 450
COMMERCIAL LAW
in the property of the dissolved
partnership. [Art. 1841, NCC]
Right to an account
In the absence of any agreement to the
contrary, the right to an account of his interest
shall accrue to any partner, or his legal
representative at the date of dissolution, as
against:
a. The winding up partners;
b. The surviving partners; or
c. The person or partnership continuing the
business [Art. 1842, NCC].
4. Limited Partnership
Definition
(1) A partnership;
(2) Formed by two or more persons;
(3) Having as members:
i. One or more general partners; and
ii.One or more limited partners.
The limited partners as such shall not be bound
by the obligations of the partnership [Art. 1843,
NCC], except to the extent of their capital
contributions.
Characteristics
1. A limited partnership is formed by
compliance with the statutory
requirements. [Art. 1844, NCC]
2. The business is controlled or managed by
one or more general partners, who are
personally liable to creditors. [Arts. 1848
and 1850, NCC]
3. One or more limited partners contribute to
the capital and share in the profits but do
not manage the business and are not
personally liable for partnership obligations
beyond their capital contributions. [Arts.
1845, 1848 and 1856, NCC]
4. Obligations or debts are paid out of the
partnership assets and the individual
property of the general partners. [Art. 1843,
NCC]
5. The limited partners may have their
contributions back subject to conditions
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

prescribed by law. [Arts. 1844 and 1957, Prohibited (subject Not prohibited
NCC] to qualifications)
Effect of retirement, death, insanity or
A limited partnership has the following insolvency
advantages: Dissolves Does not dissolve
1. For general partners, to secure capital partnership partnership; rights
from others while retaining control and transferred to executor
supervision for the business; or administrator for
2. For limited partners, to have a share in selling his estate
the profits without risk of personal liability. Assignability of interest
Not assignable Assignable
General and Limited Partners
Distinguished General and Limited Partnership
Distinguished
General partner Limited partner
Extent of liability General Limited
Personally, but Liable only to the partnership partnership
subsidiarily liable extent of his capital Creation
for obligations of contributions (subject
Partners must: [1]
the partnership to exceptions)
sign and swear to a
Right to participate in management May be constituted in certificate in
Unless otherwise No right to participate any form, subject to compliance with Art.
agreed upon, all in management exceptions 1844, NCC; and [2]
general partners file the certificate for
have an equal record in the SEC
right to manage
Composition
the partnership
One or more general,
Nature of contribution
Only general partners and one or more
Cash, property or Cash or property only,
limited partners
industry not industry Firm name
Proper party in proceedings by or Must include the word
against partnership “Limited” [SEC Memo.
Proper party Not proper party, Circ. No. 14-00]
unless (1) he is also a Must contain the word
general partner; or (2) “Company” [SEC
Must not include
where the object of the Memo Circ No. 14-
name of limited
00], except for
proceedings is to partners, unless: [1] it
professional
enforce his right is also the surname of
partnerships.
against or liability to a general partner, or
the partnership. [2] prior to the time
May or may not
when the limited
include the name of
The limited partner is partner became such,
one or more of the
a necessary but not an the business has
partners.
indispensable party. been carried on under
a name in which his
Firm name
surname appeared
Name may appear Name must not
Rules governing dissolution
in the firm name appear in the firm
Arts. 1828-1842, NCC Arts. 1860-1863, NCC
name (subject to
exceptions)
Prohibition to engage in other business

Page 119 of 450

U.P. LAW BOC BUSINESS ORGANIZATIONS
Formation
General Requirements
Two or more persons desiring to form a limited
partnership shall:
1. Sign and swear to a certificate stating the
items in Art. 1844, NCC; and
2. File for record the certificate in the SEC.
[Art. 1844, NCC]
A limited partnership is formed if there is
substantial compliance in good faith with the
requirements. [Art. 1844, NCC] When there is
failure to substantially comply with the
requirements:
1. In relation to third persons, the partnership
is general, unless they recognized that the
firm is a limited partnership; and
2. As between the partners, the partnership
remains limited, since they are bound by
their agreement. [de Leon]
Purpose of Filing
1. To give actual or constructive notice to
potential creditors or persons dealing with
the partnership; and
2. To acquaint them with its essential
features, including the limited liability of
limited partners. [de Leon]
Firm Name
General rule: The surname of a limited partner
shall not appear in the partnership name.
Page 120 of 450
COMMERCIAL LAW
Exceptions:
1. It is also the surname of a general partner;
or
2. Prior to the time when the limited partner
became such, the business had been
carried on under a name in which his
surname appeared.
A limited partner whose surname appears in a
partnership name contrary to this prohibition
is liable as a general partner to partnership
creditors who extend credit without actual
knowledge that he is not a general partner. [Art.
1846, NCC]
False Statement in the Certificate
If the certificate contains a false statement, one
who suffers loss by reliance thereon may hold
liable any party to the certificate who knew the
statement to be false:
1. At the time he signed the certificate; or
2. Subsequently, but within a sufficient time
before the statement was relied upon to
enable him to cancel or amend the
certificate, or to file a petition for its
cancellation or amendment [Art. 1847,
NCC].
Requisites:
1. The partner knew the statement to be false:
a. At the time he signed the
certificate; or
b. Subsequently, but having sufficient
time to cancel or amend it, or file a
petition for its cancellation or
amendment, and he failed to do so;
2. The person seeking to enforce liability has
relied upon the false statement in
transacting business with the partnership;
and
3. The person suffered loss as a result of
reliance upon such false statement.
U.P. LAW BOC BUSINESS ORGANIZATIONS
General and Limited Partner at the
Same Time
A person may be:
1. A general; and
2. A limited partner,
in the same partnership at the same time.
This fact must be stated in the certificate.
Such person shall have:
1. All the rights and powers of a general
partner; and
2. Be subject to all the restrictions of a general
partner.
Except that, in respect to his contribution
as a limited partner, he shall have the rights
against the other members which he would
have had if he were not also a general partner.
[Art. 1853, NCC]
Management
General Rule: Only general partners have the
right to manage the partnership.
A general partner shall have the rights and
powers and be subject to all restrictions and
liabilities of a partner in a partnership without
limited partners. Thus, he has general authority
over the business.
Thus, if a limited partner takes part in the
control of the business, he becomes liable as a
general partner. [Art. 1848, NCC]
However, written consent or ratification by
all limited partners is necessary to
authorize the general partners to:
a. Do any act in contravention of the
certificate;
b. Do any act which would make it impossible
to carry on the ordinary business of the
partnership;
c. Confess a judgment against the
partnership;
d. Possess partnership property, or assign
their rights in specific property, for other
than a partnership purpose;
e. Admit a person as a general partner;
Page 121 of 450
COMMERCIAL LAW
f. Admit a person as a limited partner, unless
the right to do so is given in the certificate;
1. Continue the business with partnership
property on the:
2. Death;
3. Retirement;
4. Insanity;
5. Civil interdiction; or
6. Insolvency of a general partner,
unless the right so to do is given in the
certificate [Art. 1850, NCC]
Obligations of a Limited Partner
Obligations Related to Contribution
The contributions of a limited partner may be
cash or other property, but not services. [Art.
1845, NCC]
A limited partner is liable for partnership
obligations when he contributes services
instead of only money or property to the
partnership. [de Leon]
A limited partner is liable to the partnership:
1. For the difference between his actual
contribution and that stated in the
certificate as having been made; and
2. For any unpaid contribution which he
agreed in the certificate to make in the
future, at the time and on the conditions
stated in the certificate. [par. 1, Art. 1858,
NCC]
He holds as trustee for the partnership:
1. Specific property stated in the certificate as
contributed by him, but which was not
contributed or which has been wrongfully
returned; and
2. Money or other property wrongfully paid or
conveyed to him on account of his
contribution. [par. 2, Art. 1858, NCC]
U.P. LAW BOC BUSINESS ORGANIZATIONS
These liabilities can be waived or compromised
only by the consent of all members. Such
waiver or compromise, however, shall not
affect the right to enforce said liabilities of a
creditor:
1. Who extended credit; or
2. Whose claim arose, after the filing or before
a cancellation or amendment of the
certificate, to enforce such liabilities. [par.
3, Art. 1858, NCC]
Even after a limited partner has rightfully
received the return in whole or in part of his
capital contribution, he is still liable to the
partnership for any sum, not in excess of such
return with interest, necessary to discharge its
liabilities to all creditors:
1. Who extended credit; or
2. Whose claims arose before such return.
[par. 4, Art. 1858, CC]
A person:
1. Who has contributed capital to a
partnership;
2. Who erroneously believed that he has
become a limited partner; and
3. Whose name appears in the certificate as
a general partner, or who is not designated
as a limited partner,
is not personally liable as a general partner by
reason of his exercise of the rights of a limited
partner, provided:
a. On ascertaining the mistake, he
promptly renounces his interest in the
profits of the business or other
compensation by way of income [Art.
1852, NCC];
b. He does not participate in the
management of the business [Art.
1848, NCC]; and
c. His surname does not appear in the
partnership name. [Art. 1846, NCC]
Liability to Partnership Creditors
General rule: A limited partner is not liable as
a general partner. His liability is limited to the
extent of his contributions. [Art. 1843, NCC]
Exceptions: The limited partner is liable as a
general partner when:
Page 122 of 450
COMMERCIAL LAW
1. His surname appears in the partnership
name, with certain exceptions. [par. 2, Art.
1846, NCC]
2. He takes part in the control of the business.
[Art. 1848, CC]
3. The certificate contains a false statement of
which he knows and which was relied
upon, resulting in loss. [Art. 1847, CC]
In cases (1) and (2), the limited partner is
entitled to reimbursement by the general
partner/s.
Ratio: The general partner/s may not have
been aware of such false statement.
Liability to Separate Creditors
On due application to a court of competent
jurisdiction by any separate creditor of a limited
partner, the court may:
1. Charge his interest with payment of the
unsatisfied amount of such claim;
2. Appoint a receiver; and
3. Make all other orders, directions and
inquiries which the circumstances of the
case may require.
The interest so charged may be redeemed with
the separate property of any general partner,
but may not be redeemed with partnership
property. [Art. 1862, NCC]
Note: In a general partnership, the interest may
be redeemed with partnership property with the
consent of all the partners whose interests are
not charged. [Art. 1814, NCC]
Rights of a Limited Partner
In General
A limited partner shall have the same rights as
a general partner to:
1. Require that the partnership books be kept
at the principal place of business of the
partnership;
2. To inspect and copy any of them at a
reasonable hour;
3. To demand true and full information of all
things affecting the partnership;
U.P. LAW BOC BUSINESS ORGANIZATIONS
4. To demand a formal account of partnership
affairs whenever circumstances render it
just and reasonable;
5. To ask for dissolution and winding up by
decree of court;
6. To receive a share of the profits or other
compensation by way of income; and
7. To receive the return of his contribution
provided the partnership assets are in
excess of all its liabilities. [Art. 1851, NCC]
Right to Transact Business with the
Partnership
A limited partner may:
1. Loan money to the partnership;
2. Transact other business with the
partnership; and
3. Receive a pro rata share of the partnership
assets with general creditors if he is not
also a general partner. [par. 1, Art. 1854,
NCC]
Limitations: A limited partner, with respect to
his transactions with the partnership, cannot:
1. Receive or hold as collateral security any
partnership property; or
2. Receive any payment, conveyance, or
release from liability if it will prejudice the
right of third persons. [par.1, Art. 1854,
NCC]
Violation of the prohibition is considered a fraud
on the creditors of the partnership. [par. 2, Art.
1854, NCC]
Right to Share in Profits
A limited partner may receive from the
partnership the share of the profits or the
compensation by way of income stipulated for
in the certificate.
This right is subject to the condition that
partnership assets will still be in excess of
partnership liabilities after such payment. [Art.
1856, NCC] The partnership liabilities being
referred to exclude the liabilities to the limited
and general partners.
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Rationale: Otherwise, he will receive a share to
the prejudice of third-party creditors.
Right to Return of Contribution
A limited partner may have his contributions
withdrawn or reduced when:
1. All the liabilities of the partnership, except
liabilities to general partners and to limited
partners on account of their contributions,
have been paid or there remains property
of the partnership sufficient to pay them;
2. The consent of all members is had, unless
the return may be demanded as a matter of
right; and
3. The certificate is cancelled or so amended
as to set forth the withdrawal or reduction.
[par. 1, Art. 1857, NCC]
Note: Once withdrawal has been approved by
the SEC and registered, the partnership may
no longer recover the limited partner’s
contributions.
The return of his contributions may be
demanded, as a matter of right [i.e., even when
not all the other partners consent]:
1. On the dissolution of the partnership;
2. Upon the arrival of the date specified in the
certificate for the return; or
3. After the expiration of a 6-month notice in
writing given by him to the other partners, if
no time is fixed in the certificate for:
a. The return of the contribution; or
b. The dissolution of the partnership
[par. 2, Art. 1857, CC].
General rule: A limited partner, irrespective of
the nature of his contribution has only the right
to demand and receive cash in return for his
contribution.
Exceptions: He may receive his contribution in
a form other than cash when:
1. There is a statement in the certificate to the
contrary; or
2. All the members of the partnership
consent. [par. 3, Art. 1857, NCC]
U.P. LAW BOC BUSINESS ORGANIZATIONS
Preference of Limited Partners
General rule: The limited partners stand on
equal footing.
Exception: By an agreement of all the partners
(general and limited) stated in the certificate,
priority or preference may be given to some
limited partners over others with respect to:
1. The return of contributions;
2. Their compensation by way of income; or
3. Any other matter. [Art. 1855, NCC].
Note: Such an agreement shall be stated in
the certificate.
Right to Assign Interest
The interest of a limited partner is assignable.
The assignee may become:
1. A substituted limited partner; or
2. A mere assignee.
A substituted limited partner is a person
admitted to all the rights of a limited partner
who has died or has assigned his interest in a
partnership. He has all the rights and powers,
and is subject to all the restrictions and
liabilities of his assignor, except those liabilities
which:
1. The assignee was ignorant of; and
2. Cannot be ascertained from the certificate.
[pars. 2 and 6, Art. 1859, NCC]
An assignee is only entitled to receive the
share of the profits or other compensation by
way of income, or the return of contribution, to
which the assignor would otherwise be entitled.
He has no right:
1. To require any information or account of
the partnership transactions;
2. To inspect the partnership books. [par. 3,
Art. 1859, NCC]
An assignee has the right to become a
substituted limited partner if:
1. All the partners consent thereto; or
2. The assignor, being empowered to do so
by the certificate, gives him that right, [par.
4, Art. 1859, NCC].
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COMMERCIAL LAW
An assignee becomes a substituted limited
partner when the certificate is appropriately
amended. [par. 5, Art. 1859, NCC]
Right to Ask for Dissolution
A limited partner may have the partnership
dissolved and its affairs wound up when:
1. He rightfully but unsuccessfully demands
the return of his contribution; or
2. He has a right to contribution but his
contribution is not paid because the
partnership property is insufficient to pay its
liabilities. [par. 4, Art. 1857, NCC]
Dissolution
A limited partnership is dissolved in much the
same way and causes as an ordinary
partnership. [de Leon]
General rule: The retirement, death,
insolvency, insanity or civil interdiction of a
general partner dissolves the partnership.
Exception: It is not so dissolved when the
business is continued by the remaining general
partners:
a. Under a right to do so stated in the
certificate; or
b. With the consent of all members. [Art.
1860, NCC]
Upon the death of a limited partner, his
executor or administrator shall have:
a. All the rights of a limited partner for the
purpose of settling his estate; and
b. The power to constitute an assignee as a
substituted limited partner, if the deceased
was so empowered in the certificate.
The estate of a deceased limited partner shall
be liable for all his liabilities as a limited partner.
[Art. 1861, NCC]
U.P. LAW BOC BUSINESS ORGANIZATIONS
Settlement of Accounts
Order of Payment
In settling accounts after dissolution, the
liabilities of the partnership shall be entitled to
payment in the following order:
1. Those to creditors, including limited
partners except those on account of their
contributions, in the order of priority as
provided by law;
2. Those to limited partners in respect to their
share of the profits and other compensation
by way of income in their contributions;
3. Those to limited partners in respect to the
capital of their contributions;
4. Those to general partners other than for
capital and profits;
5. Those to general partners in respect to
profits;
6. Those to general partners in respect to
capital. [par. 1, Art. 1863, NCC]
Note: In settling accounts of a general
partnership, those owing to partners in respect
to capital enjoy preference over those in
respect to profits.
Share in the Partnership Assets
The share of limited partners in respect to their
claims for capital, profits, or for compensation
by way of income, is in proportion of their
contribution, unless:
1. There is a statement in the certificate as to
their share in the profits; or
2. There is a subsequent agreement fixing
their share. [Art. 1863, NCC]
Amendment or Cancellation of
Certificate
a. Cancellation of Certificate
The certificate shall be cancelled when:
The partnership is dissolved; or
1. All limited partners cease to be such limited
partners.
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Amendment of Certificate
A certificate shall be amended when:
1. There is a change in the name of the
partnership or in the amount or character of
the contribution of any limited partner;
2. A person is substituted as a limited partner;
3. An additional limited partner is admitted;
4. A person is admitted as a general partner;
5. A general partner retires, dies, becomes
insolvent or insane, or is sentenced to civil
interdiction and the business is continued;
6. There is a change in the character of the
business of the partnership;
7. There is a false or erroneous statement in
the certificate;
8. There is a change in the time as stated in
the certificate for the dissolution of the
partnership or for the return of a
contribution;
9. A time is fixed for the dissolution of the
partnership, or the return of a contribution,
no time having been specified in the
certificate; or
10. The members desire to make a change in
any other statement in the certificate in
order that it shall accurately represent the
agreement among them. [Art. 1864, NCC].
Requirements for Amendment or
Cancellation
To amend or cancel a certificate:
The amendment or cancellation must be in
writing;
1. It must be signed and sworn to by all the
members including the new members, and
the assigning limited partner in case of
substitution or addition of a limited or
general partner; and
The writing to amend (with the certificate, as
amended) or to cancel must be filed for
recorded in the SEC.
When a person required to sign the writing, a
person desiring the cancellation or amendment
may petition the court to order cancellation or
amendment. The court shall order the SEC to
record the cancellation or amendment if it finds
that the petitioner has a right to have the writing
executed.
U.P. LAW BOC BUSINESS ORGANIZATIONS
From the moment the amended
certificate/writing or a certified copy of a court
order granting the petition for amendment has
been filed, such amended certificate shall
thereafter be the certificate of partnership. [Art.
1865, NCC]
Limited Partnerships Formed Prior
to the NCC
Limited partnerships formed under the law prior
to the NCC may
a. Continue to be governed by the provisions
of the old law
b. Become a limited partnership under the
NCC by compliance with Art. 1844,
provided that the certificate states:
1. The amount of the original contribution
of each limited partner and the time it
was made; and
2. That the partnership assets exceeds its
liabilities to third persons by an amount
greater than the sum of all limited
partners’ contributions. [Art. 1867,
NCC]
B. CORPORATIONS
1. Definition of Corporation
A Corporation is an artificial being created by
operation of law, having the right of succession
and the powers, attributes, and properties
expressly authorized by law or incident to its
existence. [Sec. 2, unless otherwise indicated,
all sections cited herein are from RA 11232, or
the Revised Corporation Code]
ATTRIBUTES OF A CORPORATION
a. An Artificial Being
A corporation is a juridical entity that exists
apart from its stockholders. It has its own set of
rights and obligations as provided for by law.
Technically, it has no physical existence
although it occupies a principal place of
business.
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Being only a juridical entity, the physical acts of
the corporation, like the signing of documents,
can be performed only by natural persons duly
authorized for such purpose by corporate by-
laws or by a special act of the Board of
Directors (BOD). [Swedish Match Philippines,
Inc. v. Treasurer of the City of Manila, G.R. No.
181277 (2013)]
A corporation, upon coming into existence, is
invested by law with a personality separate and
distinct from those persons composing it as
well as from any other legal entity to which it
may be related. [Yutivo Sons Hardware v. CTA,
G.R. No. L-13203 (1961)]
b. Created by Operation of Law
Mere consent of the parties to form a
corporation is not sufficient. The State must
give its consent either through a special law (in
case of government corporations) or a general
law (i.e., Revised Corporation Code in case of
private corporations).
A corporation comes into existence upon the
issuance of the certificate of incorporation.
Then, and only then, will it acquire juridical
personality to sue and be sued, enter into
contracts, hold or convey property or perform
any legal act in its own name.
c. Has the Right of Succession
Since one of the attributes of a corporation is
that it is an artificial being with a distinct
personality, the corporation’s existence is
unaffected by a change in the composition of
stockholders. Its existence is limited only by the
Articles of Incorporation (AOI), may be subject
to Quo Warranto proceedings (Rule 66 of the
Rules of Court), and may be shortened by
dissolution (Title XIV).
d. Has the Powers, Attributes and
Properties Expressly Authorized by Law or
Incident to its Existence
A corporation has no power except those
expressly conferred on it by the Revised
Corporation Code and by its articles of
incorporation, those which may be incidental to
such conferred powers, those that are implied
from its existence, and those reasonably
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

necessary to accomplish its purposes. In turn, Its governing body is usually the Board of
a corporation exercises said powers through its Trustees (BoT). However, non-stock
BOD and/or its duly authorized officers and corporations may, through their articles of
agents. [Monfort Hermanos Agricultural Dev. incorporation or their by-laws, designate their
Corp. v. Monfort III, G.R. No. 152542 (2004)] governing boards by any name other than as
board of trustees. [Sec. 174]
Being a creature of the law, its powers are
limited by: Stock Non-Stock
The law (see Sec. 35 for general
powers and Secs. 36 to 43 for specific No part of income is
powers); Have capital stock distributable as
By the express terms of its AOI as well divided into shares dividends to its
those essential or necessary to carry [Sec. 3,] members or trustees
out its purpose or purposes under such [Sec. 86]
Articles (see Sec. 35, last par.); and
By those necessary or incidental to its Are authorized to Any profit may obtain
powers so conferred (see Sec. 44) distribute to the as an incident to its
holders of such operations shall,
shares, dividends or when necessary or
2. Classes of Corporations allotments of surplus proper, be used for
profits on the basis of the furtherance of its
a. Stock Corporation the shares held [Sec. purpose or purposes
Stock corporations – corporations which 3] [Sec. 86,]
have capital stock divided into shares AND are
authorized to distribute to the holders of such Composed of Composed of
shares dividends or allotments of the surplus stockholders members
profits on the basis of shares held. [Sec. 3] It is
organized for profit. It is not for profit [Sec.
It is for profit
87]
The governing body of a stock corporation is
usually the BOD (except in certain instances, Other distinctions
e.g. one person corporations, close Stock Non-Stock
corporations).
Cumulative voting in Cumulative voting in
Note: A corporation is deemed to have the election of directors election of trustees is
power to declare dividends. So long as the is provided by law only available if
corporation has capital stock and there is no [Sec. 23] provided in AOI or
prohibition in its Articles of Incorporation or in BL [Sec. 23]
its by-laws for it to declare dividends, such
corporation is a stock corporation. [Sec. 42] Maximum of 15 May be more than 15
directors except in [Sec. 91]
b. Non-Stock Corporation merger or
All other corporations are non-stock consolidation of
corporations. [Sec. 3] banks [Sec. 13]

Term of director is 1 Maximum term of a

Non-stock corporations – One where no part trustee is 3 years
year [Sec. 22]
of the income is distributable as dividends to its [Sec. 91]
members, trustees, or officers, subject to the
provisions of the Code on dissolution. [Sec. 86]
It is not organized for profit.

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Stockholders’ May be anywhere unreasonable under t

meetings must be in within Philippine he circumstances
the principal office as territory as provided (SEC Opinion, [June
set forth in the AOI by BL. [Sec. 92] 8, 1995])
or, if not practicable,
in the city or
municipality where Residual assets are Generally, members
the principal office is to be distributed to are not allowed to
located [Sec. 50] the stockholders participate in
upon dissolution, distribution of assets.
One class of shares Right to vote of after payment of Assets are to be
must always have members of any creditors. Dissolution distributed to such
complete voting class may be denied is effected through persons, societies,
rights [Sec. 6,] in the AOI or BL the methods organizations or
[Sec. 88] provided in the Code. corporations as may
[Sec. 133] be specified in a plan
There is free transfer Transfer of of distribution. [Sec.
of shares. membership cannot 93]
Membership is not be made without
personal to the consent of the
stockholder. corporation. [Sec. 89] c. One Person Corporations
Note: Subject to Membership is One Person Corporations - A corporation
provisions on close personal. with a single stockholder. Only a natural
corporations. person, trust, or an estate may form a One
Person Corporation.
May always vote by Vote by proxy can be
proxy [Sec. 57] denied in the AOI or Banks and quasi-banks, pre-need, trust,
BL [Sec. 88] insurance, public and publicly-listed
companies, and non-chartered government-
Upon transfer of Membership may be owned and controlled corporations may not
share, seller is no terminated according incorporate as One Person Corporations.
longer part of to causes provided in
corporation. Transfer the BL. [Sec. 90] A natural person who is licensed to exercise a
may only be subject profession may not organize as a One Person
to restrictions noted Corporation for the purpose of exercising such
down in AOI, BL, and profession except as otherwise provided under
stock certificate, and special laws. [Sec. 116,]
must not be more
onerous than the d. Other Corporations
right of first refusal.
[Sec. 97] 1. Public Corporation
Public corporation – one formed or organized
Note: Transfer for the government of a portion of the state. Its
restrictions imposed i purpose is for the general good and welfare.
n a Shareholders Agr [Sec. 3, Act 1456]
eement may be bindi
ng upon the stockhol Beyond cavil, a GOCC has a personality of its
ders who are parties own, distinct and separate from that of the
thereto, since they ar government, and the intervention in a
e chargeable with not transaction of the Office of the President
ice, unless palpably through the Executive Secretary does not

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

change the independent existence of a at least 2/3 of its voting stock or voting rights is
government entity as it deals with another owned or controlled by another corporation
government entity. [Polytechnic University of which is not a close corporation. [Sec. 95]
the Phils. v. CA, G.R. No. 143513 (2001)]
Any corporation may be incorporated as a
Not all corporations which are not GOCCs close incorporation, except:
are ipso facto to be considered private 1. Mining or oil companies;
corporations as there exists another distinct 2. Stock exchanges;
class of corporations or chartered institutions 3. Banks;
which are otherwise known as “public 4. Insurance companies;
corporations.” These corporations are 5. Public utilities;
treated by law as agencies or instrumentalities 6. Educational institutions; and
of the government which are not subject to 7. Corporations declared to be vested with
the tests of ownership or control and public interest. [Sec. 95]
economic viability but to different criteria
relating to their public purposes/interests or
Ordinary Stock
constitutional policies and objectives and Close Corporation
Corporation
their administrative relationship to the
government or any of its Departments or AOI must provide:
Offices. [Boy Scouts of the Philippines v. COA, a. Not to be held by
G.R. No. 177131 (2011)] more than a certain
number of
2. Private Corporation Stockholders, not
Private corporation – One formed for some to exceed 20
private purpose, benefit, aim or end [Sec. 3, Act b. Transfer
1456]; it may be either stock or non-stock, restrictions allowed
Has an AOI with a
government-owned or controlled or quasi- c. Shall not be listed,
general template
public. and shall not
[Sec. 14]
publicly offer
The test to determine whether GOCC or
private corporation: if a corporation is created Further, a corporation
by its own charter for the exercise of a public which is not a close
function, then GOCC; if by incorporation under corp. cannot own more
the general corporation law, then private than 75% of the
corporation. [Baluyot v. Holganza, G.R. No. outstanding capital
136374 (2000)] stock

3. Close Corporation No limit to number

Close corporation – One whose articles of of corporators Not more than 20,
incorporation provide that: allowed by according to AOI
1. All issued stock, exclusive of treasury authorized shares
shares, shall be held by persons not May list in
exceeding 20; Philippine Stock May not list on PSE
2. All issued stock shall be subject to one or Exchange (PSE)
more specified restrictions on transfer; and
3. The corporation shall not list in any stock Mining, Oil, Stock
exchange or make any public offering of In general, all
Exchange, Banks
any of its stock of any class. businesses may be
Insurance, Public
carried out by
Utility, Educational,
Notwithstanding the foregoing, a corporation corporation
Public Interest cannot
shall not be deemed a close corporation when

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

be organized as close 4. Educational Corporation

corporation Educational corporation – One organized for
educational purposes. [Sec. 105]
Stockholders may
Powers exercised manage affairs directly, If organized as a non-stock corporation
by board, elected subject to the same Trustees of educational institutions organized
by stockholders rights and liabilities of as non-stock corporations shall not be less
directors than five (5) nor more than fifteen (15).
Provided, however, that the number of trustees
No limit to pre-emptive shall be in multiples of five (5). They shall
Pre-emptive right rights. Thus, includes classify themselves in such a way that the term
subject to Sec. 38 sale of treasury shares of 1/5 of them expires every year. [Sec. 106]
limitations and for acquisition of
properties If organized as a stock corporation
Appraisal right can be For institutions organized as stock
for any cause, and no corporations, the number and term of directors
need for unrestricted shall be governed by the provisions on stock
Appraisal right must corporations. [Sec. 106]
retained earnings
be for reasons
(URE), so long as the
listed in the Code 5. Religious Corporation
corporation would not
thereby become Classes of Religious Organization
insolvent (i) Corporation Sole – incorporated by one
person; and
Dissolution must Any stockholder may (ii) Religious Societies – incorporated by
comply with all the petition for dissolution more than one person. [Sec. 107]
requirements for stated grounds
Corporation sole – is one formed for the
SEC may not SEC may intervene in purpose of administering and managing, as
regulate if purpose management of corp. in trustee, the affairs, property and temporalities
not illegal case of deadlocks of any religious denomination, sect, or church,
by the chief archbishop, bishop, priest, rabbi, or
No classification of
May classify directors other presiding elder of such religious
directors
denomination, sect or church. [Sec. 108]
Shareholders, as
directors, directly elect A corporation sole has no nationality but for the
BOD elects officers purpose of applying nationalization laws,
officers, if provided by
AOI nationality is determined not by the nationality
of its presiding elder but by the nationality of its
No need for URE to members constituting the sect in the
acquire shares if Philippines. Thus, the Roman Catholic Church
Must have URE to
ordered by SEC in can acquire lands in the Philippines even if it is
buy own shares
intra-corporate headed by the Pope. [Roman Catholic
deadlock Apostolic, etc v. Register of Deeds of Davao
City, G.R. No. L-8451 (1957)]
An arbitration
agreement may be
Religious Society (Corporation Aggregate)
provided in the
Arbitration allowed Corporation aggregate – A religious
AOI/BL of unlisted
corporation incorporated by more than one
corporations [Sec.
person.
181]

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U.P. LAW BOC BUSINESS ORGANIZATIONS
6. Eleemosynary Corporation
Eleemosynary corporation– One organized
for a charitable purpose.
7. Domestic Corporation
Domestic corporation – One formed,
organized, or existing under the laws of the
Philippines.
8. Foreign Corporation
Foreign corporation – One formed, organized
or existing under any laws other than those of
the Philippines and whose law allows Filipino
citizens and corporations to do business in its
own country and state. [Sec. 140]
9. Corporation Created By Special Laws
Or Charter
Corporation created by special laws or
charter - Corporations which are governed
primarily by the provisions of the special law or
charter creating them. Corporation Code has
suppletory application. [Sec. 4]
10. Subsidiary Corporation
Subsidiary corporation – One in which
control, in the form of ownership of majority of
its shares, is in another corporation (the parent
corporation).
11. Parent Corporation
Parent corporation – Its control lies in its
power, directly or indirectly, to elect the
subsidiary’s directors thus controlling its
management policies.
Holding company – a parent company which
has no other business aside from the holding
of the shares of its subsidiaries, which it
controls.
Investment company – a company which
holds shares in other corporations not for the
purpose of controlling them but merely to invest
therein.
12. Corporation De Jure
Corporation de jure – A corporation organized
in accordance with the requirements of the law.
[CAMPOS] If the Commission finds that the
submitted documents and information are fully
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COMMERCIAL LAW
complaint with the regulations of the RCC,
other laws, rules and regulations, the
Commission shall issue the certificate of
incorporation. [Sec. 18]
13. De facto Corporation
De facto corporation – A corporation where
there exists a flaw in its incorporation.
Rule on De Facto Corporations
The due incorporation of any corporation
claiming in good faith to be a corporation under
this Code, and its right to exercise corporate
powers, shall not be inquired into collaterally in
any private suit to which such corporation may
be a party. Such inquiry may be made by the
Solicitor General in a quo warranto proceeding.
[Sec. 19]
General Rule: The defect in the juridical
personality of a corporation cannot be inquired
into by private individuals, much less used as a
defense to avoid claims.
Exception: In quo warranto proceedings
brought on behalf of the State where the main
action is to question the validity or existence of
such juridical personality. [Villanueva]
Requisites
1. There is an apparently valid statute under
which the corporation may be formed;
2. There has been colorable compliance
with the legal requirements in good faith;
and
3. There has been user of corporate
powers, i.e. the transaction of business as
if it were a corporation. [Campos]
An association of persons cannot claim to be a
corporation if it has not been issued a
certificate of incorporation since that fact belies
the claim of good faith compliance with the
requirements of the law. [Hall v. Piccio, G.R.
No. L-2598 (1950)]
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

14. Corporation By Estoppel Comparison with Sec. 15, Rule 3 of the ROC
Corporation by estoppel – Where a group of
Corporation by Estoppel Sec.15, Rule 3
persons misrepresent themselves as a
corporation, they are subsequently estopped Clothes a non-entity with
The unincorporated
from claiming lack of corporate life in order to personality to sue a third
entity may only be
avoid liability. Also, a third party who had dealt person who seeks to
sued but has no
with an unincorporated association as a evade liability in favor of
personality to sue
corporation is precluded from denying its the former
corporate existence on a suit brought by the Does not concede
alleged corporation on the contract. Merely creates a fiction to the association
whereby an association of of persons the
persons is treated as a cover of a
EFFECTS OF CORPORATION BY
corporation only for corporate entity
ESTOPPEL purposes of even for such
exacting/enforcing liability purposes of
As to liability litigation
All persons who assume to act as a corporation Procedural remedy
For purposes of both
knowing it to be without authority to do so shall for drawing out the
protecting, as well as
be liable as general partners for all debts, persons who will
imposing liability against,
liabilities and damages incurred or arising as a truly answer for the
third parties liability
result thereof. [Sec. 20]

As to the defense of lack of corporate De facto Corporation vs. Corporation By

personality Estoppel
When such ostensible corporation is sued, it De facto Estoppel
shall not be allowed to use its lack of corporate
personality as a defense. [Sec. 20] Where all the requisites If any of the requisites
of a de facto are absent, then the
As to third party corporation are estoppel doctrine may
Anyone who assumes an obligation to an present, then the be applied only if any
ostensible corporation as such cannot resist defectively formed of the parties is
corporation will have estopped from
performance thereof on the ground that there
the status of a de jure defending:
was in fact no corporation. [Sec. 20]
corporation in all cases a. The defendant
brought by or against it, association is
The doctrine of estoppel applies to a third party except only as to the estopped from
only when he tries to escape liability on a State in a direct defending on the
contract from which he has benefited on the proceeding ground of its lack
ground of defective incorporation. It does not of capacity to be
apply to a third party who is not trying to escape sued, or
liability from the contract, but rather is the one b. The defendant
claiming from the contract. [International third party had
Express Travel v. CA, G.R. No. 119002 (2000)] dealt with the
plaintiff as a
corporation and is
deemed to have
admitted its
existence.

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U.P. LAW BOC BUSINESS ORGANIZATIONS
3. Nationality of Corporations
The nationality of a corporation serves as a
legal basis for subjecting an enterprise or its
activities to the laws, the economic and fiscal
powers, and the various social and financial
policies of the State to which it is supposed to
belong. [SEC OGC Opinion No. 22-07]
Place of Incorporation Test
Under the incorporation theory, a corporation is
a national of the country under whose laws it is
organized or incorporated.
Domestic corporations – organized and
governed under and by Philippine laws.
Foreign corporations – one formed,
organized or existing under laws other than
those of the Philippines’ and whose laws allow
Filipino citizens and corporations to do
business in its own country or State. It shall
have the right to transact business in the
Philippines after obtaining a license for that
purpose. [Sec. 140]
While the incorporation test serves as the
primary test under Philippine jurisdiction, other
tests such as the Control Test and the
Grandfather Rule must also be applied in
determining compliance with the provisions of
the Constitution and of other laws on nationality
requirements. [SEC OGC Opinion No. 11-42]
Control Test
The nationality of the private corporation is
determined by the citizenship of the controlling
stockholders.
Under the “liberal” Control Test, there is no
need to further trace the ownership of the 60%
(or more) Filipino stockholdings of the Investing
Corporation since a corporation which is at
least 60% Filipino-owned is considered as
Filipino. [Narra Nickel Mining & Development
Corp. v. Redmont Consolidated Mines Corp.,
G.R. No. 195580, April 21, 2014]
Absent any doubt, the Control Test shall be
used in determining the nationality of a
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corporation specially in cases where foreign
ownership restrictions apply. [SEC OGC
Opinion No. 16-19]
Control Test is applied in the following:
Exploitation of natural resources - Only
Filipino citizens or corporations whose
capital stock is at least 60% owned by
Filipinos can qualify to exploit natural
resources. [Sec. 2, Art. XII, Const.]
Public Utilities - No franchise, certificate
or any other form of authorization for the
operation of a public utility shall be granted,
except to citizens of the Philippines or to
corporations or associations organized
under the laws of the Philippines at least
60% of whose capital is owned by such
citizens. [Sec. 11, Art. XII, Const.]
Mass Media (100%) - “The ownership and
management of mass media shall be
limited to citizens of the Philippines, or to
corporations, cooperatives or associations,
wholly-owned and managed by such
citizens.” [Sec. 11, Art. XVI, Const.]
Advertising industry (70%) – “Only
Filipino citizens or corporations or
associations at least seventy per centum of
the capital of which is owned by such
citizens shall be allowed to engage in the
advertising industry.” [Sec. 11, Art. XVI,
Const.]
Any industry or activity where foreign
ownership is prohibited or restricted under
the Foreign Investment Negative List.
The "control test" is still the prevailing mode of
determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2,
Art. XII of the 1987 Constitution, entitled to
undertake the exploration, development and
utilization of the natural resources of the
Philippines. When in the mind of the Court,
there is doubt, based on the attendant facts
and circumstances of the case, in the 60-40
Filipino equity ownership in the corporation,
then it may apply the "grandfather rule." [Narra
Nickel Mining & Development Corp. v.
Redmont Consolidated Mines Corp., G.R. No.
195580, April 21, 2014]
U.P. LAW BOC BUSINESS ORGANIZATIONS
THE GAMBOA RULINGS
2011 Gamboa Ruling
The term "capital" in Sec. 11, Article XII of the
1987 Constitution refers only to shares of stock
entitled to vote in the election of directors, and
thus in the present case only to common
shares, and not to the total outstanding capital
stock [common and non-voting preferred
shares].
For stocks to be deemed owned and held by
Philippine citizens or Philippine nationals, mere
legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights is
essential. Thus, stocks, the voting rights of
which have been assigned or transferred to
aliens, cannot be considered held by Philippine
citizens or Philippine nationals. [Gamboa v.
Teves, G.R. No. 176579 (2011)]
2012 Gamboa Ruling
In 2012, the Supreme Court reversed its ruling,
stating now that:
The term “capital” is not limited to voting shares
since the constitutional requirement of at least
60% Filipino ownership applies not only to
voting control of the corporation, but also to the
beneficial ownership of the corporation. It is
therefore imperative that such requirement
apply uniformly and across the board to all
classes of shares, regardless of nomenclature
and category, comprising the capital of a
corporation.
Preferred shares, denied the right to vote in the
election of directors, are still entitled to vote on
the eight specific corporate matters under Sec.
6. of the Corporation Code. [Note: Still Sec. 6
under the RCC]
Thus, the 60-40 ownership requirement in favor
of Filipino citizens must apply separately to
each class of shares, whether common,
preferred non-voting, preferred voting or any
other class of shares. [Gamboa v. Teves, G.R.
No. 176579 (2012)]
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2017 Gamboa Ruling (Roy III v Herbosa)
However, in 2017, the Supreme Court
explained its ruling in the 2012 Gamboa
decision. It stated that the resolution of the
2012 Gamboa resolution, specifically its
dispositive portion, did not modify the 2011
Gamboa decision.
The Supreme Court clarified that the Gamboa
Decision already held, in no uncertain terms,
that what the Constitution requires is full and
legal beneficial ownership of 60% of the
outstanding capital stock, coupled with 60% of
the voting rights must rest in the hands of
Filipino nationals. 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. [Jose
M. Roy III v. Chairperson Teresita Herbosa,
G.R. No. 207246 (2017)]
SEC Memorandum Circular No. 8 dated 20
May 2013
All corporations engaged in identified areas of
activities or enterprises specifically reserved,
wholly or partly, to Philippine Nationals by the
Constitution, the FIA and other existing laws,
shall, at all times, observe the constitutional or
statutory ownership requirement. For
purposes of determining compliance
therewith, the required percentage of Filipino
ownership shall be applied to both:
1. the total number of outstanding shares of
stock entitled to vote in the election of
directors; AND
2. the total number of outstanding shares of
stock, whether or not entitled to vote in the
election of directors. [Sec. 1-2, SEC MC
No. 8]
Note: This was the SEC Memorandum that was
put in question in the Roy III v. Herbosa case,
and subsequently upheld by the Court as
constitutional.
U.P. LAW BOC BUSINESS ORGANIZATIONS
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 structure of the
shareholder corporation. [de Leon]
The Grandfather Rule is applied if doubt exists
as to the locus of the “beneficial ownership”
and “control” of a corporation, even if the 60-40
Filipino to foreign equity ratio is apparently met
by the subject or investee corporation. [Narra
Nickel Mining & Development Corp. v.
Redmont Consolidated Mines Corp., G.R. No.
195580, April 21, 2014]
It involves the computation of Filipino
ownership of a corporation in which another
corporation, of partly-Filipino and partly-foreign
equity, owns capital stock. 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.
The Grandfather Rule must be applied to
accurately determine the actual participation,
both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity
or business. [SEC Opinion re: Silahis Int’l Hotel
(1987)]
“Doubt”
"Doubt" refers to various indicia that the
"beneficial ownership" and "control" of the
corporation do not in fact reside in Filipino
shareholders, but in foreign stakeholders. The
following are indicators of doubt:
a. That the foreign investors provide
practically all the funds for the joint
investment undertaken by these Filipino
businessmen and their foreign partner;
b. That the foreign investors undertake to
provide practically all the technological
support for the joint venture;
c. That the foreign investors, while being
minority stockholders, manage the
company and prepare all economic viability
studies. [Narra Nickel Mining and Dev.
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Corp v. Redmont Consolidated Mines
Corp., G.R. No. 195580 (2014)].
The Grandfather Rule applies only when the
60-40 Filipino foreign equity ownership is in
doubt (i.e. in cases where the joint venture
corporation with Filipino and foreign
stockholders with less than 60% Filipino
stockholdings [or 59%] invests in another joint
venture corporation, which is either 60-40%
Filipino-alien or the 59% less Filipino). [Narra
Nickel Mining and Dev. Corp v. Redmont
Consolidated Mines Corp., G.R. No. 195580
(2014)]
Successive Application of the Tests
The Control Test can be applied jointly with the
Grandfather Rule to determine the observance
of foreign ownership restriction in nationalized
economic activities. They are not incompatible
ownership-determinant methods that can only
be applied alternative to each other.
The Grandfather Rule, standing alone, should
NOT be used to determine the Filipino
ownership and control in a corporation, as it
could result in an otherwise foreign corporation
rendered qualified to perform nationalized or
partly nationalized activities.
Hence, it is only when there is doubt, based
on the Control Test, that the Grandfather
Rule is applied.
i. 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.
ii. 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.
iii. However, if there is doubt as to who
has the “beneficial ownership” and
“control” of the corporation (e.g. the
Filipino-Owned corporation subscribed
U.P. LAW BOC BUSINESS ORGANIZATIONS
to 60% of the capital and the foreign
corporation subscribed to 40%, but the
subscription of the former is only
nominally paid-up and such
corporation entered into a financial
assistance agreement with the foreign-
owned corporation), the application of
the grandfather rule is necessary.
[Narra Nickel Mining and Dev. Corp v.
Redmont Consolidated Mines Corp.,
G.R. No. 195580 (2015)]
4. Corporate Juridical
Personality
Corporate existence and juridical personality
commences from the date the SEC issues a
certificate of incorporation under its official
seal. [Sec. 18]
Persons desiring to incorporate must submit to
the SEC:
1. The intended corporate name for
verification, and
2. The articles of incorporation and bylaws.
[Sec. 18]
Note: One person corporations are not
required to submit and file bylaws. [Sec. 119]
Doctrine of Separate Juridical
Personality
Concept
A corporation has a personality separate and
distinct from that of its stockholders and
members and is not affected by the personal
rights, obligations, and transactions of the
latter.
General Rule: Due the corporation’s
seaparate juridical personality, a stockholder
may not be made to answer for acts or liabilities
of said corporation, and vice-versa. [Land Bank
of the Philippines v. CA, G.R. No. 127181
(2001)]
Exceptions: The corporation’s seaparate
juridical personality cannot be invoked to
escape liability when:
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1. This legal fiction is used for ends
subversive to the policy and purpose
behind its creation or which could not have
been intended by law to which it owes its
being (i.e. to defeat public convenience,
justify wrong, protect fraud, defend crime,
confuse legitimate legal or judicial issues,
used as a vehicle for the evasion of an
existing obligation, perpetrate deception or
otherwise circumvent the law).
2. The corporate entity is a mere alter ego,
adjunct, or business conduit for the sole
benefit of the stockholders or of another
corporate entity. [Land Bank of the
Philippines v. CA, G.R. No. 127181 (2001)]
The corporation is merely a farce, as it so
organized and controlled, and its affairs are
so conducted, as to make it merely an
instrumentality, agency, conduit or adjunct
of another corporation. [Lanuza et al v. BF
Corporation, et al, G.R. No. 174938 (2014)]
Property
Corporate property is owned by the corporation
as a juridical person, and the stockholders
have no claim on corporate property as
owners. The latter only have a mere
expectancy or inchoate right to the same upon
dissolution of the corporation and after all
corporate creditors have been paid. Such right
is limited only to their equity interest (doctrine
of limited liability).
Although a stockholder’s interest in the
corporation may be attached by his personal
creditor, corporate property cannot be used to
satisfy his claim. [Wise and Co. v. Man Sun
Lung, G.R. No. 46997 (1940)]
A stockholder cannot bring an action for
replevin to recover property of the corporation.
The corporation, as an artifical person, must
purchase, hold, grant, sell, and convey the
corporate property, and do business, sue and
be sued, plead and be impleaded, for corporate
purposes, in its corporate name. [Button v.
Hoffman, 61 Wis. 20 (1884)]
Corporations are entitled to due process and
equal protection, but subject to the police
power of the state. insofar as their properties
U.P. LAW BOC BUSINESS ORGANIZATIONS
are concerned. [Smith, Bell & Co. v. Natividad,
40 Phil. 144 (1920)] They are also entitled to
protection against unreasonable searches and
seizures. [Bache & Co. v. Ruiz, 37 SCRA 823
(1971)] They are not, however, entitled to the
privilege against self-incrimination. [Bataan
Shipyard & Engineering v. PCGG, 150 SCRA
181 (1987)]
Liability for Tort and Crime
Being an entity with a separate juridical
personality, a corporation can be held liable for
torts committed by its officers under express
direction from the stockholders or directors,
acting as a body. [PNB v. CA G.R. No. L-27155
(1978)]
The corporation itself cannot be arrested and
imprisoned; thus, it cannot be penalized for a
crime punishable by imprisonment. However, a
corporation may be charged and prosecuted
for a crime if the imposable penalty is a fine.
[Ching v. Secretary of Justice,¸G.R. No.
164317 (2006)]
Note: Sec. 170 of the RCC provides that for
violations of the Code, if it is committed by a
corporation, the same may, after notice and
hearing, be dissolved in appropriate
proceedings before the Commission.
Since a corporation as a person is a mere legal
fiction, it cannot be proceeded against
criminally because it cannot commit a crime in
which personal violence or malicious intent is
required. Criminal action is limited to the
corporate agents guilty of an act amounting
to a crime and never against the
corporation itself. [Time Inc. v. Reyes, G.R.
No. L-28882 (1971)]
Recovery of Damages
A corporation, being an artificial person, has no
feelings, emotions nor senses; therefore, it
cannot experience physical suffering and
mental anguish, which are bases for moral
damages under Art. 2217 of Civil Code. [Manila
Electric Co. v. Nordec Philippines, 861 SCRA
515 (2018)].
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Nevertheless, a corporation can recover moral
damages under Art 2219(7), if it was the victim
of defamation. [Filipinas Broadcasting Network
v. Ago Medical and Educational Center, G.R.
No. 141994 (2005)]
Note: Filipinas Broadcasting pointed out that
the doctrine in Mambulao Lumber v. PNB
(1968), to the effect that a corporation may
recover moral damages for besmirched
reputation, is obiter dictum.
Doctrine of Piercing the Corporate
Veil
A corporation will be looked upon as a legal
entity as a general rule, and until sufficient
reason to the contrary appears but when the
notion of legal entity is used to defeat
public convenience, justify wrong, protect
fraud or defend crime, the law will regard
the corporation as an association of
persons.
Piercing the veil of corporate entity is an
equitable remedy developed to address
situations where the separate corporate
personality of a corporation is abused or used
for wrongful purposes. [PNB v. Ritratto Group,
G.R. No. 142616 (2001)]
Effect of Piercing the Corporate Veil
The corporation will be considered as a mere
association of persons. Thus, the liability will
directly attach to the stockholders or to the
other corporation. [China Banking v. Dyne-
Sem, G.R. No. 149237 (2006)]
For the juridical personality of a corporation to
be disregarded, the wrongdoing must be
clearly and convincingly established, and
cannot be presumed. [Del Rosario v. NLRC,
G.R. No. 85416 (1990)]
Procedural Considerations
One cannot pierce the veil in order to acquire
jurisdiction over a party. [Pacific Rehouse
Corp. v. CA, G.R. No. 199687 (2014)]
U.P. LAW BOC BUSINESS ORGANIZATIONS
General Rule
1. Both the individual sought to be held liable
and the corporation must be impleaded at
the first instance;
2. The court must first acquire jurisdiction
over the corporation or corporations
involved before its or their separate
personalities are disregarded; and
3. The doctrine of piercing the veil of
corporate entity can only be raised during a
full-blown trial over a cause of action duly
commenced involving parties duly brought
under the authority of the court by way of
service of summons or what passes as
such service. [Kukan v. Reyes, G.R. No.
182729 (2010)].
Exception: When an aggrieved laborer is
unable to attach the properties of the
corporation, the Labor Arbiter may thereafter
“amend” its decision by ordering that the
individuals responsible be impleaded and their
properties levied. [Guillermo v. Uson, G.R. No.
198967 (2016)]
A sheriff may not pierce the corporate veil,
because such power only belongs to the court.
[Cruz v. Dalisay, A.M. No. R-181-P (1987)]
Grounds for Application of the
Doctrine
The veil of separate corporate personality may
be lifted/pierced:
1. When such personality is used to defeat
public convenience, to justify wrong, to
protect fraud or defend crime, or as a shield
to confuse the legitimate issues;
2. When the corporation is merely an adjunct,
a business conduit or an alter ego of
another corporation; or
3. Where the corporation is so organized and
controlled and its affairs are so conducted
as to make it merely an instrumentality,
agency, conduit or adjunct of another
corporation; or
4. When the corporation is used as a cloak or
cover for fraud or illegality, or to work
injustice, or
5. Where necessary to achieve equity or for
the protection of the creditors. [China
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Banking v. Dyne-Sem, G.R. No. 149237
(2006)]
Note: Aside from this general guideline, no
hard and fast rule can be laid down to cover all
cases where the corporate entity theory cannot
be availed of, and each case will have to be
considered on its merits. [CAMPOS]
The Court has pierced the veil of corporate
fiction when it was used:
1. To defraud the government of taxes due it;
2. To evade payment of civil liability;
3. By a corporation which is merely a conduit
or alter ego of another corporation;
4. To evade compliance with contractual
obligations;
5. To evade financial obligation to its
employees;
6. To ward off a judgment credit;
7. To avoid inclusion of corporate assets as
part of the estate of the decedent; and
8. To cover up an otherwise blatant violation
of the prohibition against forum shopping.
Only in these and similar instances may the veil
be pierced and disregarded. [PNB v. Andrada
Electric and Engineering Co., G.R. No. 142936
(2002)]
Test in Determining Applicability
The doctrine has been applied in the following
contexts:
1. When the liability belongs to the
corporations but the plaintiff seeks to
hold the individual liable. Mere
controlling interest is not enough. There
must be a clear showing that the corporate
fiction is used to defeat public convenience,
justify wrong, protect fraud or defend crime.
[Koppel Phil v. Yatco, G.R. No. L-47673
(1946)]
Note the following badges of fraud: (1)
used as a shield to further an end
subversive of justice; or (2) for purposes
that could not have been intended by the
law that created it; or (3) to defeat public
convenience; (4) justify wrong; (5) protect
U.P. LAW BOC BUSINESS ORGANIZATIONS
fraud; or (6) defend crime; or (7) to
perpetuate fraud or confuse legitimate
issues; or (8) to circumvent the law or
perpetuate deception.
2. Where the liability is personal to the
individual and he seeks to evade it by
hiding behind a corporate vehicle.
The veil of corporate fiction must be
pierced where the main purpose in forming
the corporation was to evade the
incorporator’s subsidiary civil liability
resulting from the conviction of one of his
employees. [Palacio v. Fely
Transportation, G.R. No. L-15121 (1962)]
3. The instrumentality or alter ego rule.
The elements of this modality are:
a. Control, not mere majority or
complete stock control, but
complete domination, not only of
finances but of policy and business
practice in respect to the
transaction attacked so that the
corporate entity as to this
transaction had at the time no
separate mind, will or existence of
its own;
b. Such control must have been used
by the defendant to commit fraud
or wrong, to perpetuate the
violation of a statutory or other
positive legal duty, or dishonest
and unjust act in contravention of
plaintiffs’ legal rights; and
c. The aforesaid control and breach of
duty must proximately cause the
injury or unjust loss complained of.
Circumstances rendering a subsidiary
an instrumentality
a. the parent corporation owns all or most
of the subsidiary’s capital stock;
b. the parent and subsidiary corporations
have common directors or officers;
c. the parent corporation finances the
subsidiary;
d. the parent corporation subscribes to all
the capital stock of the subsidiary or
otherwise causes its incorporation;
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e. the subsidiary has grossly inadequate
capital;
f. the parent corporation pays the
salaries and other expenses or losses
of the subsidiary;
g. the subsidiary has substantially no
business except with the parent
corporation or no assets except those
conveyed to or by the parent
corporation;
h. in the papers of the parent corporation
or in the statements of its officers, the
subsidiary is described as a
department or division of the parent
corporation or its business or financial
responsibility is referred to as the
parent corporation’s own;
i. the parent corporation uses the
property of the subsidiary as its own;
j. the directors or executives of the
subsidiary do not act independently in
the interest of the subsidiary but take
their orders from the parent corporation
in the latter’s interest; and
k. the formal ledger requirements of the
subsidiary are not observed. [PNB v.
Ritratto Group, G.R. No. 142616
(2001)]
4. Successor corporation rule - where a
corporation feigns dissolution or cessation
but really continues in existence organized
under another name.
The application of the rule figures
prominently in labor cases where the prior
entity seeks to evade its obligations to its
laborers. Some telltale signs exhibited in
Claparols v. CIR [G.R. No. L-30822 (1975)]
include: (1) consecutive date of cessation
and commencement of subsequent entity;
(2) ownership and control by former
controlling stockholder; and (3) turnover of
assets. On the other hand, in Livesey v.
Binswanger [G.R. No. 177493 (2014)], the
court pointed to the following: (1) same
officers; (2) same office; and (3)
continuation of the business.
Note: SME v. De Guzman, G.R. No.
184517 (2013) allows for the defense of
U.P. LAW BOC BUSINESS ORGANIZATIONS
good faith in case of assets sales between
a predecessor and successor corporation:
In asset sales or when the assets of the
selling corporation are transferred to
another entity, the rule is that –
a. The seller in good faith is authorized to
dismiss the affected employees, but is
liable for the payment of separation pay
under the law
b. The buyer in good faith is not obliged to
absorb the employees affected by the
sale, nor is it liable for the payment of
their claims. The most that it may do,
for reasons of public policy and social
justice, is to give preference to the
qualified separated personnel of the
selling firm.
In stock sales, which takes place at
the shareholder level, the rule is that –
a. A shift in the composition of its
shareholders will not affect its
existence and continuity because
the corporation possesses a
personality separate and distinct
from that of its shareholders
b. The corporation continues to be the
employer of its people and
continues to be liable for the
payment of their just claims.
c. The corporation or its new majority
shareholders are not entitled to
lawfully dismiss corporate
employees absent a just or
authorized cause
Note: This overturns the ruling in
Manlimos v. NLRC (1995) allowing
for the defense of good faith in
stock sales.
5. Capital Structure
Number and Qualification of
Incorporators
Number: Not more than fifteen [Sec. 10]
The Revised Corporation Code
removed the prescribed minimum
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number of incorporators. Previously,
the incorporators must be no less than
five except for special corporations.
[Herbosa, 2019]
A corporation with a single stockholder
is considered a One Person
Corporation
Qualifications
1. Any person, natural or juridical, may
organize a corporation [Sec. 10]
Juridical entities (partnership, association
or corporation, singly or jointly with others)
are now permitted to be incorporators, and
not merely initial subscribers under the Old
Code.
The following are NOT allowed to organize
as a corporation, except as provided under
special laws:
a. Natural persons who are licensed
to practice a profession
b. Partnerships or associations
organized for the purpose of
practicing a profession
2. Natural persons must be of legal age
3. Each incorporator must subscribe to at least
one share of the capital stock
Note: The RCC removed the Philippine
residency requirement for the majority of the
incorporators.
Subscription Requirements
No minimum capital requirement
Under the Old Corporation Code (CC), at least
25% of the authorized capital stock as stated in
the AOI must be subscribed at the time of
incorporation, and at least 25% of the total
subscription must be paid upon subscription
[Sec 13, CC].
Section 13 has been removed in the Revised
Corporation Code, thus removing such
minimum capital requirements [Sec 12].
However, the increase in capital remains
subject to the 25% subscription and 25%
payment of subscription rule [Sec. 37].
U.P. LAW BOC BUSINESS ORGANIZATIONS
Subscription Agreements
Any contract for the acquisition of unissued
stock in an existing corporation or a corporation
still to be formed shall be deemed a
subscription contract. This is
notwithstanding the fact that the parties may
refer to it as a purchase or some other contract.
[Sec. 59]
Nature of Subscription Contracts
A subscription contract is indivisible.
Consequently, where stocks were subscribed
and part of the subscription contract price was
not paid, the whole subscription shall be
considered delinquent, and not only the
shares which correspond to the amount not
paid.
Nevertheless, holders of subscribed shares not
fully paid, which are not delinquent, shall have
all the rights of a stockholder. [Sec. 71]
SEC has opined that the entire
subscription, although not yet fully paid,
may be transferred to a single transferee,
who as a result of the transfer must assume
the unpaid balance. [SEC Opinion, 9 Oct.
1995]
It is necessary, however, to secure the
consent of the corporation because such
transfer contemplates a novation which
under Art. 1293 (NCC) cannot be made
without consent of the creditor.
Characteristics
There can be a subscription only with reference
to unissued shares of the Authorized Capital
Stock (ACS), in the following cases:
1. The original issuance of the ACS at the time
of incorporation.
2. The opening, during the life of the
corporation, of the portion of the original ACS
previously unissued; or
3. The increase in ACS achieved through a
formal amendment of the Articles and
registration thereof with the SEC [Villanueva]
Status as Shareholder
One may become a stockholder in a
corporation in either of two ways:
1. By SUBSCRIPTION to shares before or
after incorporation
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becomes a stockholder upon
acceptance of the corporation of his
offer to subscribe whether the
consideration is fully paid or not
2. By acquisition of already issued shares
from an existing stockholder
purchase of TREASURY SHARES
from the corporation
Types of Subscription Contracts
1. Pre-incorporation subscription - It is a
subscription for shares of stock of a
corporation still to be formed.
2. Post-incorporation subscription - Entered
into after incorporation. [Sundiang Sr. &
Aquino, 2009]
Rules on Pre-Incorporation Subscription
General Rule: A pre-incorporation
subscription is IRREVOCABLE:
For a period of at least 6 months
from the date of subscription;
Exceptions
(1) All of the other subscribers consent to the
revocation, or
(2) The incorporation fails to materialize within
6 months or within a longer period as may
be stipulated in the contract of subscription
After the submission of the Articles
of Incorporation to the SEC. [Sec.
60]
Interest on Unpaid Subscription
General Rule: A stockholder is NOT liable to
pay interest on his unpaid subscription. He is
not considered a corporate debtor for the
unpaid amount of his subscription. [Herbosa,
2019]
Exception: If expressly stipulated in the
subscription contract. [Sec 65]
Corporate Term
Perpetual existence
General Rule: The Revised Corporation Code
provides that a corporation shall have
perpetual existence. The AOIs of existing
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

corporations shall be deemed amended to Revival of Corporate Existence

reflect their perpetual term. Corporations with an expired term upon the
effectivity of the RCC, may apply with the SEC
Exception: The AOIs of corporations created for revival of its corporate existence.
under the effectivity of this Code provide for a
specific period. [Sec 11] Upon approval by the SEC, it will then issue a
certificate of revival giving it perpetual
A corporation already existing upon effectivity existence, with all its rights and privileges, and
of the RCC may opt out of the rule on subject to all its duties, debts and liabilities prior
perpetual existence by: to revival, unless it requests for a limited term.
i. Obtaining the vote of its stockholders [Sec. 11]
representing majority of the
Outstanding Capital Stock, without This benefit does not extend to corporations
prejudice to the appraisal right of whose dissolution was decreed by the SEC or
dissenting stockholders the courts.
ii. Notifying the Commission that it elects
to retain its specific corporate term, as Should the controlling stockholders or
provided in its AOI. [Herbosa, 2019] members wish to file the application, they must
represent the prescribed number of
It is presumed that shareholders, when they stockholders or members the application for
incorporated, assented to the perpetual voluntary dissolution (i.e. at least 2/3 of
character of their contract. Their corporate OCS/membership). Dissenting stockholders
relations will only end upon agreement may not exercise their appraisal right.
between or among the prescribed number of [Herbosa, 2019]
shareholders or involuntarily upon the court’s
or the SEC’s determination. Summary of changes [Herbosa, 2019]
For newly GR: Automatic perpetual term
Extending or shortening the corporate term established XPN: AOI provides a specific
General Rule: If a corporation wishes to corporations corporate term
extend its corporate term, it may amend its AOI GR: AOI shall be deemed
at least 3 years prior to the expiration of its amended to reflect a perpetual
term. Previously, such change should be made term
at least 5 years prior to the expiration. [Sec. 11] For existing XPN: The corporation opts out
corporations and elects to retain their
Exception: When there exists justifiable existing term; Requires
majority vote of
reasons for an earlier extension, to be
shareholders/members
determined by the SEC.
GR: May apply with the SEC
For for the revival of the
Requisites: A private corporation may extend
corporations corporation. Upon approval,
or shorten its term as stated in the articles of with expired they will have a perpetual term
incorporation when – terms XPN: Their application
1. Approved by a majority vote of the board of indicates a fixed term
directors or trustees, and GR: May file an application for
2. Ratified at a meeting by the stockholders or extension of such term 3 years
members representing at least two-thirds For
prior to the expiration of the
(2/3) of the outstanding capital stock or of corporations
term
its members with a
XPN: There are justifiable
limited term
reasons for an earlier
Note: In case of extension of corporate term, a extension
dissenting stockholder may exercise the right
of appraisal [Sec. 36]

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U.P. LAW BOC BUSINESS ORGANIZATIONS
Classification of shares
Nature of Shares of Stock
Shares of stock are units into which the capital
stock is divided. A share of stock represents
interest of the holder thereof to participate in
the management of the corporation, to share
proportionally in the profits of the business and,
upon liquidation, to obtain an aliquot part of
corporate assets after all corporate debts have
been paid. [Campos]
Classes of Shares of Stock
The shares in stock corporations may be
divided into classes or series of shares, or both.
The rights, privileges, or restrictions, and the
stated par value of the class or series of shares
must be indicated in the Articles of
Incorporation. [Sec. 6]
General Rule: No share may be deprived of
voting rights [Sec. 6]
Exceptions
Preferred non-voting shares
Redeemable shares,
Provided by the Code (e.g. Treasury
shares)
There shall always be a class/series of shares
which have COMPLETE VOTING RIGHTS.
[Sec. 6]
DOCTRINE OF EQUALITY OF SHARES
Each share shall be EQUAL in ALL respects to
every other share, except as otherwise
provided in the Articles of Incorporation and
stated in the certificate of stock. [Sec. 6]
Classification of shares:
(i) Preferred Shares vs. Common Shares
(ii) Scope of Voting Rights Subject to
Classification
(iii) Founders’ Shares
(iv) Redeemable Shares
(v) Treasury Shares
(vi) Par value shares vs. No-par value shares
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i. Preferred Shares vs. Common
Shares
PREFERRED SHARES
Stocks which are given, by the issuing
corporation:
1. Preference in dividends
2. Preference in the distribution of assets of
the corporation in case of liquidation, or
3. Preference in both dividends and
distribution, or
4. Such other preferences as may be stated
in the Articles of Incorporation which do not
violate the Corporation Code.
Note: Preferred shares may be issued only
with a stated par value. [Sec. 6]
Unless the right to vote is clearly withheld, a
preferred stockholder would have such right as
it is an incident to stock ownership. The Board
of Directors may fix the terms and conditions
only when so authorized by the Articles of
Incorporation and such terms and conditions
shall be effective upon filing a certificate thereof
with the SEC. [Sec. 6]
Kinds of Preferred Shares
1. Preferred Shares as to Assets vs.
Preferred Shares as to Dividends
2. Cumulative vs. Non-Cumulative
3. Participating vs. Non-participating
Preferred Shares as to Assets vs. Preferred
Shares as to Dividends
a. Preferred shares as to assets –gives the
holder preference in the distribution of the
assets of the corporation in case of
liquidation.
b. Preferred shares as to dividends - entitled
to receive dividends on said share to the
extent agreed upon before any dividends at
all are paid to the holders of common stock.
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Cumulative vs. Non-cumulative and entitles the shareholder to a pro rata

In the absence of any express stipulation, division of profits.” [CIR v. CA, 301 SCRA 152
preferred stocks are deemed cumulative. (1999)]

a. Cumulative - regardless of lack of profits in The owners thereof are entitled to

any given year, and lack of declaration of management (via exclusive right to vote) of the
dividends, the arrears for such year have to corporation and to equal pro-rata division of
be paid to the preferred stocks in a profits.
subsequent year (once profits are made)
before any dividends can be paid to the COMPARISON
common stocks. Common Preferred
b. Non-Cumulative – entitlement to receipt of Definition Stock which Stock which
dividends essentially depends on entitles the entitles the
declaration of such; types: owner to an holder to
(i) Discretionary – right to dividends in a equal pro rata some
particular year depends on the division of preference,
discretion of the board, even if the profits either in the
corporation has profits. dividends, or
(ii) Mandatory – a positive duty is in the
imposed to declare preferred distribution of
dividends every year that profits are assets, or
earned. both
(iii) Earned cumulative or dividend credit Value Depends if it Stated par
– board has discretion not to declare is a par or no- value [Sec. 6]
dividends, even if there were profits par value
in a certain year; however, once the share
board decides that dividends will be Voting Usually May be
declared, the preferred stockholders Rights vested with deprived of
have a right to arrears in dividends the exclusive voting rights
for the years when there were profits right to vote [Sec. 6]
but no dividend was declared. Preference No Has the first
upon advantage, crack at
Participating and Non-participating Liquidatio priority or dividends/prof
n preference its/
Unless otherwise provided, preferred stocks over any other distribution of
are non-participating. stockholder in assets
the same
a. Participating - those which, after getting class
their fixed dividend preference, share with
common stocks the rest of the dividends. ii. Scope of Voting Rights Subject to
b. Non-participating - those which, after Classification
getting their fixed dividend preference,
have no more right to share in the Only preferred and redeemable shares may be
remaining dividends with the common deprived of the right to vote [Sec. 6], except as
stocks. otherwise provided in the Revised Corporation
Code.
Common shares
A common stock represents the residual General Rule: Non-Voting Shares are not
ownership interest in the corporation. It is a entitled to vote. The law only authorizes the
basic class of stock ordinarily and usually denial of voting rights in the case of
issued without extraordinary rights or privileges redeemable shares and preferred shares,

Page 144 of 450

U.P. LAW BOC BUSINESS ORGANIZATIONS
provided that there shall always be a class or
series of shares which have complete voting
rights. [Sec. 6]
Exception: These redeemable and preferred
shares, when such voting rights are denied,
shall nevertheless be entitled to vote on the
following fundamental matters:
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
iii. Founders’ Shares
Founders’ Shares are shares classified as
such in the AOI, which are given certain rights
and privileges not enjoyed by the owners of
other stocks. These may be given special
preference in voting rights and dividend
payments.
Where exclusive right to vote and be voted for
in the election of directors is granted, such right
must be for a limited period not to exceed 5
years, subject to approval by SEC The 5-year
period shall commence from date of approval
by SEC.
Founder’s shares given the exclusive right to
vote and be voted for are not allowed to
exercise that right in violation of the Anti-
Dummy Law and the Foreign Investment Act.
[Sec. 7]
iv. Redeemable Shares
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.
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COMMERCIAL LAW
The RCC made the redemption subject to the
rules and regulations that may be issued by
SEC, in addition to what may be stipulated in
the AOI and Certificate of Stock. [Sec. 8]
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]
Kinds of redeemable shares
1. Compulsory - the corporation is required to
redeem the shares.
2. Optional - the corporation is not mandated
to redeem the shares.
v. Treasury Shares
Treasury Shares are shares which have been
issued and fully paid for, but subsequently re-
acquired 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. [Sec. 9]
U.P. LAW BOC BUSINESS ORGANIZATIONS
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. [SEC Rules Governing
Redeemable and Treasury Shares, Sec 3, par
(1)(a)]
It should be recalled that corporate earnings
are not part of the corporate trust fund.
[Herbosa, 2019] They are excluded from the
definition of outstanding capital stock.
Pre-emptive right of stockholders in close
corporations shall extend to reissuance of
treasury shares, unless otherwise provided in
the AOI. [Sec. 101]
Delinquent stocks, which are stocks that have
not been fully paid, may become treasury
stocks upon bid of the corporation in absence
of other bidders. [Sec.67]
Limitations on treasury shares
1. They may be re-issued or sold again as
long as it is for a reasonable price fixed by
the BOD.
2. Cannot participate in dividends.
3. It has no voting right as long as such
shares remain in the Treasury. [Sec. 56]
4. It cannot be represented during
stockholder’s meetings.
5. The amount of URE equivalent to the cost
of treasury shares being held shall be
restricted from being declared and issued
as dividends.
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.
For both stock corporations and close
corporations, the pre-emptive right of
stockholders extends to the re-issuance or sale
treasury shares, unless the articles of
incorporation provide otherwise. [Sec. 38 and
101; SEC Opinion, 14 January 1993]
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Treasury Shares are not Retired Shares
Treasury shares do not revert to the unissued
shares of the corporation, but are regarded as
property acquired by the corporation, which
may be reissued or resold at a price to be fixed
by the Board of Directors. [SEC Rules
Governing Redeemable and Treasury Shares,
CCP No. 1-1982]
Note: Under the SEC Rules, the redemption of
redeemable shares does not necessarily make
them as treasury shares. Instead, it leads to
their automatic retirement or cancellation,
unless the contrary is specifically stipulated.
The articles thus provide advance notice to
ordinary shareholders that the board may, at its
own discretion, reissue redeemable shares
with the same features.
Treasury shares distributed by way of
dividends
Treasury shares may also be distributed as
property dividends. In order for treasury shares
to be distributed as property dividends, the
amount of the retained earnings previously
used to support their acquisition must not have
been impaired by losses. Further, such
retained earnings must not be used to justify
the distribution of treasury shares as property
dividends. They may only be distributed out of
the other earnings of the corporation. [SEC-
OGC Opinion No. 12-06, dated April 20, 2012]
Note: Treasury shares are treated as assets of
the corporation. [Herbosa, 2019] Since a
treasury share is a fully paid share re-acquired
by the corporation, it is not outstanding and
may be re-issued and resold. It cannot receive
dividends before the resale, because the
corporation cannot grant dividends to itself.
[CIR vs Manning]
vi. Par Value Shares vs. No-Par Value
Shares
Par value shares
These are shares with a stated or fixed value
set out in the Articles of Incorporation, which
remains the same regardless of the profitability
of the corporation. This gives rise to financial
stability, and is the reason why banks, trust
U.P. LAW BOC BUSINESS ORGANIZATIONS
corporations, insurance companies and
building and loan associations must always be
organized with par value shares.
Par value is minimum issue price of such share
in the Articles of Incorporation which must be
stated in the certificate. [Sec 61]
No par value shares
These are shares without a stated value in the
AOI. They are without nominal value. They
may be issued for the amount stipulated in the
AOI, or fixed by the Board. [Sec 61]
Limitations on no par value shares [Sec. 6]
1. Cannot have an issue price of less than
P5.00 per share
2. Once issued, they shall be deemed fully
paid and non-assessable, and the holders
of such shares shall not be liable to the
corporation or to its creditors in respect
thereto
3. Entire consideration received by the
corporation shall be treated as capital and
shall not be available for distribution as
dividends
4. The AOI must state the fact that the
corporation issues no-par shares and the
number of shares
5. Cannot be issued as preferred stock
6. Cannot be issued by banks, insurance
companies, public utilities and building and
loan associations
7. Cannot be issued by all corporations
authorized to obtain or access funds from
the “public”
Note: A new addition in the Revised
Corporation Code is the prohibition on the
issuance of no-par shares being imposed on all
corporations authorized to obtain or access
funds from the “public.” This prohibition is not
anymore limited to banks, insurance
companies, public utilities and building and
loan associations.
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6. Incorporation and
Organization
Promoter
Promoters – persons who, acting alone or with
others, take initiative in founding and
organizing the business or enterprise of the
issuer and receives consideration therefor.
[Sec. 3.10, RA 8799, The Securities Regulation
Code]
Promoter’s Contracts
Promoter’s contracts are those types of
contracts entered into in behalf of a corporation
which is in the process of organization and
incorporation, and such fact is acknowledged
as an essential ingredient in the process of
perfection. [Villanueva]
Liability of Promoter
General rule: the promoter binds himself
personally and assumes the responsibility of
looking to the proposed corporation for
reimbursement.
The promoter binds himself to ensure that
the corporation, once formed, will ratify the
contract entered into in its name.
Otherwise, he becomes personally liable
for such contract in the event that
corporation does not ratify.
Exceptions:
1. Express or implied agreement to the
contrary
2. Novation, not merely adoption or
ratification, of the contract
Liability of Corporation for
Promoter’s Acts
General rule: A corporation is NOT bound by
the contract. A corporation, until organized, has
no life and no legal existence. It could not have
had an agent [the promoter] who could legally
bind it. [Cagayan Fishing Development Co.,
Inc. v. Sandiko, G.R. No. L-43350 (1937)]
U.P. LAW BOC BUSINESS ORGANIZATIONS
Exceptions: A corporation may be bound by
the contract if it makes the contract its own by:
Adoption or ratification of the ENTIRE
contract after incorporation.
a. Novation or the intent to novate the original
contract is required to adopt or ratify the
pre-incorporation contract. [Campos]
b. The Court’s ruling in Cagayan Fishing v.
Teodoro Sandiko, that “a corporation
should have a full and complete
organization and existence as an entity
before it can enter into any kind of a
contract or transact any business”, is not
absolute. One of the exceptions
recognized by American courts is that “a
contract made by the promoters of a
corporation on its behalf may be
adopted, accepted or ratified by the
corporation when organized”. [Rizal
Light v. PSC and Morong Electric (1968)]
Acceptance of benefits under the contract
with knowledge of the terms thereof.
Performance of its obligation under the
contract.
The contract must of course be one which is
within the powers of the corporation to enter.
[Builders’ Duntile Co. v. Dunn Mfg. Co. (1929)]
The corporation adopts the entire contract, not
only parts which are beneficial. [Campos]
Subscription Contract
A subscription contract is any contract for the
acquisition of unissued stock in an existing
corporation, or corporation still to be formed.
Notwithstanding the fact that the parties refer
to the contract as a purchase or some other
contract, it shall be deemed a subscription as
long as it involves the acquisition of unissued
stock in an existing corporation or a corporation
still to be formed. [Sec. 59]
Pre-incorporation Subscription
Agreements
A pre-incorporation subscription
agreement is a type of promoter’s contract for
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the acquisition of unissued stock in a
corporation still to be formed.
Subscription for shares of stock of a
corporation still to be formed shall be
irrevocable for a period of at least six (6)
months from the date of subscription, UNLESS:
(1) All of the other subscribers consent to the
revocation; or
(2) The corporation fails to incorporate within
the same period or within a longer period
stipulated in the contract of subscription.
No pre-incorporation subscription may be
revoked after the articles of incorporation is
submitted to the Commission. [Sec. 60]
The rule on irrevocability of a pre-incorporation
subscription agreement embodied in the RCC
is a combination of the features of two theories:
Contract Theory: Subscription agreement
among several persons to take shares in
a proposed corporation becomes a
binding contract and is irrevocable from
the time of subscription unless cancelled
by all parties before acceptance of
corporation.
Offer Theory: Subscription agreement is
only a continuing offer to a proposed
corporation, offer does not ripen into a
contract until accepted by the corporation
when organized. [Villanueva]
Consideration for Stocks
Stocks shall not be issued for a consideration
less than the par or issued price thereof.
Consideration for the issuance of stock may be:
(a) Actual cash paid to the corporation;
(b) Property, tangible or intangible, which must
be:
i. Actually received by the
corporation; and
ii. Necessary or convenient for its use
and lawful purposes
iii. At a fair valuation equal to the par
or issued value of the stock issued;
(c) Labor performed for or services actually
rendered to the corporation;
(d) Previously incurred indebtedness of the
corporation;
U.P. LAW BOC BUSINESS ORGANIZATIONS
(e) Amounts transferred from unrestricted
retained earnings to stated capital;
(f) Outstanding shares exchanged for stocks
in the event of reclassification or
conversion;
(g) Shares of stock in another corporation;
and/or
(h) Other generally accepted form of
consideration. [Sec. 61]
Invalid Consideration
The following cannot be exchanged for the
issuance of shares of stock: [Sec. 61]
(1) Promissory notes
(2) Future service
In case a subscription contract contemplates
unlawful consideration exchanged for shares of
stock:
The subscription contract would be valid
and binding on both the corporation and
subscriber
But the provision on such unlawful
consideration is deemed void, such that the
subscription agreement would be
construed to be for cash, and the unpaid
amount treated as part of subscription
receivables
It would not be in consonance with the trust
fund doctrine to consider the subscription
contract void. [Villanueva]
Valuation of Consideration
Where the consideration is other than actual
cash, or consists of intangible property, the
valuation thereof shall initially be determined
by the stockholders or the board of directors,
subject to the approval of the Commission.
[Sec. 61]
Articles of Incorporation (AOI)
The AOI is a basic contract document, defining
the charter of the corporation, and serves as
the basis by which to judge whether it exists for
legal purposes.
The charter of the corporation is a contract
between 3 parties:
(a) between the State and the corporation;
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COMMERCIAL LAW
(b) between the stockholders and the State;
(c) between the corporation and its
stockholders. [Villanueva]
(d) among the stockholders [Campos]
The AOI must be filed with the SEC for the
issuance of the Certificate of Incorporation. The
AOI and its amendments can be filed
electronically. [Sec. 13]
Contents
The Articles of Incorporation must contain:
(a) Corporate Name;
(b) Purpose Clause;
(c) Principal Office;
(d) Corporate Term if the corporation has not
elected perpetual existence;
(e) Incorporators;
(f) Trustees/Directors;
(g) For stock corporations:
1. The authorized capital stock,
2. Number of shares into which it is
divided,
3. The par value of each share,
4. Names, nationalities, and residence
addresses of the original subscribers,
5. Amount subscribed and paid by each
on the subscription, and
6. A statement that some or all of the
shares are without par value, if
applicable
(h) For nonstock corporations:
1. Amount of its capital,
2. The names, nationalities, and
3. Residence addresses of the
contributors, and
4. Amount contributed by each
(i) Other matters (including arbitration
agreement pursuant to Sec. 181). [Sec. 13]
(a) Corporate Name
See f. Corporate Name; Limitations on Use
of Corporate Name
(b) Purpose Clause
A corporation only has such powers as are
expressly granted by law and the AOI. The
U.P. LAW BOC BUSINESS ORGANIZATIONS
purpose clause confers and limits the powers
that a corporation may exercise.
Must indicate the specific PRIMARY and
SECONDARY purposes if there are more
than one purpose; a non-stock corporation
may not include a purpose which would
contradict or change its nature as such.
[Sec. 13 (b)]
Must not be patently unconstitutional,
illegal, immoral, and contrary to
government rules and regulations. [Sec. 16
(b)]
Must not be for the purpose of practicing a
profession. [Sec. 10]
Prohibited Purposes and Activities
A corporation may not be formed for the
purpose of practicing a profession like law,
medicine or accountancy. [Sec. 10]
Under the present state of our law and
jurisprudence, a corporation cannot be
organized for or engage in the practice of law
in this country.
This cannot be subverted by employing
some so-called paralegals supposedly
rendering the alleged support services.
The remedy for the apparent breach of this
prohibition is the concern and province of
the Solicitor General who can institute the
corresponding quo warranto action. [Ulep
v. The Legal Clinic, B.M. No. 553 (1993)]
The RCC prohibits to foreign corporations from
giving donations in aid of any political party or
candidate or for purposes of partisan political
activity”. [Sec. 35(i)]
Reasons for requiring purpose clause: (a)
investor will know what line of business he will
be risking his money on; (b) Ultra vires
doctrine; (c) third persons dealing with
corporation can determine if the corporation
can enter into a transaction. [Campos]
(c) Principal Office
The principal office establishes the residence
of a corporation, which is important in
determining the venue in an action by or
against the corporation or the province where a
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COMMERCIAL LAW
chattel mortgage of shares should be
registered. [Chua Guan vs. Samahang
Magsasaka, G.R. No. L-42091 (1935)]
1. Must be within the Philippines [Sec. 13 (c)];
2. Articles of Incorporation must specify both
province or city or town where it is located;
3. All corporations and partnerships applying
for registration with the SEC should state in
their Articles of Incorporation or Articles of
Partnership the following:
a. Specific address of their principal
office, which shall include, if
feasible, the street number, street
name, barangay, city or
municipality, and if applicable, the
name of the building, number of the
building, and name or number of
the room or unit; and
b. Specific residence address of each
incorporator, stockholder, director,
trustee or partner. [SEC
Memorandum Circular No. 6, s.
2016, Sec. 1]
4. For foreign corporations, the principal
office address in the country of
incorporation, the specific address of the
resident agent, the present directors and
officers, and the specific location
where it will hold office in the Philippines,
shall be indicated. [SEC Memorandum
Circular No. 6, s. 2016, Sec. 2]
The residence of a corporation is the place
where its principal office is located, as stated in
its Articles of Incorporation.
Thus, the proper venue is not the actual
principal office but that stated in its Articles
of Incorporation.
A corporation has no residence in the same
sense in which the term is applied to a
natural person. [Hyatt Elevators v. Goldstar
Elevators, G.R. No. 161026 (2005)].
(d) Corporate Term
See c. Corporate Term under 5. Capital
Structure
(e) Number, Names, Citizenship and
Residences of the Incorporators
U.P. LAW BOC BUSINESS ORGANIZATIONS
See a. Number and Qualification of
Incorporators under 5. Capital Structure
(f) Number, Names, Citizenship and
Residences of the
Directors/Trustees
The minimum number of directors/trustees has
been repealed. [Sec. 13]
Note: Ordinary corporations can have a
minimum of two (2) directors, since only OPCs
can have one (1) director.
Stock corporations: directors, not more than
15
Non-stock corporations: trustees
a. Non-stock corporations whose articles or
by-laws may provide for more than 15
trustees. [Sec. 91]
b. Banks may have up to 21 directors for
cases of mergers and consolidation. [Sec.
17, General Banking Act]
c. For educational non-stock corporations:
i. Trustees may not be less than 5
nor exceed 15;
ii. Number of trustees shall be in
multiples of 5. [Sec. 106]
Nationalized or Partially-Nationalized
Industries:
Aliens may be directors but only in such
number as may be proportional to their
allowable ownership of shares.
(g) Capital/Capital Stock
“Outstanding capital stock” is the total shares
of stock issued under binding subscription
contracts to subscribers or stockholders,
whether fully or partially paid, except treasury
shares. [Sec. 173]
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If STOCK corporation:
Authorized capital stock (ACS) in lawful money
of the Philippines
a. The number of shares into which the ACS
is divided
b. If with par value shares, the par value of
each share [Sec. 13[h], Sec. 14[7]]
c. Names, citizenship, residences of original
subscribers
d. Amount subscribed and paid on each
subscription
e. Fact that some or all shares are without par
value
If NON-STOCK:
a. Amount of capital
b. Names, nationalities and residences of
contributors
c. Amount contributed by each
(h) Other Matters Included in the AOI
Classes of shares, as well as preferences
or restrictions on any such class [Sec. 6].
Denial or restriction of pre-emptive right
[Sec. 38]
Prohibition against transfer of stock which
would reduce stock ownership to less than
the required minimum in the case of a
nationalized business or activity [Sec.
14(11)]
Arbitration agreement [Sec. 13; 181]
No transfer clause
If the foreign shareholdings of a landholding
corporation exceed 40%, it is not the foreign
stockholders’ ownership of the shares which is
adversely affected but the capacity of the
corporation to own land – that is, the
corporation becomes disqualified to own
land. No law disqualifies a person from
purchasing shares in a landholding corporation
even if the latter will exceed the allowed foreign
equity, what the law disqualifies is the
corporation from owning land [J.G. Summit
Holdings, Inc. v. CA, G.R. No. 124293 (2005)
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Contents of AOI Comments

Under the RCC, incorporators undertake to change the name of the corporation
immediately upon receipt of notice from SEC that another corporation, partnership
or person has acquired a prior right to its use, that the name has been declared
Corporate name
not distinguishable from a name already registered or reserved for the use of
another corporation, or that it is contrary to law, public morals, good customs or
public policy. [Sec. 14(11)] See also SEC Memorandum Circular No. 13, s. 2019

A corporation can only have one (1) primary purpose. However, it can have
several secondary purposes.

A corporation has only such powers as are expressly granted to it by law & by its
articles of incorporation, those which may be incidental to such conferred powers,
Purpose clause
those reasonably necessary to accomplish its purposes & those which may be
incident to its existence.

Corporation may not be formed for the purpose of practicing a profession like law,
medicine or accountancy.

● Must be within the Philippines

● Must contain specific address of their principal office, which shall include, if
feasible, the street number, street name, barangay, city or municipality, and
if applicable, the name of the building, number of the building, and name or
Principal office
number of the room or unit
● Important in determining venue in an action by or against the corp., or on
determining the province where a chattel mortgage of shares should be
registered

● A corporation shall now have perpetual existence unless its AOI provides
Term of existence
otherwise. [Sec. 11]

● Names, nationalities & residences of the incorporators;

● Names, nationalities & residences of the directors or trustees who will act as
such until the first regular directors or trustees are elected;
Incorporators and
● Treasurer who has been chosen by the pre-incorporation
Directors/Trustees
subscribers/members to receive on behalf of the corporation, all
subscriptions /contributions paid by them See SEC Memorandum Circular
No. 26, s. 2019

● Amount of its authorized capital stock in lawful money of the Philippines

● Number of shares into which it is divided
● In case the shares are par value shares, the par value of each,
● Names, nationalities and residences of the original subscribers, and the
Capital stock amount subscribed and paid by each on his subscription, and if some or all
of the shares are without par value, such fact must be stated
● For a non-stock corporation, the amount of its capital, the names, nationalities
and residences of the contributors and the amount contributed by each
● The provision on minimum subscribed and paid up capital has been repealed.

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

● Classes of shares into which the shares of stock have been

divided; preferences of & restrictions on any such class; and any denial or
restriction of the pre-emptive right of stockholders should also be expressly
stated in said articles.
● If the corporation is engaged in a wholly or partially nationalized business or
Other matters
activity, the AOI must contain a prohibition against a transfer of stock which
would reduce the Filipino ownership of its stock to less than the required
minimum.
● Transfer restrictions
● Arbitration agreement

ii. Non-amendable Items
The following items are amendable under Sec.
15:
1. Change of name of the Corporation; adding
business name
2. Adding to or changing the purpose/s
3. Change of principal office
4. Change in the number of directors or
trustees
5. Increase or decrease in authorized capital
stock [subject to Sec. 37]; re-classifying
shares in the authorized capital stock;
6. Adding or revising transfer restrictions
Requirements for Making Amendments to
AOI
a. By a majority vote of the BOD or trustees;
and
b. The vote or written assent of
a. 2/3 of the outstanding capital stock,
without prejudice to the appraisal
right of dissenting stockholders in
accordance with the provisions of
this Code,
b. 2/3 of the members if it be a non-
stock corporation. [Sec. 15]
unless the AOI provides for higher voting
requirements
Limitations
(a) Requirements imposed by the Code or by
special laws
(b) Must be for a legitimate purpose
(c) Must be approved by the directors/trustees
and the stockholders/members through the
vote requirement
(d) Appraisal Right (in specified cases)
(e) Both the original and the amended articles
together must contain all the provisions
required by law to be set out in the articles
(f) If the corporation is governed by a special
law, the amended articles must be
accompanied by a favorable
recommendation of the appropriate
government agency to the effect that such
amendment is in accordance with law.
[Lopez]
(g) Will take effect only:
a. Upon their approval by the SEC by the
issuance of a certificate of filing of
amended articles; OR
b. From the date of filing with the SEC if not
acted upon within 6 months from the date
of filing for a cause not attributable to the
corporation
Procedure
a. The original and amended articles together
shall contain all provisions required by law
to be set out in the articles of incorporation
b. The articles, as amended shall be indicated
by underscoring the change or changes
made
c. A copy shall be submitted to the SEC
a. Duly certified under oath by the
corporate secretary and a majority
of the directors or trustees
b. Stating the fact that the
amendment or amendments have
been duly approved by the required
vote of the directors or trustees and
stockholders or members

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U.P. LAW BOC BUSINESS ORGANIZATIONS
Non-Amendable Items
The following items state accomplished facts
(fait accompli), therefore, cannot be
amended:
1. The names, nationalities and residences
of the incorporators.
To allow an amendment would mean
going against the definition of
“incorporators” in Sec. 5
2. Treasurer-in-trust
3. First set of directors or trustees
4. Original stock subscriptions and paid-in
capital
5. Place and date of execution
6. Witnesses [De Leon]
Corporate Name; Limitations on
Use of Corporate Name
The name of a corporation is essential not
only for its existence as a juridical person, but
also in the manner of dealing with it, and it
cannot be changed except in the manner
provided for by law. [Villanueva]
SEC Memorandum Circular No. 13 s. 2019
a) The corporate name shall contain the
word "Corporation" or "Incorporated," or
the abbreviations "Corp." or "Inc."
respectively;
b) In the case of a One Person Corporation,
the corporate name shall contain the word
"OPC" either below or at the end of its
corporate name;
c) The partnership name shall bear the word
"Company" or "Co." and if it is a limited
partnership, the word "Limited" or "Ltd.".
d) A professional partnership name may
bear the word "Company," "Associates," or
"Partners," or other similar descriptions;
e) The corporate name of a foundation shall
use the word "Foundation";
f) The corporate name of all non-stock, non-
profit corporations, including non-
governmental organizations and
foundations, engaging in micro finance
activities shall use the word "Microfinance"
or "Microfinancing"
- Provided that said corporations
shall state in the purpose clause of
their AOI that they shall conduct
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COMMERCIAL LAW
microfinance operations pursuant
to Republic Act No. 8425 or the
Social Reform and Poverty
Alleviation Act.
Criteria for Allowable Corporate Names
Under present law, no corporate name shall be
allowed by the Commission if it is:
a. Not distinguishable from that already
reserved or registered for the use of
another corporation, or
b. Already protected by law, or
c. Used contrary to existing law, rules and
regulations. [Sec. 17]
A name is not distinguishable even if it
contains one or more of the following:
i. The word “corporation”, “company”,
“incorporated”, “limited”, “limited liability”,
or an abbreviation of one of such words;
and
ii. Punctuations, articles, conjunctions,
contractions, prepositions, abbreviations,
different tenses, spacing, or number of the
same word or phrase. [Sec. 17]
Note: Instead of being distinguishable, the old
criteria under the Sec. 18 of the OLD
Corporation Code to determine whether or not
a corporate name should be allowed is whether
it is “identical or deceptively or confusingly
similar” to that of any existing corporation or
which is “patently deceptive or patently
confusing”.
If the SEC determines that a corporation’s
name is not allowed, it may:
(1) Summarily order the corporation to
immediately cease and desist from using a
non-distinguishable name and require it to
register a new one,
(2) Cause the removal of all visible signages,
marks, advertisements, labels, prints and
other effects bearing such corporate name.
[Sec. 17]
Business or trade name which is different from
the corporate or partnership name shall be
indicated in the articles of incorporation or
partnership. A company may have more than
U.P. LAW BOC BUSINESS ORGANIZATIONS
one business or trade name. [SEC
Memorandum Circular No. 13 s. 2019]
Change of Corporate Name
A change of corporate name requires the
amendment of the Articles of Incorporation
which must be approved by:
(1) Majority vote of the board; and
(2) The vote or written assent of stockholders
holding 2/3 of the outstanding capital stock.
[Sec. 16]
Unless the Articles of Incorporation provides for
a higher voting requirement.
Amendment of a corporation’s Articles of
Incorporation to change its corporate name
does not extinguish the personality of the
original corporation. It is the same corporation
with a different name, and its character is not
changed. Consequently, the “new” corporation
is still liable for the debts and obligations of the
“old” corporation. [Republic Planters Bank v.
CA, G.R. No. 93073 (1992)]
Use of Corporate Names of Dissolved
Corporations
The name of a corporation or partnership that
has been dissolved or whose registration has
been revoked shall not be used by another
corporation or partnership:
a. Within five years from the approval of the
dissolution; or
b. Within five (5) years from the date of
revocation, unless its use has been
allowed at the time of the dissolution or
revocation by the stockholders, members
or partners who represent a majority of the
outstanding capital stock or membership of
the dissolved corporation or partnership, as
the case may be. [SEC Memo Circ. No. 13,
s. 2019]
Registration, Incorporation, and
Commencement of Corporate
Existence
A private corporation organized under the RCC
commences its corporate existence and
juridical personality from the date the SEC
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COMMERCIAL LAW
issues the certificate of incorporation under its
official seal. [Sec. 18]
Thereupon, the incorporators, stockholders
or members, and their successors
constitute a body politic and corporate
under the name stated in the AOI, for the
period of time mentioned therein. [Sec. 18]
AOIs do not become binding as the charter
of the corporation unless they have been
filed and registered with, and certified by
the SEC.
DOCUMENTS TO BE FILED WITH SEC:
a. Articles of Incorporation, and By-Laws (if
crafted prior to incorporation)
b. Certification concerning the amount of
capital stock subscribed and/or paid
Note: Sec. 15 of the OLD Corporation Code
requiring that at least 25% of amount
subscribed be paid, and a minimum paid-
up capital upon incorporation, was
removed under the RCC.
Note: SEC Resolution No. 0331 dated July
20, 2012 no longer requires a bank
certificate of deposit covering the paid-up
capital if payment for shares is made in
cash; where the capital stock is paid by a
combination of cash and property, only the
portion paid by way of property will require
the submission of supporting documents.
c. Undertaking to change the corporate name
in case there is another person or entity
with same or similar name that was
previously registered (unless already
incorporated in the Articles of
Incorporation)
d. Favorable recommendation from the
appropriate government agency that the
AOI or amendments thereto of banks,
banking and quasi-banking institutions,
preneed, insurance and trust companies,
NSSLAS, pawnshops, and other financial
intermediaries, is in accordance with law.
[Sundiang and Aquino; Sec. 16]
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

ISSUANCE OF CERTIFICATE OF
INCORPORATION BY SEC
Effect: Commencement of corporate existence
and juridical personality. [Sec. 18]

Ground for revocation of certificate of

incorporation: If, after due notice and hearing,
the Commission finds that any provision of this
Code, rules or regulations, or any of the
Commission’s orders has been violated
- Depending on the extent of participation,
nature, effects, frequency and seriousness
of the violation. [Sec. 158]

GROUNDS FOR DISAPPROVING THE

ARTICLES OF INCORPORATION:

a. Does not substantially comply with form

prescribed
b. Purpose is patently unconstitutional, illegal,
immoral, contrary to government rules and
regulations
c. The certification concerning the amount of
capital stock subscribed and/or paid is false
d. Required percentage of ownership of
Filipino citizens has not been complied with
when required by existing laws or the
Constitution. [Sec. 16]

SEC shall give the incorporators reasonable

time to correct or modify objectionable portions
of the articles or amendment. [Sec. 16]

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Steps in Incorporation
Steps Comments
Promoter:
● Brings together persons who become interested in the
enterprise
● Aids in procuring subscriptions and sets in motion the
Promotional Stage machinery which leads to the formation of the corporation itself
● Formulates the necessary initial business and financial plan
and, if necessary, buys the rights and property which the
business may need, with the understanding that the
corporation, when formed, shall take over the same

[See e. Articles of Incorporation under 6. Incorporation and

Organization]
Drafting Articles of ● Arbitration agreements may now be provided in the AOI
Incorporation (see Sec. 13) (see Sec. 181).
● The AOI and applications for amendments may be filed in
an electronic document
● AOI must be filed w/ the SEC & the corresponding fees paid
● Failure to file the AOI will prevent due incorporation of the
proposed corporation and will not give rise to its juridical
personality. It will not even be a de facto corporation.
● Under present SEC rules, the AOI once filed, will be published
Filing of Articles; Payment of
in the SEC Weekly Bulletin at the expense of the corporation
Fees
[SEC Circular # 4, 1982].
For corporations governed by special laws (banks, insurance
companies, public utilities and educational institutions) the AOI
must be accompanied by a favorable recommendation from the
appropriate government agency.

Process:
a. SEC shall examine them in order to determine whether they
are in conformity with law
b. If it is not, the SEC must give the incorporators a reasonable
time within which to correct or modify the objectionable
portions.

Grounds for rejection or disapproval of AOI: [Sec. 16]

Examination of Articles; a. AOI/amendment not substantially in accordance with the form
Approval or Rejection by SEC prescribed
b. Purpose/s are patently unconstitutional, illegal, immoral, or
contrary to government rules and regulations
c. The certification concerning the amount of capital stock
subscribed and/or paid is false
d. Required percentage of ownership has not been complied with
Favorable recommendation from the appropriate government
agency did not accompany the AOI or amendments thereto of
banks, banking and quasi-banking institutions, preneed, insurance

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

and trust companies, NSSLAS, pawnshops, and other financial

intermediaries, is in accordance with law.

Certificate of Incorporation will be issued if:

a. SEC is satisfied that all legal requirements have been complied
with; AND
b. There are no reasons for rejecting or disapproving the AOI.
Issuance of Certificate of
It is only upon such issuance that the corporation acquires juridical
Incorporation
personality. [Sec. 18]

Should it be subsequently found that the incorporators were guilty

of fraud in procuring the certificate of incorporation, the same may
be revoked by the SEC, after proper notice and hearing.

Election of Directors or Trustees By a resolution of the majority of the

When Elections are Held
The time for holding the annual election of
directors of trustees and the mode or manner
of giving notice thereof are provided in the by-
laws. [Sec. 49]
Nomination
General Rule: Each stockholder or member
shall have the right to nominate any director or
trustee who possesses all of the qualifications
and none of the disqualifications set forth in this
Code.
board of directors; Provided, That the
resolution shall only be applicable for
a particular meeting.
Notwithstanding the absence of a
provision in the bylaws of the
corporation [SEC Memorandum
Circular No. 6, s. 20]
The right to vote through such modes may be
exercised in corporations vested with public
interest, notwithstanding the absence of a
provision in the bylaws of such corporations.
[Sec. 23]

Exception: When the exclusive right to A stockholder or member who participates

nominate directors or trustees is reserved for through remote communication or in absentia,
holders of founders’ shares under Section 7 of shall be deemed present for purposes of
the RCC. [Sec. 23] quorum.

Required Participation The election must be by ballot if requested by

At all elections of directors or trustees, there
must be present, either in person or through a
representative authorized to act by written
proxy:
(1) Stock Corporations: The owners of
majority of the outstanding capital stock
(2) Non-Stock Corporations: A majority of the
members entitled to vote. [Sec. 23]
Voting via Remote Communication/In
Absentia
The stockholders or members may also vote
through remote communication or in absentia:
any voting stockholder or member.
Voting in Stock Corporations
Stockholders entitled to vote shall have the
right to vote the number of shares of stock
standing in their own names in the stock books
of the corporation at the time fixed in the
bylaws, or where the bylaws are silent, at the
time of the election.

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U.P. LAW BOC BUSINESS ORGANIZATIONS
The said stockholder may:
(a) vote such number of shares for as many
persons as there are directors to be
elected;
(b) cumulate said shares and give one (1)
candidate as many votes as the number of
directors to be elected multiplied by the
number of the shares owned; or
(c) distribute them on the same principle
among as many candidates as may be
seen fit: Provided, That –
i. The total number of votes cast shall not
exceed the number of shares owned by
the stockholders as shown in the books
of the corporation multiplied by the
whole number of directors to be elected
ii. No delinquent stock shall be voted.
[Sec. 23]
Nominees for directors receiving the highest
number of votes shall be declared elected.
They shall perform their duties as prescribed by
law, rules of good corporate governance, and
bylaws of the corporation. [Sec. 23]
Voting in Non-Stock Corporations
General Rule: Members of nonstock
corporations may cast as many votes as there
are trustees to be elected but may not cast
more than one (1) vote for one (1) candidate.
Exception: Unless otherwise provided in the
articles of incorporation or in the bylaws. [Sec.
23]
Nominees for trustees receiving the highest
number of votes shall be declared elected.
They shall perform their duties as prescribed by
law, rules of good corporate governance, and
bylaws of the corporation. [Sec. 23]
Report to SEC
Within thirty (30) days after the election of the
directors, trustees and officers of the
corporation, the secretary, or any other officer
of the corporation, shall submit to the
Commission, the elected trustees’ and
officers’:
i. Names
ii. Nationalities
iii. Shareholdings, and
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COMMERCIAL LAW
iv. Residence addresses [Sec. 25]
When No Election is Held
The meeting may be adjourned if:
(1) If no election is held; or
(2) The owners of majority of the outstanding
capital stock or majority of the members
entitled to vote are not present in person,
by proxy, or through remote
communication or not voting in absentia at
the meeting.
Report to SEC
After such adjournment, the non-holding of
elections and the reasons therefor shall be
reported to the Commission within thirty (30)
days from the date of the scheduled election.
[Sec. 25]
The report shall specify a new date for the
election, which shall not be later than sixty (60)
days from the scheduled date.
SEC Order to Hold Election
If no new date has been designated, or if the
rescheduled election is likewise not held:
(1) The Commission may summarily order that
an election be held.
a. Upon the application of a
stockholder, member, director or
trustee; and
b. After verification of the unjustified
non-holding of the election
(2) The Commission shall have the power to
issue such orders as may be appropriate,
including orders directing the issuance of a
notice stating the:
a. Time and place of the election,
b. Designated presiding officer, and
c. The record date or dates for the
determination of stockholders or
members entitled to vote. [Sec. 25]
(3) The shares of stock or membership
represented at such meeting and entitled to
vote shall constitute a quorum for purposes
of conducting an election under this
section.
Notwithstanding any provision of the
articles of incorporation or bylaws to
the contrary.
U.P. LAW BOC BUSINESS ORGANIZATIONS
Election of Officers
Immediately after the election of directors, the
directors must formally organize by electing the
corporate officers. They are tasked to carry out
the policies laid down by the Board, the AOI
and the by- laws. [Sec. 24]
Who are the Corporate Officers
. President – must be a director;
a. Treasurer – may or may not be a director;
must be a resident
b. Secretary – need not be a director unless
required by the by-laws; must be a citizen
and resident of the Philippines; and
c. Other officers as may be provided in the by-
laws.
d. Compliance officer – only for corporations
vested with public interest. [Sec. 24]
Note: Any 2 or more positions may be held
concurrently by the same person, EXCEPT that
no one shall act as president and secretary or
as president and treasurer at the same time,
unless otherwise allowed in the Code. [Sec 24]
The number of officers is not limited to those
three enumerated in Sec. 24. A corporation
may have such other officers as may be
provided for by its by-laws. [Garcia v. Eastern
Telecommunications Philippines, Inc., G.R.
No. 173115 (2009)].
Qualifications of Corporate Officers
President Secretary Treasurer
Director YES NO NO
Filipino NO YES NO
Citizen*
Residency NO YES YES
Prohibited Secretary President President
concurrent or
positions
Treasurer
* subject to rule if corporation is engaged in a
nationalized or partially-nationalized industry
Additional qualifications of officers may be
provided for in the by-laws. [Sec. 46(f)]
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COMMERCIAL LAW
Adoption of By-Laws
By-laws are regulations, ordinances, rules or
laws adopted by an association or corporation
for its internal governance, including rules for
routine matters such as calling meetings. [SMC
v. Mandaue, G.R. No. 152356 (2005)]
May be done either:
1. Prior to incorporation - approved and
signed by all the incorporators and
submitted to SEC together with Articles of
Incorporation; or
2. After incorporation - The requirement of
adoption of by-laws one (1) month after
receipt of the notice of issuance of
certificate of incorporation has been
deleted in the RCC. [Sec. 45]
Nature: It is a product of agreement of the
stockholders or members. [Campos]
Function: It establishes the rules for internal
government of the corporation [Campos]. It
also regulates the affairs and relationship
between and among stockholders, BOD and
corporation. [Lopez]
Note: OPCs are not required to have by-laws.
EFFECT OF FAILURE TO FILE THE BY-
LAWS
Does not imply the "demise" of the
corporation. By-laws may be required by law
for an orderly governance and management of
corporations but they are not essential to
corporate birth. Nonetheless, failure to file them
within the period required by law by no means
tolls the automatic dissolution of a corporation.
[Loyola Grand Villas Homeowners Association
v. CA G.R. No. 117188 (1997)]
Note: Sec. 21 on the effect of failure to formally
organize within 5 years from incorporation, the
corporation’s corporate powers cease and the
corporation is deemed dissolved. Organization
includes: the filing and approval of by-laws with
the SEC and the election of directors and
officers. [Campos]
U.P. LAW BOC BUSINESS ORGANIZATIONS
REQUISITES OF VALID BY-LAWS
Approval requirement: Must be approved by
the affirmative vote of the stockholders
representing at least a MAJORITY of the
outstanding capital stock, or majority of
members. [Sec. 45]
If filed pre-incorporation: Must be approved
and signed by all incorporators.
Record-Keeping: Must be kept in the principal
office of the corporation, subject to inspection
by any director, trustee, stockholder or member
of the corporation in person or by a
representative at reasonable hours on
business days. [Sec. 45]
Filing with SEC: A copy of the by-laws duly
certified by a majority of the directors or
trustees and countersigned by the secretary of
the corporation, shall be filed with the
Commission and attached to the original
articles of incorporation. [Sec. 45]
No provision of the by-laws can be adopted if it
is contrary to law. Since the provision in
question is contrary to law, the fact that for
fifteen years it has not been questioned or
challenged but, on the contrary, appears to
have been implemented by the members of the
association cannot forestall a later challenge to
its validity. [Grace Christian High School v. CA,
G.R. No. 108905 (1997)]
Contents of By-laws
Matters Usually Found in By-Laws
a. The time, place and manner of calling and
conducting regular or special meetings of
the directors or trustees;
b. The time and manner of calling and
conducting regular or special meetings and
mode of notifying the stockholders or
members thereof;
c. The required quorum in meetings of
stockholders or members and the manner
of voting therein;
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COMMERCIAL LAW
d. The modes by which a stockholder,
member, director, or trustee may attend
meetings and cast their votes;
e. The form for proxies of stockholders and
members and the manner of voting them;
f. The directors’ or trustees’ qualifications,
duties and responsibilities, the guidelines
for setting the compensation of directors or
trustees and officers, and the maximum
number of other board representations that
an independent director or trustee may
have which shall, in no case, be more than
the number prescribed by the Commission;
g. The time for holding the annual election of
directors or trustees and the mode or
manner of giving notice thereof;
h. The manner of election or appointment and
the term of office of all officers other than
directors or trustees;
i. The penalties for violation of the bylaws;
j. In the case of stock corporations, the
manner of issuing stock certificates; and
k. Such other matters as may be necessary
for the proper or convenient transaction of
its corporate affairs for the promotion of
good governance and anti-graft and
corruption measures.
l. An arbitration agreement may be provided
in the bylaws pursuant to Section 181 of
RCC. [Sec. 46]
Note: In close corporations - restrictions on
the right to transfer shares must appear in both
the articles of incorporation and in the by-laws
as well as in the certificate of stock; otherwise,
restriction shall not be binding on any
purchases of good faith. [Sec. 97]
Matters That Cannot Be Provided for in the
By-laws (must be in the AOI)
● Classification of shares of stock and
preferences granted to preferred shares
● Provisions on founder’s shares
● Providing for redeemable shares
● Provisions on the purposes of the
corporation
● Providing for the corporate term of
existence
● Capitalization of stock corporations
● Corporate Name
● Denial of pre-emptive rights [Villanueva]
U.P. LAW BOC BUSINESS ORGANIZATIONS
ii. Binding Effects
When Binding: ONLY from date of issuance of
SEC of a certification that the by-laws are not
inconsistent with the Code [Sec. 45] Pending
such approval, they cannot bind stockholders
or corporation.
Effect on third parties: Mere internal rules
among stockholders cannot affect or prejudice
3rd persons who deal with the corporation
unless they have knowledge of the same
[China Banking Corp v CA G.R. No. 117604
(1997)].
iii. Amendments
Effected by: majority vote of the members of
the board and majority vote of owners of the
Outstanding Capital Stock or members, in a
meeting duly called for the purpose. [Sec. 47]
Unless a higher requirement is provided in the
by-laws
Delegation to BOD of power to amend
By vote of stockholders representing 2/3 of the
Outstanding Capital Stock or 2/3 of the
members. [Sec. 47]
Delegation to BOD may be revoked
Any power delegated to the BOD or trustees to
amend or repeal any by-laws or adopt new by-
laws shall be considered as revoked whenever
stockholders owning or representing a majority
of the outstanding capital stock or a majority of
the members in non-stock corporations, shall
so vote at a regular or special meeting. [Sec.
47]
Filing with SEC
Whenever the bylaws are amended or new
bylaws are adopted, the corporation shall file
with the Commission:
(1) Such amended or new bylaws; and,
(2) If applicable, the stockholders’ or
members’ resolution authorizing the
delegation of the power to amend
and/or adopt new bylaws, duly certified
under oath by the corporate secretary
and a majority of the directors or
trustees. [Sec. 47]
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Effectivity of Amended By-Laws
The amended or new bylaws shall only be
effective upon the issuance by the Commission
of a certification that the same is in accordance
with this Code and other relevant laws. [Sec.
47]
Effects of Non-Use of Corporate
Charter
Failure to Organize
If a corporation does not formally organize and
commence its business within five (5) years
from the date of its incorporation, its certificate
of incorporation shall be deemed revoked as
of the day following the end of the five (5) year
period. [Sec. 21]
Continuous Inoperation
If a corporation has commenced its business
but subsequently becomes inoperative for a
period of at least five (5) consecutive years, the
Commission may, after due notice and hearing,
place the corporation under delinquent
status. [Sec. 21]
● A delinquent corporation shall have a
period of two (2) years to resume
operations and comply with all
requirements that the Commission shall
prescribe.
● Upon compliance by the corporation, the
Commission shall issue an order lifting the
delinquent status.
● Failure to comply with the requirements
and resume operations within the period
given by the Commission shall cause the
revocation of the corporation’s certificate
of incorporation. [Sec. 21]
7. Corporate Powers
General Powers; Theory of General
Capacity [Sec. 35]
General Powers
Every corporation has the power and capacity:
(a) To sue and be sued in its corporate
name;
(b) To have perpetual existence;
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

- Unless the certificate of giving donations in aid of any

incorporation provides otherwise
(c) To adopt and use a corporate seal;
(d) To amend its articles
incorporation in accordance with the
provisions of this Code;
(e) To adopt bylaws, and to amend or
repeal the same in accordance with
this Code;
- Must not contrary to law, morals or
public policy
(f) In case of stock corporations: To issue
or sell stocks to subscribers and to
sell treasury stocks in accordance with
the provisions of this Code; and
In case of non-stock corporations: To
admit members to the corporation;
(g) To purchase, receive, take or grant,
hold, convey, sell, lease, pledge,
mortgage, and otherwise deal with
such real and personal property,
including securities and bonds of other
corporations;
- As the transaction of the lawful
business of the corporation may
reasonably and necessarily require
- Subject to the limitations
prescribed by law and the
Constitution
(h) To enter, with natural and juridical
persons, into a:
i. Partnership, (Note: New in the
RCC)
ii. Joint venture, (Note: New in the
RCC)
iii. Merger,
iv. Consolidation, or
v. Any other commercial
agreement
(i) To make reasonable donations,
including those for the public welfare or
for hospital, charitable, cultural,
scientific, civic, or similar purposes:
- Provided, That no foreign
corporation shall give donations in
aid of any political party or
candidate or for purposes of
partisan political activity;
- Note: Under OLD Corporation
Code, both domestic and foreign
corporations were prohibited from
political party or candidate or for
purposes of partisan political
of activity.
(j) To establish pension, retirement,
and other plans for the benefit of its
directors, trustees, officers, and
employees; and
(k) To exercise such other powers as
may be essential or necessary to
carry out its purpose or purposes as
stated in the articles of incorporation.
[Sec. 35]
A corporation has:
i. Express Powers – such powers as
are expressly granted by law and its
articles of incorporation;
ii. Implied Powers – those reasonably
necessary to accomplish its purposes,
as stated in its articles of incorporation;
and
Note: Such implied powers are deemed to
exist because of the following provisions –
“Except such as are necessary or
incidental to the exercise of the powers
so conferred” [Sec. 44]
“Such powers as are essential or
necessary to carry out its purpose or
purposes as stated in the Articles of
Incorporation” – catch-all phrase.
[Sec. 35(k)]
iii. Incidental Powers – those which may
be incident to its existence as a juridical
entity [Pilipinas Loan v. SEC, 356
SCRA 193 (2001)]
The Theory of General Capacity states that a
corporation is said to hold such powers as are
not prohibited or withheld from it
by general law.

Page 163 of 450

U.P. LAW BOC BUSINESS ORGANIZATIONS
Specific Powers; Theory of
Specific Capacity [Secs. 36-43, 15]
The Theory of Specific Capacity states that
the corporation cannot exercise powers except
those expressly/impliedly given.
Under the Theory of Specific Capacity, the
specific powers of a corporation are as
follows:
(a) Power to extend or shorten corporate
term [Sec. 36]
(b) Power to increase or decrease capital
stock, or incur, create, increase bonded
indebtedness [Sec. 37]
(c) Power to deny pre-emptive rights [Sec.
38]
(d) Power to sell or dispose corporate
assets [Sec. 39]
(e) Power to acquire own shares [Sec. 40]
(f) Power to invest corporate funds in
another corporation or business, or for any
other purpose [Sec. 41]
(g) Power to declare dividends [Sec. 42]
(h) Power to enter into management
contract [Sec. 43]
(i) Power to amend AOI [Sec. 15]
Power to Extend or Shorten the
Corporate Term [Sec. 36]
A private corporation may extend or shorten its
term as stated in the articles of incorporation.
[Sec. 36]
Perpetual existence under the RCC applies to
existing corporations. AOIs shall be deemed
amended to reflect its perpetual term, unless
the corporation elects to retain its limited term
[Herbosa, 2019].
When Exercised
Period to extend the corporate term has been
reduced by the RCC to three years before
expiration.
When the term expires, it is not ipso facto
dissolved but may apply for a revival of its
corporate existence. [Divina, 2020]
Page 164 of 450
COMMERCIAL LAW
Requirements
(1) Approval by majority vote of the board of
directors or trustees, and
(2) Ratification at a meeting by the
stockholders or members representing at
least two-thirds (2/3) of the outstanding
capital stock or of its members.
(3) Notice Requirement – Written notice of
the proposed action and the time and place
of the meeting shall be:
i. Sent to stockholders or members at
their respective place of residence as
shown in the books of the corporation,
and
ii. Either:
a. Deposited to the addressee in the post
office with postage prepaid, served
personally, OR
b. Sent electronically in accordance with the
rules and regulations of the Commission on
the use of electronic data messages, when
allowed in the by-laws or done with the
consent of the stockholder. [Sec. 36]
Exercise of Appraisal Right
In case of extension of corporate term, a
dissenting stockholder may exercise the right
of appraisal under the conditions provided in
this Code. [Sec. 36]
An extension of corporate term actually
novates the corporate contract with each
shareholder by extending the corporate
relationship beyond the original term.
Shortening the corporate term DOES NOT
trigger the right of appraisal because there
would be no violation of the original
contractual intent, since shortening would
mean the early realization of the value of the
shares of a dissenting stockholder with the
dissolution of the corporation. [Villanueva]
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Power to Increase or Decrease meeting and the purpose for said meeting
Capital Stock or Incur, Create, must be:
Increase Bonded Indebtedness i. Sent to the stockholders at their places
of residence as shown in the books of
[Sec. 37] the corporation and
ii. Served on the stockholders personally,
A corporation may increase or decrease its
OR through electronic means
capital stock or incur, create or increase any
recognized in the corporation’s bylaws
bonded indebtedness. [Sec. 37]
and/or the Commission’s rules as a
valid mode for service of notices.
Power to Increase or Decrease Capital (4) Certification Requirement – A certificate
Stock
must be signed by a majority of the
An increase or decrease of the capital stock
directors of the corporation and
amends the underlying contractual
countersigned by the chairperson and
relationships between and among members of
secretary of the stockholders’ meeting,
the corporation.
setting forth:
(a) That the requirements of this
Aside from the requisites in Sec. 37, when the
section have been complied with;
capital stock is increased or decreased, the
(b) The amount of the increase or
provisions of Sec. 15 on the amendment of the
decrease of the capital stock;
articles of incorporation must also be complied
(c) In case of an increase of the capital
with. [Villanueva]
stock:
i. The amount of capital stock or
Power to Incur, Create, or Increase Bonded number of shares of no-par
Indebtedness
stock thereof actually
“Bonded indebtedness” are long term debts of subscribed,
the corporation, secured by mortgage on real
ii. The names, nationalities and
or personal property of the corporation, which
addresses of the persons
are:
subscribing,
Structured in denominated units of iii. The amount of capital stock or
indebtedness number of no-par stock
Intended to eventually circulate within subscribed by each, and
the investing public as securities, iv. The amount paid by each on the
representing units of investment subscription in cash or property,
Thus, the power to incur, create, or increase or the amount of capital stock or
bonded indebtedness is a form of distributing number of shares of no-par
liability securities to the public, and constitutes stock allotted to each
an aspect of the inherent power of every stockholder, if such increase is
corporation to borrow or to incur loan for the purpose of making
obligations. [Villanueva] effective stock dividend therefor
authorized;
Requirements [Sec. 37] (d) Any bonded indebtedness to be
(1) Approval by a majority vote of the board incurred, created or increased;
of directors or trustees (e) The amount of stock represented at
(2) Approval by two-thirds (2/3) of the the meeting; and
outstanding capital stock or at least (f) The vote authorizing the increase
two-thirds (2/3) of the members at a or decrease of the capital stock, or
stockholders’ meeting duly called for the
the incurring, creating or increasing
purpose
of any bonded indebtedness.
(3) Notice Requirement – Written notice of
(5) Sworn Statement of the Treasurer – A
the time and place of the stockholders’
sworn statement of the corporation’s

Page 165 of 450

U.P. LAW BOC BUSINESS ORGANIZATIONS
treasurer must accompany the filing of the
certificate, and it must show that:
(a) At least twenty-five percent (25%) of the
increase in capital stock has been
subscribed; and
(b) At least twenty-five percent (25%) of the
amount subscribed has been paid in
actual cash to the corporation or that
property, the valuation of which is equal to
twenty-five percent (25%) of the
subscription, has been transferred to the
corporation
Note: A treasurer’s affidavit is required in
an increase of capital stock, not in a
decrease in capital stock.
(6) Prior SEC Approval – The application with
the Commission shall be made within six
(6) months from the date of approval of the
board of directors and stockholders, which
period may be extended for justifiable
reasons.
(7) Prior PCC Approval – Where appropriate,
prior approval of the Philippine Competition
Commission is required for any increase or
decrease in the capital stock or the
incurring, creating or increasing of any
bonded indebtedness
(8) SEC Registration – Applicable only to
bonds issued by a corporation.
After approval and the issuance by the
Commission of its certificate of filing:
(1) The capital stock shall be deemed
increased or decreased; and
(2) The incurring, creating or increasing of any
bonded indebtedness authorized, as the
certificate of filing may declare
Provided, That:
(a) The Commission shall not accept for
filing any certificate of increase of
capital stock unless accompanied by a
sworn statement of the treasurer (with
the abovementioned contents)
(b) No decrease in capital stock shall be
approved by the Commission if its effect
shall prejudice the rights of corporate
creditors. [Sec. 37]
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COMMERCIAL LAW
Copies of the certificate of the
increase/decrease in capital shall:
(1) Be kept on file in the office of the
corporation and
(2) Filed with the Commission and
(3) Attached to the original articles of
incorporation. [Sec. 37]
Exercise of Appraisal Right
In Cases of Increase or Decrease of Capital
Sock
The right of appraisal can be exercised in
cases of increase of capital stock because it
has the potential effect of diluting the
proportionate interest of a stockholder in the
corporation.
Even with the existence of the pre-emptive
right, there is no guaranty that the stockholder
can preserve his proportional interest, since he
might not have the financial resources to
exercise his pre-emptive right on the increase.
The right of appraisal CANNOT be exercised in
cases of decrease in capital stock since the
decrease would result in returning part of the
investments of the stockholders, including
dissenting stockholders. [Villanueva]
In Cases of Incurring, Creating or Increasing
Bonded Indebtedness
The appraisal right CANNOT be exercised by
dissenting stockholders when the corporation
validly incurs, creates, or increases bonded
indebtedness.
To allow them to do so would drain the financial
resources of the corporation, which is contrary
to the purpose for which the power is
exercised, which is to raise funds for corporate
affairs. [Villanueva]
Power to Deny Pre-Emptive Rights
[Sec. 38]
Preemptive right
The preferential right of shareholders to
subscribe to all issues or disposition of shares
of any class in proportion to their present
shareholdings. [Sec 38] The purpose of pre-
emptive right is to enable the shareholder to
U.P. LAW BOC BUSINESS ORGANIZATIONS
retain his proportionate control in the
corporation and to retain his equity in the
surplus.
General Rule: All shareholders of a stock
corporation have the preemptive right to
subscribe to all issues or disposition of shares
of any class, in proportion to their respective
shareholdings.
Exception: If such right is denied by the AOI or
an amendment thereto. [Sec. 38]
“All issues” of shares extends to BOTH
issuances of:
New shares resulting in an increase in
capital stock, and
Previously unsubscribed shares which
formed part of the existing capital
stock. [Herbosa, 2019; SEC Opinion
No. 5-03]
For close corporations, the pre-emptive rights
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
provides otherwise. [Sec. 101]
Pre-emptive right can only be exercised to the
same class of shares issued or disposed with
that owned by the stockholder (Share-a-like
basis).
Requirements
(1) Approval by majority vote of the board of
directors, and
(2) Ratification at a meeting by the
stockholders or members representing at
least two-thirds (2/3) of the outstanding
capital stock.
(3) Notice Requirement – Written notice of
the proposed action and the time and place
of the meeting shall be:
i. Sent to stockholders at their respective
place of residence as shown in the
books of the corporation, and
ii. Either:
a. Deposited to the addressee in the
post office with postage prepaid,
served personally, OR
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COMMERCIAL LAW
b. Sent electronically in accordance
with the rules and regulations of the
Commission on the use of
electronic data messages, when
allowed in the by-laws or done with
the consent of the stockholder.
Denial of preemptive right
The AOI may deny pre-emptive right. It may
also be denied when circumstances call for its
denial, specifically when:
Shares to be issued are to comply with
laws requiring stock offerings or minimum
stock ownership by the public; [Sec. 38]
Shares to be issued are in good faith with
the approval of the stockholders
representing 2/3 of the OCS in exchange
for property needed for corporate
purposes; [Sec. 38]
Shares to be issued are issued in payment
of previously contracted debts; [Sec. 38]
In case the right is denied in the AOI;
Waiver of the right by the stockholder.
Note: The validity of issuance of additional
shares may be questioned if done in breach of
trust by the controlling stockholders
notwithstanding the non-existence of the pre-
emptive right, (i.e. when controlling
stockholders’ primary purpose is to perpetuate
or shift control of the corporation or to “freeze
out” the minority interest).
Amendment of the Articles of Incorporation
to deny pre-emptive right
Such amendment to the AOI to deny pre-
emptive right may trigger the exercise of a
dissenting stockholder of his appraisal right.
This is because such amendment prevents the
dissenting stockholder from maintaining his
equity interest in the corporation. The test is
whether the company controllers initiated the
questioned amendment. [Herbosa, 2019]
Power to Sell or Dispose Corporate
Assets [Sec. 39]
A corporation may sell, lease, exchange,
mortgage, pledge, or otherwise dispose of its
property and assets:
U.P. LAW BOC BUSINESS ORGANIZATIONS
For such consideration as its board of
directors or trustees may deem expedient,
which may be:
- Money
- Stocks
- Bonds, or
- Other instruments for the payment of
money or
- Other property or consideration
Subject to the provisions of Republic Act
No. 10667, otherwise known as “Philippine
Competition Act”, and other related laws.
Requisite: A majority vote of its board of
directors or trustees [Sec. 39]
Sale of all or substantially all of corporate
assets
A corporation may sell all or substantially all of
the its properties and assets, including its
goodwill. [Sec. 39]
To determine whether a sale or other
disposition shall be deemed to cover all or
substantially all the corporate property and
assets:
i. Make a computation based on the
corporation’s net asset value, as shown
in its latest financial statements.
ii. Assess whether the corporation would
be rendered incapable of continuing
the business or accomplishing the
purpose for which it was incorporated.
[Sec. 39]
The exercise of this power does not render the
corporation empty, since it is still left with
assets received in exchange. It always
receives something of equal value to what has
been disposed. [Villanueva]
Requirements
(1) Vote of the stockholders representing at
least two- thirds (2/3) of the outstanding
capital stock, or at least two-thirds (2/3)
of the members, in a stockholders’ or
members’ meeting duly called for the
purpose; OR
Vote of at least a majority of the trustees
in office in nonstock corporations, where
there are no members with voting rights
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COMMERCIAL LAW
(2) Notice Requirement – Written notice of
the proposed action and of the time and
place for the meeting shall be:
i. Addressed to stockholders or
members at their places of
residence as shown in the books of
the corporation; and
ii. Deposited to the addressee in the
post office with postage prepaid,
served personally, OR sent
electronically, when allowed by the
by-laws or done with the consent of
the stockholder. [Sec. 39]
Abandonment of Sale/Lease/Mortgage
After obtaining the authorization or approval by
the stockholders or members, the board of
directors or trustees may abandon such sale,
lease, exchange, mortgage, pledge, or other
disposition of property and assets.
However, this is subject to the rights of third
parties under any contract relating thereto,
without further action or approval by the
stockholders or members. [Sec. 39]
Where only the approval of a quorum of the
BOD/T is required
Corporation is not restricted in its power to sell
or dispose of its assets without the
authorization of shareholders or members:
a. If the same is necessary in the usual
and regular course of business of
the corporation or
b. If the proceeds of the sale will be
appropriated for the conduct of its
remaining business
c. If the transaction does not cover all or
substantially all of the assets. [Sec. 39]
Exercise of Appraisal Right
Any stockholder who disagrees from the sale,
lease, exchange, mortgage, pledge and any
other disposition may exercise his appraisal
right. [Sec. 39]
The transfer should not prejudice the
creditors of the assignor
The only way the transfer can proceed without
prejudice to the creditors is to hold the
assignee liable for the obligations of the
U.P. LAW BOC BUSINESS ORGANIZATIONS
assignor. The acquisition by the assignee of
all or substantially all of the assets of the
assignor necessarily includes the assumption
of the assignor’s liabilities, unless the creditors
who did not consent to the transfer choose to
rescind the transfer on the ground of fraud.
[Caltex (Phils.) Inc. v. PNOC Shipping and
Transport Corp, G.R. No. 150711 (2006)]
De facto Merger – Continuity-of-business
enterprise requirement
There is a de facto merger when a corporation
(transferring corporation) exchanges all or
substantially all of its assets for the shares of
another (transferee corporation). The
transferring corporation may later on be
dissolved, where the shares of the transferee
corporation will be distributed by way of
liquidating dividends to the shareholders of the
transferring corporation.
The continuity-of-business enterprise
requirement is what differentiates a de facto
merger from a voluntary dissolution of a
corporation. [Herbosa, 2019]
Power to Acquire Its Own Shares
[Sec. 40]
The power of a corporation to acquire its
own shares
A stock corporation shall have the power to
purchase or acquire its own shares for a
legitimate corporate purpose or purposes.
This corporate power does not need
shareholder’s approval. Discretion solely rests
on the board, subject to the existence of
unrestricted retained earnings (“URE”) and
for a legitimate corporate purpose/s. [Sec.
40]
Unrestricted Retained Earnings
This is defined as the amount which is:
(1) The
accumulated profits and gains realized out
of the normal and continuous
operations of the company AFTER
deducting therefrom:
a. Distributions to stockholders and
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COMMERCIAL LAW
b. Transfers to capital stock or other
accounts, and
(2) NOT appropriated by its Board of Directors
for corporate expansion projects or
programs:
(3) NOT covered by a restriction for dividend
declaration under a loan agreement; and
(4) NOT required to be retained under special
circumstances obtaining in the corporation
such as when there is a need for a special
reserve for probable contingencies. [SEC
Memorandum Circular No. 11-08,
(December 5, 2008)]
General Rule: The corporation may only
acquire its own stocks in the presence of URE.
[Sec. 40]
Rationale: Existence of URE is required before
a corporation acquires its own shares because:
i. The repurchase of shares is a method
of distribution or withdrawal of assets,
and is subject to abuse, as creditors
have a right to assume that so long as
there are debts and liabilities, the
Board will not use corporate assets to
purchase its own stock; and
ii. Treasury shares may be availed of to
perpetrate control of the enterprise
without the expensive requisite of a
majority voting stock. [Villanueva]
Exceptions:
a. Redeemable shares may be acquired even
without surplus profit for as long as it will
not result to the insolvency of the
Corporation;
b. In cases that the corporation conveys its
stocks in payment of a Debt;
c. 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.
Legitimate Corporate Purposes [Sec. 40]
Legitimate corporate purposes include, but is
not limited to the following:
1. To eliminate fractional shares arising out of
stock dividends
2. To collect or compromise an indebtedness
to the corporation, arising out of unpaid
U.P. LAW BOC BUSINESS ORGANIZATIONS
subscription, in a delinquency sale, and to
purchase delinquent shares sold during
said sale; and
3. To pay dissenting or withdrawing
stockholders.
Power to Invest Corporate Funds
in Another Corporation or
Business [Sec. 41]
General Rule: The corporation is not allowed
to engage in a business different from those
enumerated in its AOI.
Exception: The purpose will be amended to
include the desired business activity among its
secondary purpose.
Rules in case a corporation wants to invest
in an undertaking
● Investment of a corporation in a business
which is in line with its primary purpose
requires only the approval of the board.
● Investment of assets for any of its
secondary purposes requires the prior
approval of its shareholders/members
● If the investment is outside the purpose/s
for which the corporation was organized,
Articles of Incorporation must be amended
first, otherwise it will be an Ultra Vires act.
Requirements
(1) Approval by majority vote of the board of
directors or trustees, and
(2) Ratification at a meeting by the
stockholders or members representing at
least two-thirds (2/3) of the outstanding
capital stock or of its members.
(3) Notice Requirement – Written notice of
the proposed action and the time and place
of the meeting shall be:
i. Sent to stockholders or members at
their respective place of residence
as shown in the books of the
corporation, and
ii. Either:
a. Deposited to the addressee in
the post office with postage
prepaid, served personally, OR
b. Sent electronically in
accordance with the rules and
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COMMERCIAL LAW
regulations of the Commission
on the use of electronic data
messages, when allowed in the
by-laws or done with the
consent of the stockholder
Exercise of Appraisal Right
Any stockholder who disagrees from the
investment of corporate funds in another
corporation or business may exercise his
appraisal right.
Power to Declare Dividends [Sec.
42]
Requirements
(1) Must be distributed out of URE
(2) Payable in cash, in property, or in stock to
all shareholders on the basis of outstanding
stock held by them
(3) Resolution by the Board
Additional requirement for stock dividend
Approved by 2/3 of shareholders representing
the outstanding capital stock at a
regular/special meeting called for that purpose
- Note: The approval requirement for the
declaration of stock dividends
underscores that the payment of
dividends to a stockholder is not a
matter of right but a matter of
consensus. [Republic Planters Bank v.
Agana, 269 SCRA 1 (1997)]
A corporation must have also a sufficient
number of authorized unissued shares for
distribution to stockholders (if ACS is
insufficient, corporation must apply for increase
in capital stock).
Source of dividends
Dividends may only be declared out of actual
and bona fide unrestricted retained earnings.
Prohibition imposed by law on UREs of a
stock corporation
Stock corporations are prohibited from
retaining surplus profits in excess of 100% of
their paid-in capital stock, except:
a. When justified by definite corporate
expansion projects or programs approved
by the BOD;
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

b. When the corporation is prohibited under plus cost and

any loan agreement with any financial expenses
institution or creditor from declaring
dividends without its consent, and such
consent has not yet been secured;
c. When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the corporation.
No, since this
Can this be
Note: In case a corporation unjustifiably retains requires
issued by
surplus profits in excess of one hundred No [Sec. 34] stockholders’
Executive
approval [Sec.
(100%) percent of the paid-in accumulated Committee?
34]
capital, it will be liable for Improperly
Accumulated Earnings Tax (IAET) equal to
10% of the improperly accumulated taxable Rule on shares of stock issued to pay for
income. [Sec. 29 (A), NIRC] Moreover, it will services
also be liable to pay a penalty imposed by the A corporation may legally issue shares of stock
SEC. [SEC Memo. Circ. No. 6, s. 2005] in consideration of services rendered to it by a
person not a stockholder, or in payment of its
Forms of dividends indebtedness. But a share of stock thus issued
1. Cash - Any cash dividend due on should be part of:
delinquent stock shall first be applied to the i. The original capital stock of the
unpaid balance on the subscription plus corporation upon its organization; or
cost and expenses. [Sec. 42] ii. The stocks issued when the increase
2. Stock - Stock dividends shall be withheld of the capitalization of a corporation is
from the delinquent stockholder until his properly authorized.
unpaid subscription is fully paid; Stock
dividends cannot be issued to a person In other words, it is the shares of stock that
who is not a stockholder in payment of are ORIGINALLY ISSUED by the
services rendered. corporation and FORMING PART OF THE
3. Property - Stockholders are entitled to CAPITAL that can be exchanged for cash or
dividends pro-rata based on the total services rendered, or property; that is, if the
number of shares and not on the amount corporation has original shares of stock unsold
paid on shares. or unsubscribed, either coming from the
original capitalization or from the increased
Cash Dividends vs. Stock Dividends capitalization. STOCK DIVIDENDS are issued
only to stockholders because only stockholders
Cash Stock
are entitled to dividends. [Nielson and Co. v.
Dividends Dividends
Lepanto Consolidated Mining, G.R. No. L-
21601., (1968)].
Voting Board of
Board of
requirements Directors + 2/3
Directors Rule on the receipt of dividends in case of
for issuance of stockholders
mortgaged or pledged shares
General Rule: The mortgagor or the pledgor
Shall be has the right to receive the dividends.
Shall be
withheld from
applied to the
Effect on the delinquent
unpaid Exception: When the mortgagor or pledgor
delinquent stockholder
stock
balance on defaults and the mortgagee or pledgee
until his unpaid
the acquires the pledged stocks and the transfer is
subscription is
subscription recorded in the books of the corporation, the
paid

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U.P. LAW BOC BUSINESS ORGANIZATIONS
mortgagee or pledgee is entitled to receive the
dividends.
Power to Enter into Management
Contracts [Sec. 43]
Management Contract
Any contract whereby a corporation
undertakes to manage or operate all or
substantially all of the business of another
corporation, whether such contracts are
called service contracts, operating agreements
or otherwise.
This refers only to a management contract with
another corporation and does not apply to
management contracts entered into by a
corporation with natural persons. Corollary to
this, management contract with a natural
person need not comply with the requisites of
Sec. 43.
Period of every management contract
General Rule: No management contract shall
be entered into for a period longer than 5 years
for any one term.
Exception: Service contracts or operating
agreements which relate to exploration,
development, exploitation or utilization of
natural resources may be entered into for such
periods as may be provided in the pertinent
laws and regulations.
Requirements
(1) Approval by majority vote of the BOD of
both the managing and the managed
corporation
(2) Approval by shareholders owning at least
the majority of the outstanding capital
stock or at least a majority of the members
of both the managing and the managed
corporation
However, the contract must be approved by 2/3
of stockholders owning outstanding capital
stock/members of the managed corporation
when:
i. Stockholders representing the same
interest of both the managing and
managed corporations own more than
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1/3 of the total outstanding capital stock
entitled to vote of the managing
corporation (Interlocking stockholders);
or
ii. A majority of the members of the BOD
of the managing corporation also
constitute a majority of the BOD of the
managed corporation (Interlocking
directors).
For the managed corporation: There is a need
for such ratification as such contract is a
deviation from the principle that corporate
affairs shall be managed by the BOD.
For the managing corporation: There is a need
for such ratification as such contract is a
deviation from the principle that the BOD would
devote their time and resources for the affairs
of the corporation. [Villanueva]
Limitations
a. Ultra Vires Acts
Ultra Vires Acts
Those acts which a corporation is not
empowered to do or perform because they are
outside or beyond the express and implied
powers conferred by its Articles of
Incorporation or by the Revised Corporation
Code, or not necessary or incidental to the
exercise of the powers so conferred. [Sec. 44]
Types of Ultra Vires Acts
a. Acts done beyond the powers of the
corporation as provided in the law or its
articles of incorporation;
b. Ultra Vires acts of officers and not of the
corporation
c. Acts or contracts, which are per se illegal
as being contrary to law. [Villanueva]
Kinds of Ultra Vires acts by reason
a. By reason of Lack of Authority (ultra vires
acts)
b. By reason of Illegality (illegal acts)
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Basis Ultra Vires Illegal Acts 3. The act reasonably tributary to the
Acts promotion of those ends, in a substantial,
and not in a remote and fanciful sense.
Lawfulness Lack of Illegality;
authority; Unlawful; The test to be applied is whether the act in
Not necessarily against law, question is in direct and immediate furtherance
unlawful, but morals, public of the corporation’s business, fairly incident to
outside the policy, and the express powers and reasonably necessary
powers of the public order to their exercise. If so, the corporation has the
corporation power to do it; otherwise, not. [Montelibano v.
Ratification Can be ratified Cannot be Bacolod-Murcia Milling Co., Inc., G.R. No. L-
ratified 15092 (1962)]

Binding Can bind the Cannot bind the (b) Consequences of Ultra Vires Acts
power parties if wholly parties
or partly Ultra vires acts, which are per se illegal are
executed generally void.
Enforceabil Voidable, and Void and cannot
ity may be be validated While ultra vires acts which are not illegal but
enforced by are within the scope of the articles of
performance, incorporation, are merely voidable and may
ratification or become binding and enforceable when ratified
estoppel by stockholders. [Montelibano v. Bacolod-
Murcia Milling Co., Inc., G.R. No. L-15092
Examples 1. Acts done Acts or (1962)]
beyond the contracts, which
powers of the are per se illegal Consequences of Ultra Vires Acts with
corporation as as being respect to contracts:
provided in the contrary to law.
law or its
a. Executed contract – courts will not set
articles of
incorporation;
aside or interfere with such contracts;
2. Ultra Vires b. Executory contracts – no enforcement
acts of officers even at the suit of either party (void and
and not of the unenforceable);
corporation c. Partly executed and partly executory –
principle of “no unjust enrichment at
expense of another” shall apply;
(a) Applicability of the Ultra Vires Doctrine d. Executory contracts apparently
authorized but Ultra Vires – the principle
The application of the Ultra Vires Doctrine is a of estoppel shall apply.
question, in each case, of the logical relation of
the act to the corporate purpose expressed in Remedies in case of Ultra Vires Acts
the charter. a. State
i. Dissolution of the corporation thru a
It may fairly be considered within the charter quo warranto proceeding
powers if: ii. Injunction
1. The act is one which is lawful in itself, and iii. Suspension or revocation of the
not otherwise prohibited; certificate of registration by the SEC
2. The act is done for the purpose of serving b. Stockholders
corporate ends; AND Injunction
Derivative suit

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U.P. LAW BOC BUSINESS ORGANIZATIONS
Ratification (except when a 3rd party is
prejudiced or the act is illegal)
c. Creditors - Nullification of contract in fraud
of creditors
Doctrine of Individuality of
Subscription
The Doctrine of Individuality of Subscription
states that a subscription is one entire and
indivisible whole contract. It cannot be divided
into portions.
Consequently, where stocks were subscribed
and part of the subscription contract price was
not paid, the whole subscription shall be
considered delinquent, and not only the
shares which correspond to the amount not
paid.
Nevertheless, holders of subscribed shares not
fully paid, which are not delinquent, shall have
all the rights of a stockholder. [Sec. 71]
SEC has opined that the entire
subscription, although not yet fully paid,
may be transferred to a single transferee,
who as a result of the transfer must assume
the unpaid balance. [SEC Opinion, 9 Oct.
1995]
It is necessary, however, to secure the
consent of the corporation because such
transfer contemplates a novation which
under Art. 1293 (NCC) cannot be made
without consent of the creditor.
Doctrine of Equality of Shares
The doctrine of equality of shares states that all
stocks issued by the corporation are presumed
equal with the same privileges and liabilities,
provided that the Articles of Incorporation is
silent on such differences. [Sec. 6]
There is a presumption of equality of the rights
and features of shares when nothing is
expressly provided to the contrary.
Although a corporation has the power to
classify its shares of stock, provide for
preferences and other conditions, no
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COMMERCIAL LAW
presumption should exist to distinguish one
share from another.
Sec. 6 of the RCC now requires that the
distinguishing features be stated also in the
Certificate of Stock.
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.
All funds received by the corporation in
payment of the shares of stock shall be
held in trust for the corporate creditors and
other stockholders of the corporation.
No fund shall be used to buy back the
issued shares of stock except only in
instances specifically allowed by the
Corporation Code. [Boman Environmental
Development Corporation v. CA, G.R. No.
77860 (1988)]
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. General Rule: The corporation cannot buy
its own shares using the subscribed capital
as the consideration therefore. [NTC v. CA.
G.R. No. 127937 (1999)]
Exceptions:
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
U.P. LAW BOC BUSINESS ORGANIZATIONS
assets and property of the corporation.
[Ong Yong v. Tiu, G.R. No. 144476 (2003)]
NOTE: Rescission of a subscription agreement
is not one of the instances when distribution of
capital assets and property of the corporation
is allowed (Ibid).
Exceptions to the Trust Fund Doctrine ---
When Distribution of Corporate Capital is
Allowed
The Trust Fund Doctrine, first enunciated by
this Court in the 1923 case of Philippine Trust
Co. v. Rivera is the underlying principle in the
procedure for the distribution of capital assets,
embodied in Corporation Code, which allows
the distribution of corporate capital only in three
instances:
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)]
Scope of the Trust Fund Doctrine
The trust fund doctrine is NOT limited to
reaching the stockholder’s unpaid
subscriptions.
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, or fraudulently, to
the prejudice of creditors.
The creditor is allowed to maintain an
action upon any unpaid subscriptions and
thereby steps into the shoes of the
corporation for the satisfaction of its debt.
The scope of the doctrine when the corporation
is insolvent also encompasses other property
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COMMERCIAL LAW
and assets generally regarded in equity as a
trust fund for the payment of corporate debts.
All assets and property belonging to the
corporation held in trust for the benefit of
creditors that were distributed or in the
possession of the stockholders, regardless of
full payment of their subscriptions, may be
reached by the creditor in satisfaction of its
claim.
To make out a prima facie case in a suit
against stockholders of an insolvent
corporation to compel them to contribute to the
payment of its debts by making good unpaid
balances upon their subscriptions, it is only
necessary to establish that the stockholders
have not in good faith paid the par value of the
stocks of the corporation. [Donnina Halley v.
Printwell, Inc., G.R. No. 157549 (2011)]
How Corporate Powers Are
Exercised
By the Shareholders
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 [Sec. 6]:
Voting and non-voting shares shall be entitled
to vote in the following cases:
a. Amendment of Articles of Incorporation
[Sec. 15]
b. Adoption, Amendment and Repeal of By-
Laws [Sec. 47]
c. Sale, Lease, Mortgage or Other Disposition
of Substantially all corporate assets [Sec.
39]
d. Incurring, Creating or Increasing Bonded
Indebtedness [Sec. 37]
e. Increase or Decrease of Capital Stock
[Sec. 37]
f. Merger and Consolidation [Sec. 76-79]
g. Investment of funds in another corporation
or business or for any purpose other than
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

the primary purpose for which it was authority, but an innocent person cannot be
organized [Sec. 41] prejudiced if he had the right to presume under
h. Dissolution of the Corporation [Secs. 133- the circumstances the authority of the acting
138] officers.

Corporate Acts Requiring Voting Doctrine of Apparent Authority

Shareholders’ Approval
1. Declaration of Stock Dividends [Sec. 42]
2. Management Contracts [Sec. 43]
3. Fixing the Consideration of No-Par shares
[Sec. 61]
4. Fixing the Compensation of Directors [Sec.
29]
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]
Corporate officers have apparent authority to
bind the corporation on matters that are
generally within the domain of corporate
business, and the scope of their usual duties.
[Herbosa, 2019]
If a corporation knowingly permits one of its
officers, or any other agent, to act within the
scope of an apparent authority, it holds him out
to the public as possessing the power to do
those acts; the corporation will, as against
anyone who has in good faith dealt with it
through such agent, be estopped from denying
the agent’s authority. [Associated Bank v.
Pronstroller, G.R. No. 148444 (2008)]

Majority vote of the Board is needed in the

exercise of the ff. powers:
(1) Filling of vacancies in the board, except
when it is due to removal by the
stockholders/members or by expiration of
term
(2) Extension or shortening of the corporate
term
(3) Increase or decrease of capital stock or the
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 or business or for any purpose
other than its primary purpose
(7) Declaration of cash, property, and stock
dividends
(8) Entering into management contracts
(9) Amendment of AOI
(10) Amendment of the by-laws
(11) Approval of the plan of merger or
consolidation
(12) Dissolution of the corporation
By the Officers

Authority of Corporate Officers

A person dealing with a corporate officer is put
on inquiry as to the scope of the latter’s

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

SUMMARY OF SPECIFIC POWERS

Specific Power Approval Required Appraisal Right

Power to extend or Majority vote of the BOD/T and
shorten corporate term
[Sec. 36] Ratification by the stockholders or
members representing at 2/3 of the
outstanding capital stock or of its members
Can be exercised only in case of
extension of the corporate term
[Sec. 36]
[Note: Section 80(a) however
provides that appraisal right may
be exercised in both extension and
shortening of corporate term, which
is an error carried over from the old
Corporation Code. It does not
make sense to grant appraisal right
in case of shortening the
term/dissolution, since the same
would already result in liquidation
of the corporation.]

Power to increase or Majority vote of the BOD Can be exercised only if the
decrease capital stock, or increase of capital stock results in or
incur, create, increase Approval by 2/3 of the outstanding capital has the effect of changing or
bonded indebtedness stock restricting the rights of any
[Sec. 37] stockholder or class of shares, or of
authorizing preferences in any
respect superior to those of
outstanding shares of any class
[Sec. 80(a)];

Power to incur, create, Majority vote of the BOD/T

increase bonded x
indebtedness [Sec. 37] Approval by 2/3 of the outstanding capital
stock or of the members

Power to deny pre- Can be denied by the AOI or an Can be exercised in case it is
emptive rights [Sec. 38] amendment thereto denied through an amendment of
AOI [Sec. 80(a)]

Power to Sell of All or A majority vote of its board of directors or Can be exercised [Sec. 39/ 80(b)]
Substantially All of the trustees
Properties of the
Corporation [Sec. 39] Ratification by the stockholders or
members representing at 2/3 of the
outstanding capital stock or of its members
(Note: Vote of at least a majority of the
trustees in office in nonstock corporations,
where there are no members with voting
rights)

[Note: power to sell assets in the ordinary

course of business only requires board
approval]

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Specific Power Approval Required Appraisal Right

Power to acquire own Majority vote of the BOD x

shares [Sec. 40]

Power to invest corporate Majority vote of the board of directors or Can be exercised [Sec. 41/80(d)]
funds in another trustees and
corporation or business,
or for any other purpose Ratification by the stockholders
[Sec. 41] representing at least 2/3 of the outstanding
capital stock, or of the members

Power to declare For cash and property dividends: Resolution

dividends [Sec. 42] by the Board only x

Additional requirement for stock dividends:

Approval of stockholders representing not
less than 2/3 of the outstanding capital
stock

Power to enter into Approval of:

management contract - BOD of both managing and managed x
[Sec. 43] corporation; and
- Majority of outstanding shares or Note: A management contract is a
members of both managed and deviation from the centralized
managing corporation management doctrine, and this
departure would require the
But 2/3 vote of outstanding stock/members approval of the stockholders under
of managed corporation is necessary in the the principle that it would vary the
ff: contractual corporate arrangements
- A stockholder/s representing the same [Villanueva]
interest of both the managing and
managed corporations own more than
1/3 of the total outstanding capital
stock; or
- Where majority of directors in both
corporations are the same

OTHERS
Approval Required Appraisal Right

Merger or consolidation Majority vote of the board of directors or

[Sec. 76] trustees and Can be exercised [Sec. 76/80(c)]

Ratification by the stockholders representing

at least 2/3 of the outstanding capital stock, or
of the members

Voluntary Dissolution (by Majority vote of the board of directors or

Petition or by shortening trustees and x
corporate term) [Sections
134-136] Ratification by the stockholders representing [See Note on Sec. 36]
at least 2/3 of the outstanding capital stock,
or of the members

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U.P. LAW BOC BUSINESS ORGANIZATIONS
8. Stockholders and Members
Fundamental Rights of a
Stockholder
1. Direct or indirect participation in
management [Sec. 6]
2. Voting rights [Sec. 6]
3. Right to remove directors [Sec. 27]
4. Proprietary rights
(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
Nature of the Rights of Members
The eleemosynary nature (i.e. charitable) of
every non-stock corporation defines the
characteristic of membership therein as being
essentially personal in character and therefore
essentially non-transferable in nature.
[Villanueva]
Sec. 88 of the Revised Corporation Code
specifically provides that in a non-stock
corporation, the right of members of any class
or classes to vote “may be limited, broadened
or denied to the extent specified in the articles
of incorporation or the by-laws.”
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Participation in Management
Proxy
Stockholders and members may vote in person
or by proxy in all meetings. [Sec. 57]
The word “proxy” may be understood in two
ways:
(1) First, it may refer to the person duly
authorized by a stockholder to vote in his
behalf in a stockholder’s meeting.
(2) Secondly, it may refer to the document
which evidences this authority. [CAMPOS]
Right to Issue a Proxy
The right to issue a proxy is vested with public
interest when it comes to stock corporations.
• Although it may be regulated under the by-
laws, it cannot be denied, since it is an
aspect of ownership interest of
stockholders.
• However, the right of members to vote by
proxy may be denied under the articles of
incorporation or bylaws of a non-stock
corporation. [Sec. 88; CAMPOS]
Requisites for a Valid and Enforceable
Proxy:
1. It must be in writing;
2. Signed by the stockholder or member of
record; and
3. Filed with the corporation before the
scheduled meeting with the Corporate
Secretary. [Sec. 57]
Period of Effectivity
Unless otherwise provided in the proxy, it shall
be valid only for the meeting for which it is
intended. No proxy shall be valid and effective
for a period longer than five (5) years at any
one time. [Sec. 57]
Procedural Matters Relating to Proxies:
1. “Proxy solicitation” involves the securing
and submission of proxies, while “proxy
validation” concerns the validation of such
secured and submitted proxies;
U.P. LAW BOC BUSINESS ORGANIZATIONS
2. The SEC’s power to pass upon the validity
of proxies in relation to election
controversies has effectively been
withdrawn, tied as it is to its abrogated
quasi-judicial powers, and has been
transferred to the RTC Special Commercial
Courts pursuant to the terms of Sec. 5.2 of
the Securities Regulation Code;
Note: The SEC has the power to mpose or
recommend new modes by which a
stockholder, member, director, or trustee
may attend meetings or cast their votes, as
technology may allow, taking into account
the company’s scale, number of
shareholders or members, structure, and
other factors consistent with the basic right
of corporate suffrage. [Sec. 179]
3. Nevertheless, although an intra-corporate
controversy may animate a disgruntled
shareholder to complain to the SEC a
corporation’s violations of SEC rules and
regulations, that motive alone should not
be sufficient to deprive the SEC of its
investigatory and regulatory powers,
especially so since such powers are
exercisable on a motu proprio basis.
The fact that the jurisdiction of the RTC
Special Commercial Courts is confined to
the voting on election of officers, and not all
matters which may be voted upon by
stockholders, elucidates that the power of
the SEC to regulate proxies remains extant
and could very well be exercised when
stockholders vote on matters other than the
election of directors. [GSIS v. C.A., G.R.
No. 183905 (2009)]
Voting Trust
Voting Trust — An arrangement created by
one or more stockholders:
(a) For the purpose of conferring upon a
trustee or trustees the right to vote and
other rights pertaining to the shares;
(b) For a period not exceeding 5 years at any
time [Sec. 58].
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Under a voting trust agreement, a stockholder
of a stock corporation parts with the naked or
legal title, including the power to vote, of the
shares and only retains the beneficial
ownership of the stock.
Voting trustee — A share owner vested with
colorable and naked title of the shares covered
for the primary purpose of voting upon stocks
that he does not own.
A voting trust agreement shall be ineffective
and unenforceable unless:
1. It is in writing and notarized;
2. It specifies the terms and conditions
thereof; and
3. A certified copy of such agreement is filed
with the corporation and with the SEC.
[Sec. 58]
Period of Effectivity
General Rule: Voting trust agreements shall
not exceed five (5) years at any one time.
Exception: Voting trust agreements may be for
a period exceeding five (5) years if it is
specifically required as a condition in a loan
agreement.
• This envisions a situation where a
corporation obtains a loan from a bank,
but as a condition of the loan, the majority
stockholders would be required to
execute voting trust agreements to
ensure that the lending institution would
have a controlling interest in the corporate
votes to be taken that may affect the
ability of the borrowing corporation to pay.
The voting trust agreement therefore
constitutes further security to the lending
institution. (VILLANUEVA, supra at 432)
• Such voting trust agreement conditioned
upon a loan agreement, however, shall
automatically expire upon full payment of
the loan. [Sec. 58]
Unless the agreement is expressly renewed, all
rights granted in the agreement shall
automatically expire at the end of the agreed
period. [Sec. 58]
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Right to Inspect holds legal title over

The voting trust agreement filed with the the shares
corporation shall be subject to examination by
any stockholder in the same manner as any
Revocable at will in Irrevocable, as long
other corporate record. [Sec. 58]
any manner, as no misconduct or
EXCEPT if coupled fraud
Both the trustor and trustee may exercise the
with an interest
right of inspection of all corporate books and
records in accordance with the provisions of Max of 5 years at a Max of 5 years at a
the RCC. [Sec. 58] time time (unless the
voting trust is
Limitation of a Voting Trust Agreement specifically required
No voting trust agreement shall be entered into as a condition in a
for the purposes of circumventing the laws loan agreement)
against:
Anti-competitive agreements; SEC can pass on validity
Abuse of dominant position;
Anti-competitive mergers and acquisitions; Cases When Stockholders’ Action is
Violations of nationality and capital Required
requirements; or
Fraud. [Sec. 58] Right to Vote in Stock Corporations
General Rule: Each share of stock is entitled
Proxy vs. Trustee to vote. [Sec. 6]
Proxy Trustee 1. The stockholder of record has the right to
participate and to vote [Villanueva]
Principal-agent Trustee-beneficiary 2. Executors, administrators, receivers, and
other legal representatives duly appointed
Proxy cannot exceed The only limit to by the court may attend or vote in behalf of
delegated authority authority is that the stockholders without need of any written
act must be for the proxy. [Sec. 54]
benefit of the trustor
(fiduciary obligation) Exception: Unless otherwise provided in
Must be in writing Must be in writing the articles of incorporation or declared
and notarized delinquent under Sec. 66. [Sec. 6]

Copy must be filed Copy must be filed Note: “Outstanding capital stock” means
with the corporation with SEC and the stocks entitled to VOTE.
corporation
Nevertheless, ALL stockholders,
No transfer Transfer of legal title regardless of classification as voting or
to trustee non-voting, are entitled to vote in the
Proxy exercises Trustee exercises following matters:
voting rights only for absolute voting rights a. Amendment of the articles of
a specific meeting continuously, subject incorporation;
(unless otherwise only to fiduciary duty b. Adoption and amendment of by-laws;
provided) c. Sale, lease, exchange, mortgage,
pledge, or other disposition of all or
Proxy cannot be Trustee can be substantially all of the corporate
director director because he property;
d. Incurring, creating, or increasing
bonded indebtedness;

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

e. Increase or decrease of capital stock; Pledged or Pledgor or mortgagor

f. Merger or consolidation; mortgaged shares shall have the right to
g. Investment of corporate funds in attend and vote,
another corporation or business; and unless the pledgee or
h. Dissolution of the corporation. [Sec. 6] mortgagee is
expressly given such
Right to Vote in Non-Stock Corporations right in writing which
In non-stock corporations, the voting rights is recorded on the
attach to membership. Members vote as appropriate corporate
persons, in accordance with the law and the by- books. [Sec. 54]
laws of the corporation.
Treasury shares No voting rights as
General Rule: Each member shall be entitled long as such stock
to one vote. [Sec. 88] remains in the
Executors, administrators, receivers, and treasury.
other legal representatives duly appointed
by the court may attend or vote in behalf of (a) By a majority vote
stockholders without need of any written
proxy. [Sec. 54] (1) Power to enter into management
contracts [Sec. 43]
Exception: Unless the right to vote is limited,
broadened, or denied in the articles of General Rule: Requires approval by —
incorporation or by-laws. a. Majority of the BOD/BOT; and
When the principle for determining the b. Stockholders owning at least the majority
quorum for stock corporations is applied by of the outstanding capital stock/majority of
analogy to non-stock corporations, only members of both the managing and the
those who are actual members with voting managed corporation.
rights should be counted. [Sec. 88]
Exceptions: In the ff. cases, at least 2/3 votes
Limitations on the Right to Vote of the outstanding capital stock/membership of
Type of Shares Manner of Voting the managed corporation is required. BUT
only majority vote is required for the managing
Shares of stock The consent of all corporation:
owned jointly by two the co-owners shall a. Where a stockholder/s representing the
(2) or more persons be necessary, unless same interest of both the managing and the
there is a written managed corporations own or control more
proxy signed by all than one-third (1/3) of the total outstanding
the co-owners capital stock entitled to vote of the
authorizing the managing corporation; or
person to vote such
b. Where a majority of the members of the
share or shares.
managing corporation’s BOD also
[Sec. 55]
constitute a majority of the managed
Any of the joint corporation’s BOD.
owners can vote said
Shares owned in an (2) Amendments to by-laws [Sec. 47]
shares or appoint a
and/or capacity
proxy therefor. [Sec.
55] Requires approval by:
a. Majority of the BOD/BOT; and

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U.P. LAW BOC BUSINESS ORGANIZATIONS
b. Stockholders owning at least the majority
of the outstanding capital stock/majority of
members.
Includes all stockholders with or without voting
rights.
(3) Revocation of delegation to the BOD of
the power to amend or repeal or adopt
by-laws [Sec. 47]
Requires approval by stockholders owning at
least the majority of the outstanding capital
stock/majority of members.
(4) Granting compensation other than per
diems to directors [Sec. 29]
Compensation other than per diems may be
granted to directors by the vote of the
stockholders representing at least a majority
of the outstanding capital stock.
(5) Fixing the consideration for no-par
shares [Sec. 61]
When the Articles of Incorporation or the BOD
does not provide for the value of no-par shares,
the value of such shares shall be determined
by the stockholders representing at least
majority of the outstanding capital stock.
(6) Voluntary dissolution of a corporation
where no creditors are affected [Sec.
134]
If dissolution of a corporation DOES NOT
prejudice the rights of any creditor having a
claim against it, the dissolution may be effected
by:
a. Majority vote of the BOD/BOT; and
b. A resolution adopted by the affirmative vote
of the stockholders owning at least
majority of the outstanding capital
stock/membership.
(7) Revocation of Delegation to the Board
of the Power to Amend/Repeal/Adopt
By-laws [Sec. 47]
Any power delegated to the board of directors
or trustees to amend or repeal the by-laws or
Page 183 of 450
COMMERCIAL LAW
to adopt new by-laws shall be considered
revoked when stockholders representing a
majority of the outstanding capital stock or a
majority of the members shall so vote at a
regular or special meeting.
(8) Calling a Meeting to Remove Directors
or Trustees [Sec. 27]
A special meeting for the purpose of removing
any director or trustee must be called:
1. By the secretary on order of the president;
or
2. Upon written demand of stockholders
representing or holding at least a majority
of the outstanding capital stock, or a
majority of the members entitled to vote.
[Sec. 27]
(b) By a two-thirds vote
(1) Removal of directors or trustees [Sec.
27]
Any director or trustee of a corporation may be
removed from office by a vote of —
• The stockholders holding or representing
at least two-thirds (2/3) of the outstanding
capital stock; or
• At least two-thirds (2/3) of the members
entitled to vote in a non-stock corporation.
Note: Such removal shall take place —
a. Either at a regular meeting of the
corporation or at a special meeting
called for the purpose; and
b. In either case, after previous notice to
stockholders or members of the
corporation of the intention to propose
such removal at the meeting.
(2) Amendment of AOI [Sec. 15]
Amendment of the AOI may be made by:
a. A majority vote of the BOD/BOT; and
b. The vote or written assent of the
stockholders representing at least two-
thirds (2/3) of the outstanding capital stock,
or by the vote or written assent of at least
two-thirds (2/3) of the members.
U.P. LAW BOC BUSINESS ORGANIZATIONS
Note: Includes all stockholders with or without
voting rights.
Amendment of Articles of Incorporation of
close corporations [Sec. 102]
An affirmative vote of at least two-thirds (2/3) of
the outstanding capital stock, whether with or
without voting rights, at a meeting duly called
for the purpose is required to make any
amendment to the AOI which seeks to:
a. Delete or remove any provision; or
b. Reduce a quorum of the voting requirement
stated in the articles shall require.
(3) Delegating the power to amend or
repeal by-laws or adopt new by-laws
[Sec. 47]
Delegation to the BOD/BOT of the power to
amend or repeal by-laws or adopt new by-laws
requires approval by at least 2/3 of the
outstanding capital stock/membership.
Note: Revocation of the delegation requires
only majority vote of the outstanding capital
stock/membership.
(4) Extending/shortening corporate term
[Sec. 36]
Requires approval by a majority vote of the
BOD/BOT and approval by at least 2/3 of the
outstanding capital stock/membership.
Includes all stockholders with or without voting
rights.
(5) Increasing/decreasing capital stock
[Sec. 37]
Requires approval by:
a. A majority vote of the BOD; and
b. At least 2/3 of the outstanding capital
stock.
Includes all stockholders with or without voting
rights.
Page 184 of 450
COMMERCIAL LAW
Incurring, creating, increasing bonded
indebtedness [Sec. 37]
Requires approval by a majority vote of the
BOD and approval by at least 2/3 of the
outstanding capital stock.
Includes all stockholders with or without voting
rights.
(6) Issuance of shares not subject to pre-
emptive right [Sec. 38]
Shares in good faith in exchange for property
or previously incurred indebtedness with the
approval of the stockholders representing 2/3
of the outstanding capital stock are not subject
to pre-emptive rights.
(7) Sale/disposition of all or substantially
all of corporate assets [Sec. 39]
A sale of all or substantially all of the
corporation’s properties and assets, including
its goodwill must be authorized by the vote of:
• The stockholders representing at least 2/3
of the outstanding capital stock; or
• At least 2/3 of the members, in a
stockholders’ or members’ meeting duly
called for the purpose.
- Note: In non-stock corporations
where there are no members with
voting rights, the vote of at least a
majority of the trustees in office will
be sufficient authorization.
(8) Investment of funds in another
business [Sec. 41]
Requires approval by:
a. A majority vote of the BOD/BOT; and
b. At least 2/3 of the outstanding capital
stock/membership.
Includes all stockholders with or without voting
rights.
• However, where the investment by the
corporation is reasonably necessary to
accomplish its primary purpose as stated in
the articles of incorporation, the approval of
U.P. LAW BOC BUSINESS ORGANIZATIONS
the stockholders or members shall not be
necessary.
(10) Stock Dividend declaration [Sec.
42]
Requires approval by:
a. A majority vote of the BOD; and
b. At least 2/3 of the outstanding capital stock.
Note: Declaration of cash and property
dividends only requires BOD/BOT approval.
(11) Power to enter into management
contracts [Sec. 43]
General Rule: Requires approval by —
a. Majority of the BOD/BOT; and
b. Stockholders owning at least the majority
of the outstanding capital stock/majority of
members of both the managing and the
managed corporation.
Exceptions: In the ff. cases, at least 2/3 votes
of the outstanding capital stock/membership of
the managed corporation is required. BUT
only majority vote is required for the managing
corporation:
a. Where a stockholder/s representing
the same interest of both the managing
and the managed corporations own or
control more than one-third (1/3) of the
total outstanding capital stock entitled
to vote of the managing corporation; or
b. Where a majority of the members of the
managing corporation’s BOD also
constitute a majority of the managed
corporation’s BOD.
(12) Ratifying contracts with respect to
dealings with directors/trustees [Sec.
31]
A contract of the corporation with one or more
of its directors is voidable, at the option of such
corporation, unless ALL of the following
conditions are present:
a. The presence of such director/trustee in the
board meeting in which the contract was
approved was not necessary to constitute
a quorum for such meeting;
Page 185 of 450
COMMERCIAL LAW
b. The vote of such director or trustee was not
necessary for the approval of the contract;
c. The contract is fair and reasonable under
the circumstances;
In case of corporations vested with
public interest, material contracts are
approved by at least two-thirds (2/3) of the
entire membership of the board, with at
least majority of the independent directors
voting to approve the material contract; and
In case of an officer, the contract has been
previously authorized by the BOD.
Note: Where any of the first 3 conditions in the
preceding paragraph is absent, in the case of a
contract with a director/trustee, the contract
may be ratified by the vote of the
stockholders representing 2/3 of the
outstanding capital stock or at least 2/3 of
the members in a meeting called for that
purpose.
Full disclosure of the adverse interest of the
directors/trustees involved is made at such
meeting and the contract is fair and reasonable
under the circumstances. [Sec 31]
(13) Ratifying acts of disloyalty of a
director [Sec. 33]
General Rule: Where a director, by virtue of
such office, acquires a business opportunity,
which should belong to the corporation, thereby
obtaining profits to the prejudice of such
corporation, the director must account for and
refund to the latter all such profits.
Exception: His act may be ratified by a vote of
the stockholders owning or representing at
least 2/3 of the outstanding capital stock.
(14) Plan of merger or consolidation
[Sec. 76]
Requires approval by:
a. Majority of each of the BOD/BOT of the
constituent corporations of the plan of merger
or consolidation; and
U.P. LAW BOC BUSINESS ORGANIZATIONS
b. At least 2/3 of the outstanding capital
stock/membership of each corporation at
separate corporate meetings duly called.
Amendments to the plan of the merger or
consolidation also requires approval by
majority vote of each of the BOD and 2/3 vote
of the outstanding capital stock/membership of
each corporation voting separately.
Includes all stockholders with or without voting
rights.
(15) Plan of distribution of assets in
non-stock corporations [Sec. 94]
The BOT shall, by majority vote, adopt a
resolution recommending a plan of distribution
which shall be approved by at least 2/3 of the
members with voting rights.
(16) Incorporation of a religious society
[Sec. 114]
General Rule: Any religious society or
religious order, or any diocese, synod, or
district organization of any religious
denomination, sect or church, may incorporate
—
a. Upon written consent and/or by an affirmative
vote at a meeting called for the purpose of at
least 2/3 of its membership;
b. For the administration of its temporalities or
for the management of its affairs, properties
and estate
Exception: Unless forbidden by the
Constitution, rules, regulations or discipline of
the religious denomination, sect or church of
which it is a part, or by competent authority.
Page 186 of 450
COMMERCIAL LAW
(17) Voluntary dissolution of a
corporation where creditors are
affected [Sec. 135]
If dissolution of a corporation may prejudice the
rights of any creditor having a claim against it,
the dissolution may be effected by:
a. Majority vote of the BOD/BOT; and
b. A resolution adopted by the affirmative vote
of the stockholders representing at least 2/3
of the outstanding capital stock/membership.
(c) By cumulative voting
Election of Directors or Trustees [Sec. 23]
Stockholders entitled to vote may:
a. Vote such number of shares for as many
persons as there are directors to be elected
[Straight Voting];
b. Cumulate said shares and give 1 candidate
as many votes as the number of directors to
be elected multiplied by the number of the
shares owned [Cumulative Voting for 1
Candidate]; or
c. Distribute them on the same principle among
as many candidates as may be seen fit
[Cumulative Voting by Distribution].
Note: No delinquent stock shall be voted [Sec.
23].
Members of a non-stock corporation may cast
as many votes as there are trustees to be
elected, but may not cast more than 1 vote for
1 candidate.
Nominees for directors or trustees receiving the
highest number of votes shall be declared
elected.
U.P. LAW BOC
VOTE REQUIREMENTS FOR ACTS REQUIRING APPROVAL OF STOCKHOLDER/MEMBERS
Corporate Act
Amendment of AOI [Sec. 15]
Election of directors [Sec. 23]
Removal of director/trustee
[Sec. 27]
Filling of vacancy other than
removal by stockholders,
expiration of term and
increase of seats [Sec. 28]
If vacancy prevents the quorum
Granting of compensation to
directors other than
reasonable per diems [Sec.
29]
Ratification of contract with
director [Sec. 31]
Ratification of contracts
between interlocking
directors [Sec. 32]
Ratification of act of director
acquiring interest [Sec. 33]
Extend or shorten corporate
term [Sec. 36]
Increase or decrease capital
stock, create or increase
bonded indebtedness [Sec.
37]
Sale or disposition of other
asserts [Sec. 39]
Invest coroporate funds in
another corporation or
business not in line with
primary purpose [Sec. 41]
BUSINESS ORGANIZATIONS COMMERCIAL LAW
Board of Directors/Trustees Stockholders/Members
2/3 outstanding capital
Majority vote of the BOD/BOT
stock/members
Plurality vote of the outstanding
-
capital stock/members
- 2/3 outstanding capital stock
Majority of the remaining
BOD/BOT, if there is still
quorum.
and emergency action is
required, may be filled by
unanimous vote of the
remaining BOD/BOT.
Majority vote of outstanding
-
capital stock
- 2/3 outstanding capital stock
- 2/3 outstanding capital stock
- 2/3 outstanding capital stock
2/3 outstanding capital
Majority vote of the BOD/BOT
stock/members
Majority vote of the BOD 2/3 outstanding capital stock
2/3 outstanding capital
Majority vote of BOD/BOT
stock/members
2/3 outstanding capital
Majority vote of BOD/BOT
stock/members
Page 187 of 450
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Declaration of dividends [Sec. 2/3 outstanding capital stock

42] Majority vote of BOD (required only in the case of
issuance of stock dividend)

Enter into a management General Rule: Majority of the

contract [Sec. 43] outstanding capital
stock/members of both
managing and maanged
corporation

Exception: 2/3 of outstanding

capital stock/members required
for the managed corporation:
a. Where a stockholder
representing the same
interest of both the
managing and the
Majority of the quorum of the
managed corporations
BOD/BOT
own or control more than
1/3 of the total
outstanding capital stock
entitled to vote of the
managing corporation;
or
b. Where a majority of the
members of the BOD of
the maging corporation
also constitute a majority
of the members of the
BOD of the managed
corporation

Approval of by-laws [Sec. 45] Majority of the outstanding

-
capital stock/members
Amendment or repeal of by- Majority of the oustanding
Majority vote of BOD/BOT
laws [Sec. 47] capital stock/members
Delegation to the BOD the
2/3 of the oustanding capital
power to amend, repeal or -
stock/members
adopt by-laws [Sec. 47]

Revocation of the power

delegated to the BOD to Majority of the oustanding
-
amend, repeal or adopt by- capital stock/members
laws [Sec. 47]

Fix the issued price of no-par General Rule: Fixed in the AOI Exception: Majority of the
value shares [Sec. 62] or by majority of the quroum of outstanding capital stock in the
the BOD pursuant to authority absence of provisions in the
under the AOI AOI

Page 188 of 450

U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Merger or consolidation [Sec. 2/3 outstanding capital stock of

Majority of each BOD/BOT
77] each corporation

Amendment to the plan of

2/3 outstanding capital of each
merger or consolidation [Sec. Majority of each BOD/BOT
corporation
77]

Plan of distibution of assets

of non-stock corporations Majority vote of BOT 2/3 of the membership
[Sec. 95]

Amendment of AOI of close

corporations to delete any
2/3 outstanding capital stock,
required provision or to
- with or without voting rights, or
reduce a quoru or voting
greater if provided by the AOI
requirement as stated in the
AOI [Sec. 103]
Voluntary dissolution where
2/3 outstanding capital stock or
creditors are affected [Sec. Majority vote of the BOD/BOT
members
134]

Voluntary dissolution where

Majority of the outstanding
no creditors are affected [Sec. Majority of the BOD/BOT
capital stock./members
135]

Manner of Voting Procedural Matters Relating to Voting Via

Remote Communication or In Absentia:
A stockholder may vote either: [Sec. 57]
1. Directly (in person); or Must be authorized in the by-laws or by a
2. Indirectly, through a representative, in any majority of the board of directors;
of the following manner: o EXCEPT: The right to vote through
a. By means of a proxy these modes may be exercised in
b. By a trustee under a voting trust corporations vested with public
agreement; or interest, notwithstanding absence of
c. By executors, administrators, provision in the by-laws of such
receivers, or other legal corporations [Sec 23].
representatives duly appointed by the Votes must be received before the
court corporation finishes the tally of votes;
3. Remote communication If a stockholder or member intends to
4. In absentia [Sec. 57] participate in a meeting through remote
communication, he/she shall notify in
Remote communication or in absentia advance the Presiding Oicer and the
The Revised Corporation Code introduced Corporate Secretary of his/her intention.
voting through remote communication or in The Corporate Secretary shall note such
absentia for stockholders [Sec. 57] and fact in the Minutes of the meeting. [SEC
members. [Sec. 88] MC 6 s. 2020, Sec. 10]
A stockholder or member who participates
through remote communication or in
absentia, shall be deemed present for
purposes of quorum;

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U.P. LAW BOC BUSINESS ORGANIZATIONS
The corporation shall establish the
appropriate requirements and procedures
for voting, taking into account:
o The company’s scale;
o Number of shareholders or members;
o Structure;
o Other factors consistent with the basic
right of corporate suffrage. [Sec. 57]
For the convenience of their stockholders
and members, corporations shall issue
their own internal procedures embodying
the mechanisms for participation in
meetings and voting through remote
communication or in absentia. [SEC MC 6
s. 2020, Sec. 13]
If no election is held, or the owners of
majority of the outstanding capital stock or
majority of the members entitled to vote are
not present even through these modes, the
meeting may be adjourned and the
corporation shall proceed. [Sec. 23]
When attendance, participation and voting
are allowed by these modes, each notice of
meeting shall be accompanied by the
requirements and procedures to be
followed when a stockholder or member
elects either option. [Sec. 50]
Proprietary Rights
Right to Dividends
Concept of Dividends
A dividend is —
That portion of the profits of the corporation
set aside, declared and ordered by the
directors to be paid ratably to the
stockholders on demand or at a fixed time.
Payment to the stockholders as a return
upon their investment. [Villanueva]
Discretion of Board to Declare Dividends
General Rule: The board of directors of a stock
corporation may declare dividends out of the
unrestricted retained earnings to all
stockholders on the basis of outstanding stock
held by them. [Sec. 42]
Upon lawful declaration of dividends by the
BOD, dividends become a debt owing to
Page 190 of 450
COMMERCIAL LAW
the shareholders. No revocation can be
made.
Exceptions:
- Dividends are revocable if NOT yet
announced or communicated to the
stockholders.
- Stock dividends, even if already declared,
may be revoked prior to actual issuance
since these are not distributions but merely
representations of changes in the capital
structure.
Such declaration is essentially within the
business judgment of the board of
directors.
• The fact that profits have accrued in the
prosecution of the corporate business
does not necessarily impose upon the
directors the duty to declare them as
dividends. [Villanueva]
Exception: Stock corporations are prohibited
from retaining surplus profits in excess of 100%
of their paid-in capital stock.
Exception to the exception: Stock
corporations may retain surplus profits in
excess of 100% of their paid-in capital stock:
1. When justified by definite corporate
expansion projects or programs approved
by the board of directors; or
2. When the corporation is prohibited under
any loan agreement with financial
institutions or creditors, whether local or
foreign, from declaring dividends without
their consent, and such consent has not yet
been secured; or
3. When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the corporation,
such as when there is need for special
reserve for probable contingencies. [Sec.
42]
Note: Right to dividends vests upon declaration
so whoever owns the stock at such time also
owns the dividends. Subsequent transfer of
stock would not carry with it right to dividends
UNLESS agreed upon by the parties.
U.P. LAW BOC BUSINESS ORGANIZATIONS
Unrestricted Retained Earnings
The board of directors of a stock corporation
may declare dividends out of the unrestricted
retained earnings. [Sec. 42]
Retained Earnings
Represents the accumulation of net profits
of the corporation over the years and
likewise losses sustained, as well as
deductions made upon previous dividends
declared.
Restricted Unrestricted
Retained Earnings Retained Earnings
That portion of the That portion which is
retained earnings free and can be
specifically declared as
earmarked or set- dividends to
aside for specific stockholders.
purposes.
[Villanueva]
In case of no-par value shares, the entire
consideration received by the corporation for its
no-par value shares shall be treated as capital
and shall not be available for distribution as
dividends. [Sec. 6]
Appraisal Right
Appraisal Right — 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. [Sec. 80]
Who is Entitled to Exercise
A prejudiced stockholder who dissented in the
meeting where the proposal was approved.
Mere silence or abstention does not suffice.
The stockholder must have voted against the
corporate action. [Villanueva]
Amount Paid to Dissenting Stockholder
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. [Sec. 81]
Page 191 of 450
COMMERCIAL LAW
(a) When Available [Sec. 80]
a. If amendment of AOI results in:
a. Changing or restricting the rights of
any stockholder or class of shares;
or
b. Authorizing preferences in any
respect superior to those of
outstanding share of any class;
[Sec. 80]
b. Extension of the term of corporate
existence [Sec. 80], including Voluntary
Dissolution (by Petition or by shortening
corporate term); [Secs. 134-136]
c. Note: Section 80(a) however provides that
appraisal right may be exercised in both
extension and shortening of corporate
term, which is an error carried over from the
old Corporation Code.
d. Sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or
substantially all of the corporate property
and assets; [Sec. 80]
e. Merger or consolidation; [Sec. 80]
f. Investment of corporate funds for any
purpose other than the primary purpose of
the corporation; [Sec. 80]
g. Increasing or decreasing capital stock, or
incurrring, creating, increasing bonded
indebtedness; [Sec. 37]
h. Note: Can be exercised only if the increase
of capital stock results in or 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. [Sec. 80(a)]
i. Denial of pre-emptive rights through an
amendment of AOI; [Sec. 80(a)]
See “SUMMARY OF SPECIFIC POWERS“
table under “7. Corporate Powers“.
(b) Manner of Exercise of Right
Requirements for Exercise of Appraisal
Right [Sec. 81 & 85]
a. Stockholder must have voted against
the corporate act.
b. Stockholder must make a written
demand on the corporation within 30
U.P. LAW BOC BUSINESS ORGANIZATIONS
days after the vote was taken for
payment of the fair value of his shares.
o Failure to make demand within
such period shall be deemed
waiver of the appraisal right.
c. Stockholder must submit his certificate
of stock to the corporation for notation
within 10 days after demand for
payment.
o Otherwise, right to appraisal may
be terminated at the option of
corporation.
Effect of Demand for Payment [Sec. 82]
a. ALL rights accruing to such shares,
including voting and dividend rights, shall be
suspended, EXCEPT the right of such
stockholder to receive payment of the fair
value thereof.
b. There is RESTORATION of voting and
dividend rights if the dissenting stockholder
is not paid the value of his shares within 30
days after the award.
Note: The award shall be —
(a) Agreed upon by the dissenting
stockholder and corporation; or
(b) Determined and appraised by 3
disinterested persons, if they fail to
agree within 60 days from the date when
the corporate action was approved,
these 3 persons shall be —
1. One named by the shareholder;
2. One named by the corporation;
3. One chosen by 1 & 2.
The findings of the majority of the appraisers
shall be final. [Sec. 81]
c. If shares represented by the certificates
bearing a notation that such shares are
dissenting shares are transferred, and the
certificates consequently cancelled:
(1) The rights of the transferor as a
dissenting stockholder under this Title
[Appraisal Right] shall cease; and
(2) The transferee shall have all the rights of
a regular stockholder; and all dividend
distributions which would have accrued
on such shares shall be paid to the
transferee. [Sec. 85]
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When Right to Payment Ceases [Sec. 83,
generally]
General Rule: No demand for payment may be
withdrawn.
Exceptions: The right may be extinguished in
the following instances —
1. Withdrawal of demand by the stockholders
WITH CONSENT of the corporation
2. Abandonment of the proposed corporate
action
3. Disapproval by SEC of the proposed
corporate action where such approval is
necessary
4. Where SEC determines that such
stockholder is not entitled to appraisal right
5. Failure to submit the certificates of stock
representing his shares to the corporation
for notation as dissenting shares within 10
days after demand for payment, at the
option of the corporation. [Sec. 85]
Effect of Extinguishment of Right
a. Right of dissenting stockholder to be paid
for the fair value of his shares shall cease;
b. His status as a stockholder shall thereupon
by restores; and
c. All dividend distributions which would have
accrued on his shares shall be paid to him.
[Sec. 83]
Right to Inspect
Basis of Right
As the beneficial owners of the business, the
stockholders have the right to know the
financial condition and management of
corporate affairs.
A stockholder’s right of inspection is based on
his ownership of the assets and property of the
corporation. Therefore, it is an incident of
ownership of the corporate property, whether
this ownership or interest is termed an
equitable ownership, a beneficial ownership, or
quasi-ownership. Such right is predicated upon
the necessity of self-protection. [Gokongwei Jr.
v. SEC, G.R. No. L-45911 (1979)]
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Records Subject to Inspection [Sec. 73] Requirements for the exercise of the right
Every corporation shall keep and carefully of inspection [Sec. 73]
preserve at its principal office all information a. The records are open to inspection only by
relating to the corporation including, but any director, trustee, stockholder or
not limited to: member of the corporation in person or by
a. The AOI and by-laws of the corporation and a representative.
all their amendments; b. Must be done at reasonable hours on
b. The current ownership structure and voting business days.
rights of the corporation, including lists of c. A demand in writing may be made by the
stockholders or members, group director, trustee or stockholder at their
structures, intra-group relations, ownership expense, for such records or excerpts from
data, and beneficial ownership; the records.
c. The names and addresses of all the d. The inspecting or reproducing party shall
members of the BOD or BOT and the remain bound by confidentiality rules under
executive officers; prevailing laws such as:
d. A record of all business transactions; a. Intellectual Property Code
e. A record of the resolutions of the BOD or b. Data Privacy Act
BOT and of the stockholders or members; c. Securities Regulation Code
f. Copies of the latest repertorial d. Rules of Court
requirements submitted to the
Commission; and Test to Determine Whether the Purpose of
g. The minutes of all meetings of stockholders Inspection is Legitimate
or members, or of the BOD/BOT, which A legitimate purpose is one which is genuine to
shall set forth – the interests of the stockholders as such and
i. Time and place of the meeting not contrary to the interests of the corporation
held; [Gokongwei Jr. v. SEC, G.R. No. L-45911
ii. How meeting was authorized; (1979)].
iii. Notice given;
iv. Agenda; Valid defenses of the officer or agent of the
v. Whether meeting was regular or corporation who refuses to allow
special (its object, if special) inspection and/or reproduction of records:
vi. Those present and absent a. The person demanding to examine and
vii. Every act done or ordered done at copy excerpts from the corporation’s
the meeting records and minutes has improperly used
h. Upon demand of the any information secured through any prior
BOD/BOT/stockholder or member – examination of the records or minutes of
i. Time when any director, trustee, such corporation or of any other
stockholder or member entered or corporation;
left the meeting must be noted in the b. The person was not acting in good faith;
minutes; c. The person was not acting for a legitimate
ii. The yeas and nays must be taken purpose in making the demand to examine
on any motion or proposition, and a or reproduce corporate records;
record thereof carefully made; d. The person is a competitor, director, officer,
iii. The protest of a director, trustee, controlling stockholder or otherwise
stockholder or member on any represents the interests of a competitor.
action or proposed action [Sec. 73]

Remedies when inspection is refused

a. Mandamus
Under the Rules of Court, the writ of
mandamus should be granted only if the

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

court is satisfied that justice so requires. Distinguished from Right of First Refusal
[Sec. 8, Rule 65] Pre-emptive Right Right of First
b. Injunction Refusal
c. Action for damages [Sec. 73] Grants stockholders Grants the existing
d. File an action under Sec. 161 to impose a the option to stockholders or the
penal offense by fine subscribe to all issues corporation the option
The unjustified failure or refusal by the or disposition of to purchase the
corporation, or by those responsible for shares of any class, in shares of the
keeping and maintaining corporate proportion to their transferring
records, to comply with the pertinent rules respective stockholder. [Sec. 97]
and provisions of the RCC on inspection shareholdings. [Sec.
38]
and reproduction of records shall be
All stockholders of a Arises only by virtue
punished with a fine ranging from
stock corporation of contract
P10,000.00 to P200,000.00, at the
shall enjoy the pre- stipulations, by which
discretion of the Court
emptive right to the right is strictly
When the violation of this provision is subscribe to all issues construed against the
injurious or detrimental to the public, the or disposition of right of person to
penalty is a fine ranging from P20,000.00 shares of any class, in dispose or deal with
to P400,000.00 [Sec. 161] proportion to their their property.
e. Summary investigation by SEC [Sec. 73] respective
shareholdings. [Sec.
Preemptive Right 38]
A right claimed A right exercisable
Definition against the against another
Pre-emptive right — An option or privilege of corporation on stockholder on his
an existing stockholder to subscribe to a unissued shares of its shares of stock.
proportionate part of shares subsequently capital stock, and [Villanueva]
issued by the corporation before the same can likewise on treasury
be disposed of in favor of others. shares held by the
corporation.
• This right includes all issues and [Villanueva]
disposition of such shares any class.
• It is a common law right and may be Purpose of Pre-emptive Right
exercised by stockholders even without The purpose is to enable the shareholder to
legal provision. retain his proportionate control in the
corporation and to retain his equity in the
Basis of Preemptive Right: Preservation of
surplus.
the existing proportional rights of the
stockholders. [Campos]
Scope of Pre-emptive Right
The broad phrase “all issues or disposition of
shares of any class” is construed to include:
a. New shares issued in pursuance of increase
in capital stock or from the unissued shares
which form part of the ACS; and also
b. Treasury shares
• Treasury shares would come under the
term “disposition”.
• Likewise considering that it is not
included among the exceptions
enumerated therein, where pre-emptive
right shall not extend, the intention is to

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U.P. LAW BOC BUSINESS ORGANIZATIONS
include it in its application. [SEC
Opinion, 14 January 1993]
Limitations to Exercise of Pre-emptive right
[Sec. 38]
a. Such pre-emptive right shall NOT extend to
shares to be issued in compliance with
laws requiring stock offerings or minimum
stock ownership by the public;
b. It shall also NOT extend to shares to be
issued in good faith with the approval of the
stockholders representing 2/3 of the
outstanding capital stock, in exchange for
property needed for corporate purposes or
in payment of a previously contracted debt;
c. It shall not take effect if denied in the AOI
or an amendment thereto;
d. If one shareholder does not want to
exercise his pre-emptive right, the other
shareholders are not entitled to purchase
the corresponding shares of the
shareholder who declined. But if nobody
purchased the same and later on the board
re-issued the shares, the pre-emptive right
applies. [Sundiang and Aquino]
Exceptions to the Pre-emptive Right
1. When such right is denied by the articles of
incorporation or an amendment thereto;
and
2. Shares to be issued:
a. In compliance with laws requiring
stock offerings or minimum stock
ownership by the public; or
b. To shares to be issued in good faith
with the approval of the
stockholders representing ⅔ of the
outstanding capital stock in
exchange for:
i. Property needed for
corporate purposes; or
ii. In payment of a previously
contracted debt. [Sec. 38]
Remedies in case of unwarranted denial
i. Injunction
ii. Mandamus
iii. The suit should be individual and not
derivative because the wrong done is
to the stockholders individually
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COMMERCIAL LAW
iv. SEC can cancel shares if the 3rd party
is not innocent
Waiver/Denial of Preemptive Right
Allowed by the Code provided that it is made in
the AOI
a. Waiver made through AOI would bind
present and subsequent shareholders;
b. 2/3 vote of the outstanding capital stock is
necessary before waiver is binding;
c. Result of non-placement of waiver clause
in AOI: Waiver shall not bind future
stockholders but only those who agreed to
it.
The shareholders must be given reasonable
time within which to exercise their preemptive
rights.
• Upon expiration of such period, any
shareholders who did not exercise such
will be deemed to have waived it.
• This is necessary so as to not hinder
future financing plans of the corporation.
Some new investors may be willing to
invest only if all the new shares will be
issued to them. [Campos]
Right to Vote
Nature of the Right to Vote
The right to vote is inherent and incidental to
the ownership of corporate stocks. [Tan v.
Sycip, 499 SCRA 216 (2016)]
It represents the right of a stockholder to
participate in the control and management of
the corporation. However, it is subject to the
rule of the majority. [Villanueva]
General Rule: No share may be deprived of
voting rights.
Exception: Shares classified and issued as
“preferred” or “redeemable” may be deprived of
voting rights: Provided, that there shall always
be a class or series of shares with complete
voting rights. [Sec. 6]
U.P. LAW BOC BUSINESS ORGANIZATIONS
Non-Voting Shares
Non-voting shares are not entitled to vote,
except as provided for in par. 3 of Sec. 6.
Holders of nonvoting shares shall nevertheless
be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of bylaws;
3. Sale, lease, exchange, mortgage, pledge,
or other disposition of all or substantially all
of the corporate property;
4. Incurring, creating, or increasing bonded
indebtedness;
5. Increase or decrease of authorized capital
stock;
6. Merger or consolidation of the corporation
with another corporation or other
corporations;
7. Investment of corporate funds in another
corporation or business in accordance with
this Code; and
8. Dissolution of the corporation.
Except in the above cases, the vote necessary
to approve a particular corporate act shall be
deemed to refer only to stocks with right to
vote. [Sec. 6]
Rules Applicable to Certain Kinds of Shares
i. Preferred or redeemable shares may be
deprived of the right to vote. [Sec. 6]
ii. Fractional shares of stock cannot be
voted.
iii. Treasury shares have no voting rights as
long as they remain in the treasury.
iv. No delinquent stock shall be voted. [Sec.
70]
v. A transferee of stock cannot vote if his
transfer is not registered in the stock and
transfer book of the corporation.
vi. In case a stockholder grants security
interest in his or her shares in stock
corporations, the stockholder-grantor shall
have the right to attend and vote at meetings
of stockholders.
• Exception: The secured creditor is
expressly given by the stockholder-
grantor such right in writing which is
recorded in the appropriate corporate
books. [Sec. 54]
vii. The sequestration of shares does not
entitle the government to exercise acts of
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COMMERCIAL LAW
ownership over the shares. Even
sequestered shares may be voted upon by
the registered stockholder of record.
[Cojuangco, Jr. v. Roxas, 195 SCRA 797
(1991)]
Exception: The PCGG may exercise the
voting right on sequestered shares
whenever it is able to comply with the “two-
tiered” or “public character” tests:
a. The two-tiered test is satisfied when:
a. Prima facie evidence show that
the wealth and/or the shares
are indeed ill-gotten; and
b. There is demonstrated
imminent danger of dissipation
of the assets.
b. The two-tiered test does not apply
when the funds are prima facie public
in character or, at least, affected with
public interest. [Republic v.
COCOFED, 372 SCRA 462 (2001)]
viii. When shares are jointly owned by two or
more persons, the consent of all the co-
owners shall be necessary.
• Exception: There is a written proxy,
signed by all the co-owners,
authorizing one or some of them or any
other person to vote such share or
shares: Provided, That when the
shares are owned in an “and/or”
capacity, any one of the joint owners
can vote said shares or appoint a
proxy therefor. [Sec. 55]
Right of First Refusal
Right of First Refusal — Obligates a
stockholder who may wish to sell or assign his
shares to first offer the shares to the
corporation or to the other existing
stockholders under terms and conditions which
are reasonable.
• Grants the existing stockholders or the
corporation the option to purchase the
shares of the transferring stockholder.
[Sec. 97]
• Only when the corporation or the other
stockholders do not or fail to exercise
their option, is the offering stockholder
U.P. LAW BOC BUSINESS ORGANIZATIONS
at liberty to dispose of his shares to third
parties.
An agreement entered into between the two
majority stockholders of a corporation,
whereby they mutually agreed not to sell,
transfer, or otherwise dispose of any part of
their shareholdings till after one year from the
date of the agreement is valid. [Lambert v. Fox
G.R. No. L-7991 (1914)]
Nature of the Right of First Refusal
The right of first refusal is primarily an attribute
of ownership, and consequently can be
effected only through a contractual
commitment by the owner of the shares.
Consequently, the waiver of a right of first
refusal when duly constituted can be effected
only by the registered owner. [PCGG v. SEC,
G.R. No. 82188 (1988)]
Remedial Rights
Individual Suit
A suit brought by the shareholder in his own
name against the corporation when a wrong is
directly inflicted against him.
Representative Suit
A suit brought by the stockholder in behalf of
himself and all other stockholders similarly
situated when a suit brought by the shareholder
in his own name against the corporation when
a wrong is directly inflicted against him or a
wrong is committed against a group of
stockholders.
Derivative Suit
Definition
A suit brought by a stockholder for and on
behalf of the corporation for its protection from
the wrongful acts committed by the
directors/trustees of the corporation, when the
stockholder finds that he has no redress
because the directors/trustees, are the ones
vested by law to decide whether or not to sue.
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• It is an action brought by minority
shareholders in the name of the
corporation to redress wrongs committed
against the corporation, for which the
directors refuse to sue.
• It is a remedy designed by equity and has
been the defense of minority
shareholders against abuses by the
majority. [Villanueva]
Derivative Suit as Defined in Jurisprudence
It is a suit by a shareholder to enforce a
corporate cause of action.
• It is a condition sine qua non that the
corporation be impleaded as a party
because not only is the corporation an
indispensable party, but it is also the
present rule that it must be served with
process.
• The judgment must be made binding upon
the corporation in order that the corporation
may get the benefit of the suit and may not
bring subsequent suit against the same
defendants for the same cause of action.
[Chua v. C.A., G.R. No. 150793 (2004)]
It is a suit brought by one or more
stockholders/members in the name and on
behalf of the corporation to redress wrongs
committed against it, or protect/vindicate
corporate rights whenever the officials of the
corporation refuse to sue, or the ones to be
sued, or has control of the corporation.
[Sundiang and Aquino]
Business Judgment Rule
As a general rule, when a wrong is committed
against a corporation, whether to bring the suit
or not primarily lies within the discretion and
exercise of business judgment of the BOD.
• But where corporate directors are guilty of
a breach of trust, not of mere error of
judgment or abuse of discretion, and inta-
corporate remedy is futile or useless, a
shareholder may institute a derivative suit
in behalf of himself and other stockholders
and for the benefit of the corporation,
• The purpose of the suit is to bring about a
redress of the wrong inflicted directly upon
U.P. LAW BOC BUSINESS ORGANIZATIONS
the corporation and indirectly upon the
stockholders. [Bitong v. C.A., G.R. No.
123553 (1998)]
Parties to a Derivative Suit
In a derivative suit, the suing stockholder is
merely a nominal party, while the corporation is
the real party in interest. Thus, the action must
be brought for the benefit and in the name of
the corporation. [Villanueva]
The corporation is an unwilling co-plaintiff.
[Rule 3 Section 10, Rules of Court]
• The corporation should be made a party to
the suit, either as plaintiff or defendant, for
res judicata to apply.
• BUT the personal injury suffered by the
stockholder cannot disqualify him from
filing a derivative suit in behalf of the
corporation. It merely gives rise to an
additional cause of action for damages
against the erring corporate officers.
[Gochan v. Young, G.R. No. 131889
(2001)].
Proper Forum for Derivative Suits
The Regional Trial Courts exercise jurisdiction
over derivative suits. [Sec. 5.2., Securities
Regulation Code]
Requisites of Derivative Actions
a. That the person instituting the action be a
stockholder or member at the time the acts
or transactions subject of the action
occurred and the time the action was filed;
b. That the stockholder or member exerted all
reasonable efforts, and alleges the same
with particularity in the complaint, to
exhaust all remedies available under the
AOI, by-laws, laws or rules governing the
corporation or partnership to obtain the
relief he desires;
c. That there is no appraisal right available for
the act(s) complained of;
d. That the suit is not a nuisance or
harassment suit; [Rule 8, Interim Rules of
Procedure for Intra-Corporate
Controversies]
e. The action brought by the
stockholder/member must be “in the name
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of the corporation or association”. [implied
from 1st par. of Rule 8, Sec. 1 of the Interim
Rules; see also Florete v. Florete, G.R. No.
174909 (2016)]
The action brought by the shareholder or
member must be in the name of the corporation
or association. [Villamor v. Umale, G.R. No.
172843 (2014)]
Requisites of a Derivative Suit according to
Jurisprudence [SMC v. Kahn, G.R. No. 85339
(1989)]
1. The party bringing the suit should be a
shareholder as of the time of the act or
transaction complained of, the number of
his shares not being material;
2. He has tried to exhaust intra-corporate
remedies, i.e., has made a demand on the
BOD for the appropriate relief but the latter
has failed or refused to heed his plea; and
3. The cause of action actually devolves on
the corporation, the wrongdoing or harm
having been, or being caused to the
corporation and not to the particular
stockholder bringing the suit. [Lisam
Enterprises, Inc., represented by Lolita A.
Soriano and Lolita A. Soriano v. Banco de
Oro Unibank, Inc. et al., G.R. No. 143264
(2012)].
Note: The “wrong” contemplated in a derivative
suit is one in which the injury alleged be indirect
as far as the stockholders are concerned and
direct only insofar as the corporation is
concerned. [de Leon] The reliefs sought pertain
to the corporation. [Symaco Trading Corp. v
Santos, G.R. No. 142474 (2005)]
Stockholder may commence a derivative suit
“for mismanagement, waste or dissipation of
corporate asset because of a special injury to
him for which he is otherwise without redress.
[Yu v. Yukayguan, G.R. No. 177549 (2009)]
Exhaustion of Administrative Remedies
General Rule: A derivative suit can only be
filed when there has been a showing of
exhaustion of intra-corporate remedies.
U.P. LAW BOC BUSINESS ORGANIZATIONS
Exception: But where corporate directors are
the ones guilty of a breach of trust, and intra-
corporate remedy is futile or useless,
shareholders may institute a derivative suit for
the benefit of the corporation without having to
exhaust intra-corporate remedies in order to
bring about a redress of the wrong inflicted
directly upon the corporation and indirectly
upon the stockholders. [Villanueva]
Obligations of a Stockholder
(1) Liability to the Corporation for Unpaid
Subscription [Sec. 66]
Payment of unpaid subscription or any
percentage thereof, together with any interest
accrued shall be made:
On the date specified in the subscription
contract; or
On the date stated in the call made by the
board.
Failure to pay on such date shall:
1. Render the entire balance due and
payable; and
2. Make the stockholder liable for interest at
the legal rate on such balance, unless a
different interest rate is provided in the
subscription contract.
A subscription contract is unconditional (i.e.,
obligation to pay is not subject to any
contingency) and indivisible (as to the amount
and transferability). [Fua Cun v. Summers
(1923)] Hence, if the subscriber paid 20% of his
subscription, he is not entitled to the issuance
of certificates corresponding to 20% of the
shares.
Unpaid claim refers to any unpaid subscription,
and not to any indebtedness which a
subscriber may owe the corporation rising from
any other transaction. [China Banking Corp. v.
C.A., G.R. No. 117604 (1997)]
(2) Liability to the Corporation for Interest
on Unpaid Subscription if so Required
by the By-Laws [Sec. 65]
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General Rule: Subscribers for stock are NOT
liable to pay interest on his unpaid subscription.
Exception: If so required in the by-laws at the
rate fixed in the by-laws. If no rate is fixed in the
subscription contract, the prevailing legal rate
shall apply. [Sec. 65]
Notes:
Transfer for consideration of treasury shares is
a sale (or disposition) by the corporation (not
subscription). A transfer of previously issued
shares by a stockholder to a third person in a
sale (or disposition). Transfer of unissued
shares is subscription.
Shareholders are not creditors of the
corporation with respect to their shareholdings
thereto and the principle of compensation or
set-off has no application.
Subscription contract is NOT required to be in
writing.
(3) Liability for Watered Stocks [Sec. 64]
Definition
Watered Stocks — Shares issued as fully paid
when in truth no consideration is paid, or the
consideration received is known to be less than
the par value or issued value of the shares.
[Sec. 64]
See b. Watered stocks under 10. Capital Affairs
Liability of directors or officers [Sec. 64]
Any director or officer of a corporation who:
1. Consents to the issuance of stocks for a
consideration less than its par or issued
value;
2. Consents to the issuance of stocks for a
consideration other than cash, valued in
excess of its fair value; or
3. Having knowledge of the insufficient
consideration, does not file a written
objection with the corporate secretary.
The director or officer shall be liable to the
corporation or its creditors, SOLIDARILY with
the stockholder concerned to the corporation
U.P. LAW BOC BUSINESS ORGANIZATIONS
and its creditors for the difference in value.
[Sec. 64]
Value received at time of Php XXX
issuance of the stock
Par or issued value (XXX)
Liability for watered stock Php XXX
Personal liability of corporate directors,
trustees or officers attaches when they consent
to the issuance of watered down stocks or
when, having knowledge of such issuance, do
not file with the corporate secretary their written
objection. [SPI Technologies Inc. V. Mapua,
G.R. No. 191154 (2014)]
(4) Liability for Dividends Unlawfully Paid
The director, trustee or officer shall be liable as
a trustee for the corporation and must account
for the profits, which would otherwise have
accrued to the corporation when:
• A director, trustee willfully attempts to
acquire, or acquires any interest
adverse to the corporation
• In respect of any matter which has been
reposed in them in confidence, and
upon which, equity imposes a disability
upon themselves to deal in their own
behalf. [Sec. 30]
The sanction can be found in Sec. 158 which
can be:
(a) A fine from P5,000 and not more than
P1,000 for each day of continuing
violation but in no case to exceed
P2,000,000;
(b) An issuance of a permanent cease-and-
desist order, suspension or revocation
of the certificate of incorporation, or
dissolution and forfeiture of corporate
assets.
(5) Liability for Assuming to Act as a
Corporation Knowing it to be Without
Authority
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All persons who assume to act as a
corporation, knowing it to be without authority
to do so, shall be liable as general partners for
all debts, liabilities and damages incurred or
arising as a result thereof.
When any such ostensible corporation is sued
on any transaction entered or on any tort
committed by it as a corporation, it shall not be
allowed to use as a defense its lack of
corporate personality.
Anyone who assumes an obligation to an
ostensible corporation cannot resist
performance thereof on the ground that there
was in fact no corporation. [Sec. 20]
Meetings
General Rule: Stockholders’ or members’
approval is expressed in a meeting duly called
and held for the purpose.
Exception: In case of amendment of AOI,
approval may be expressed by referendum or
written assent of the stockholders or members.
[Sec. 15]
Who May Attend and Vote
a. Stockholders [Sec. 23]
a. In person
b. By proxy
c. Via remote communication (only if
allowed by by-laws or by majority of
BOD/BOT, except if vested with
public interest)
d. In absentia (only if allowed by by-
laws or by majority of BOD/BOT,
except if vested with public interest)
e. Note: The SEC shall issue the rules
and regulations governing
participation and voting through
remote communication or in
absentia.
b. Stockholder-grantor [Sec. 54]
c. Secured creditor, if expressly empowered
by the stockholder-grantor [Sec. 54]
d. Executors, administrators, receivers and
other legal representatives duly appointed
by the court, without need of any written
proxy [Sec. 54]
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

e. ALL joint owners of stocks, or any of them

with the consent of ALL the co-owners,
unless there is a written proxy, signed by all
the co-owners [Sec. 55]
f. Any one of the joint owners of shares
owned in an “and/or” capacity or a proxy
thereof [Sec. 55]

Who Calls the Meeting

Any petitioning stockholder or member upon
order of the SEC when there is no person
authorized to call a meeting. The petitioning
stockholder or member shall preside until at
least a majority of the stockholders/members
present have chosen from among themselves,
a presiding officer. [Sec. 49]

Who Presides at the Meeting

General Rule: The chairman or, in his
absence, the president shall preside at all
meetings of the directors or201 trustees as well
as of the stockholders or members.

Exception: The bylaws provide otherwise.

[Sec. 53]

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Regular or Special
Regular Special
Annually on a date fixed by the by-laws.
Any time deemed necessary
When or as provided in the by-laws
If not fixed, on any date AFTER April 15 of every
[Sec. 49]
year as determined by the BOD/BOT [Sec. 49]
General Rule : Sent at least 21 days prior to the
meeting
General Rule : At least 1
Exception : A different period is required by the by- week written notice
Written
laws, law or regulation. Exception : A different period
notice
is provided in the by-laws, law
Written notice may be sent to all stockholders or or regulation [Sec. 49]
members of record through electronic mail or such
other manner as the SEC shall allow [Sec. 49]
Notice of meetings shall be sent through means of communication provided in the
by-laws and must contain :
1. Time ;
2. Place ;
3. Purpose;
4. Agenda ;
5. Proxy form which shall be submitted to the corporate secretary within a
reasonable time before the meeting ;
6. When attendance, participation and voting are allowed by remote
communication or in absentia, the requirements and procedures to be followed
when a stockholder/members elects either option ;
7. When the meeting is for election of directors/trustees, the requirements and
procedure for nomination and election [Sec. 50]
1. Minutes of the most recent regular meeting
which shall include :
a) Description of the voting and vote
tabulation procedures used in the previous
meeting ;
b) Description of opportunity given to
stockholders/members to ask questions
and a record of the questions asked and
asnwers given ; A stockholder or
c) Matters discussed and resolutions member may propose the
Agenda
reached ; items to be included in the
d) Record of the voting results for each agenda [Sec. 49].
agenda item ;
e) List of directors/trustees, officers and
stockholders/members who attended the
meeting ;
f) Other items that the SEC may require in the
interest of good corporate governance and
protection of minority stockholders

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Regular Special
2. Members’ list for non-stock corporations. For
stock corporations, material information on the
current stokcholders, and their voting rights ;

3. Detailed, descriptive, balanced and

comprehensible assessment of the corporation’s
performance, which shall include information on
any material change in the corporation’s business,
strategy and other affairs ;

4. Financial report for the preceding year, which

shall include financial statements duly signed and
certified, a statement on the adequacy of the
corporation’s internal controls or risk management
systems, and a statement of all external audit and
non-audit fees ;

5. Explanation of the dividend policy and the fact

of payment of dividends or the reasons for
nonpayment ;

6. Director/trustee profiles which shall include their

qualifications and relevant experience, length of
service in the corporation, trainings and continuing
education attended, and their board
representations in other corporations

7. Director/trustee attendance report, indicating

the attendance of each director or trustee at each
of the meetings of the board and its committees
and in regular or special meetings ;

8. Appraisals and performance reports for the

board and the criteria and procedure for
assessment ;

9. Director/trustee compensation report

10. Director disclosures on self-dealings and

related party transactions ; and/or

11. The profiles of directors nominated or seeking

election/re-election [Sec. 49]
Written notice and reason therefor shall be sent to
all stockholders/members at least 2 weeks
Postponemen
before the meeting, unless a different period is
t
required under the bylaws, law or regulation [Sec.
49]

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Regular Special
Stock Corporations
General Rule : Principal office of the corporation as set forth in the AOI

Exception : If not practicable, in the city or municipality where the principal office of
the corporation is located.

Where Note : Any city or municipality in Metro Manila, Metro Cebu, Metro Davao and other
Metropolitan areas shall be considered a city or municipality [Sec. 50].

Non-stock Corporations
Any place even outside the place where the principal office of the corporation is
located, as long as within Philippine territory and proper notice is sent to all
members. [Sec. 92]
General Rule: Stokcholders representing majority of the outstanding capital stock
or majority of the members.
Quorum
Exception: The Code or the by-laws provide otherwise. [Sec. 51]

Notice of Meetings Attendance as Waiver

Content of Notice
Notice of meetings shall be sent through the
means of communication provided in the
bylaws, which notice shall state the time, place
and purpose of the meetings.
Each notice of meeting shall be accompanied
by the following:
1. The agenda for the meeting;
2. A proxy form which shall be submitted to
the corporate secretary within a reasonable
time prior to the meeting;
3. When attendance, participation, and voting
are allowed by remote communication or in
absentia, the requirements and procedures
to be followed when a stockholder or
member elects either option; and
4. When the meeting is for the election of
directors or trustees, the requirements and
procedure for nomination and election.
[Sec. 50]
General Rule: Attendance at a meeting shall
constitute a waiver of notice of such meeting.
Exception: When the person attends a
meeting for the express purpose of objecting to
the transaction of any business because the
meeting is not lawfully called or convened.
[Sec. 49]
Postponement of Regular Meetings
General Rule: In case of postponement of
stockholders’ or members’ regular meetings,
written notice thereof and the reason therefor
shall be sent to all stockholders or members of
record at least 2 weeks prior to the date of the
meeting.
Exception: If a different period is required
under the bylaws, law or regulation. [Sec. 49]
Place and Time of Meetings
See table under i. Regular or special

Subject to Waiver Quorum

General Rule: Notice of any meeting may be
waived, expressly or impliedly, by any
stockholder or member.
Exception: General waivers of notice in the
articles of incorporation or the bylaws shall not
be allowed. [Sec. 49]
General Rule: Stockholders representing
majority of the outstanding capital stock or
majority of the members.
Exception: The Code or the by-laws provide
otherwise. [Sec. 51]

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U.P. LAW BOC BUSINESS ORGANIZATIONS
Where quorum is present at the start of a lawful
meeting, stockholders present cannot, without
justifiable cause, break the quorum by walking
out from said meeting so as to defeat the
validity of any act proposed and approved by
the majority. However, stockholders can break
the quorum for justifiable causes. [Johnston v.
Johnston (1965), CA decision]
Minutes and Agenda of Meetings
Agenda in Regular Meetings
See enumeration in the table under i. Regular
or special.
A director, trustee, stockholder, or member
may propose any other matter for inclusion in
the agenda at any regular meeting of
stockholders or members. [Sec. 49]
Agenda in Special Meetings
See enumeration in the table under i. Regular
or special.
A stockholder or member may propose the
items to be included in the agenda during a
special meeting. [Sec. 49]
Minutes of Meetings
The minutes of all meetings of stockholders or
members shall be kept and carefully preserved
at its principal office.
Such minutes shall set forth in detail, among
others:
a. The time and place of the meeting held;
b. How it was authorized;
c. The notice given;
d. The agenda therefor;
e. Whether the meeting was regular or
special, its object if special;
f. Those present and absent; and
g. Every act done or ordered done at the
meeting.
Upon the demand of a director, trustee,
stockholder or member, the following must be
noted in the minutes:
1. The time when any director, trustee,
stockholder or member entered or left the
meeting;
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COMMERCIAL LAW
2. The yeas and nays on any motion or
proposition;
3. The protest of a director, trustee,
stockholder or member on any action or
proposed action. [Sec. 73]
9. Board of Directors and
Trustees
Repository of Corporate Powers
Doctrine of Centralized Management
BOARD IS SEAT OF CORPORATE POWERS
General Rule: 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]
Governing Body of the Corporation
It is well established in corporation law that the
corporation can act only through its board of
directors in the case of stock corporations, or
board of trustees in the case of non-stock
corporations. [de Leon]
Exceptions:
1. In case of an Executive Committee duly
authorized in the by-laws; [Sec. 34]
Exception to Exception: The following
may not be delegated to the executive
committee:
(1) Approval of any action for which
shareholders' approval is also
required;
(2) The filing of vacancies in the board;
(3) The amendment or repeal of by-laws or
the adoption of new by-laws;
(4) The amendment or repeal of any
resolution of the board which by its
express terms is not so amendable or
repealable; and
(5) A distribution of cash dividends to the
shareholders. [Sec. 34]
2. In case of a contracted manager which
may be an individual, a partnership, or
another corporation
U.P. LAW BOC BUSINESS ORGANIZATIONS
Note: In case the contracted manager is
another corporation, the special rule in
Sec. 43 applies.
3. In case of close corporations, the
stockholders may manage the business
of the corporation rather than by a BOD,
if the Articles of Incorporation so
provide [Sec. 96]
The power to purchase real property is vested
in the BOD or trustees. While a corporation
may appoint agents to negotiate for the
purchase of real property needed by the
corporation, the final say will have to be with
the board, whose approval will finalize the
transaction. [Spouses Constantine Firme v.
Bukal Enterprises and Development
Corporation, G.R. No. 146608 (2003)]
Indisputably, one of the rights of a stockholder
is the right to participate in the control or
management of the corporation. This is
exercised through his vote in the election of
directors because it is the BOD that controls or
manages the corporation. [Gamboa v. Teves,
G.R. No. 176579 (2011)]
Limitations on powers of BOD/BOT
(1) Limitations imposed by the Constitution,
statutes, articles of incorporation or by-
laws;
(2) Certain acts of the corporation that require
joint action of the stockholders and BOD:
a. Removal of director [Sec. 27]
b. Amendments of Articles of
Incorporation [Sec. 15]
c. Fundamental changes [Sec. 37]
d. Declaration of stock dividends [Sec.
42]
e. Entering into management contracts
[Sec. 43]
f. Fixing of consideration of no-par
shares [Sec. 61]
g. Fixing of compensation of directors
[Sec. 29]
(3) Cannot exercise powers not possessed by
the corporation.
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Principle on Delegation of Board Power
Under Sec. 23 (now Sec. 22, RCC), the power
and the responsibility to decide whether the
corporation should enter into a contract that will
bind the corporation is lodged in the board,
subject to the articles of incorporation, by-laws,
or relevant provisions of law.
However, just as a natural person may
authorize another to do certain acts for and on
his behalf, the BOD may validly delegate some
of its functions and powers to officers,
committees or agents. The authority of such
individuals to bind the corporation is generally
derived from law, corporate by-laws or
authorization from the board, either expressly
or impliedly by habit, custom or acquiescence
in the general course of business. [People’s
Aircargo v. CA, G.R. No. 117847 (1998)]
Corporate powers may be directly conferred
upon corporate officers or agents by statute,
the articles of incorporation, the by-laws, or by
resolution or other act of the board of directors.
[Citibank, N.A. vs. Chua, 220 SCRA 75 (1993)]
Tenure, Qualifications, and
Disqualifications of Directors or
Trustees
Tenure
Directors – Term of 1 year from among the
holders of stocks registered in the corporation’s
books. [Sec. 22]
Trustees – Term not exceeding 3 years from
among the members of the corporation. [Sec.
22]
Holdover Principle
Upon failure of a quorum at any meeting of the
stockholders or members called for an election,
the directorate naturally holds over and
continues to function until another directorate
is chosen and qualified.
Each director and trustee shall hold office until
the successor is elected and qualified. [Sec.
22]
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

The failure to elect does not terminate the Qualifications

terms of incumbent officers nor dissolve the
corporation. a. Director: Must own at least one (1) share of
stock.
Term v. Tenure
Term Tenure Trustee: Must be a member of the
corporation.
Time during which A director who ceases to own at least
the officer may claim The period within one (1) share of stock or a trustee who
to hold the office as of which the director ceases to be a member of the
right, and fixes the actually holds office, corporation shall cease to be such.
interval after which including the [Sec. 22]
the several holdover period after In order to be eligible as a director,
incumbents shall the end of his term what is material is the legal title to, not
succeed one another. beneficial ownership of, the stock as
appearing on the books of the
Not affected by the corporation. [Lee v. CA, G.R. No.
Includes holdover
holdover 93695 (1992)]
Fixed by statute, and
it does not change b. Must be a natural person, of legal age,
simply because the possess full legal capacity
office may have May be shorter or c. Must not be convicted by final judgment of
become vacant, nor longer (in case of a an offense punishable by imprisonment for
because the holdover) than the a period exceeding 6 years [Sec. 26]
incumbent holds over term for reasons d. Other qualifications as may be prescribed
in office beyond the within or beyond the in the by-laws of the corporation. [Sec. 46]
end of the term due to power of the While additional qualifications may be
the fact that a incumbent prescribed, this cannot be in conflict
successor has not with the requirements as set by the
been elected and has RCC.
failed to qualify.
Note: The RCC removed the requirement that
[Valle Verde Country Club v. Africa, G.R. No. majority of the directors or trustees must be
151969 (2009)] residents of the Philippines.

Permanent representation not allowed in Disqualifications

BOD
The board of directors of corporations must be
elected from among the stockholders or
members directors every year. Estoppel does
not set in to legitimize what is wrongful. (Grace
Christian High School v. CA, G.R. No. 108905,
October 23, 1997)
A person shall be disqualified from being a
director, trustee, or officer of any corporation if,
within five (5) years prior to the election or
appointment as such, the person was:
(a) Convicted by final judgment:
(1) Of an offense punishable by
imprisonment for a period exceeding
six (6) years;
(2) For violating this Code; and
(3) For violating Republic Act No. 8799,
otherwise known as “The Securities
Regulation Code”;
(b) Found administratively liable for any
offense involving fraud acts; and

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U.P. LAW BOC BUSINESS ORGANIZATIONS
(c) By a foreign court or equivalent foreign
regulatory authority for acts, violations or
misconduct similar to those enumerated in
paragraphs (a) and (b) above. [Sec. 26]
Note: The foregoing is without prejudice to
qualifications or other disqualifications, which
the Commission, the primary regulatory
agency, or the Philippine Competition
Commission may impose in its promotion of
good corporate governance or as a sanction in
its administrative proceedings.
An amendment to the corporation’s by-laws
which renders a stockholder ineligible to be a
director, if he be also a director in a corporation
whose business is in competition with that of
the other corporation, has been sustained as
valid. This is based upon the principle that
where the director is so employed in the service
of a rival company, he cannot serve both, but
must betray one or the other. Such an
amendment "advances the benefit of the
corporation and is good." [Gokongwei, Jr. v.
SEC, G.R. No. L-45911 (1979)]
Note: See Sec. 160
Requirement of Independent
Directors
Independent Directors
An independent director is a person who, apart
from shareholdings and fees received from the
corporation, is independent of management
and free from any business or other
relationship which could, or could reasonably
be perceived to materially interfere with the
exercise of independent judgment in carrying
out the responsibilities as a director. [Sec. 22]
Requirement for Independent Directors
Corporations vested with public interest are
now required to have independent directors
constituting at least twenty percent (20%) of
the board. [Sec. 22] This is in order to promote
good governance.
These corporations include:
(1) Corporations covered by the Securities
Regulation Code, namely:
i. ose whose securities are
registered with the
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COMMERCIAL LAW
Commission;
ii. Corporations listed with an exchange
or with assets of at least Fifty million
pesos (P50,000,000.00); and
iii. Having two hundred (200) or more
holders of shares, each holding at
least one hundred (100) shares of a
class of its equity shares;
(2) Banks and quasi-banks, NSSLAs,
pawnshops, corporations engaged in
money service business, pre-need, trust
and insurance companies, and other
financial intermediaries;
(3) Other corporations engaged in business
vested with public interest similar to the
above, as may be determined by the
Commission. [Sec. 22]
Manner of Election
Independent directors must be elected by the
shareholders present or entitled to vote in
absentia during the election of directors. [Sec.
22]
Independent directors shall be subject to rules
and regulations governing their:
Qualifications, disqualifications, voting
requirements, duration of term and
term limit, maximum number of board
memberships; and
Other requirements that the
Commission will prescribe to
strengthen their independence and
align with international best practices.
[Sec. 22]
Elections [Sec. 23]
Number of Directors and Trustees
Directors: Not more than fifteen (15)
Trustees: May be more than fifteen (15) [Sec.
13 and 91]
The RCC removed the minimum number of
directors which stood at five (5) under the old
code. [Sec. 14, Old Corporation Code]
U.P. LAW BOC BUSINESS ORGANIZATIONS
Election of Directors or Trustees
See h. Election of Directors or Trustees
under 6. Incorporation and Organization
Cumulative Voting
Methods of Voting
(1) Straight voting
(2) Cumulative voting for one candidate
(3) Cumulative voting by distribution
Rules Governing all Methods of Voting
a. The total number of votes cast shall not
exceed the number of shares owned by the
stockholders as shown in the books of the
corporation multiplied by the whole number
of directors to be elected
b. No delinquent stock shall be voted. [Sec.
23]
Straight Voting
Every stockholder may vote such number of
shares for as many persons as there are
directors to be elected. [Sec. 23]
Cumulative Voting
Cumulative Voting For One Candidate
A stockholder is allowed to concentrate his
votes and give one candidate as many votes
as the number of directors to be elected
multiplied by the number of his shares shall
equal. [Sec. 23]
Illustration:
If there are 5 directors to be elected and Pedro,
as shareholder, has 100 shares, Pedro can
give 500 (5 x 100 shares) votes to just one
candidate.
Cumulative Voting By Distribution
A stockholder may cumulate his shares by
multiplying the number of his shares by the
number of directors to be elected and distribute
the same among as many candidates as he
shall see fit. [Sec. 23]
Illustration:
In the illustration above, Pedro instead may
choose to give 100 votes to candidate 1, 100
votes to candidate 2, 100 votes to candidate 3,
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COMMERCIAL LAW
150 votes to candidate 4, and 50 votes to
candidate 5.
Quorum
At all elections of directors or trustees, there
must be present, either in person or through a
representative authorized to act by written
proxy:
(1) Stock Corporations: The owners of
majority of the outstanding capital stock
(2) Non-Stock Corporations: A majority of the
members entitled to vote. [Sec. 23]
It is necessary that there be a quorum. An
election without quorum is invalid.
If the owners of majority of the outstanding
capital stock or majority of the members
entitled to vote are not present in person, by
proxy, or through remote communication, or
not voting in absentia at the meeting, such
meeting may be adjourned. [Sec. 23]
See subheading “When No Election is Held”
under h. Election of Directors or Trustees
under 6. Incorporation and Organization
Election Contests
All matters affecting the manner and conduct of
the election of directors are properly
cognizable by the regular courts. Otherwise,
these matters may be brought before the SEC
for resolution based on the regulatory powers it
exercises over corporations, partnerships, and
associations. [SEC v. CA, 739 SCRA 99
(2014)]
Removal
General Rule: Any Director or Trustee of a
corporation may be removed from office, with
or without cause. [Sec. 27]
Exception: If the director was elected by the
minority, there must be cause for removal
because the minority may not be deprived of
the right to representation to which they may be
entitled to under Sec. 23 of the Code. [Sec. 27]
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Note: The right to representation refers to the (3) Grounds other than the above, but the
right to cumulative voting for one candidate. remaining directors can constitute a
quorum.
Requisites for Removal: (4) Grounds other than the above, but the
1) It must take place either at a regular remaining directors cannot constitute a
meeting or special meeting of the quorum for the purpose of filling the
stockholders or members called for the vacancy;
purpose; (5) By reason of an increase in the number of
2) A special meeting for the purpose of directors or trustees.
removing directors or trustees must be
called by: Cause of Procedure
a. The secretary, on order of the Vacancy
president; or
b. The secretary, upon written The election by stockholders
demand of the stockholders shall be held no later than the
Expiration
representing or holding at least a day of such expiration at a
of term
MAJORITY of the capital stock or a meeting called for that
MAJORITY of the members purpose.
entitled to vote;
3) There must be previous notice to the The election may be held on
stockholders or members of the intention to the same day of the meeting
remove a director; and authorizing the removal and
Removal this fact must be so stated in
4) There must be a vote of the stockholders
representing 2/3 of outstanding capital the agenda and notice of said
stock or in case of a nonstock corporation, meeting.
2/3 of members entitled to vote.
Other The election must be held no
New Power of the SEC under the Revised grounds, later than forty-five (45) days
Corporation Code [Sec. 27] but the from the time the vacancy
The Commission shall, motu proprio or upon remaining arose.
verified complaint, and after due notice and directors
hearing, order the removal of a director or can
trustee elected despite the disqualification, or constitute
whose disqualification arose or is discovered a quorum
subsequent to an election.
a. The vacancy must be filled
The removal of a disqualified director shall be by the stockholders or
Other
without prejudice to other sanctions that the members in a regular or special
grounds,
Commission may impose on the board of meeting for that purpose; or
but the
directors or trustees who, with knowledge of b. In case of the necessity of
remaining
the disqualification, failed to remove such emergency action, the vacancy
directors
director or trustee. [Sec. 27] may be temporarily filled from
CANNOT
among the officers of the
constitute
corporation by unanimous
Filling of Vacancies [Sec. 28] a quorum:
vote of the remaining directors
or trustees.
Ways which the filling of a vacancy may
occur: By reason Shall be filled only by an
(1) Expiration of term; of an election at a regular or at a
(2) Removal; increase in special meeting of
the stockholders duly called for the

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U.P. LAW BOC BUSINESS ORGANIZATIONS
Cause of Procedure
Vacancy
number of purpose, or in the same
directors meeting authorizing the
or trustees increase of directors or
trustees if so stated in the
notice of the meeting.
Note: In all elections to fill vacancies under this
section, the procedure set forth in Sections 23
and 25 of the Revised Corporation Code shall
apply. [Sec. 28]
Designation of director or trustee
A vacancy may be temporarily filled from
among the officers of the corporation by
unanimous vote of the remaining directors or
trustees when:
(1) The vacancy prevents the remaining
directors from constituting a quorum; and
(2) Emergency action is required to prevent
grave, substantial, and irreparable loss or
damage to the corporation.
The action by the designated director or
trustee shall be limited to the emergency
action necessary. [Sec. 28]
Term of designated director or trustee
The term of the designated director or trustee
shall cease:
(1) Within a reasonable time from the
termination of the emergency; or
(2) Upon election of the replacement director
or trustee, whichever comes earlier. [Sec.
28]
Compensation
General Rule: Directors or trustees are only
entitled to reasonable per diems. They are not
entitled to compensation as directors or
trustees. [Sec. 29]
Exceptions:
a. When Articles of Incorporation, by-laws, or
an advance contract provides for
compensation.
b. Compensation other than per diems may
also be granted to directors by the vote of
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the stockholders representing at least a
majority of the Outstanding Capital Stock
or a majority of the members at a regular or
special stockholders’ meeting.
Note: The total yearly compensation of
directors shall not exceed 10% of the net
income before income tax of the corporation
during the preceding year. [Sec. 29]
Added in the RCC
The directors or trustees shall NOT
participate in the determination of their own
per diems or compensation.
Corporations vested with public interest
shall submit to their shareholders and the
Commission, an annual report of the total
compensation of each of their directors or
trustees.
Compensation of Directors as Corporate
Officers
The position of being Chairman and Vice-
Chairman, like that of treasurer and secretary,
are not considered directorship positions, but
officership positions that would entitle the
occupants to compensation.
Likewise, the limitation placed under Sec. 30
(now Sec. 29, RCC) of the Corporation Code
that directors cannot receive compensation
exceeding 10% of the net income of the
corporation would not apply to the
compensation given to such positions since it
is being given in their capacity as officers of the
corporation and not as board members.
[Western Institute of Technology v. Salas, G.R.
No. 113032 (1997)]
Disloyalty
Duties of Directors and Trustees
THREE-FOLD DUTY
In this jurisdiction, the members of the BOD
have a three-fold duty: duty of obedience,
duty of diligence, and duty of loyalty.
1) Duty of Obedience - shall direct the affairs
of the corporation only in accordance with
the purposes for which it was organized;
U.P. LAW BOC BUSINESS ORGANIZATIONS
2) Duty of Diligence - shall not willfully and
knowingly vote for or assent to patently
unlawful acts of the corporation or act in
bad faith or with gross negligence in
directing the affairs of the corporation; and
3) Duty of Loyalty - shall not acquire any
personal or pecuniary interest in conflict
with their duty as such directors or trustees.
[Strategic Alliance Development Corp v.
Radstock Securities Ltd., G.R. No. 178158
(2009)]
Duty of Obedience
The Directors or Trustees and Officers should
direct the affairs of the corporations only in
accordance with the purposes for which it was
organized.
Duty of Diligence
The directors should not willfully and knowingly
vote for or assent to patently unlawful acts of
the corporation or act in bad faith or with gross
negligence in directing the affairs of the
corporation. [Sec. 30]
Note: The conditions for the application of Sec.
31 (now Sec. 30, RCC) of the Corporation
Code require factual foundations to be first laid
out in appropriate judicial proceedings. Hence,
concluding that a person breached fiduciary
duties as an officer and member of the BOD of
a corporation without competent evidence
thereon would be unwarranted and
unreasonable. [Republic of the Philippines v.
Sandiganbayan (First Division) et al., G.R. No.
166859 (2011)]
Duty of Loyalty
General Rule: Where a director, by virtue of
such office, acquires a business opportunity
which should belong to the corporation,
thereby obtaining profits to the prejudice of
such corporation, the director must account for
and refund to the latter all such profits.
Exception: Unless the act has been ratified
by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the
outstanding capital stock. [Sec. 33]
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COMMERCIAL LAW
DOCTRINE OF CORPORATE
OPPORTUNITY
Unless his act is ratified, a director shall refund
to the corporation all the profits he realizes on
a business opportunity which:
a. 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. One in which the corporation has an
interest or a reasonable expectancy.
The rule shall be applied notwithstanding the
fact that the director risked his own funds in the
venture. [Sec. 33]
By embracing the opportunity, the self-interest
of the officer or director will be brought into
conflict with that of his corporation. Hence, the
law does not permit him to seize the
opportunity even if he will use his own funds in
the venture. [Sundiang & Aquino]
A director, trustee, or officer shall be liable as a
trustee for the corporation and must account
for the profits which otherwise would have
accrued to the corporation if:
(1) He attempts to acquire, or acquire any
interest adverse to the corporation in
respect of any matter which has been
reposed in them in confidence; and
(2) Upon which, equity imposes a disability
upon themselves to deal in their own
behalf. [Sec. 30]
Note: Differences between Sec. 30 and Sec.
33:
a) First, while both involve the same subject
matter (business opportunity) they concern
different personalities; Sec. 33 is
applicable only to directors and not to
officers, whereas Sec. 30 applies to
directors, trustees and officers.
b) Second, Sec. 33 allows a ratification of a
transaction by a self-dealing director by
vote of stockholders representing at least
2/3 of the outstanding capital stock.
[Villanueva]
U.P. LAW BOC BUSINESS ORGANIZATIONS
Business Judgment Rule
General Rule: Questions of policy or
management are left solely to the honest
decision of officers and directors of a
corporation and the courts are without authority
to substitute their judgment for the judgment of
the board of directors.
The board is the business manager of the
corporation and so long as it acts in good faith,
its orders are not reviewable by the courts or
the SEC. [Montelibano v. Bacolod-Murica
Milling Co., G.R. No. L-15092 (1962); Phil.
Stock Exchange, Inc. v. CA, G.R. No. 125469,
(1997)]
Exceptions:
a. If the contracts are so unconscionable and
oppressive as to amount to a wanton
destruction of the rights of the minority
[Ingersoll v. Malabon Sugar, G.R. No. L-
27770 (1927)];
b. If they violate their duties under Sec. 30
(director willfully and knowingly assents to
patently unlawful acts of the corporation, or
are guilty of gross negligence or bad faith);
and
c. If they violate Sec. 33 (disloyalty of a
director who acquires for himself a
business opportunity that should have
belonged to the corporation, unless his act
is ratified by a 2/3 vote of stockholders).
CONSEQUENCES OF THE BUSINESS
JUDGMENT RULE
The resolution, contracts and transactions
of the board cannot be reversed or set
aside by the Courts even on the behest of
stockholders or members, under the
principle that the business of the
corporation has been left to the hands of
the board.
Directors and duly authorized officers
cannot be held personally liable for acts
or contracts done with the exercise of their
business judgment.
Page 213 of 450
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REQUIREMENTS FOR THE BUSINESS
JUDGMENT RULE TO APPLY
a. Presence of a business decision including
decisions on policy management and
administration;
b. The decision must be intra vires and must
comply with the procedural and substantive
requirements of law;
c. Good faith;
d. Due care in making the decision;
e. The director must not have personal
interest or nor self-dealing or otherwise on
breach of the duty of loyalty. [Villanueva]
REMEDIES IN CASE OF MISMANAGEMENT
(1) Removal of directors pursuant to Sec. 27
(2) Derivative suit or complaint filed with the
RTC [Sec. 5.2, R.A. 8799, Securities
Regulation Code; A.M. No. 01-2-04 SC,
Interim Rules of Procedure Governing
Intracorporate Controversies]
(3) Receivership
(4) Injunction if the act has not yet been done
(5) Dissolution if abuse amounts to a ground for
quo warranto but Solicitor General refuses
to act
Note: Dean Villanueva opined that a derivative
suit may be an exception to the Business
Judgment Rule –
This occurs when it is apparent that the
Board is not in a position to validly exercise
its business judgment for the protection of
the corporation
e.g., when the Board itself has committed
an act causing damage to the corporation
or when the Board is placed in a conflict of
interest scenario, whereby it is unlikely that
it would use such business discretion to file
such suit for the best interest of the
corporation.
Solidary Liabilities for Damages
Solidary Liability For Damages
a. The directors and trustees are solidarily
liable for damages arising from the ff.:
b. Willfully and knowingly voting for and
assenting to patently unlawful acts of the
corporation; [Sec. 30]
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

c. Gross negligence or bad faith in directing because they are in-charge of day-to-day
the affairs of the corporation; [Sec. 30] activities. [Campos]
d. Acquiring any personal or pecuniary The provisions on seizing corporate
interest in conflict of duty; [Sec. 30] opportunity and disloyalty [Secs. 30 and
e. Consenting to the issuance of watered 33] shall also apply to corporate officers.
stocks, or, having knowledge thereof, [Price v. Innodata Phils., Inc., G.R. No.
failing to file objections with secretary; 178505 (2008)]
[Sec. 64]
f. Agreeing or stipulating in a contract to hold Doctrine of Limited Doctrine of
himself liable with the corporation; or Liability Immunity
g. By virtue of a specific provision of law.
Protects a person
Shields the
LIABILITY FOR WATERED STOCKS acting for and in
incorporators from
Watered Stocks – stocks issued for a behalf of the
corporate liability
consideration less than its par or issued value corporation from
beyond their agreed
or for a consideration in any form other than being himself
contribution to the
cash, valued in excess of its fair value. personally liable for
capital or shareholding
his authorized
Any director or officer of a corporation shall be in the corporation
actions
solidarily liable with the stockholder
concerned to the corporation and its creditors
Strains in Labor Law
for the difference in value for:
The Supreme Court appears to have different
(1) Consenting to the issuance of watered
views regarding the personal liability of officers
stocks or;
when it comes to labor law violations:
(2) Failing express his objection in writing and
● Absent proof that the manager exceeded
file the same with the corporate secretary
his authority in dealing as regards the
despite having knowledge thereof of such
employee, he cannot be held personally
issuance [Sec. 64].
liable for the said employee’s monetary
compensation. (Nicario v. NLRC, GR No.
Personal Liabilities 125340 [1998])
● Officers can be held personally liable for
General rule: Members of the Board, who 13th month pay of employees after the
purport to act in good faith for and on behalf of corporation has ceased to exist. This is
the corporation within the lawful scope of their because the officers are deemed to have
authority, are not liable for the consequences acted on behalf of the corporation.
of their acts. When the acts are of such nature (Restaurante Las Conchas v. Llego, 372
and done under those circumstances, they are Phil 697 [1999])
attributed to the corporation alone and no
personal liability is incurred. [Price v.
Responsibility for Crimes
Innodata Phils., Inc., G.R. No. 178505 (2008)].
Since a corporation is a person by mere legal
Exception: When sufficient proof exists on
fiction, it cannot be proceeded against
record that the officers acted fraudulently,
criminally because it cannot commit a crime in
beyond his authority or when the officer agrees
which personal violence or malicious intent is
to be personally liable on behalf of the
required.
corporation.
Note: However, violations of the Code, if it is
Note:
committed by a corporation, the same may,
Members of the BOD who are also officers after notice and hearing, be dissolved in
are held to a more stringent liability

Page 214 of 450

U.P. LAW BOC BUSINESS ORGANIZATIONS
appropriate proceedings before the
Commission. [Sec. 170]
If the offender is a corporation, the penalty
may, at the discretion of the court, be imposed
upon:
(1) Such corporation and/or upon its directors,
trustees, stockholders, members, officers,
or employees responsible for the violation
or indispensable to its commission; or
(2) Anyone who shall aid, abet, counsel,
command, induce, or procure any
violation of this Code, or any rule,
regulation, or order of the Commission.
[Sec. 171-172]
Criminal Liability of Corporate Agents
Criminal action is limited to the corporate
agents guilty of an act amounting to a crime
and never against the corporation itself.
Since the BOD is the repository of corporate
powers and acts as the agent of the
corporation, the directors may be held
criminally liable. [Time Inc. v. Reyes, G.R.
No. L-28882 (1971)]
Corporations, partnerships, associations and
other juridical entities cannot be put to jail.
Hence, the criminal liability falls on the human
agent responsible for the violation of the Trust
Receipts Law. [Ong v. CA, G.R. No. 119858
(2003); see also Sec. 13, P.D. 115]
Special Fact Doctrine
General Rule:
Majority view: Directors only owe their duty to
the corporation. They owe no fiduciary duty to
stockholders, but they may deal with each
other at fair and reasonable terms, as if they
were unrelated. No duty to disclose facts
known to the director or officer. [Taylor v.
Wright, 53 N.Y.S. 423 (1945)]
Note: Minority View (Realistic View)
recognizes the directors’ obligation to the
stockholders individually as well as collectively,
and refuses to permit him to profit at the latter’s
expense by the use of information obtained as
a result of official position and duties.
Page 215 of 450
COMMERCIAL LAW
Exception:
Special Facts Doctrine
Conceding the absence of a fiduciary
relationship in the ordinary case, where special
circumstances or facts are present which make
it inequitable for the director to withhold
information from the stockholder –
Courts nevertheless hold that the duty
to disclose arises and concealment is
fraud
Examples:
o Concealment of the defendant-
purchaser's identity (the corporate
officer had used an agent go-
between to avoid detection of his
actions by the seller here)
o Failure to disclose significant facts
that materially affected the price of
the stock. [Strong v. Repide, 213
U.S. 419 (1909)]
Inside Information
The fiduciary position of insiders, directors, and
officers prohibits them from using confidential
information relating to the business of the
corporation to benefit themselves or any
competitor corporation in which they may have
a mere substantial interest.
Since loss and prejudice to the corporation is
not a requirement for liability, the corporation
has a cause of action as long as there is unfair
use of inside information.
It is inside information if it is not generally
available to others and is acquired because of
the close relationship of the director or officer
to the corporation.
An INSIDER means:
(a) The issuer;
(b) A director or officer (or any person
performing similar functions) of, or a
person controlling the issuer; gives or gave
him access to material information about
the issuer or the security that is not
generally available to the public;
(c) A government employee, director, or officer
of an exchange, clearing agency and/or
self-regulatory organization who has
U.P. LAW BOC BUSINESS ORGANIZATIONS
access to material information about an
issuer or a security that is not generally
available to the public; or
(d) A person who learns such information by a
communication from any foregoing
insiders. [Sec. 3.8, Securities Regulation
Code]
Contracts
By Self-Dealing Directors with the
Corporation
General Rule: A contract of the corporation
with (1) one or more of its directors, trustees,
officers or their spouses and relatives within
the fourth civil degree of consanguinity or
affinity is voidable, at the option of such
corporation. [Sec. 31]
Exception:
Such contract is VALID if all of the following
conditions are present:
. 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;
a. The vote of such director or trustee was not
necessary for the approval of the contract;
b. The contract is fair and reasonable under
the circumstances; and
c. In case of corporations vested with public
interest: Material contracts are approved
by at least two-thirds (2/3) of the entire
membership of the board, with at least a
majority of the independent directors voting
to approve the material contract; and
d. In case of an officer: The contract has been
previously authorized by the BOD. [Sec.
31]
Ratification
In case of absence of the first three* conditions
above, contract may be ratified if:
a. 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;
b. There is full disclosure of the adverse
interest of the directors or trustees involved
is made at such meeting; AND
Page 216 of 450
COMMERCIAL LAW
c. The contract is fair and reasonable under
the circumstances. [Sec. 31]
*Amended from two to three in the Revised
Corporation Code.
Between Corporations with
Interlocking Directors
General Rule: A contract between two or more
corporations having interlocking directors shall
NOT be invalidated on that ground alone. [Sec.
32]
Exception: If contract is fraudulent or not fair
and reasonable under the circumstances, such
contract is invalid. [Sec. 32]
Interlocking, characterized
Interlocking directors are persons who serve as
member of the board of directors of two or more
competing corporations or corporations
engaged in practically the same kind of
business.
Interlocking director with nominal and
substantial interest
Nominal Interest – His stockholdings are 20%
or less of the OCS
Substantial Interest – His stockholdings
exceed 20% of the OCS
If the interest of the interlocking director in one
of the corporations is substantial, while nominal
in the other, the contract shall be VALID, if the
following conditions are met, insofar as the
latter corporation is concerned:
1. 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;
2. That the vote of such director or trustee
was not necessary for the approval of the
contract; and
3. That the contract is fair and reasonable
under the circumstances.
Where (a) and (b) are absent, the contract can
be ratified by the vote of the stockholders
representing at least 2/3 of the outstanding
capital stock or at least 2/3 of the members in
U.P. LAW BOC BUSINESS ORGANIZATIONS
a meeting called for the purpose voted to ratify
the contract, provided that:
1. Full disclosure of the adverse interest of the
directors/trustees involved is made on such
meeting;
2. The contract is fair and reasonable under
the circumstances. [Sec. 31-32]
Executive Committee and Other
Special Committees [Sec. 34]
Creation
Executive Committee
The by-laws may provide for the creation an
executive committee, composed of not less
than 3 members of the board, to be appointed
by the Board. [Sec. 34]
Said committee may act, by majority vote of all
its members, on such specific matters within
the competence of the board, as may be
delegated to it in the by-laws or on a majority
vote of the board. [Sec. 34]
Special Committees
The board of directors may create special
committees of temporary or permanent nature
and to determine the members’ term,
composition, compensation, powers, and
responsibilities.
Limitations on Its Power
The following CANNOT be delegated to the
Executive Committee:
a. Matters needing stockholder approval
[Sec. 34];
b. Filling up of board vacancies [Sec. 34];
c. Amendment, repeal or adoption of new by-
laws [Sec. 34];
d. Amendment or repeal of any resolution of
the Board which by its express terms is not
amendable or repealable [Sec. 34];
e. Cash dividend distribution [Sec. 34]; and
f. Acts which would render the BOD
powerless and free from all responsibilities
imposed on it by law. [Campos]
Page 217 of 450
COMMERCIAL LAW
Where by-laws are silent as to creation of
executive committee
Under Sec. 34 of the RCC, the creation of an
executive committee must be provided for in
the bylaws of the corporation.
Unfortunately, the by-laws of the corporation in
this case are silent as to the creation by its
BOD of an executive committee.
Notwithstanding the silence of the by-laws on
the matter, the SC did not rule that the BOD’s
creation of the executive committee is illegal or
unlawful.
No showing that the "executive
committee," referred to in Sec. 35 (now
34) of the Corporation Code, which is as
powerful as the BOD, and in effect acting
for the board itself, should be
distinguished from other committees
which are within the competency of the
board to create at any time and whose
actions require ratification and
confirmation by the board.
The BOD has the power to create
positions not provided for in the by-laws
since the board is the corporation’s
governing body. [Filipinas Port Services
Inc. v. Go, G.R. No. 161886 (2007)]
Meetings
Regular or Special
Kinds of Meetings
Meetings of directors, trustees, stockholders,
or members may be regular or special. [Sec.
48]
(a) When and Where
When [Sec. 52]
Regular meetings of directors or trustees
shall be held monthly, unless the by-laws
provide otherwise.
Special meetings of the BOD or trustees
may be held at any time upon the call of the
president or as provided in the by-laws.
Where [Sec. 53]
Meetings of directors or trustees of
corporations may be held anywhere in or
U.P. LAW BOC BUSINESS ORGANIZATIONS
outside of the Philippines, unless the by-laws
provide otherwise.
(b) Notice
Notice of regular or special meetings stating
the date, time and place of the meeting must
be sent to every director or trustee at least two
(2) days* prior to the scheduled meeting,
unless a longer time is provided by the by-laws.
Note: This was previously just one day, under
the old corporation code.
A director or trustee may waive this
requirement, either expressly or impliedly.
[Sec. 52]
(c) Attendance in Meetings
In the old corporation code, directors or
trustees cannot be represented or voted by
proxies at board meetings. [Sec. 25, CC]
Allowable Alternative Modes of Attendance
Directors or trustees who cannot physically
attend or vote at board meetings can
participate and vote through:
(1) Remote communication such as
videoconferencing, teleconferencing; or
(2) Other alternative modes of communication
that allow them reasonable opportunities to
participate. [Sec. 52]
If a director or trustee intends to participate in
a meeting through remote communication,
he/she shall notify in advance the Presiding
Officer and the Corporate Secretary of his/her
intention. The Corporate Secretary shall note
such fact in the Minutes of the meeting.
Corporations may issue their own internal
procedures for the conduct of board meetings
through remote communication or other
alternative modes of communication to
address administrative, technical and logistical
issues. [SEC Memo. Circ. No. 6, s. 2020]
Attendance and Voting by Proxy
Directors or trustees cannot attend or vote by
proxy at board meetings. [Sec. 52]
Page 218 of 450
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In the Philippines, teleconferencing and
videoconferencing of members of BOD of
private corporations is a reality, in light of
Republic Act No. 8792. The Securities and
Exchange Commission issued SEC
Memorandum Circular No. 15, series of 2001,
on November 30, 2001, providing the
guidelines to be complied with in relation to
such conferences. [Expertravel and Tours, Inc.
v. CA, G.R. No. 152392 (2005)]
Mandatory Recusal
A director or trustee who has a potential
interest in any related party transaction must
recuse from voting on the approval of the
related party transaction without prejudice to
compliance with the requirements of Section
31 of this Code. [Sec. 52]
Who Presides
The chairman, or in his absence, the president
shall preside at all meetings of the directors or
trustees as well as of the stockholders or
members, unless the bylaws provide
otherwise. [Sec. 53]
Quorum
Quorum to Transact Corporate Business
General Rule: Majority of the directors or
trustees. as stated in the articles of
incorporation, shall constitute a quorum to
transact corporate business. [Sec. 52]
Exception: Unless the articles of incorporation
or the by-laws provide for a GREATER
majority.
Decisions Reached by Majority of Quorum
General Rule: Every decision reached by at
least a majority of the directors or trustees
constituting a quorum shall be valid as a
corporate act.
Exception: A vote of a majority of all the
members of the board is required in case of
election of officers. [Sec. 52]
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

In Case of Death of Board Members

Philippines, unless otherwise
In stock corporations: Shareholders may
provided by by-laws
generally transfer their shares. Thus, on the
death of a shareholder, the executor or Notice ● Date, time, and place of
administrator duly appointed by the Court is the meeting must be
vested with the legal title to the stock and sent to every member
entitled to vote it. Until a settlement and at least two (2) days
division of the estate is effected, the stocks of prior to the scheduled
the decedent are held by the administrator or meeting, unless a
executor. longer time is provided
in the by-laws
In non-stock corporations: Membership in and ● This requirement may
all rights arising from a non-stock corporation be waived
are personal and non-transferable, unless the
articles of incorporation or the bylaws of the Attendance ● Proxy not allowed
corporation provide otherwise. In other words, ● Voting through remote
the determination of whether or not “dead communication is
members” are entitled to exercise their voting allowed
rights (through their executor or administrator), (videoconferencing,
depends on the Articles of Incorporation or by- teleconferencing, etc.)
laws. [Tan v. Sycip, G.R. No. 153468 (2006)]
Who ● The chairman
Rule on Abstention Presides ● In his absence, the
president
No inference can be drawn in a vote of
abstention. When a director or trustee Quorum GR: Majority of the directors or
abstains, it cannot be said that he intended to trustees, as stated in the AOI
acquiesce in the action taken by those who
voted affirmatively. Neither, for that matter, can EX: Unless the AOI or the by-
such inference be drawn from the abstention laws provide for a GREATER
that he was abstaining because he was not majority.
then ready to make a decision. [Lopez v. Ercita,
G.R. No. L-32991 (1972)]
10. Capital Affairs
SUMMARY OF MEETINGS
Certificate of stock
Regular Special
Meeting Meeting
Nature of the certificate
Description Meetings that Meetings that
are fixed by law are called for Shares of stock so issued are personal
or as provided a special property and may be transferred by delivery of
by the by-laws purpose the certificate or certificates indorsed by the
owner, his attorney-in-fact, or any other person
Date and Held monthly, Held anytime legally authorized to make the transfer. [Sec.
time unless upon call 62, RCC]
otherwise
provided by the A certificate of stock is —
by-laws An instrument formally issued by the
corporation with the intention that the same
Venue Anywhere in and outside the constitute the best evidence of the rights
and status of a shareholder

Page 219 of 450

U.P. LAW BOC BUSINESS ORGANIZATIONS
An instrument signed by the proper
corporate officer acknowledging that the
person named in the document is the
owner of a designated number of shares of
stock. It is prima facie evidence that the
holder is a shareholder of a corporation.
(Lao v. Lao, 567 SCRA 558, 2008)
The paper representative or tangible
evidence of the stock itself and of the
various interests therein.
It is merely evidence of the holder’s interest
and status in the corporation, his
ownership of the share represented
thereby.
It expresses the contract between the
corporation and the stockholder [Makati
Sports Club v. Cheng, G.R. No. 178523
(2010)].
A certificate of stock is NOT —
A condition precedent to the acquisition of
of the rights and status of a shareholder
A stock in the corporation
The equivalent of ownership of the share it
represents
Essential to the existence of a share of
stock or the nature of the relation of
shareholder to the corporation [Makati
Sports Club v. Cheng, G.R. No. 178523
(2010)].
Uncertificated shares
An uncertificated share is a subscription duly
recorded in the corporate books, but has no
corresponding certificate of stock yet issued.
Uncertificated shares or securities are those
evidenced by electronic or similar records [Sec.
3.14, Securities Regulation Code]
Added provision in Sec. 62 of the Revised
Corporation Code:
The Commission may require corporations
whose securities are traded in trading markets
and, which can reasonably demonstrate their
capability to do so, to issue their securities or
shares of stocks in uncertificated or scripless
form in accordance with the rules of the
Commission.
Page 220 of 450
COMMERCIAL LAW
Notwithstanding Sec. 62, RCC (Certificate
of Stock and Transfer of Shares), a
corporation whose securities are registered
pursuant to the SRC or listed on securities
exchange may:
If so resolved by the BOD and agreed by
a shareholder, investor or securities
intermediary, issue shares to, or record
the transfer of some or all its shares into the
name of such shareholders, investors or,
securities intermediary in the form of
uncertified securities.
The use of uncertified securities in these
circumstances shall be without prejudice to the
rights of the securities intermediary
subsequently to require the corporation to
issue a certificate in respect of any shares
recorded in its name; and
If so provided in its articles of incorporation
and by-laws, issue all of the shares of a
particular class in the form of uncertificated
securities and subject to a condition that
investors may not require the corporation to
issue a certificate in respect of any shares
recorded in their name. [Sec. 43, Securities
Regulation Code]
TRANSFERS OF UNCERTIFICATED
SECURITIES, HOW MADE
Valid as between parties - validly made and
consummated by appropriate book-entries in
the securities intermediaries, or in the stock
and transfer book held by the corporation or the
stock transfer agent.
A transfer made pursuant to the foregoing has
the effect of delivery of a security in bearer form
or duly indorsed in blank representing the
amount of security or right transferred,
including the unrestricted negotiability of that
security by reason of such delivery.
Valid as to corporation – when the transfer is
recorded in the books of the corporation so as
to show the names of the parties to the transfer
and the number of shares transferred [Sec.
43.3, Securities Regulation Code].
U.P. LAW BOC BUSINESS ORGANIZATIONS
Negotiability; requirements for valid
transfer of stocks
Theory of Quasi-Negotiability
Although a stock certificate is sometimes
regarded as quasi-negotiable, in the sense that
it may be transferred by delivery, it is well-
settled that the instrument is NON-
NEGOTIABLE, because —
The holder thereof takes it without prejudice to
such rights or defenses as the registered
owner or creditor may have under the law
Except insofar as such rights or defenses are
subject to the limitations imposed by the
principles governing estoppels. [Republic v.
Sandiganbayan, G.R. Nos. 107789 & 147214,
April 30, 2003].
Certificates of stock are not negotiable
instruments. Consequently —
A transferee under a forged assignment
acquires no title which can be asserted against
the true owner, unless the latter’s negligence
has been such as to create an estoppel against
him.
If the owner of the certificate has endorsed it in
blank, and it is stolen from him, no title is
acquired by on innocent purchaser for value
[De los Santos v. Republic, G.R. No. L-4818
(1955)].
Street Certificate
When a stock certificate is endorsed in blank
by the owner thereof, it constitutes what is
termed as street certificate.
Upon its face, the holder is entitled to demand
its transfer into his name from the issuing
corporation.
Such certificate is deemed quasi-negotiable,
and as such the transferee thereof is justified
in believing that it belongs to the holder and
transferor. [Santamaria v. Hongkong and
Shanghai Banking Corporation, 89 Phil. 780,
788-789 (1951)].
Page 221 of 450
COMMERCIAL LAW
REQUIREMENTS FOR VALID TRANSFER
OF STOCKS
For a valid transfer of stocks, the requirements
are as follows:
(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; and
(3) To be valid against third parties, the transfer
must be recorded in the books of the
corporation (i.e., showing the names of the
parties to the transaction, the date of the
transfer, the number of the certificate or
certificates and the number of shares
transferred) [Sec. 62, RCC] [Bitong v. CA,
G.R. No. 123553 (1998)].
No shares of stock against which the
corporation holds an unpaid claim shall be
transferable in the books of the corporation
[Sec. 62, RCC].
The Corporation Code acknowledges that the
delivery of a duly indorsed stock certificate is
sufficient to transfer ownership of shares of
stock in stock corporations. Such mode of
transfer is valid between the parties.
In order to bind third persons, however, the
transfer must be recorded in the books of the
corporation. [Sec. 43.3, Securities Regulation
Code] Clearly then, the absence of a deed of
assignment is not a fatal flaw which renders the
transfer invalid.
Requisites for a valid transfer per Sec. 62,
RCC:
1. Between the parties:
2. Delivery
3. Indorsement
4. To be valid as to third persons: Recorded
in the books of the corporation [Republic v.
Estate of Hans Menzi, G.R. No. 152578
(2005)]
The execution of a deed of sale does not
necessarily make the transfer effective. The
delivery of the stock certificate duly indorsed by
the owner is the operative act that transfers the
U.P. LAW BOC BUSINESS ORGANIZATIONS
shares. The absence of delivery is a fatal
defect which is not cured by mere execution of
a deed of assignment [Rural Bank of Lipa City
v. CA, G.R. No. 124535 (2001)].
The stock and transfer book is the basis for
ascertaining the persons entitled to the rights
and subject to the liabilities of a
stockholder. Where a transferee is not yet
recognized as a stockholder, the corporation is
under no specific legal duty to issue stock
certificates in the transferee’s name [Ponce v.
Alsons Cement Corp., G.R. NO. 139802
(2002)].
Citing Hager v. Bryan (1911): A mandamus
should not issue to compel the secretary of a
corporation to make a transfer of the stock on
the books of the company, unless it
affirmatively appears that he has failed or
refused so to do, upon the demand either:
- Of the person in whose name the stock is
registered, or
- Of some person holding a power of
attorney for that purpose from the
registered owner of the stock.
A transfer of shares is not valid unless recorded
in the books of the corporation. [Sec. 43.4,
RCC]
The purpose of registration is two-fold:
(a)To enable the transferee to exercise all the
rights of a stockholder, including the right to
vote and to be voted for, and
(b) To inform the corporation of any change in
share ownership so that it can ascertain the
persons entitled to the rights and subject to
the liabilities of a stockholder [Batangas
Laguna Tayabas Bus Co. v. Bitangas, G.R.
No. 137934 (2001)].
Until challenged in a proper proceeding, a
stockholder of record has a right to participate
in any meeting.
His vote can be properly counted to determine
whether a stockholders’ resolution was
approved, despite the claim of the alleged
transferee.
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On the other hand, a person who has
purchased stock, and who desires to be
recognized as a stockholder for the purpose of
voting, must secure such a standing by having
the transfer recorded in the corporate books.
Until the transfer is registered, the transferee is
not a stockholder, but an outsider.
Issuance
(a) Full payment
General Rule: No certificate of stock shall be
issued to a subscriber until the full amount of
his subscription together with interest and
expenses (in case of delinquent shares), if any
is due, has been paid [Sec. 63, RCC].
Exception: Where it was the practice of the
corporation since its inception to issue
certificates of stock to its individual
stockholders for unpaid shares of stock and to
give full voting power to shares fully paid
[Baltazar v. Lingayen Gulf Electric Power
Company, G.R. No. L-16236 (1965)].
(b) Payment pro-rata
The entire subscription must be paid first
before the certificates of stock can be issued.
Partial payments are to be applied pro rata to
each share of stock subscribed [Nava v Peers
Mktg. Corp., G.R. No. L-28120 (1976)].
Stock and transfer book
(a) Contents
Stock corporations must also keep a stock and
transfer book, which shall contain:
a. A record of all stocks in the names of the
stockholders alphabetically arranged
b. The installments paid and unpaid on all
stocks for which subscription has been
made
c. The date of payment of any installment
d. A statement of every alienation, sale or
transfer of stock made, the date thereof, by
and to whom made
e. Such other entries as the by-laws may
prescribe. [Sec. 73, RCC]
U.P. LAW BOC BUSINESS ORGANIZATIONS
Note: The stock and transfer book shall be kept
in the principal office of the corporation or in the
office of its stock transfer agent and shall be
open for inspection by any director or
stockholder of the corporation at reasonable
hours on business days. [Sec. 73, RCC]
(b) Who may make valid entries
The obligation and duty to make proper entries
in stock and transfer books falls on the
corporate secretary.
If the corporate secretary refuses to comply,
the stockholder may rightfully bring suit to
compel performance. [Torres, Jr. v. CA, G.R.
No. 120138, Sept. 5, 1997].
(c) Stock transfer agent
A stock transfer agent is one engaged
principally in the business of registering
transfers of stocks in behalf of a stock
corporation.
The stock transfer agent shall be allowed to
operate in the Philippines upon securing a
license from the Commission. Provided, That
— ownership of said certificates. [Sec. 72,
(1) A stock corporation is not precluded from
performing or making transfers of its own
stocks
In which case, all the rules and regulations
imposed on stock transfer agents shall be
applicable
Except the payment of a license fee herein
provided
(2) The Commission may require stock
corporations which transfer and/or trade
stocks in secondary markets to have an
independent transfer agent. [Sec. 73, RCC]
Page 223 of 450
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Lost or destroyed certificates
Procedure for re-issuance in case of loss,
stolen or destroyed certificates:
1) Filing of an affidavit of loss with the
corporation by the registered owner.
2) Verifying the affidavit and other information
and evidence with the books of the
corporation by the corporation.
3) Publishing by the corporation of a notice of
loss in a newspaper of general circulation
published —
4) In the place, where the corporation has its
principal office;
5) Once a week for 3 consecutive weeks;
6) At the expense of the owner of the
certificate of stock.
7) Cancellation of the certificate in the books
of the corporation and issuance of new
certificates, after the expiration of 1 year
from the date of the last publication and
there is no contest. The right to make such
contest shall be barred after the expiration
of the one-year period.
8) Issuance by the corporation of new
certificates before 1 year period if the
registered owner files a bond and there is
no pending contest regarding the
RCC]
Note: Except in cases of fraud, bad faith, or
negligence on the part of the corporation and
its officers, no action may be brought against
the corporation which shall have issued
certificates of stock in lieu of those lost, stolen
or destroyed pursuant to the above procedure.
Situs of the shares of stock
General rule: The situs of shares of stock is
the country where the corporation is domiciled
[Wells Fargo Bank v. CIR, G.R. No. L-46720,
June 28, 1940].
It is not the domicile of the owner of a certificate
but the domicile of the corporation which is
decisive [Chua Guan v. Samahang
Magsasaka, Inc., 1935].
U.P. LAW BOC BUSINESS ORGANIZATIONS
The residence of the corporation is the place
where the principal office of the corporation is
located as stated in its AOI, even though the
corporation has closed its office therein and
relocated to another place [Hyatt Elevators and
Escalators Corp. v. Goldstar Elevator Phils.,
Inc., G.R. No. 161026, 2005]
Exception: In property taxation – the situs of
intangible property, such as shares of stocks,
is at the domicile or residence of the owner.
Exception to the Exception:
1. When a nonresident alien has shares of
stock in a domestic corporation, then the situs
will be in the Philippines; and
2. For purposes of the estate tax, the gross
estate of a resident decedent, whether citizen
or alien, or a citizen decedent, whether resident
or nonresident, includes his intangible personal
property wherever situated [De Leon].
Watered stocks
Definition
Watered stock are shares issued as fully paid
when in truth —
(1) No consideration is paid in any form; or
(2) The consideration received is known to be
less than the par value or issued value of
the shares [Sec. 64, RCC].
Watered stocks can either be par or no par
value shares.
A watered stock is a stock issued in exchange
for:
(a) A consideration less than its par value or
issued price; and
(b) A non-cash consideration valued in excess
of its fair value. [Herbosa, 2019]
Scope
Watered stocks include the following:
Issued without consideration (bonus share)
Issued as fully paid when the corporation has
received less sum of money than its par or
issued value (discounted share)
Page 224 of 450
COMMERCIAL LAW
Issued for consideration other than actual cash
(i.e., property or services), the fair valuation of
which is less than its par or issued value
Issue stock dividend when there are no
sufficient retained earnings or surplus profit to
justify it.
Note: Subsequent increase in the value of the
property used in paying the stock does not do
away with the watered stocks, nor cure the
defect in issuance. The existence of watered
stocks is determined at the time of issuance of
the stock.
Rationale Behind Prohibition
Stock watering is prohibited because:
• Corporation is deprived of needed capital
and the opportunity to market its securities
to its own advantage
• Existing and future stockholders who are
also injured by the dilution of their
proportionate interests in the corporation
• Present and future creditors who are injured
as the corporation is deprived of the assets
or capital and reduces the value of the
corporate assets, which stand as a
substitute for the stockholders’ personal
liability to them
• Persons who deal with it or purchase its
securities who are deceived because stock
watering is invariable accompanied with
misleading corporate accounts and financial
statements
Liability of directors for watered
stocks
A director or officer of a corporation who:
1) consents to the issuance of stocks for a
consideration less than its par or issued
value;
2) consents to the issuance of stocks for a
consideration other than cash, valued in
excess of its fair value
3) having knowledge of the insufficient
consideration, does not file a written
objection with the corporate secretary
U.P. LAW BOC BUSINESS ORGANIZATIONS
shall be solidarily liable with the stockholder
concerned to the corporation and its creditors
for the difference in value [Sec. 64, RCC].
Trust fund doctrine for liability for
watered stocks
Trust Fund Doctrine
It is established doctrine that subscription to
the capital of a corporation constitute a fund to
which creditors have a right to look for
satisfaction of their claims, and that the
assignee in insolvency can maintain an action
upon any unpaid stock subscription in order to
realize assets for the payment of its debts
[Philippine Trust Corp. v. Rivera, G.R. No. L-
19761 (1923), citing Velasco v. Poizat, (1918)]
A corporation has no power to release an
original subscriber to its capital stock from the
obligation of paying for his shares, without a
valuable consideration for such release
• As against creditors. a reduction of the
capital stock can take place only in the
manner and under the conditions prescribed
by the statute or the charter or the articles of
incorporation.
• Moreover, strict compliance with the
statutory regulations is necessary
[Philippine Trust Corp. v. Rivera, G.R. No.
L-19761 (1923)].
Trust Fund Doctrine for Liability for
Watered Stocks
Where the corporation issues watered stock
and thereby assumes an ostensible
capitalization in excess of its real assets, the
transaction necessarily involves —
• The misleading of subsequent creditors;
and
• A constructive fraud upon creditors, whether
done with that purpose actually in mind or
not
Hence, it is held that recovery may be had by
a creditor in such case, even though the
corporation itself has no cause of action
against the stockholders.
Page 225 of 450
COMMERCIAL LAW
• Some of the earlier decisions put the right of
recovery in such a case upon the so-called
“trust fund doctrine.”
• The creditors’ right of action to compel the
making good of the representation as to the
corporation’s capital is based on fraud, and
the trust fund doctrine is only another way of
expressing the same underlying idea [DE
LEON].
Despite the view of foreign authors that the
fraud theory is the prevailing view, it would
seem that in the Philippine jurisdiction, the trust
fund doctrine on watered stock prevails.
Payment of balance of
subscription [Sec. 66]
Time when the balance of the subscription
should be paid:
1) On the date specified in the subscription
contract, without need of demand or call.
2) If no date of payment has been specified,
on the date specified on the call made by
the BOD
3) If no date of payment has been specified
on the call made, within 30 days from the
date of call; and
4) When insolvency supervenes upon a
corporation and the court assumes
jurisdiction to wind it up, all unpaid
subscriptions become payable on demand,
and are at once recoverable, without
necessity of any prior call.
Call by board of directors
The BOD of any stock corporation may, at any
time:
(1) Declare due and payable to the corporation
unpaid subscriptions to the capital stock;
and
(2) Collect the same or such percentage
thereof, in either case with accrued interest,
if any, as it may deem necessary.
When Payment Should be Made
Payment shall be made:
(a) On the date specified in the contract of
subscription; or
U.P. LAW BOC BUSINESS ORGANIZATIONS
(b) On the date stated in the call.
Failure to pay on such date shall —
• Render the entire balance due and payable;
and
• Make the stockholder liable for interest at
the legal rate on such balance, unless a
different rate of interest is provided for in the
by-laws.
If within 30 days from said date no payment is
made, all stocks covered by said subscription
shall —
(1) Become delinquent; and
(2) Subject to sale under Sec. 67 of RCC,
unless the BOD orders otherwise.
Requisites for a valid call
SEC opined on July 21, 1976 that the following
are the requisites for a valid call:
1. It must be made in the manner prescribed by
law;
2. It must be made by the BOD; and
3. It must operate uniformly upon all the
shareholders.
There are two instances when call is not
necessary to make the subscriber liable for
payment of the unpaid subscription:
When, under the terms of the subscription
contract, subscription is payable, not upon
call, but immediately, or on a specified day,
or when it is payable in installments at
specified times; [Sec. 66, RCC] and
If the corporation becomes insolvent, which
makes the liability on the unpaid
subscription due and demandable,
regardless of any stipulation to the contrary
in the subscription agreement [Villanueva].
Notice requirement
Where call is necessary, notice must be given
to the stockholder concerned. A call without
notice to the subscriber is practically no
call at all.
The notice is regarded as a condition
precedent to the right of recovery. It must,
therefore, be alleged and proved to maintain an
Page 226 of 450
COMMERCIAL LAW
action for the call [Lingayen Gulf Electric Power
Co., Inc. v. Baltazar, G.R. No. L-4824 (1965)].
The right to notice of call, however, may be
waived by the subscriber [De Leon].
Sale of delinquent shares [Sec. 67]
Delinquent Shares - shares in which the
corresponding subscription or balance remains
unpaid after a grace period of 30 days from —
(a) The date specified in the contract of
subscription; or
(b) The date stated in the call made by the
BOD.
All stocks covered by said subscription shall
thereupon become delinquent and shall be
subject to delinquency sale, unless the BOD
orders otherwise [Sec. 67].
Effect of delinquency [Sec. 70]
Effects of Delinquency
Generally, delinquency suspends the rights of
a subscriber, except the right to receive
dividends
(1) No delinquent stock shall be voted for
(2) No delinquent stock shall be entitled to vote
or to representation at any stockholders’
meeting.
(3) Delinquent stock shall be subject to
delinquency sale.
A subscriber acquires all the rights of a
shareholder at the point of subscription. His
political and economic rights are not impaired
by the fact that he has unpaid subscription.
• Delinquency suspends the rights of a
subscriber, except the right to receive
dividends.
• The dividends corresponding to such
shares, if any, shall be applied against the
unpaid amount. [Herbosa, 2019].
Note: The holder thereof shall NOT be entitled
to any of the rights of a stockholder except the
right to dividends. But the dividends it will
receive will be subject to Sec. 42, RCC, that is
—
U.P. LAW BOC BUSINESS ORGANIZATIONS
• Cash dividends shall first be applied to the
unpaid balance on the subscription plus
costs and expenses; and
• Stock dividends shall be withheld until the
unpaid subscription is fully paid.
Call by resolution of the board of
directors [Sec. 67]
The BOD may, by resolution, order the sale of
delinquent stock and shall specifically state —
(1) The amount due on each subscription plus
all accrued interest, and
(2) The date, time and place of the sale, which
shall not be less than 30 days nor more than
60 days from the date the stocks became
delinquent, which is 30 days after the date
specified in the contract of subscription or
on the date stated in the call.
Notice of sale [Sec. 67]
If the BOD resolves to proceed with the sale:
Notice of sale and a copy of the resolution shall
be sent to every delinquent stockholder either
personally or by registered mail.
Notice of sale shall furthermore be published
once a week for 2 consecutive weeks in a
newspaper of general circulation in the
province or city where the principal office of the
corporation is located.
Auction sale
Procedure for delinquency sale [Sec. 67,
RCC]
1. Call for payment made by the BOD.
2. Notice of call served on each stockholder.
3. Notice of delinquency issued by the BOD
upon failure of the stockholder to pay within
30 days from date specified.
4. Service of notice of delinquency on the
non-paying subscriber, PLUS publication in
a newspaper of general circulation in the
province or city where the principal office of
the corporation is located, once a week for
2 consecutive weeks.
Note: Requirements on notice and publication
are mandatory. Lacking such requirements,
Page 227 of 450
COMMERCIAL LAW
the stockholder may question the sale as
provided under Sec. 67, RCC.
Public Auction
• The highest bidder is one who is willing to
pay the balance of the subscription for the
least number of shares.
- The stock so purchased shall be
transferred to such purchases in the
books of the corporation and a certificate
of such stock shall be issued in his favor.
- The remaining shares, if any, shall be
credited in favor of the delinquent
stockholder who shall likewise be
entitled to the issuance of a certificate of
stock covering such shares.
• If there are no bidders, the corporation must
bid for the whole number of shares
regardless of how much the shareholders
has paid. Such stocks will pertain to the
corporation as fully paid treasury stocks.
Payment by Delinquent Stockholder
The delinquent stockholder may stop the
auction by paying to the corporation on or
before the date specified for the sale the
balance due on his subscription, plus accrued
interest, costs of advertisement and expenses
of the sale.
Otherwise, the public auction shall proceed
and the delinquent shares shall be sold to the
bidder that will pay the full amount of the
balance of subscription with accrued interest,
costs and expenses of the sale, for the smallest
number of shares or fraction of a share.
Irregularities in the delinquency sale [Sec.
68]
Action to recover delinquent stock must be on
the ground of irregularity or defect in:
o the notice of sale or
o in the sale itself of delinquent stock
Unless, party seeking to recover first pays or
tenders to the party holding the stock the sum
for which the same was sold, with interest from
the date of sale at the legal rate.
U.P. LAW BOC BUSINESS ORGANIZATIONS
The action must be commenced within 6
months from the date of sale.
Alienation of shares
Allowable restrictions on the sale of
shares
General Rule: Free Transferability of Shares
Shares of stock so issued are personal
property and may be transferred [Sec. 62].
Exception: In CLOSE corporations,
restrictions on the right to transfer shares may
be provided in the Articles of Incorporation, by-
laws and certificates [Sec. 97].
Sale of partially paid shares
No shares of stock against which the
corporation holds any unpaid claim shall be
transferable in the books of the corporation.
[Sec. 62]
A corporation may refuse to acknowledge and
register a sale or assignment of shares which
are not fully paid, and may continue to hold the
original subscriber liable on the payment of the
subscription.
• However, the above principle in Section 62
cannot be utilized by the corporation to
refuse to recognize ownership over pledged
shares purchased at public auction.
• The term “unpaid claims” refers to “any
unpaid claims arising from unpaid
subscription, and not to any indebtedness
which a subscriber or stockholder may owe
the corporation arising from any other
transactions. [China Banking Corp. v. CA,
G.R. No. 117604 (1997)]
Sale of a portion of shares not fully
paid
The SEC has opined on several occasions that
a stockholder who has not paid the full amount
of his subscription cannot transfer part of his
subscription in view of the indivisible nature of
a subscription contract.
Page 228 of 450
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Rationale Behind Prohibition
The reason behind the principle of disallowing
transfer of not fully paid subscription to several
transferee is that it would be difficult to
determine:
(1) Whether or not the partial payments made
should be applied as —
• Full payment for the corresponding
number of shares which can only be
covered by such payment; or
• Proportional payment to each and all of
the entire number of subscribed shares
(2) The unpaid balance to be assumed by
each transferee [Villanueva].
Sale of all of shares not fully paid
The SEC has opined that the entire
subscription, although not yet fully paid, may
be transferred to a single transferee, who as a
result of the transfer must assume the unpaid
balance.
It is necessary, however, to secure the
consent of the corporation, since the transfer
of subscription rights and obligations
contemplates a novation of contract which
under Article 1293 of the Civil Code cannot be
made without the consent if the creditor
[Villanueva].
Sale of fully paid shares
Shares of stock so issued are personal
property and may be transferred by the delivery
of the stock certificate or certificates, indorsed
by —
(1) The owner; or
(2) The owner’s attorney-in-fact; or
(3) Other person legally authorized to make
the transfer. [Sec. 62]
Requisites of a valid transfer
Same as requirements for valid transfer of
stocks.
No transfer shall be valid, except as between
the parties, until the transfer is recorded in the
books of the corporation showing:
i. The names of the parties to the transaction
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

ii. The date of the transfer, his shares in favor of

iii. The number of the certificate or certificates
and
iv. The number of shares transferred [Sec.
62].
The failure to register a sale or disposition of
shares of stock in the books of the corporation
would render the same invalid to all persons,
including the attaching creditors of the seller.
[Uson v. Diosomito, 61 Phil. 535 (1935).]
See iii. Negotiability; requirements for valid
transfer of stocks under a. Certificate of stock
any 3rd party
Right to Vote of Secured Creditors and
Administrators
General Rule: In case a stockholder grants
security interest in his or her shares in stock
corporations, the stockholder-grantor shall
have the right to attend and vote at meetings of
stockholders
Exception: Unless the secured creditor is
expressly given by the stockholder-grantor
such right in writing which is recorded in the
appropriate corporate books. [Sec. 54]

Involuntary dealings Executors, administrators, receivers, and other

legal representatives duly appointed by the
Right to Encumber Shares court may attend and vote in behalf of the
Shares of stock are personal property and the stockholders or members without need of any
owner has an inherent right, as incident of written proxy. [Sec. 54]
ownership to transfer the same at will, which
would include the power to encumber the Attachment, Execution and Other
shares. Involuntary Dealings on Shares
Attachments of shares of stock are not
The right of a stockholder to pledge, mortgage included in the term “transfer” as provided in
or otherwise encumber his shares is [Section 62, RCC]. Both the Revised Rules of
recognized under Sec. 54 of the RCC which Court and [Revised Corporation Code] do not
regulates the manner of voting on pledged or require annotation in the corporation’s STB for
mortgaged shares. the attachment of shares to be valid and
binding on the corporation and third parties.
Restrictions on the Right to Encumber [Chemphil Export & Import Corp. v. CA, 251
Shares SCRA 257 (1995).]
Restriction Valid/Invalid
A bona fide transfer of shares, not registered in
Absolutely prohibits INVALID the corporate books, is not valid as against a
the stockholders from subsequent lawful attachment of said shares,
pledging or It would be violative of regardless of whether the attaching creditor
mortgaging their the statutory right of had actual notice of said transfer or not. All
shares without the the stockholders to transfers not so entered on the books of the
consent of the BOD encumber shares of corporation are absolutely void; not because
stock as allowed in
they are without notice or fraudulent in law or
Sec. 54.
fact, but because they are made so void by
Merely allows the VALID and binding
statute. [Garcia v. Jomouad, 323 SCRA 424
corporation or
(2000).]
existing stockholders
to accept the offer
within the option Bias Against Voluntary Sales
period, and By the strict application of Sec. 63 of the
thereafter, if no one Corporation Code [now Sec. 62, RCC] to cover
accepts the offer, the only the sale, assignment or absolute
stockholder is free to disposition of shares of stock, the SC has
pledge or mortgage placed a bias against voluntary sales,

Page 229 of 450

U.P. LAW BOC BUSINESS ORGANIZATIONS
assignments or dispositions of shares of stock
vis-à-vis pledges, mortgages, attachment or
levy thereof.
• To be valid and binding on third parties, the
voluntary sale, assignment or disposition of
shares requires the essential element of
registration in the stock and transfer book;
• Otherwise the sale, assignment or
disposition is considered void as to third
parties, even when they have actual notice.
In contrast, when it comes to pledge,
mortgage, encumbrance, attachment or levy of
shares, registration thereof in the stock and
transfer book is not essential either for validity
or as a species of notifying third parties.
[Villanueva].
Corporate books and records
Records to be kept at principal office
Every corporation shall keep and carefully
preserve at its principal office all information
including but not limited to:
■ Articles of incorporation and by-laws and all
their amendments;
■ Current ownership structure and voting
rights of corporation
■ Names and addresses of all members of
BOD/trustees and the executive officers
■ Record of all business transactions
■ Record of resolutions of BOD/Trustees and
of stockholders/members
■ Copies of latest reportorial requirements
submitted to the Commission; and
■ Minutes of all meetings of
stockholders/members or of BOD/trustees.
Stock Corporations [Sec. 73]
Stock corporations must also keep:
Books that record all business transactions of
the corporation which shall include contract,
memoranda, journals, ledgers, etc;
Minute book for meetings of the
stockholders/members;
Minute book for meetings of the board/trustees;
Stock and transfer book, which shall contain:
Page 230 of 450
COMMERCIAL LAW
• A record of all stocks in the names of the
stockholders alphabetically arranged;
• The installments paid and unpaid on all
stocks for which subscription has been
made, and the date of payment of any
installment;
• A statement of every alienation, sale or
transfer of stock made, the date thereof,
by and to whom made; and
• Such other entries as the by-laws may
prescribe
NOTE: The duty to keep these books is
imperative and mandatory. The stockholder
can likewise inspect the financial statements of
the corporation [Sec. 73].
Financial Statements [Sec. 74]
A corporation shall furnish a stockholder or
member its most recent financial statement
within 10 days from receipt of written request.
At a regular meeting, the Board shall present a
financial report of the operations of the
corporation for the preceding year, which shall
include financial statements duly signed and
certified in accordance with the Code.
Exception:
However, if the total assets or total liabilities of
the corporation is less than Six hundred
thousand pesos (P600,000.00), or such other
amount as may be determined appropriate by
the Department of Finance, the financial
statements may be certified under oath by the
treasurer and the president.
Right to inspect corporate records
Requirements for the exercise of the right
of inspection [Sec. 74]
It must be exercised at reasonable hours on
business days
The inspecting or reproducing party shall
remain bound by confidentiality rules under
prevailing laws, such as the rules on trade
secrets or processes under the Intellectual
Property Code, Data Privacy Act, and the
Securities Regulation Code.
U.P. LAW BOC BUSINESS ORGANIZATIONS
Directors of a corporation have the unqualified
right to inspect the books and records of the
corporation at all reasonable times.
• The right of inspection is not to be
denied on the ground that the director or
shareholder is on unfriendly terms with
the officers of the corporation whose
records are sought to be inspected.
• A director or stockholder can make
copies, abstracts, and memoranda of
documents, books, and papers as an
incident to the right of inspection, but
cannot, without an order of a court, be
permitted to take books from the office
of the corporation.
• However, a director or stockholder does
not have any absolute right to secure
certified copies of the minutes of the
corporation until these minutes have
been written up and approved by the
directors [Veraguth v. Isabela Sugar,
G.R. No. L-37064 (1932)].
A stockholder of a sequestered company has
the right to inspect and/or examine the records
of the corporation pursuant to Sec. 74 of the
Corporation Code (now Sec. 73, RCC) [Africa
v. PCGG, G.R. No. 83831 (1992)].
Effect of refusal to inspect corporate
records
Refusal to allow inspection is a criminal
offense. Such refusal, when done in violation of
Sec. 74(4) of the Corporation Code (now Sec.
73, RCC), properly falls within the purview of
Sec. 144 of the same code and thus may be
penalized as an offense [Yujuico and Sumbilla
v. Quiambao and Pilapil, G.R. No. 180416
(2014)]. (please note that the Code’s
provisions have been changed under the RCC)
Because the obligations provided for in Sec.
73, RCC fall on the corporation, violation of the
same is done by the corporation; thus, criminal
action based on such violation can only be
maintained against corporate officers or other
such persons acting on behalf of the
corporations.
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Officer or agent of corporation who refused to
allow the inspection and/or reproduction of
records shall be liable to the requesting officer
for damages and shall be punishable under
Section 161
If refusal is made pursuant to a resolution or
order of the BOD/trustees, liability for such
action shall be imposed upon the
directors/trustees who voted on such refusal
Defenses for refusal
• Person demanding to examine and
copy excerpts has improperly used any
information secured through any prior
examination of the records of such corp
of any other corp
• Person demanding to inspect was not
acting in good faith or for a legitimate
purpose
• Person demanding to inspect is a
competitor, director, officer, controlling
stockholder, or otherwise represents
interests of a competitor [Sec. 73]
Remedies when inspection is refused
Mandamus
Injunction
Action for damages
File an action under Sec. 161 to impose a penal
offense by fine and/or imprisonment.
Under the Rules of Court, the writ of
mandamus should be granted only if the court
is satisfied that justice so requires [Sec. 8, Rule
65].
11. Dissolution And
Liquidation
Dissolution of a corporation is the
extinguishment of its franchise and the
termination of its corporate existence or
business purpose.
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 such dissolution [Sec. 139].
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Upon dissolution, the corporation ceases to be dissolution for

a juridical person and consequently can no approval
longer continue transacting its business
[Campos].

Note: If no dissolution papers are filed with the

SEC by a corporation claiming dissolution 5. By merger or 5. By order of the
voluntarily, such corporation is still deemed consolidation SEC on grounds
legally existing, notwithstanding the fact that it under existing laws
has ceased to operate [De Leon]. [Sec 138]
5. By order of the
Modes Of Dissolution Courts following a
quo warranto
Based on jurisprudence, the methods of proceeding, a
effecting dissolution as prescribed by law are proceeding
exclusive, and a corporation cannot be involving a
dissolved except in the manner prescribed by financially
law [De Leon]. distressed
corporation, or for
Dissolution may be voluntary or involuntary: grounds under
VOLUNTARY INVOLUNTARY existing laws.

1. Voluntary surrender 1. Expiration of the Note: Where the veil of corporate fiction is
of its charter by the shortened pierced, it does not operate as a cause for the
vote of the BOD/T and corporate term dissolution of the corporation.
the [Sec 36]
stockholders/members Voluntary Dissolution
where no creditors are
affected [Sec 134] (a) Where no creditors are affected
[Sec. 134]
2. By the judgment of 2. By legislative This type of dissolution is initiated by the
the SEC after hearing enactment corporation. It does not prejudice, or is not
of petition for consented by creditors.
voluntary dissolution,
where Procedure
creditors are affected 1. Notice of the meeting should be given to
the stockholders or members by personal
3. Amending the AOI 3. Failure to delivery, registered mail, or by any means
to shorten its term [Sec organize and authorized under its by- laws at least 20
136] commence days prior to the meeting.
business 2. The notice of meeting should also be
within 2 years from published once prior to the meeting
incorporation [Sec a. Notice shall contain the time,
21]
place and object of the meeting
4. In case of a 4. Cessation of b. in a newspaper published in the
corporation sole, by business for 5 years place where the principal office
submitting [Sec 21] of said corporation is located,
to the SEC a verified or if no newspaper is published
declaration of the in such place, then in a
newspaper of general
circulation in the Philippines.

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U.P. LAW BOC BUSINESS ORGANIZATIONS
3. The resolution to dissolve must be
approved by the majority of the BOD/T
and approved by at least majority of the
Outstanding Capital Stock or majority of
the members.
a. In the old Corporation Code, only a
vote of majority of the BOD/T and
2/3 of the OCS/members was
required.
4. The corporation must submit the following
to the SEC:
a) A verified request for dissolution
stating the following:
the reason for the dissolution,
the form, manner, and time when
the notices were given
names of the stockholders and
directors or members and trustees
who approved of the dissolution
the date, place and time of the
meeting in which the vote was
made,
date of publication
b) A copy of the resolution certified by
the majority of the BOD/T and
countersigned by the secretary.
c) Proof of publication
d) Favorable recommendation from the
appropriate regulatory agency, when
necessary
e) The signed and countersigned copy
will be filed with the SEC and the latter
will issue the certificate of dissolution.
Withdrawal of the request
The corporation may withdraw its verified
request for dissolution within 15 days from
receipt by the SEC. Otherwise, the SEC shall
approve the request and issue the certificate of
dissolution.
Effectivity of the dissolution
Dissolution shall take effect upon the issuance
of the certificate of dissolution by the SEC
Favorable recommendation by the
appropriate agency required
No application of dissolution will be approved
without the favorable recommendation of the
appropriate government agency for:
1. banks,
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2. banking and quasi-banking institutions,
3. pre-need, insurance and trust companies,
4. non-stock savings and loans associations
(NSSLA),
5. pawnshops, and
6. other financial intermediaries
(b) Where creditors are affected [Sec.
135]
This covers a case where the corporation
petitions for its dissolution which may prejudice
the rights of creditors, or are not consented by
all of them. Here, the corporation is not under
financial distress or in a state of insolvency. In
those cases, the corporation must file a petition
for rehabilitation or liquidation in court.
[Herbosa, 2019]
1. A petition shall be filed with the SEC
containing the following:
(1) signature by a majority of its BOD/T or
other officers having management of
its affairs;
(2) verified by its president, or secretary or
one of its director or trustees;
(3) all claims and demands against the
corporation; and
(4) resolved upon by affirmative vote of the
stockholders representing at least 2/3
of the Outstanding Capital Stock or 2/3
of members;
2. The corporation must submit the following
to the SEC:
(1) The petition for dissolution stating the
following:
a. the reason for the dissolution;
b. the form, manner, and time
when the notices were given;
c. the date, place and time of the
meeting in which the vote was
made
(2) A copy of the resolution authorizing
the dissolution, certified by the majority
of the BOD/T and countersigned by the
secretary.
(3) A list of all its creditors
3. If the petition is sufficient in form and
substance, the SEC shall issue an order
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

fixing the date on or before which Ipso Facto Dissolution

objections to the petition may be filed. Such Upon approval of the expired shortened term,
date shall not be less than 30 days nor the corporation shall be deemed dissolved
more than 60 days after the entry of the without any further proceedings. The
order. corporation shall be deemed dissolved without
any further proceedings, taking effect on the
4. A copy of the order shall be published at day following the last day of the corporate term.
least once a week for 3 consecutive
weeks in a newspaper of general Shortening vs. Expiration
circulation published in the municipality or Shortening of the Expiration of the
city of the corporation’s principal office. If Corporate Term Original Term
none, in a news paper of general Has the effect of Where a corporation
circulation in the Philippines. A similar copy dissolving the elects to retain its
shall be posted for 3 consecutive weeks corporation, ipso corporate term, and
in 3 public places in such municipality or facto, once the such term has
city. shortened term has expired, the
arrived corporation may file
5. A hearing of any issue or objections raised a petition for revival
shall be conducted 5 days after the lapse of corporate
of the expiration of the time to file existence.
objections. [Divina]

6. If the objections are insufficient or the (d) Withdrawal of dissolution [Sec.

material facts in the petition are true,
judgment shall be rendered dissolving
the corporation and directing the
disposition of assets. The judgment may
include appointment of a receiver.
a. As long as 2/3 vote is obtained, no
member/ stockholder can prevent such
dissolution unless the majority
stockholders acted in bad faith. The
latter may be held liable for damages
[Campos].
b. Even where there are creditors of the
corporation who may be prejudiced by
the dissolution, it is still possible for the
corporation to terminate its existence
prior to the expiration of its term,
provided said creditors are given the
opportunity to present their claims and
objections so that their interests may
be protected [Campos].
(c) By shortening of corporate term
[Sec. 136]
137]
A withdrawal of the request for dissolution shall
be:
(1) Made in writing;
(2) Duly verified by any incorporator, director,
trustee, shareholder, or member;
(3) Signed by the same number of
incorporators, directors, trustees,
shareholders, or members necessary to
request for dissolution as set forth in Sec.
133-136;
(4) Submitted no later than fifteen (15) days
from receipt by the Commission of the
request for dissolution.
A withdrawal of the petition for dissolution shall
be in the form of a motion and similar in
substance to a withdrawal of request for
dissolution but shall be verified and filed prior
to publication of the order setting the deadline
for filing objections to the petition.

A voluntary dissolution may be effected by

amending the AOI to shorten the corporate
term under Sec 16.

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U.P. LAW BOC BUSINESS ORGANIZATIONS
SEC Action
Upon receipt of a withdrawal of request for
dissolution, the Commission shall withhold
action on the request for dissolution and shall,
after investigation:
(a) Make a pronouncement that the request
for dissolution is deemed withdrawn;
(b) Direct a joint meeting of the board of
directors or trustees and the
stockholders or members for the
purpose of ascertaining whether to
proceed with dissolution; or
(c) Issue such other orders as it may deem
appropriate.
Involuntary Dissolution
BY EXPIRATION OF CORPORATE TERM
The RCC provides that a corporation shall
have perpetual existence. The AOIs of existing
corporations shall be deemed amended to
reflect their perpetual term. The exception is
when the AOIs of corporations created under
the effectivity of this Code provide for a specific
period [Sec 11].
An existing corporation may opt out of the rule
on perpetual existence by notifying the
Commission, provided it was approved by
shareholders, and without prejudice to the
appraisal right of dissenting stockholders.
[Herbosa, 2019]
When such term has expired, a petition for
revival of corporate existence may be filed.
[Divina]
LEGISLATIVE DISSOLUTION
The inherent power of Congress to make laws
carries with it the power to amend or repeal
them. Involuntary corporate dissolution may be
effected through the amendment or repeal of
the Revised Corporation Code [implied from
Sec. 184, DE LEON].
The limitations on the power to dissolve
corporations by legislative enactment are as
follows:
1. Under the Constitution, the amendment,
alteration, or repeal of the corporate
Page 235 of 450
COMMERCIAL LAW
franchise of a public utility shall be made
only “when the common good so requires”;
2. Under Sec. 84 of the Code, it is provided
that: “No right or remedy in favor of or
against any corporation, its stockholders,
members, directors, trustees, or officers,
nor any liability incurred by any such
corporation, stockholders, members,
directors, trustees, or officers, shall be
removed or impaired either by the
subsequent dissolution of said corporation
or by any subsequent amendment or
repeal of this Code or of any part thereof”;
3. While Congress may provide for the
dissolution of a corporation, it cannot
impair the obligation of existing contracts
between the corporation and third persons,
or take away the vested rights of its
creditors. [De Leon]
Note: Thus, except for the expiration of its
term, no dissolution can be effective
without some act of the State [Daguhoy
Enterprises v. Ponce, G.R. No. L-6515
(1954)].
NON-USE OF CORPORATE CHARTER [Sec
21; Sec 138(a)]
If a corporation fails to formally organize and
commence the transaction of its business or
construction of its works within 5 years, its
certificate of incorporation shall be deemed
revoked, its corporate powers shall cease and
the corporation shall be deemed dissolved
[Sec. 21].
Dissolution in this case is automatic [Campos].
Contrary view: Since there is a defense
available to the corporation, that is, if its
failure to organize and commence its
business is due to causes beyond the
control of the corporation as may be
determined by the SEC, therefore, the
dissolution is not automatic.
Formal organization includes not only the
adoption of the by-laws but also the
establishment of the body which will administer
the affairs of the corporation and exercise its
powers
U.P. LAW BOC BUSINESS ORGANIZATIONS
By-laws should be adopted within one
month of receipt of official notice of the
issuance of the certificate of incorporation,
otherwise the certificate may be
suspended or revoked [PD 902-A, Sec. 6
(i)(5)].
CONTINUOUS INOPERATION OF
CORPORATION [Sec 21; 138(b)]
If a corporation commenced its business but
fails to continue operations after least 5
consecutive years, the corporation is first
placed on delinquent status, after due notice
and hearing.
• The delinquent corporation is given 2 years
to resume operations and comply with all
the requirements that the SEC shall
prescribe.
• Otherwise, the SEC will prescribe its
dissolution. The corporation may have the
revocation reconsidered. Otherwise, the
SEC may proceed to involuntary
dissolution with notice and hearing.
Dissolution in this case is not automatic
[Campos].
DISSOLUTION BY THE SEC ON GROUNDS
UNDER THE CODE AND OTHER EXISTING
LAWS
The Revised Corporation Code also introduced
a number of changes on involuntary
dissolution. Sec. 138 codified the grounds that
may lead to involuntary dissolution by the
Commission motu proprio or upon filing of a
verified complaint by any interested party.
Grounds for dissolution [Sec 138]
(a) Non-use of corporate charter;
(b) Continuous inoperation of a corporation;
(c) Upon receipt of a lawful court order
dissolving the corporation;
(d) Upon finding by final judgment that the
corporation procured its incorporation
through fraud;
(e) Upon finding by final judgment that the
corporation:
(1) Was created for the purpose of
committing, concealing or aiding the
commission of securities violations,
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COMMERCIAL LAW
smuggling, tax evasion, money
laundering, or graft and corrupt
practices;
(2) Committed or aided in the commission
of securities violations, smuggling, tax
evasion, money laundering, or graft
and corrupt practices, and its
stockholders knew; and
(3) Repeatedly and knowingly tolerated the
commission of graft and corrupt
practices or other fraudulent or illegal
acts by its directors, trustees, officers,
or employees.
Non-use of corporate charter and
continuous inoperation
The grounds for dissolution under (a) and (b)
as discussed above, will lead to the dissolution
of the corporation unless the corporation files a
petition to set aside its delinquency status, and
the SEC grants it.
Upon receipt of a lawful court order
dissolving the corporation
The ground under (c) may involve or arise from
a quo warranto proceeding involving a de facto
corporation (Sec 19, RCC) or a liquidation
proceeding involving an insolvent debtor under
FRIA (infra).
Upon finding by final judgment that the
corporation procured its incorporation
through fraud
The ground under (d) constitutes cases where
a corporation misrepresented its purpose of
incorporation, or when the incorporators used
fictitious names, there was then fraud in the
procurement of the certificate.
Upon finding by final judgment that the
corporation was created for an unlawful
purpose
The ground under (e) is a new provision. Here,
a corporation found by final judgment to have
been created for the purpose of committing,
concealing, or aiding the commission of
securities violations, smuggling, tax evasion,
money laundering or graft and corrupt
practices, may be subjected to involuntary
dissolution by the SEC, motu proprio or upon
filing of a verified complaint by any interested
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

party. In addition, the corporate assets after The RCC provides that any distributable asset
payment of its liabilities shall be forfeited in to an unknown creditor or corporator shall be
favor of the government upon petition of the escheated in favor of the national government.
Commission with the appropriate court. This was previously in favor of the LGU where
such assets are located, under the old Code.
Grounds under other existing laws
The grounds enumerated above are not Difference between Liquidation and
exclusive. There are other grounds to dissolve Rehabilitation
the corporation upon order of the SEC which Liquidation Rehabilitation
may be found in other laws. For example, the
SEC may also suspend or revoke, after proper The winding up of a Contemplates a
notice and hearing, the certificate of corporation so that continuance of
registration of private corporations under any of assets are
corporate life and
the following grounds: distributed to those activities in an effort
Fraud in procuring its certificate of entitled to receive to restore and
incorporation; them. It is the reinstate the
Serious misrepresentation as to what the process of reducing corporation to its
corporation can do or is doing to the great assets to cash,former position of
prejudice of or damage to the general successful operation
discharging liabilities
public; and dividing surplus and solvency. Both
Refusal to comply or defiance of any lawful or loss cannot be
order of the SEC restraining commission of undertaken at the
acts which amount to a grave violation of same time
its franchise; [Phil. Veterans Bank v. Employees Union, G.R.
Failure to file bylaws No. 105364 (2001)].
Failure to file required reports in
appropriate forms as determined by the Winding up of corporate affairs
SEC within the prescribed period (PD No. Under Sec. 139 of the RCC, a corporation
902-A, Sec 6(i)). loses its juridical personality and can no longer
enter into transactions that have the effect of
Methods of Liquidation continuing its business.

Liquidation is the process by which all the
assets of the corporation are converted into
liquid assets (cash) in order to facilitate the
payment of obligations to creditors, and the
remaining balance if any is to be distributed to
the stockholders.
• Among corporate creditors, the rules on
concurrence and preference of credits
apply.
• It is a proceeding in rem.
The end of corporate relations does not result
in the immediate termination of corporate
existence. A corporation shall have the
extended term of 3 years to wind up its
corporate affairs and liquidate its assets.
[Herbosa]
The only exception to this is the “winding-up”
period which takes place for 3 years after the
loss of the corporation’s juridical personality.
• It continues to be a body corporate for
purposes of prosecuting and defending
suits by and against it and to enable it to
settle and close its affairs, culminating in
the disposition and distribution of its
remaining assets.
• It may, during the 3-year term, appoint a
trustee or a receiver who may act beyond
that period.
A corporation in the process of liquidation has
no legal authority to engage in any new
business, even if the same is in accordance
with the primary purpose stated in its article of
incorporation.

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U.P. LAW BOC BUSINESS ORGANIZATIONS
• It may not acquire new rights or incur new
obligations.
• It may only have rights as may be required
by the process of liquidation. [Herbosa]
Pending actions against the corporation are
not extinguished
Pending actions against the corporation may
still be prosecuted against the corporation even
beyond the 3-year period.
General Rule: The creditors of the corporation
who were not paid within the 3-year period may
follow the property of the corporation that may
have passed to its stockholders
Exceptions:
• Unless the action is barred by prescription
or laches; or
• Unless there was a disposition of said
property in favor of a purchaser in good
faith..
Suits not brought against the corporation
within the 3-year period may still be
prosecuted against the corporation, since there
is nothing in Sec. 122, par. 1 which bars action
for the recovery of the debts of the corporation
against the liquidator thereof after the lapse of
the winding up period of 3 years [Republic of
the Philippines vs. Marsman Dev. Co., G.R.
No. L-175109, April 27, 1972].
Right of the corporation to appeal a
judgment is not extinguished by the
expiration of the 3-year period. Corporations
whose certificate of registration was revoked
by the SEC may still maintain actions in court
for the protection of its rights which includes the
right to appeal [Paramount Insurance Corp. v.
A.C. Ordonez Corp., G.R. No. 175109, August
6, 2008].
Methods of liquidation:
1. By the corporation itself or its board of
directors or trustees (Sec. 139[1], RCC)
2. By conveyance to a trustee within a three-
year period (Sec. 139[2], RCC; Board of
Liquidators v. Kalaw, G.R. No. L-18805,
Aug. 14, 1967)
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COMMERCIAL LAW
3. By a management committee or
rehabilitation receiver appointed by SEC
(Sec. 119, RCC)
4. By liquidation after three years
By the Corporation Itself
The liquidation and distribution of the assets of
a dissolved corporation is a matter of internal
concern of the corporation and falls within the
power of the directors and stockholders or duly
appointed liquidation trustee [SEC Opinion,
July 23, 1996].
The corporation through its board and/or
executive officers are in charge for this method
of liquidation.
The Legislature intended to let the
shareholders have the control of the assets
of the corporation upon dissolution in
winding up its affairs.
The normal method of procedure is for the
directors and executive officers to have
charge of the winding up operations,
though there is the alternative method of
assigning the property of the corporation to
trustees for the benefit of its creditors and
shareholders. China Banking Corp. V. M.
Michelin & Cie, 58 Phil. 261 (1933).
The termination of the life of a corporate entity
does not by itself cause the extinction or
diminution of the rights and liabilities of such
entity.
If the 3-year extended life has expired
without a trustee or receiver having been
expressly designated by the corporation,
within that period, the BOD (or trustees)
itself, may be permitted to so continue as
"trustees" by legal implication
Such designation as “trustees” is for the
purpose of completing the corporate
liquidation [Pepsi-Cola Products
Philippines, Inc. v. CA, G.R. No. 145855
(2004)].
A corporation under liquidation may not amend
its articles of incorporation to extend its
lifespan.
When a corporation is liquidating pursuant
to the statutory period of 3 years to
U.P. LAW BOC BUSINESS ORGANIZATIONS
liquidate, it is only allowed to continue for
the purpose of final closure of its business
and no other purposes.
In fact, within that period, the corporation is
enjoined from “continuing the business for
which it was established.” [Alhambra Cigar
and Cigarette Mfg. v. SEC, G.R. No. L-
23606 (1968)]
Conveyance To A Trustee Within A
3-Year Period
Liquidation may also be placed in the hands of
a trustee or assignee. All the corporate assets
are conveyed to such trustee or assignee by a
resolution of stockholders at any time during
the 3-year period. [Sec. 139]
In this method, the 3-year limitation DOES
NOT apply, provided that the designation of the
trustees is made within the period.
General rule: There is no time limit within
which the trustee must finish the liquidation,
and he may sue and be sued as such even
beyond the 3-year period.
Exception: The trusteeship is limited in its
duration by the deed of trust.
Trustees to whom the corporate assets have
been conveyed pursuant to liquidation may sue
and be sued as such in all matters connected
with the liquidation [National Abaca v. Pore,
G.R. No. L-16779 (1961)].
The trustee of a dissolved corporation may
commence a suit which can proceed to final
judgment even beyond the 3-year period of
liquidation. [Reburiano v. CA, G.R. No. 102965
(1999)].
Unless the trusteeship is limited in its duration
by the deed of trust, there is no time limit within
which the trustee must finish liquidation [Board
of Liquidators v Kalaw, G.R. No. L-18805
(1967)].
Any corporate creditor, shareholder, member
or other person-in-interest may petition the
courts for the appointment of a different
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COMMERCIAL LAW
trustee//s in liquidation. [Clemente et.al. v. CA,
G.R. No. 82407 (1995), citing Gelano v. CA,
103 SCRA 90].
By Management Committee or
Rehabilitation Receiver
In SEC’s judgment dissolving the corporation
and directing disposition of its assets as justice
requires, it may appoint a receiver to collect
such assets and pay the debts of the
corporation [Sec. 135].
In the exercise of its jurisdiction, the
Commission possesses the following powers:
(1) To appoint one or more receivers of the
property, real and personal, which is the
subject of the action pending before the
Commission in such other cases whenever
necessary in order to preserve the rights of
the parties-litigants and/or protect the
interest of the investing public and creditors;
(2) To create and appoint a management
committee, board, or body upon petition or
motu propio to undertake the management
of corporations, partnerships or other
associations not supervised or regulated by
other government agencies in appropriate
cases. [PD 902-A, as amended by PD 1799,
Sec. 6]
While the SEC has the authority to dissolve a
corporation, it does not have the authority to
settle disputes arising from its liquidation. A
commercial court is in the best position to
convene all stakeholders, including creditors,
to ascertain their claims and determine their
preferences [Consuelo Metals Corporation v.
Planters Development Bank G.R. No. 152580
(2008)].
WHO IS A REHABILITATION RECEIVER
• A rehabilitation receiver is a natural or
juridical person appointed by the court
pursuant to RA 10142 or the Financial
Rehabilitation and Insolvency Act (FRIA) of
2010, whenever necessary in order to
preserve the rights of the parties-litigants
and/or protect the interest of the investing
public and creditors.
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

• The receiver’s principal duty is to The mere appointment of a receiver, without

- Preserve and maximize the value of the anything more, does not result in the
assets of the debtor during the dissolution of the corporation, nor bar it from
rehabilitation proceedings; the exercise of its corporate rights [Leyte
- Assess the viability of rehabilitation, and Asphalt and Mineral Oil Co. Ltd., v. Block
implement a Rehabilitation Plan Johnston and Breenbrawn, G.R. No. 9755
(1928)].
• Unless appointed by the court, the
rehabilitation receiver shall not take over
While the appointment of a receiver rests within
the management and control of the debtor,
the sound judicial discretion of the court,
but may recommend the appointment of a
such discretion must, however, always be
management committee over the debtor in
exercised with caution and governed by legal
the cases provided by the FRIA [Sec. 31,
and equitable principles, the violation of which
FRIA].
will amount to its abuse, and in making such
appointment the court should take into
WHAT IS A MANAGEMENT COMMITTEE
consideration all the facts and weigh the
The management committee is the body
relative advantages and disadvantages of
appointed by the court who shall take the place
appointing a receiver to wind up the corporate
of the management and the governing body of
business. China Banking Corp. v. M. Michelin
the debtor corporation and assume their rights
& Cie, 58 Phil. 261 (1933).
and responsibilities. A rehabilitation receiver
may also be appointed to assume the
management of the corporation [Sec. 36, RECEIVERSHIP VS. TRUSTEESHIP
FRIA]. (1) Trusteeship is a contractual relationship
that can be created by a corporation
through its Board of Directors.
A management committee may be appointed in
Receivership is created by judicial
the following cases:
appointment of a rehabilitation receiver
1. Actual or imminent danger of dissipation,
and/or management committee.
loss, wastage or destruction of the debtor’s
(2) Both involve transfers of legal/naked
assets or other properties;
title from the corporation to the
2. Paralyzation of the business operations of
trustee/receiver/management
the debtor; or
committee. From the time the assets of the
3. Gross mismanagement of the debtor, or
corporation are transferred to a trustee or
fraud or other wrongful conduct on the part
receiver pursuant to liquidation, all such
of, or gross or willful violation of the FRIA
assets are then held by and in the name of
by existing management of the debtor or
the trustee or receiver who can lawfully
the owner, partner, director, officer or
proceed with liquidation even if the
representative/s in management of the
corporation no longer exists, because he
debtor [Sec. 36, FRIA]
has title to the assets.
(3) The trustee in liquidation is accountable
EFFECTS OF APPOINTING A RECEIVER
under the terms of the trust agreement.
The appointment of a receiver suspends the
The receiver and management committee
authority of the corporation, as well as its
members are deemed officers of the court
directors and officers, over the properties of the
and must therefore be accountable to the
corporation.
court by provision of law.
• The receiver shall act as the representative (4) Both are not subject to the 3-year period
of the corporation. because the corporation is substituted in
• The receivership shall exist indefinitely until either case by the trustee or the receiver
the complete settlement and liquidation of who may sue or be sued even after the
the corporation, unless otherwise limited. expiration of the 3-year period. However, in
[Herbosa] the case of trusteeship, the trustee must

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U.P. LAW BOC BUSINESS ORGANIZATIONS
have been designated within the 3-year
period.
3-YEAR PERIOD DOES NOT APPLY
When the liquidation of a dissolved corporation
has been placed in the hands of a receiver or
assignee:
The 3-year period prescribed by law for •
liquidation cannot be made to apply, and
The receiver or trustee may institute all
actions leading to the liquidation of the
assets of the corporation even after the
expiration of said period. Sumera v.
Valencia, 67 Phil. 721 (1939).
Liquidation after three years
Under Sec. 139, after the expiration of the 3-
year winding-up period, pending actions by or
against the corporation are abated.
It should not, however, be construed as to
prevent a corporation from pursuing
activities which would complete the
final liquidation of a dissolved
corporation.
In this case, Northern Luzon Corporation
Inc. which term has long expired, was
unable to dispose of its remaining assets
even during the 3-year period granted it by
Sec. 122 [now Sec. 139, RCC].
- Accordingly, it should be allowed to
continue liquidating its remaining
assets in order to complete the
process of dissolving the corporation.
- Likewise, it should be allowed to
distribute the proceeds from said
disposition to its stockholders or
creditors if any. A contrary
interpretation would have unjust and
absurd results. SEC-OGC Opinion
No. 15-07 (2015) citing SECAC No.
347 (1991).
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Directors as Trustees
If full liquidation can only be effected after the
3-year period and there is no trustee, the
directors may be permitted to complete the
liquidation by continuing as trustees by legal
implication [Reburiano v. CA, G.R. No. 102965
(1999)].
A corporation’s BOD is not rendered
functus officio by its dissolution.
• Sec. 122 [now Sec 139] allows a
corporation to continue its existence for a
limited purpose, necessarily there must be
a board that will continue acting for and on
behalf of the dissolved corporation for that
purpose [Aguirre vs. FQB+, Inc., G.R. No.
170770 (2013)].
Continuation of Pending Suits
The trustee of a corporation may continue to
prosecute a case commenced by the
corporation within 3 years from its dissolution
until rendition of the final judgment, even if such
judgment is rendered beyond the 3-year period
allowed by Sec 139, RCC
• However, an already defunct corporation is
barred from initiating a suit after the lapse
of the said 3-year period.
• If a petition is filed after the corporate
existence, the effect is that petitioner lacks
the capacity to sue as a corporation.
• To allow such petition to prosper, on the
ground that it is for the sole purpose of
liquidating the corporation’s assets, would
be to circumvent the provisions of Sec. 122
of the Corporation Code (now Sec. 139,
RCC) [Alabang Development Corporation
v. Alabang Hills Village Association and
Rafael Tinio, G.R. No. 187456 (2014)].
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

12. Other Corporations Incorporating a Close Corporation

General Rule: Any corporation may be
incorporated as a close corporation.
Close corporations
Exceptions: The ff. cannot be incorporated as
Statutory Definition
a close corporation –
A close corporation is –
i. Mining or oil companies
1. One whose AOI provides that:
ii. Stock exchanges
(a) All the corporation’s issued stock of all
iii. Banks
classes, exclusive of treasury shares,
iv. Insurance companies
shall be held of record by not more
v. Public utilities
than a specified number of persons,
vi. Educational institutions; and
not exceeding twenty (20);
vii. Corporations declared to be vested
(b) All the issued stock of all classes shall
with public interest in accordance with
be subject to one or more specified
the provisions of this Code. [Sec. 95,
restrictions on transfer permitted by
RCC]
this Title; and
(c) The corporation shall not list in any
Applicability of RCC Provisions
stock exchange or make any public
The provisions of Title XII (Close Corporations)
offering of its stocks of any class.
primarily govern close corporations, while other
2. One where two-thirds (2/3) or more of its
Titles of the RCC apply suppletorily, except as
voting stock or voting rights is NOT owned
otherwise provided under Title XII. [Sec. 95,
or controlled by another corporation, which
RCC]
is not a close corporation within the
meaning of this Code. [Sec. 95, RCC]
Characteristics of a close
corporation
A narrow distribution of ownership does not, by
itself, make a close corporation. When a
DIRECT MANAGEMENT BY
corporation’s AOI does not contain the
STOCKHOLDERS
provisions enumerated under Sec. 96 of the
The AOI of a close corporation may provide
Code [now Sec. 95, RCC], such corporation is
that the business of the corporation shall be
not a “close corporation”. It does not become
managed by the stockholders of the
one either, just because only a few individuals
corporation rather than by a board of directors.
owned 99.866% of its subscribed capital stock
[San Juan Structural and Steel Fabricators v [Sec. 96, RCC]
CA, G.R. No. 129459 (1998)].
The feature of a close corporation, whereby
there is a merger of stock ownership and active
“Incorporated Partnership”
management is what significantly distinguishes
A close corporation embodies what
it from other corporations. [Villanueva]
businessmen perceive to be the best features
of a partnership and a corporation, such as –
Identity of Stock Ownership and Active
Corporation: separate personality, limited
Management
liability, and the right of succession
All or most of the stockholders of a close
Partnership: delectus personae (the
corporation are active in the corporate
selection of a person satisfactory to oneself
business either as directors, officers or other
for a position), and general management
key men in management [Campos].
by all partners of business affairs
[Villanueva]

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U.P. LAW BOC BUSINESS ORGANIZATIONS
Stockholders’ Meeting Unnecessary
So long as the abovementioned AOI provision
continues in effect, no meeting of stockholders
need be called to elect directors.
Provided, that the stockholders of the
corporation shall be:
(1) Deemed to be directors for the purpose
of applying the provisions of this Code;
and
- Unless the context clearly requires
otherwise
(2) Subject to all liabilities of directors.
[Sec.96,RCC]
IDENTITY AND NUMBER STOCKHOLDERS
(1) Stockholders of record not more than 20
(2) Stocks not publicly listed
(3) Restricted transfer of ownership of stocks
[Sec. 95, RCC]
VOTING STOCK OR VOTING RIGHTS NOT
HELD BY ANOTHER CORPORATION
A corporation cannot be deemed as a close
corporation when at least two-thirds (2/3) of its
voting stock or voting rights is owned or
controlled by another corporation, which is not
a close corporation within the meaning of this
Code. [Sec. 95, RCC]
Validity of restrictions on transfer of
shares
In order to be binding on any purchaser in good
faith, restrictions on the right to transfer shares
must appear in the:
(1) AOI;
(2) By-laws; and
(3) Certificate of stock. [Sec. 97, RCC]
Right of First Refusal
Restrictions on transfer shall not be more
onerous than granting the existing
stockholders or the corporation the option to
purchase the shares of the transferring
stockholder.
Said option is subject to such reasonable
terms, conditions or period stated in the
AOI, by-laws, and certificate of stock.
If upon the expiration of said period, the
existing stockholders or the corporation
fails to exercise the option to purchase, the
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COMMERCIAL LAW
transferring stockholder may sell their
shares to any third person. [Sec. 97, RCC]
The right of first refusal as discussed above, is
the most onerous transfer restriction allowed.
Such right is a control scheme essential to
a close corporation.
It allows the existing stockholders the
power to maintain the character of delectus
personae by preventing an outsider from
coming into and interfering with the affairs
of the close corporation. [Villanueva]
A transfer restriction should NOT amount to a
deprivation of a stockholder’s right to ultimately
dispose of his shareholdings. [Rural Bank of
Salinas v. CA, 210 SCRA 510 (1992)]
Issuance or transfer of stock in
breach of qualifying conditions
Subject to certain requirements, the person to
whom stock is issued or transferred shall be
conclusively presumed to have notice of the
fact of the breach of the ff. qualifying
conditions:
(a) Eligibility of Stockholder
(b) Number of Stockholders of Record
(c) Stock Transfer Restrictions [Sec. 98 (a)-
(c), RCC]
Note: The term “transfer”, as used in Sec. 98,
is not limited to a transfer for value. [Sec. 98(f),
RCC]
Breach: Ineligibility of Stockholder
The transferee is conclusively presumed to
have notice of the fact of the ineligibility to be a
stockholder:
(1) If a stock of a close corporation is issued or
transferred to any person who is not
eligible thereof under any provision of the
AOI; and
(2) If the certificate for such stock
conspicuously shows the qualifications of
the persons entitled to be holders of record
thereof. [Sec. 98(a), RCC]
U.P. LAW BOC BUSINESS ORGANIZATIONS
Breach: Exceeding the Number of
Stockholders of Record
The transferee is conclusively presumed to
have notice of the fact that the issuance or
transfer of stock to any person would cause the
stock to be held by more than the number
stated in the AOI:
(1) If the AOI of a close corporation states
the number of persons, not exceeding
twenty (20), who are entitled to be
stockholders of record; and
(2) If the certificate for such stock
conspicuously states such number; and
(3) The issuance or transfer of stock to any
person would cause the stock to be held
by more than such number of person
[Sec. 98(b), RCC]
Breach: Violation of Stock Transfer
Restriction
The transferee is conclusively presumed to
have notice of the fact that the stock was
acquired in violation of the transfer restriction:
(1) If a stock certificate of a close corporation
conspicuously shows a restriction on
transfer of the corporation’s stock; and
(2) The transferee acquires the stock in
violation of such restriction [Sec. 98(c),
RCC]
Effect of Conclusive Presumption
General Rule: Whenever a person to whom
stock of a close corporation has been issued or
transferred is conclusively presumed to have
notice of the breach of qualifying conditions,
the corporation may, at its option, refuse to
register the transfer in the name of the
transferee. [Sec. 98(d), RCC]
Exceptions:
(1) If the transfer of stock, though in breach of
the qualifying conditions, has been
consented to by ALL the stockholders of
the close corporation; or
(2) If the close corporation has amended its
articles of incorporation in accordance with
Title XII. [Sec. 98(e), RCC]
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COMMERCIAL LAW
Option to Rescind or Recover
The provisions of Sec. 98 shall not impair any
right which the transferee may have to either:
(a) Rescind the transfer; or
(b) Recover the stock under any express or
implied warranty. [Sec. 98(g), RC
When board meeting is unnecessary
or improperly held
Board Must Act as a Body to Bind the
Corporation
Generally, under the doctrine of centralized
management, the exercise of powers by the
BOD is done through the adoption of a board
resolution in a board meeting called for the
purpose. [Villanueva]
When Board Meeting is Unnecessary
However, in a close corporation, unless the by-
laws provide otherwise, any action taken by the
directors without a meeting called properly and
with due notice shall nevertheless be deemed
VALID if:
(a) Before or after such action is taken, written
consent thereto is signed by all the
directors; or
(b) All the stockholders have actual or implied
knowledge of the action and make no
prompt objection in writing; or
(c) The directors are accustomed to take
informal action with the express or
implied acquiescence of all the
stockholders; or
(d) All the directors have express or implied
knowledge of the action in question and
none of them makes a prompt objection
in writing. [Sec. 100, RCC]
In a close corporation, a board resolution
authorizing the sale or mortgage of the subject
property is not necessary to bind the
corporation for the action of its president.
[Manuel R. Dulay Enterprises v. CA [G.R. No.
91889 (1993)]
When Board Meeting is Improperly Held
General Rule: An action within the corporate
powers taken at a meeting held without proper
call or notice, is deemed ratified by a director
who failed to attend.
U.P. LAW BOC BUSINESS ORGANIZATIONS
Exception: Unless after having knowledge
thereof, the director promptly files his written
objection with the secretary of the corporation.
[Sec. 100, RCC]
Preemptive right
Definition
The preemptive right is a right granted to
stockholders to subscribe to all issues or
disposition of shares of any class, in proportion
to their respective shareholdings. [Sec. 38,
RCC]
Scope of Pre-emptive Right in Ordinary
Corporations
In ordinary corporations, the pre-emptive right
shall not extend to –
(1) Shares issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public; or
(2) Shares issued in good faith with the
approval of the stockholders representing
two-thirds (2/3) of the outstanding capital
stock, in exchange for property needed for
corporate purposes or in payment of a
previously contracted debt. [Sec. 38, RCC]
However, because of the desire to preserve the
characteristic of delectus personae in close
corporations, the aforesaid limitations are NOT
APPLICABLE to close corporations.
Scope of Pre-emptive Right in Close
Corporations
General Rule: The preemptive right of
stockholders in close corporations shall extend
to ALL stock to be issued, including
reissuance of treasury shares, whether:
(1) For money, property or personal services;
or
(2) In payment of corporate debts
Exception: Unless the AOI provide otherwise.
[Sec. 101, RCC]
Page 245 of 450
COMMERCIAL LAW
Amendment of articles of
incorporation
Contents of the AOI of Close Corporations
Mandatory Provisions
The AOI of a close corporation must provide
that:
(a) 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 twenty (20);
(b) All the issued stock of all classes shall be
subject to one or more specified
restrictions on transfer permitted by this
Title; and z
(c) The corporation shall not list in any
stock exchange or make any public
offering of its stocks of any class. [Sec.
95, RCC]
Optional Provisions
The AOI of a close corporation may provide for:
(1) A classification of shares or rights,
The qualifications for owning or holding
the same, and
Restrictions on their transfers, subject
to the provisions of the following
section;
(2) A classification of directors into one (1)
or more classes,
Each of whom may be voted for and
elected solely by a particular class of
stock
(3) Greater quorum or voting requirements
in meetings of stockholders or directors
than those provided in this Code,
(4) The management by the stockholders of
the business of the corporation, rather than
by a board of directors; and
(5) The election or appointment by the
stockholders of all officers or employees,
or specified officers or employees, instead
of by the board of directors. [Sec. 96, RCC]
Amendments
Any amendment to the AOI, which seeks:
(1) To delete or remove any provision
required by this Title; or
U.P. LAW BOC BUSINESS ORGANIZATIONS
(2) To reduce a quorum or voting
requirement stated in said articles of
incorporation
shall require, at a meeting duly called for the
purpose, the affirmative vote –
a. Of at least two-thirds (2/3) of the
outstanding capital stock, whether with
or without voting rights; or
b. Of such greater proportion of shares as
may be specifically provided in the AOI
for amending, deleting or removing any
of the aforesaid provisions. [Sec. 102,
RCC]
Deadlocks
Definition
A deadlock is a situation when the directors or
stockholders are so divided on the
management of the corporation’s business and
affairs that:
(1) The votes required for a corporate action
cannot be obtained;
(2) With the consequence that the business
and affairs of the corporation can no longer
be conducted to the advantage of the
stockholders generally. [Sec. 103, RCC]
Effect of the Existence of a Deadlock
General Rule: The SEC, upon written petition
by any stockholder, shall have the power to
arbitrate the dispute.
Exception: Contrary provision in the close
corporation’s articles of incorporation, bylaws,
or stockholders’ agreement. [Sec. 103, RCC]
Exercise of Power to Arbitrate by the SEC
In the exercise of such power, the Commission
shall have authority to make appropriate
orders, such as:
(a) Cancelling or altering any provision
contained in the articles of incorporation,
bylaws, or any stockholder’s agreement;
(b) Cancelling, altering or enjoining a
resolution or act of the corporation or its
board of directors, stockholders, or officers;
(c) Directing or prohibiting any act of the
corporation or its board of directors,
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COMMERCIAL LAW
stockholders, officers, or other persons
party to the action;
(d) Requiring the purchase at their fair value of
shares of any stockholder, either by the
corporation regardless of the availability of
unrestricted retained earnings in its books,
or by the other stockholders;
(e) Appointing a provisional director;
(f) Dissolving the corporation; or
(g) Granting such other relief as the
circumstances may warrant. [Sec. 103,
RCC]
Appointment of a Provisional Director
Qualifications
A provisional director shall be an impartial
person:
1. Who is neither a stockholder, nor a creditor
of the corporation or any of its subsidiaries
or affiliates; and
2. Whose further qualifications, if any, may be
determined by the Commission. [Sec. 103,
RCC]
Powers, Rights, Compensation
A provisional director shall have all the rights
and powers of a duly elected director.
This includes the right to be notified of, and
to vote at meetings of directors until
removed by order of the Commission or by
all the stockholders.
However, the provisional director is not a
receiver of the corporation and does not
have the title and powers of a custodian or
receiver. [Sec. 103, RCC]
The compensation of the provisional director
shall be determined by agreement between
such director and the corporation, subject to
approval of the Commission.
The SEC may fix the compensation, absent an
agreement or in the event of disagreement
between the provisional director and the
corporation. [Sec. 103, RCC]
Buy-Back Order & Right to Withdraw
In the exercise of its power to arbitrate a
deadlock situation, the SEC can require the
purchase, at their fair value, of shares of any
stockholder, either by:
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

The corporation regardless of the Non-stock corporations

availability of unrestricted retained
earnings in its books; or Definition
The other stockholders. [Sec. 103(d), RCC]
A non- stock corporation is one where no part
The stockholder of a close corporation has a of its income is distributable as dividends to its
counterpart right to compel the corporation, for members, trustees, or officers. [Sec. 86, RCC]
any reason, to purchase shares held at fair
value. Essence of a Non-Stock Corporation
Such purchase shall not be less than the It is legally possible for a corporation having
par or issued value capital stock to still be considered a non-stock
Such purchase shall take place only when corporation.
the corporation has sufficient assets in its
books to cover its debts and liabilities For this reason, the essence of a non-stock
exclusive of capital stock. [Sec. 104, RCC] corporation is NOT the non-existence of shares
of stock, but that:
Dissolution Order & Right to Dissolve a. Its primary purpose should be
In the exercise of its power to arbitrate a eleemosynary in nature; and
deadlock situation, the SEC can order the b. There is a prohibition in its AOI and by-laws
dissolution of a corporation. [Sec. 103(f), RCC] that no part of the income or any form of
dividend is distributable to the members,
The stockholder of a close corporation has a trustees, or officers of the corporation.
counterpart right to compel the dissolution of [Villanueva]
such corporation by written petition to the
Commission: Purposes
(1) Whenever any of acts of the directors,
officers, or those in control of the Non-stock corporations may be formed or
corporation is illegal, fraudulent, dishonest, organized for the ff. purposes:
oppressive or unfairly prejudicial to the (1) Charitable,
corporation or any stockholder; or (2) Religious,
(2) Whenever corporate assets are being (3) Educational,
misapplied or wasted. [Sec. 104, RCC] (4) Professional,
(5) Cultural,
Rationale Behind Deadlock Provisions (6) Fraternal,
The deadlock provisions, through the threat of (7) Literary,
dissolution or repurchase of shares, provide a (8) Scientific,
strong incentive for the controlling group to (9) Social,
manage equitably, or otherwise face the (10) Civic service,
likelihood that the enterprises would be folded (11) Similar purposes, like trade, industry,
up by the SEC. agricultural and like chambers; or
A close corporation setting does not allow (12) Any combination thereof, subject to the
a stockholder to “cash-in” on his equity special provisions of this Title governing
because there is no market for his shares particular classes of non-stock
(i.e. right of first refusal) corporations. [Sec. 87, RCC]
Deadlocks arise often because some
members feel that the managing group has A non-stock corporation may not include in its
been able to corner profits through AOI a purpose which would change or
schemes that are inequitable to the other contradict its nature as such. [Sec. 13(b), RCC]
parties. [Villanueva]
A nonstock corporation may not engage in
investment business, where profit is the main

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

or underlying purpose. [People v. Menil, 340 Note: Reasons for Dissolution under Sec. 139
SCRA 125 (2000)] Charter expires pursuant to its AOI,
Charter is annulled by forfeiture, or
Treatment of Profits Corporate existence is terminated in any
other manner [Sec. 139, RCC]
Any profit which a non-stock corporation may
obtain incidental to its operations shall, Rules of Distribution of Assets Upon
whenever necessary or proper, be used for Dissolution
the furtherance of the purpose or purposes The assets of a nonstock corporation
for which the corporation was organized, undergoing the process of dissolution for
subject to the provisions of this Title. [Sec. 86, reasons other than those set forth in Section
RCC] 139, shall be applied and distributed as follows:
(a) All liabilities and obligations of the
A non-stock corporation holds its funds in trust corporation shall be paid, satisfied and
for the carrying out of the objectives and discharged, or adequate provision shall be
purposes expressed in its AOI. Thus, if it were made therefor;
to be converted to a stock corporation, it must (b) For the assets of the corporation –
be dissolved first, otherwise, such Type of Asset How Distributed
transformation would be tantamount to an
unauthorized distribution of its assets or Assets held by the Returned, transferred
income to its members. [Villanueva] corporation upon a or conveyed in
condition requiring accordance with such
Earning of Profits Merely Incidental return, transfer or requirements;
conveyance, and which
It is not inconsistent with the nature of a
condition occurs by
nonstock corporation to incidentally earn profits reason of the dissolution
in pursuing its eleemosynary purpose. [CIR v.
University of Visayas, 1 SCRA 669 (1961)] Assets received and held Transferred or
by the corporation conveyed to one or
The incurring of profit or losses does not subject to limitations more corporations,
determine whether an activity is for profit or permitting their use only societies or
for charitable, religious, organizations:
non-profit, what the courts will consider is:
benevolent, educational (1) Engaged in
1. Whether dividends have been declared; or or similar purposes, but activities in the
2. Whether its profit was ever used for NOT held upon a Philippines
personal or individual gain, and not for the condition requiring substantially
purpose of carrying out the objectives of return, transfer or similar to those of
the enterprise. [Manila Sanitarium and conveyance by reason of the dissolving
Hospital v. Gabuco, 7 SCRA 14 (1963)] the dissolution corporation
(2) According to a
Plan and distribution of assets upon plan of distribution
adopted pursuant
dissolution
to this Chapter;
Applicability
The subsequent rules of distribution of assets
are applicable only when the nonstock
corporation undergoing dissolution was
dissolved for reasons other than those set
forth in Section 139. [Sec. 93, RCC]

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Assets other than those Distributed in

mentioned in the accordance with the
preceding paragraphs, if provisions of the AOI
any or the bylaws to the
extent that the AOI or
the bylaws:
• Determine the
distributive rights
of members or
any class or
classes of
members; or
• Provide for
distribution

Assets, in any other case Distributed to such

persons, societies,
organizations or
corporations, whether
or not organized for
profit, as may be
specified in a plan of
distribution adopted
pursuant to this
Chapter
[Sec. 93, RCC]

Plan of Distribution of Assets Upon

Dissolution
A plan providing for the distribution of assets
may be adopted by a non-stock corporation in
the process of dissolution in the following
manner:
(1 ) The board of trus tees shall, by majority vote, adopt a resol ution:
a. Recommendi ng a pl an of distributi on and
b. Directing the s ubmis sion thereof to a vote at a reg ular or s peci al meeting of members having voti ng rights;
(2 ) Eac h member entitl ed to vote s hall be gi ven, i n the manner provi ded in this Code for the givi ng of notic e of meeti ngs, a written notic e s etti ng forth:
a. The propos ed pl an of distri bution or a s ummar y thereof
b. The date, ti me and pl ace of s uch meeti ng within the time; and
(3 ) Suc h plan of dis tribution s hall be adopted upon approval of at l east two-thirds (2/3) of the members having voti ng rights pr esent or r epr es ented by proxy at s uc h meeting. [Sec. 94, RCC]

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

SUMMARY: Stock vs. Non-Stock Corporations

Stock Non-stock
Definition

Stock corporations are those which have

capital stock divided into shares and are All other corporations . [Sec. 3, RCC]
authorized to distribute to the holders of such One where no part of its income is distributable as
shares, dividends, or allotments of the surplus dividends to its members, trustees or officers. [Sec.
profits on the basis of the shares held. [Sec. 3, 87, RCC]
RCC]
Purpose

Non-stock corporations may be formed or

Primarily to make profits for its shareholders.
organized for charitable, religious, educational,
professional, cultural, fraternal, literary, scientific,
social, civic service, or similar purposes, like trade,
industry, agricultural and like chambers, or any
combination thereof, subject to the special
provisions of this Title governing particular classes
of non-stock corporations. [Sec. 87, RCC]

Distribution of profits

A nonstock corporation is one where no part of its

income is distributable as dividends to its members,
trustees, or officers: Provided, That any profit which
a non-stock corporation may obtain incidental to its
Profit is distributed to shareholders.
operations shall, whenever necessary or proper, be
used for the furtherance of the purpose or purposes
for which the corporation was organized, subject to
the provisions of this Title. [Sec. 86, RCC]

Scope of Voting Rights

Each stockholder votes according to the

proportion of his shares in the corporation. No
share may be deprived of voting rights except Each member, regardless of class, is entitled to one
those classified and issued as “preferred” or (1) vote UNLESS such right to vote has been
“redeemable” shares, unless otherwise limited, broadened, or denied in the AOI or by-laws
provided in this Code: Provided, That there [Sec. 88, RCC].
shall always be a class or series of shares with
complete voting rights [Sec. 6, RCC].

Voting by proxy

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Stock Non-stock

Stockholders and members may vote in

person or by proxy in all meetings of
stockholders or members.

When so authorized in the by-laws or by a

May be denied by the AOI or the by-laws [Sec. 88,
majority of the board of directors, the
RCC]
stockholders or members of corporations may
also vote through remote communication or in
absentia: Provided, That the votes are
received before the corporation finishes the
tally of votes.
[Sec. 57, RCC]

Who Exercises Corporate Power

Board of Trustees, which may or may not be more

Board of Directors or Trustees. [Sec. 22, 92,
than 15 trustees, as provided by the AOI or by-laws
RCC]
[Sec. 23, 91, RCC]

Term of Directors of Trustees

Board classified in such a way that the term of office

Directors / trustees shall hold office for 1 year of 1/3 of their number shall expire every year.
and until their successors are elected and Subsequent elections of trustees comprising 1/3 of
qualified [Sec. 23]. the board shall be held annually, and trustees so
elected shall have a term of 3 years [Sec. 92].

Election of Officers

Directors shall be elected for a term of one (1)

year from among the holders of stocks
registered in the corporation’s books, while
trustees shall be elected for a term not
exceeding three (3) years from among the Except with respect to independent trustees of
members of the corporation. Each director and nonstock corporations vested with public interest,
trustee shall hold office until the successor is only a member of the corporation shall be elected
elected and qualified. [Sec. 22, RCC] as trustee. [Sec. 91, RCC]
The articles of incorporation may provide that Officers may directly elected by the members
all officers or employees or that specified UNLESS the AOI or by-laws provide otherwise
officers or employees shall be elected or [Sec. 91, RCC].
appointed by the stockholders, instead of by
the board of directors.

[Sec. 97].

Transferability of interest or membership

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Stock Non-stock

Generally non-transferable since membership and

all rights arising therefrom are personal. However,
Transferable.
the AOI or by-laws can provide otherwise [Sec. 89,
RCC].

Educational corporations Quorum

Educational corporation – A stock or non-
stock corporation organized for educational
purposes. [De Leon, Corporation Code]
Educational corporations shall be governed by
special laws and by the general provisions of
this Code. [Sec. 105, RCC]
Composition of Board:
If organized as a non-stock corporation
Trustees of educational institutions organized
as non-stock corporations shall not be less
than five (5) nor more than fifteen (15).
Provided, however, that –
The number of trustees shall be in multiples of
five
They shall classify themselves in such a way
that the term of 1/5 of them expires every year.
[Sec. 106, RCC]
If organized as a stock corporation
For institutions organized as stock
corporations, the number and term of directors
shall be governed by the provisions on stock
corporations. [Sec. 106, RCC]
The powers and authority of trustees shall be
defined in the bylaws.
Rules as to Vacancies
Trustees thereafter elected to fill vacancies,
occurring before the expiration of a particular
term, shall hold office only for the unexpired
period.
Trustees elected thereafter to fill vacancies
caused by expiration of term shall hold office
for five (5) years. [Sec. 106, RCC]
A majority of the trustees shall constitute a
quorum for the transaction of business. [Sec.
106, RCC]
Constitutional Provisions Related to
Educational Corporations:
Educational institutions, other than those
established by religious groups and mission
boards, shall be owned solely by citizens of the
Philippines or corporations or associations at
least sixty per centum of the capital of which is
owned by such citizens. The Congress may,
however, require increased Filipino equity
participation in all educational institutions. The
control and administration of educational
institutions shall be vested in citizens of the
Philippines. [CONST, Art. XIV, Sec. 4(2), par.
1]
No educational institution shall be established
exclusively for aliens and no group of aliens
shall comprise more than one-third of the
enrollment in any school. The provisions of this
subsection shall not apply to schools
established for foreign diplomatic personnel
and their dependents and, unless otherwise
provided by law, for other foreign temporary
residents. [CONST, Art. XIV, Sec. 4(2), par. 1]
Religious corporations
Religious corporations may be incorporated by
one or more persons. Such corporations may
be classified into:
1. Corporations sole; and
2. Religious societies. [Sec. 107, RCC]
Religious corporations shall be governed by
Title XIII, and by the general provisions on non-
stock corporations insofar as applicable. [Sec.
107, RCC]

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U.P. LAW BOC BUSINESS ORGANIZATIONS
Corporation sole; nationality
A corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi, or
other presiding elder of such religious
denomination, sect, or church. [Sec. 108, RCC]
A corporation sole consists of only one person
and his successors (who will always be one at
a time), in some particular station. [Roman
Catholic Apostolic Adm. of Davao v. LRC, 102
Phil. 596 (1957)]
Purpose
A corporation sole is incorporated for the
purpose of administering and managing, as
trustee, the affairs, property and temporalities
of any religious denomination, sect or church.
[Sec. 108, RCC]
A corporation sole is not the owner of the
properties that he may acquire, but merely the
administrator thereof. [Roman Catholic
Apostolic Adm. of Davao v. LRC, 102 Phil. 596
(1957)]
Nationality
A corporation sole has no nationality, but for
the purpose of applying nationalization laws,
nationality is determined not by the nationality
of its presiding elder but by the nationality of its
members constituting the sect in the
Philippines. Thus, the Roman Catholic Church
can acquire lands in the Philippines even if it is
headed by the Pope [Roman Catholic
Apostolic, etc v. Register of Deeds of Davao
City, G.R. No. L-8451 (1957)].
Incorporation
Contents of the AOI
The AOI of the corporation sole must set forth
the following:
1. That the applicant chief archbishop,
bishop, priest, minister, rabbi, or presiding
elder represents the religious
denomination, sect, or church who desires
to become a corporation sole;
2. That the rules, regulations and discipline of
the religious denomination, sect or church
are consistent with becoming a corporation
sole and do not forbid it;
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COMMERCIAL LAW
3. That such chief archbishop, bishop, priest,
minister, rabbi, or presiding elder is
charged with:
4. The administration of the temporalities and
5. The management of the affairs, estate and
properties of the religious denomination,
sect, or church within the territorial
jurisdiction, so described succinctly in the
AOI;
6. The manner by which any vacancy
occurring in the office of chief archbishop,
bishop, priest, minister, rabbi, or presiding
elder is required to be filled, according to
the rules, regulations or discipline of the
religious denomination, sect, or church;
and
7. The place where the principal office of the
corporation sole is to be established and
located, which place must be within the
territory of the Philippines. [Sec. 109, RCC]
Submission of the AOI
The chief archbishop, bishop, priest, minister,
rabbi or presiding elder of any religious
denomination, sect or church must file the AOI
with the Commission. [Sec. 109, RCC]
The articles of incorporation must be:
(1) Verified, by affidavit or affirmation of the
chief archbishop, bishop, priest, minister,
rabbi, or presiding elder, as the case may
be; and
(2) Accompanied by a copy of the commission,
certificate of election or letter of
appointment of such chief archbishop,
bishop, priest, minister, rabbi, or presiding
elder, duly certified to be correct by any
notary public. [Sec. 110, RCC]
From and after filing with the Commission of
the said AOI:
(1) Such chief archbishop, bishop, priest,
minister, rabbi, or presiding elder shall
become a corporation sole; and
(2) All temporalities, estate and properties of
the religious denomination, sect or church
theretofore administered or managed as
such chief archbishop, bishop, priest,
minister, rabbi, or presiding elder shall be
personally held in trust as a corporation
sole
U.P. LAW BOC BUSINESS ORGANIZATIONS
For the use, purpose, exclusive benefit
and on behalf of the religious
denomination, sect, or church.
This includes hospitals, schools,
colleges, orphan asylums, parsonages,
and cemeteries thereof. [Sec. 110,
RCC]
Power to Amend AOI
Note that Sec. 107 allows the application to
religious corporations of the general provisions
governing non-stock corporations, insofar as
applicable.
For non-stock corporations, the power to
amend its Articles of Incorporation lies in its
members. The code requires two-thirds of
their votes for the approval of such an
amendment.
So how will this requirement apply to a
corporation sole that has technically but one
member (the head of the religious
organization) who holds in his hands its broad
corporate powers over the properties, rights,
and interests of his religious organization?
• Although a non-stock corporation has a
personality that is distinct from those of its
members who established it, its AOI cannot
be amended solely through the action of its
BOT. The amendment needs the
concurrence of at least 2/3 of its
membership.
• If such approval mechanism is made to
operate in a corporation sole, its one
member in whom all the powers of the
corporation technically belongs, needs
to get the concurrence of 2/3 of its
membership. The one member is but a
trustee of its membership.
• There is no point to dissolving the
corporation sole of one member to enable
the corporation aggregate to emerge from
it. The one member, with the concurrence
of two-thirds of the membership of the
organization for whom he acts as trustee,
can self-will the amendment. He can, with
membership concurrence, increase the
technical number of the members of the
corporation from “sole” or one to the
greater number authorized by its amended
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COMMERCIAL LAW
articles. [Iglesia Evangelica Metodista En
Las Filipinas (Corporation Sole) Inc., et al
v. Bishop Nathanael Lazaro, et al, G.R. No.
184088 (2010)]
Filling of Vacancies
The successors in office of any chief
archbishop, bishop, priest, minister, rabbi, or
presiding elder in a corporation sole:
(1) Shall become the corporation sole on their
accession to office; and
(2) Shall be permitted to transact business as
such upon filing a copy of their commission,
certificate of election, or letters of
appointment, duly certified by any notary
public with the Commission. [Sec. 112,
RCC]
During any vacancy in the office, all the powers
and authority of the corporation sole during
such vacancy shall be exercised by the
person or persons authorized by the rules,
regulations or discipline of the religious
denomination, sect, or church represented by
the corporation sole to:
i. Administer the temporalities and
ii. Manage the affairs, estate, and
properties of the corporation sole. [Sec.
112, RCC]
Acquisition of Property
A corporation sole may:
(1) Purchase and hold real estate and
personal property for its church, charitable,
benevolent, or educational purposes; and
(2) Receive bequests or gifts for such
purposes. [Sec. 111, RCC]
Alienation of Property
A corporation sole may sell or mortgage real
property held by it by:
(1) Obtaining an order for that purpose from
the Regional Trial Court of the province
where the property is situated
(2) Adducing proof that:
The notice of the application for leave
to sell or mortgage has been made
through publication or as directed by
the Court; and
U.P. LAW BOC BUSINESS ORGANIZATIONS
It is in the interest of the corporation
that leave to sell or mortgage be
granted.
The application for leave to sell or mortgage:
(1) Must be made by petition, duly verified, by
the chief archbishop, bishop, priest,
minister, rabbi, or presiding elder acting as
corporation sole, and;
(2) May be opposed by any member of the
religious denomination, sect, or church
represented by the corporation sole.
Provided, that in cases where the rules,
regulations, and discipline of the religious
denomination, sect, or church, religious
society, or order concerned represented by
such corporation sole regulate the method of
acquiring, holding, selling, and mortgaging real
estate and personal property:
a. Such rules, regulations and discipline shall
control; and
b. The intervention of the courts shall not be
necessary. [Sec. 111, RCC]
Voluntary Dissolution
A corporation sole may be dissolved and its
affairs settled voluntarily by submitting to the
Commission a verified declaration of
dissolution, setting forth:
(a) The name of the corporation;
(b) The reason for dissolution and winding up;
(c) The authorization for the dissolution of the
corporation by the particular religious
denomination, sect or church;
(d) The names and addresses of the persons
who are to supervise the winding up of the
affairs of the corporation. [Sec. 113, RCC]
Upon approval of such declaration of
dissolution by the Commission, the corporation
shall cease to carry on its operations except for
the purpose of winding up its affairs. [Sec. 113,
RCC]
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Religious societies
Religious society – A religious corporation
incorporated by more than one person. Also
called “corporation aggregate.”
Incorporation
General Rule: Any religious society, religious
order, diocese, synod, or district organization
of any religious denomination, sect, or church,
may incorporate for the administration of its
temporalities or for the management of its
affairs, properties, and estate –
(1) Upon written consent of at least two-thirds
(2/3) of its membership; and/or
(2) By an affirmative vote at a meeting called
for the purpose of at least two-thirds (2/3)
of its membership
Exception: Unless forbidden by competent
authority, the Constitution, pertinent rules,
regulations, or discipline of the religious
denomination, sect, or church of which it is a
part. [Sec. 114, RCC]
Filing and Contents of the AOI
The AOI must be:
(1) Verified by the affidavit of the presiding
elder, secretary, or clerk or other member
of such religious society or religious order,
or diocese, synod, or district organization
of the religious denomination, sect, or
church; and
(2) Filed with the Commission. [Sec. 114,
RCC]
The AOI must set forth the following:
(a) That the religious society or religious order,
or diocese, synod, or district organization is
a religious organization of a religious
denomination, sect or church;
(b) That at least two-thirds (2/3) of its
membership has given written consent or
has voted to incorporate, at a duly
convened meeting of the body;
(c) That the incorporation of the religious
society or religious order, diocese, synod,
or district organization is not forbidden by
competent authority or by the Constitution,
rules, regulations or discipline of the
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

religious denomination, sect, or church of The assets of the

which it forms part; The assets of the sole OPC are not owned
(d) That the religious society or religious order, proprietorship are by its sole
diocese, synod, or district organization similarly owned by stockholder unless
desires to incorporate for the the proprietor the OPC is not
administration of its affairs, properties and conducting the adequately-
estate; business. financed and/or the
(e) The place within the Philippines where the assets.
principal office of the corporation is to be The obligations of
established and located; and The obligations that
the corporation
(f) The names, nationalities, and residence the sole
cannot be enforced
addresses of the trustees, not less than five proprietorship
against its sole
(5) nor more than fifteen (15) incurred in
stockholder unless
conducting the
Elected by the religious society or the situation
business may be
religious order, or the diocese, synod, warrants piercing
or district organization enforced against the
the veil of corporate
proprietor.
To serve for the first year, or such other fiction.
period as may be prescribed by the Registered with the Registered with the
laws of the religious society or religious DTI. SEC.
order, or of the diocese, synod, or [Divina, “Highlights of the Revised Corporation
district organization. [Sec. 114, RCC] Code”]

One person corporations Excepted corporations

One Person Corporation (OPC) – A
corporation with a single stockholder. [Sec.
116, RCC]
Who May Form OPCs
Only the ff. may form OPCs:
(1) A natural person;
(2) A trust; or
(3) An estate.
Note: A natural person who is licensed to
exercise a profession may not organize as a
OPC for the purpose of exercising such
profession, except as otherwise provided
under special laws. [Sec. 116, RCC]
The ff. may NOT incorporate as OPCs:
a. Banks and quasi-banks
b. Pre-need, trust, insurance, public and
publicly-listed companies; and
c. Non-chartered GOCCs. [Sec. 116, RCC]
Capital stock requirement
A One Person Corporation shall not be
required to have a minimum authorized
capital stock, except as otherwise provided by
special law. [Sec. 117, RCC]
Articles of incorporation and by-
laws

Sole Proprietorship vs. OPC Articles of Incorporation

Sole Proprietorship OPC A One Person Corporation shall file articles of
Has no separate Has a legal incorporation in accordance with the
legal personality from personality separate requirements under Section 14 of this Code.
the proprietor and distinct from the
conducting the sole stockholder of It shall likewise substantially contain the
business. the corporation. following:
(a) If the single stockholder is a trust or an
estate –
a. The name, nationality, and
residence of the trustee,

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U.P. LAW BOC BUSINESS ORGANIZATIONS
administrator, executor, guardian,
conservator, custodian, or other
person exercising fiduciary duties
b. Proof of such authority to act on
behalf of the trust or estate; and
(b) Name, nationality, residence of the
nominee and alternate nominee, and the
extent, coverage and limitation of the
authority. [Sec. 118, RCC]
By-Laws
The OPC is not required to submit and file
corporate by-laws. [Sec. 119, RCC]
Corporate name
A One Person Corporation shall indicate the
letters “OPC” either below or at the end of its
corporate name. [Sec. 120, RCC]
Corporate structure and officers
Single Stockholder as Director, President
The single stockholder shall be the sole
director and president of the One Person
Corporation. [Sec. 121, RCC]
Treasurer, Corporate Secretary, and Other
Officers
Within fifteen (15) days from the issuance of its
certificate of incorporation, the OPC shall
appoint:
(1) A treasurer;
(2) A corporate secretary; and
(3) Other officers as it may deem necessary
Note: The single stockholder may NOT be
appointed as the corporate secretary.
Within five (5) days from appointment, the OPC
shall notify the Commission thereof. [Sec. 122,
RCC]
Treasurer’s Bond
A single stockholder who is likewise the self-
appointed treasurer of the corporation, shall
give a bond to the Commission in such a sum
as may be required: Provided, That –
(1) The said stockholder/treasurer shall
undertake in writing:
a. To faithfully administer the OPC’s
funds to be received as treasurer, and
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COMMERCIAL LAW
b. To disburse and invest the same
according to the articles of
incorporation as approved by the
Commission.
(2) The bond shall be renewed every two (2)
years or as often as may be required. [Sec.
122, RCC]
Corporate Secretary’s Special Functions
In addition to the functions designated by the
OPC, the corporate secretary shall:
(a) Be responsible for maintaining the minutes
book and/or records of the corporation;
(b) Notify the nominee or alternate nominee of
the death or incapacity of the single
stockholder
Such notice shall be given no later than
five (5) days from such occurrence;
(c) Notify the Commission of the death of the
single stockholder within five (5) days from
such occurrence and stating in such notice
–
The names, residence addresses, and
contact details of all known legal heirs;
and
(d) Call the nominee or alternate nominee and
the known legal heirs to a meeting and
advise the legal heirs with regard to,
among others:
The election of a new director;
Amendment of the AOI; and
Other ancillary and/or consequential
matters. [Sec. 123, RCC]
Nominee
The single stockholder shall designate in the
AOI a nominee and an alternate nominee who
shall, in the event of the single stockholder’s
death or incapacity:
(1) Take the place of the single stockholder as
director; and
(2) Manage the corporation’s affairs. [Sec.
124, RCC]
Consent of Nominee and Alternate Nominee
The written consent of the nominee and
alternate nominee shall be attached to the AOI.
Such consent may be withdrawn in writing any
time before the death or incapacity of the single
stockholder. [Sec. 124, RCC]
U.P. LAW BOC BUSINESS ORGANIZATIONS
Term of Nominee
When the single stockholder is temporarily
incapacitated:
(1) The nominee shall sit as director and
manage the affairs of the OPC
(2) The nominee shall serve only until the
stockholder, by self-determination, regains
the capacity to assume such duties. [Sec.
125, RCC]
In case of death or permanent incapacity of the
single stockholder:
(1) The nominee shall sit as director and
manage the affairs of the OPC
(2) The nominee shall serve until:
a. The legal heirs of the single
stockholder have been lawfully
determined; and
b. The heirs have designated one of them
or have agreed that the estate shall be
the single stockholder of the OPC.
[Sec. 125, RCC]
Term of Alternate Nominee
In case of the nominee’s inability, incapacity,
death, or refusal to discharge the functions as
director and manager of the corporation:
(1) The alternate nominee shall sit as director
and manage the One Person Corporation;
and
(2) The alternate nominee shall serve only for
the same term, and under the same
conditions applicable to the nominee. [Sec.
125, RCC]
Change of Nominee or Alternate Nominee
The single stockholder may, at any time,
change its nominee and alternate nominee by
submitting to the Commission:
(1) The names of the new nominees; and
(2) The new nominees’ corresponding written
consent.
Note: For this purpose, the AOI need not be
amended. [Sec. 126, RCC]
Minutes and records
Minutes Book
A One Person Corporation shall maintain a
minutes book which shall contain all its actions,
decisions, and resolutions. [Sec. 127, RCC]
Page 258 of 450
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The corporate secretary shall be responsible
for maintaining the minutes book and/or
records of the corporation. [Sec. 123(a), RCC]
Records in Lieu of Meetings
When action is needed on any matter, it shall
be sufficient to prepare a written resolution:
(a) Signed and dated by the single
stockholder; and
(b) Recorded in the minutes book of the One
Person Corporation. [Sec. 128, RCC]
The date of recording in the minutes book shall
be deemed to be the date of the meeting for all
purposes under this Code. [Sec. 128, RCC]
Liability
Limited Liability
An important advantage of the corporation is
the limitation of an investor’s liability to the
amount of investment, which flows from the
legal theory that a corporate entity is separate
and distinct from its stockholders. [San Juan
Structural and Steel, Inc. v. CA, 296 SCRA 631
(1998).]
Liability of Single Shareholder
A sole shareholder claiming limited liability has
the burden of affirmatively showing that the
corporation was adequately financed.
Where the single stockholder cannot prove that
the property of the OPC is independent of the
stockholder’s personal property, the
stockholder shall be jointly and severally
liable for the debts and other liabilities of the
OPC.
Applicability of the Doctrine of Piercing the
Corporate Veil
The principles of piercing the corporate veil
applies with equal force to OPCs, as with other
corporations. [Sec. 130, RCC]
When the veil of corporate fiction is pierced:
The corporation will be considered as a mere
association of persons; and
The liability will directly attach to the
stockholders or to the other corporation
U.P. LAW BOC BUSINESS ORGANIZATIONS
[China Banking v. Dyne-Sem, G.R. No. 149237
(2006)].
Conversion of corporation to one
person corporations and vice-versa
Conversion from an Ordinary Corporation
to a OPC
When a single stockholder acquires ALL the
stocks of an ordinary stock corporation, the
latter may apply for conversion into a One
Person Corporation, subject to the submission
of such documents as the Commission may
require.
If the application for conversion is approved:
(1) The Commission shall issue certificate of
filing of amended articles of incorporation
reflecting the conversion
(2) The OPC converted from an ordinary stock
corporation shall succeed the latter, and be
legally responsible for all the latter’s
outstanding liabilities as of the date of
conversion. [Sec. 131, RCC]
Conversion from a OPC to an Ordinary
Stock Corporation
A One Person Corporation may be converted
into an ordinary stock corporation after:
(1) Due notice to the Commission of such fact
and of the circumstances leading to the
conversion; and
Such notice shall be filed with the
Commission within sixty (60) days from
the occurrence of the circumstances
leading to the conversion into an
ordinary stock corporation
(2) Compliance with all other requirements for
stock corporations under this Code and
applicable rules.
If all requirements have been complied with,
the Commission shall issue an amended
certificate of incorporation reflecting the
conversion. [Sec. 132, RCC]
In case of death of the single stockholder:
1. Within seven (7) days from receipt of either
an affidavit of heirship or self- adjudication
executed by a sole heir, or any other legal
document declaring the legal heirs of the
Page 259 of 450
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single stockholder, the nominee or
alternate nominee shall:
a. Transfer the shares to the duly
designated legal heir or estate; and
b. Notify the Commission of the
transfer.
2. Within sixty (60) days from the transfer of
the shares, the legal heirs shall notify the
Commission of their decision to either:
a. Wind up and dissolve the One
Person Corporation; or
b. Convert it into an ordinary stock
corporation.
The ordinary stock corporation converted from
a One Person Corporation shall succeed the
latter and be legally responsible for all the
latter’s outstanding liabilities as of the date of
conversion. [Sec. 132, RCC]
Foreign corporations
Foreign Corporation — Those formed,
organized, or existing under any laws other
than those of the Philippines and whose laws
allow Filipino citizens and corporations to do
business in its own country or state [Sec. 140].
Bases of authority over foreign
corporations
(a) Consent
As a rule, a foreign corporation can have no
legal existence or status beyond the bounds of
the State or sovereignty by which it is created
or incorporated and organized.
It exists only in contemplation of law and by
force of the law
Where that law ceases to operate, the
corporation can have no existence.
However, this principle does not prevent a
corporation from acting in another State or
country with the latter’s express or implied
consent.
U.P. LAW BOC BUSINESS ORGANIZATIONS
Consent Doctrine
The legal standing of foreign corporations in
the host state is founded on international law
on the basis of consent, whether implied or
express.
A corporation can exercise none of the
functions and privileges conferred by its
charter in another State or country except
by the comity and consent of such State or
country. [DE LEON]
Under Philippine law, the condition is that it
must obtain a license to do business in the
Philippines [CAMPOS].
Consent as Basis for Exercise of
Jurisdiction
To obtain jurisdiction over foreign corporations,
the considerations of due process and fair play
require that consent be obtained. [Villanueva]
The jurisdiction of courts to render judgment in
personam is grounded on their de facto power
over the defendant's person. His presence
within the territorial jurisdiction of a court is
prerequisite to its rendition of judgment
personally binding him. [Pennoyer v, Neff, 95
U.S. 714 (1877)]
Thus, a foreign corporation may be subjected
to jurisdiction by reason of consent, ownership
of property within the State, or by reason of
activities within or having an effect within the
state. [Villanueva citing Salonga]
(b) Doctrine of “doing business”
When a foreign corporation undertakes
business activities within the territorial
jurisdiction of a host state, then it ascribes to
the host state standing to enforce its laws, rules
and regulations. [Villanueva]
Said business activities serves as the basis by
which a host state is deemed to have authority
over a foreign corporation within its territorial
jurisdiction. [Villanueva]
Concept of“Doing Business”
The concept of "doing business" implies a
continuity of commercial dealings and
arrangements and the performance of
Page 260 of 450
COMMERCIAL LAW
acts/works/exercise of some of the functions
normally incident to the purpose or object of a
foreign corporation’s organization.
[Mentholatum Co., Inc. v. Mangaliman, 72 Phil.
525 (1941)]
It is the crucial point to determine:
• Whether foreign corporations and
multinational enterprises have come within
the territorial jurisdictions of the host
countries; and
• To what extent they are bound to obtain
licenses within various host countries before
they can sue with local courts and
administrative bodies. [Villanueva]
Jurisprudential Tests of “Doing Business
In The Philippines”
1. Twin Characterization Test
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.
Substance Test: Doing business implies
that a foreign corporation is continuing the
body or substance of the enterprise of
business for which it was organized
[Agilent Technologies v Integrated Silicon
Technology, G.R. No. 154618 (2004)]
2. 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 under the
control and direction of the foreign
corporation are consummated in the
Philippines [Pacific Vegetable Oil v.
Singson, G.R. No. L-7917 (1955)].
Necessity of a license to do
business
Every foreign corporation, which on the date of
the effectivity of this Code, is authorized to do
business in the Philippines under a license
issued to it, shall continue to have such
authority under the terms and conditions of its
U.P. LAW BOC BUSINESS ORGANIZATIONS
license, subject to the provisions of this Code
and other special laws [Sec 141, RCC].
(a) Requisites for issuance of a determine and assess the fees payable
license
A foreign corporation shall submit:
1. A copy of its articles of incorporation and
bylaws, certified in accordance with law,
and
2. Their translation to an official language of
the Philippines, if necessary. [Sec 142,
RCC]
The application shall be under oath and, unless
already stated in its articles of incorporation,
shall specifically set forth the following:
The date and term of incorporation;
The address, including the street number,
of the principal office of the corporation in
the country or State of incorporation;
The name and address of its resident agent
authorized to accept summons and
process in all legal proceedings and all
notices affecting the corporation, pending
the establishment of a local office;
The place in the Philippines where the
corporation intends to operate;
The specific purpose or purposes which
the corporation intends to pursue in the
transaction of its business in the
Philippines: Provided, That said purpose or
purposes are those specifically stated in
the certificate of authority issued by the
appropriate government agency;
The names and addresses of the present
directors and officers of the corporation;
A statement of its authorized capital stock
and the aggregate number of shares which
the corporation has authority to issue,
itemized by class, par value of shares,
shares without par value, and series, if any;
A statement of its outstanding capital stock
and the aggregate number of shares which
the corporation has issued, itemized by
class, par value of shares, shares without
par value, and series, if any;
A statement of the amount actually paid in;
and
Such additional information as may be
necessary or appropriate in order to enable
Page 261 of 450
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the Commission to determine whether
such corporation is entitled to a license to
transact business in the Philippines, and to
[Sec. 142, RCC]
Documents Attached to Application
Attached to the application shall be:
(1) A certificate under oath duly executed by
the authorized official or officials of the
jurisdiction of its incorporation, attesting to
the fact that:
a. The laws of the country or State
of the applicant allow Filipino
citizens and corporations to do
business therein;
b. The applicant is an existing
corporation in good standing. (Sec
142, RCC)
(2) A statement under oath of the president or
any other person authorized by the
corporation:
a. Showing to the satisfaction of the
Commission and when appropriate,
other governmental agencies that
the applicant is solvent and in
sound financial condition; and
b. Setting forth the assets and
liabilities of the corporation as of the
date not exceeding one year
immediately prior to the filing of the
application [Sec. 142, RCC]
Issuance of a License
Upon issuance of the license, such foreign
corporation may commence to transact
business in the Philippines and continue to do
so for as long as it retains its authority to act as
a corporation under the laws of the country or
State of its incorporation, unless such license
is:
surrendered,
revoked,
suspended, or
annulled
in accordance with this Code or other special
laws. [Sec. 143, RCC]
Deposit of Securities
Within 60 days, the licensee, except foreign
banking or insurance corporations, shall
U.P. LAW BOC BUSINESS ORGANIZATIONS
deposit with the Commission for the benefit of
present and future creditors of the licensee in
the Philippines, securities satisfactory to the
Commission, consisting of:
bonds or other evidence of indebtedness of
the Government of the Philippines, its
political subdivisions and instrumentalities,
or of government-owned or - controlled
corporations and entities,
shares of stock or debt securities that are
registered under Republic Act No. 8799,
otherwise known as “The Securities
Regulation Code”,
shares of stock in domestic corporations
listed in the stock exchange, shares of
stock in domestic insurance companies
and banks, any financial instrument
determined suitable by the Commission, or
any combination thereof with an actual
market value of at least Five hundred
thousand (P500,000.00) pesos or such
other amount that may be set by the
Commission. [Sec. 143, RCC]
Within 6 months after each fiscal year of the
licensee, the Commission shall require:
● the licensee to deposit additional
securities or financial instruments
equivalent in actual market value to 2% of
the amount by which the licensee’s gross
income for that fiscal year exceeds
P10,000,000.00.
● the deposit of additional securities or
financial instruments if the actual market
value of the deposited securities or
financial instruments has decreased by at
least 10% of their actual market value at
the time they were deposited. [Sec. 143,
RCC]
The Commission may:
at its discretion, release part of the
additional deposit if the gross income of the
licensee has decreased, or if the actual
market value of the total deposit has
increased, by more than ten (10%) percent
of their actual market value at the time they
were deposited.
allow the licensee to make substitute
deposits for those already on deposit as
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long as the licensee is solvent. (Sec 143,
RCC)
In the event the licensee ceases to do business
in the Philippines, its deposits shall be
returned:
Upon the licensee’s application therefore;
and
Upon proof to the satisfaction of the
Commission that the licensee has no
liability to Philippine residents, including
the Government of the Republic of the
Philippines. [Sec. 143, RCC]
(b) Resident agent
A resident agent may be either:
an individual residing in the Philippines
(must be of good moral character and
sound financial standing) or
a domestic corporation (must likewise be of
sound financial standing and must show
proof of good standing) lawfully transacting
business in the Philippines. [Sec. 144,
RCC]
The foreign corporation shall file a written
power of attorney:
(1) Designating a person (Philippine resident),
on whom summons and other legal
processes may be served in all actions or
other legal proceedings against such
corporation; and
(2) Consenting that service upon such resident
agent shall be admitted and held as valid,
as if served upon the duly authorized
officers of the foreign corporation at its
home office. [Sec. 144, RCC]
It shall be the duty of the resident agent to
immediately notify the Commission in writing of
any change in the resident agent’s address.
[Sec. 144, RCC]
(c) Amendment of license
A foreign corporation shall obtain an amended
license in the event it changes its corporate
name, or desires to pursue other or additional
purposes in the Philippines.
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Said amendment may be made by submitting Doctrine on Isolated Transactions

an application with the Commission, endorsed Foreign corporations are not required to obtain
by the appropriate government agency. [Sec. a license in order to obtain relief from local
148, RCC] courts or agencies. [Villanueva]

Personality to sue In an isolated transaction, there is no intent on

Foreign corporations which conduct regular
business should be denied any access to
courts until they secure a license so as to
ensure that they will abide by the decisions of
the local courts. [Eriks Ltd. v. CA, 267 SCRA
567 (1997)]
A foreign corporation transacting business in
the Philippines is required to secure a license
to have the personality to sue before, or
intervene in, any court or administrative
proceeding. [Sec. 150, RCC; CAMPOS]
By filing an action before Philippine courts, a
foreign corporation puts itself under their
jurisdiction. [Communication Materials v. CA,
260 SCRA 673 (1996)]
the part of the foreign corporation to engage in
a progressive pursuit of the purpose of a
business transaction. [Eriks Ltd. v. CA, 267
SCRA 567 (1997)]
General Rule: No foreign corporation
transacting business in the Philippines without
a license, or its successors or assigns, shall be
permitted to maintain or intervene in any
action, suit or proceeding in any court or
administrative agency of the Philippines;
Exception: but such may be sued or
proceeded against before Philippine courts or
administrative tribunals on any valid cause of
action recognized under Philippine laws. [Sec.
150, RCC]

Suability of foreign corporations Summary of Rules on Capacity to Sue

[Agilent Technologies v Integrated Silicon
No foreign corporation transacting business in Technology, G.R. No. 154618 (2004)]
the Philippines without a license, or its STATUS CONSEQUENCE
successors or assigns, shall be permitted to
maintain or intervene in any action, suit or Doing Business in Can sue and be
proceeding in any court or administrative the PH, WITH a sued
agency of the Philippines. license
Doing Business in GR: Cannot sue, but
Nevertheless, such corporation may be sued the PH, WITHOUT a may be sued in the
or proceeded against before Philippine license PH
courts or administrative tribunals on any valid EX: Capacity to sue
cause of action recognized under may not be
Philippine laws [Sec. 150, RCC]. questioned if the
other party is
A foreign corporation cannot claim exemption estopped
from being sued in Philippine courts for acts NOT doing May sue; may be
done against a person or persons in the business in the PH, sued
Philippines [Facilities Management on isolated
Corporation v. De La Osa, G.R. No. L-38649 transactions
(1979)].
Grounds for revocation of license
Instances when unlicensed foreign
corporations may be allowed to sue Grounds for revocation of license:
(isolated transactions) Failure to file its annual report or pay any
fees as required by this Code;

Page 263 of 450

U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Failure to appoint and maintain a resident

Merger Consolidation
agent in the Philippines as required by this
Title; One or more
Failure, after change of its resident agent corporations are
Union of 2 or more
or address, to submit to the Commission a absorbed by another
corporations to form
statement of such change as required by which survives and
a new corporation
this Title; continues the
Failure to submit to the Commission an combined business
authenticated copy of any amendment to
its articles of incorporation or bylaws or of One of the
any articles of merger or consolidation constituent
All constituents
within the time prescribed by this Title; corporations remains
corporations
A misrepresentation of any material matter as an existing
disappear with the
in any application, report, affidavit or other juridical person,
emergence of a new
document submitted by such corporation whereas the other
corporate entity
pursuant to this Title; corporation shall
Failure to pay any and all taxes, imposts, cease to exist.
assessments or penalties, if any, lawfully The surviving
due to the Philippine Government or any of The new corporate
corporation shall
its agencies or political subdivisions; entity shall obtain all
acquire all the assets,
Transacting business in the Philippines the assets of the
rights of action, and
outside of the purpose or purposes for disappearing
assuming all the
which such corporation is authorized under corporations, and
liabilities of the
its license; likewise shall assume
disappearing
Transacting business in the Philippines as all their liabilities.
corporation/s.
agent of or acting on behalf of any foreign
corporation or entity not duly licensed to do There is no liquidation of the assets of the
business in the Philippines; or dissolved corporation, all rights, properties
Any other ground as would render it unfit to and franchises are acquired by the
transact business in the Philippines. [Sec. surviving/new corporation.
151, RCC]
Merger and consolidation involve fundamental
13. Merger and Consolidation changes in the corporation, the rights of
stockholders and creditors. There must be an
Definition and Concept express provision of law that authorizes them.
Otherwise, such combinations are ultra vires.
Merger – a corporation absorbs the other and With the approval of the Corporation Code,
remains in existence while the others are such express authority has been granted.
dissolved [Sec.75]. [Campos]

Mergers may be horizontal (between Distinguish: Constituent and

competing firms), vertical (if a corporation Consolidated Corporation
acquires another which uses or distributes its
products) or conglomerate (neither competing Constituent Corporations – the parties to a
nor related in the chain of production or merger or consolidation
distribution). [Campos]
Consolidated Corporation - The new single
Consolidation – a new corporation is created, corporation created through consolidation.
and consolidating corporations are
extinguished [Sec.75].

Page 264 of 450

U.P. LAW BOC BUSINESS ORGANIZATIONS
Surviving Corporation – one of the
constituent corporations which remain in
existence after the merger
Plan of Merger or Consolidation
(Sec. 75)
Each of the constituent corporations must draw
up a Plan of Merger or Consolidation which
shall set forth:
a. Names of the corporation involved;
b. Terms and mode of carrying it to effect;
c. Statement of changes, if any, in the present
articles of the surviving corporation to be
formed in the case of merger; and with
respect to the consolidated corporation in
case of consolidation
The Plan must be approved by the board of
directors or trustees of each constituent
corporation by majority vote.
Articles of Merger or Consolidation
(Sec. 77)
The Articles of Merger or Consolidation:
a. take the place of the AOI of the
consolidated corporation; or
b. amend the Articles of Incorporation of the
surviving corporation.
Articles of Merger/Consolidation Requisites:
● Executed by each of the constituent
corporations
● Signed by the president/vice-president
● Certified by the secretary/assistant
secretary of each corporation
Contents
The Articles must contain the following:
Plan of the merger/consolidation
As to stock corporations, the number of
shares outstanding, or in the case of non-
stock corporations, the number of
members;
As to each corporation, the number of
shares or members voting for or against
such plan, respectively;
Page 265 of 450
COMMERCIAL LAW
the carrying amounts and fair values of the
assets and liabilities of the respective
companies as of the agreed cut-off date;
The method to be used in the merger or
consolidation of accounts of the
companies;
The provisional or pro-forma values, as
merged or consolidated, using the
accounting method; and
Such other information as may be
prescribed by the Commission
Procedure
Approval of Plan of Merger or
Consolidation by BOD and
Stockholders of Constituent
Corporations [Sec. 76]
1. Approval by majority vote of each of the
board of directors or trustees of the
constituent corporations of the plan of
merger or consolidation.
2. Approval by the stockholders or
members of each of such corporations at
separate corporate meetings duly called for
that purpose.
i. The affirmative vote of stockholders
representing at least two-thirds (2/3) of
the outstanding capital stock of each
corporation in the case of stock
corporations or at least two-thirds (2/3)
of the members in the case of non-stock
corporations shall be necessary for the
approval of such plan.
ii. Holders of non-voting shares are
entitled to vote on the plan [Sec. 6, par.
6(6)].
3. Notice of such meetings shall be given to
all stockholders or members in the same
manner as giving notice of regular or
special meetings under Section 49. The
notice shall state the purpose of the
meeting and include a copy or a summary
of the plan of merger or consolidation.
Any dissenting stockholder in stock
corporations may exercise his appraisal right
in accordance with the Code. Provided, that if
after the approval by the stockholders of such
plan, the board of directors decides to abandon
U.P. LAW BOC BUSINESS ORGANIZATIONS
the plan, the appraisal right shall be
extinguished.
Amendment to the plan of merger or
consolidation
An amendment to the Plan may be made by
approval of the majority vote of the respective
boards of directors or trustees of all the
constituent corporations and ratified by the
affirmative vote of stockholders representing at
least two-thirds (2/3) of the outstanding capital
stock or of two-thirds (2/3) of the members of
each of the constituent corporations. Such
plan, together with any amendment, shall be
considered as the agreement of merger or
consolidation.
Execution of Articles of Merger or
Consolidation
Articles of Merger or Articles of Consolidation
shall be executed by each of the constituent
corporations.
Submission to SEC of the Articles
Submission of of the Articles of Merger or
Articles of Consolidation to the SEC for
approval.
Mergers and consolidations of corporations
governed by special laws requires a
recommendation from the appropriate
government agency [Sec. 78 (1)].
Action by SEC
Conduct hearing or issue certificate. [Sec. 78]
a. If necessary, the SEC shall set a hearing,
notifying all corporations concerned at
least 2 weeks before.
b. SEC shall issue a certificate approving the
articles and plan of merger or of
consolidation.
Effectivity
Upon issuance of the certificate of merger or
consolidation, such merger or consolidation
shall become effective [Sec. 78].
Page 266 of 450
COMMERCIAL LAW
Merger or consolidation does not become
effective by mere agreement of the constituent
corporations. The approval of the SEC is
required [PNB v. Andrada Electric and Engr.
Co., Inc. (2002)].
Notwithstanding Sec. 79 (now, sec. 78), parties
may stipulate a specific effective date of
merger (or consolidation) where no 3rd party
will be prejudiced [SEC Opinion No. 09-13, July
1, 2009].
Limitations
Consent of appropriate government
agency:
In the case of merger or consolidation of banks
or banking institutions, building and loan
associations, 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 first be obtained
[Sec. 78].
Effects (Sec. 79)
As enumerated in the RCC, the following
are the legal effects of
merger/consolidation:
1. The constituent corporations shall become
a single corporation which, in case of
merger, shall be the surviving corporation
designated in the plan of merger; and, in
case of consolidation, shall be the
consolidated corporation designated in the
plan of consolidation;
2. The separate existence of the constituent
corporations shall cease, except that of the
surviving or the consolidated corporation;
3. The surviving or the consolidated
corporation shall possess all the rights,
privileges, immunities, and powers and
shall be subject to all the duties and
liabilities of a corporation organized under
this Code;
4. The surviving or the consolidated
corporation shall possess all the rights,
privileges, immunities and franchises of
each constituent corporation; and all real or
U.P. LAW BOC BUSINESS ORGANIZATIONS
personal property, all receivables due on
whatever account, including subscriptions
to shares and other choses in action, and
every other interest of, belonging to, or due
to each constituent corporation, shall be
deemed transferred to and vested in such
surviving or consolidated corporation
without further act or deed; and
5. The surviving or consolidated corporation
shall be responsible for all the liabilities and
obligations of each constituent corporation
as though such surviving or consolidated
corporation had itself incurred such
liabilities or obligations; and any pending
claim, action or proceeding brought by or
against any constituent corporation may be
prosecuted by or against the surviving or
consolidated corporation. The rights of
creditors or liens upon the property of such
constituent corporations shall not be
impaired by the merger or consolidation.
Although in a merger, there is dissolution of the
absorbed corporations, there is no winding up
of their affairs, because the surviving
corporation automatically acquires all their
rights, privileges, powers and liabilities
(Associated Bank v. CA, 291 SCRA 511).
Same goes for the consolidated corporation.
Salient Advantages of
Mergers/Consolidation
Unlike regular transfer/acquisition, it is able to
achieve a continuous flow of the juridical
personalities and business enterprises of the
constituent corporations. There is no “legal
break” in their juridical personalities and
business enterprises.
Thus, merger/consolidation is not a violation of
a non-transfer clause
Surviving/consolidated corporation is not
considered a transferee
Unlike regular transfer of assets/business
enterprise, there is no gain or loss in the pursuit
of merger or consolidation, thus it is not subject
to taxable gains under Section 40(C)(2)(a) of
the NIRC, as amended by the Train Law.
Page 267 of 450
COMMERCIAL LAW
AS TO THE CONSTITUENT
CORPORATIONS
Corporate existence
The constituent corporations shall become a
single corporation.
The separate existence of the constituents
shall cease, except that of the surviving or the
consolidated corporation.
The absorbed or constituent corporations are
ipso facto dissolved by operation of law [SEC
Opinion, July 16, 1981].
Assets and liabilities
There is no liquidation of the assets of the
dissolved corporations [CAMPOS].
The surviving or the consolidated corporation
shall possess all the rights, privileges,
immunities, powers, and franchises of each
constituent corporation and the properties shall
be deemed transferred to and vested in the
surviving or consolidated corporation without
further act or deed.
The surviving or the consolidated corporation
shall be subject to all the duties and liabilities
of the dissolving corporation(s).
AS TO CREDITORS
The creditors of a corporation cannot prevent
its merger or consolidation with another even if
the surviving or new corporation is not as
acceptable a debtor as the absorbed
corporation [CAMPOS].
Any claim, action or proceeding pending by or
against any of the constituent corporations may
be prosecuted by or against the surviving or
consolidated corporation; and
The rights of the creditors or lien upon the
property of any of each constituent corporation
shall not be impaired by such merger or
consolidation.
U.P. LAW BOC BUSINESS ORGANIZATIONS
MERGERS/CONSOLIDATION ON
EMPLOYEES
Because there is no legal break by the act
of merging, consolidating, it is logical to
expect that the contractual rights of
employees and the existing collective
bargaining agreement, if any, would have
to be absorbed by the
surviving/consolidated corporation
However, SC has made contrary rulings.
Rule on automatic assumption/absorption does
not impair the right of an employer to terminate
the employment of the absorbed employees for
a lawful or authorized cause or the right of such
an employee to resign, retire, or otherwise
sever his employment, whether before or after
the merger, subject to existing contractual
obligations (The Philippine Geothermal Inc.
Employees Union vs. Unocal Philippines, Inc,
September 26, 2016)
14. Investigations, offenses,
and penalties
Authority of Commissioner
Investigation and prosecution of
offenses
Under Sec. 154 of the RCC (Revised
Corporation Code) the SEC has the power to:
1. Power to Investigate
The SEC is expressly granted the power to
investigate any alleged violation of the
RCC, or of a rule, regulation, or order
issued pursuant thereto.
2. Power to Public Findings
The SEC is expressly authorized to publish
its findings, orders, opinions, advisories, or
information concerning any such violation
as may be relevant to the general public or
to the parties concerned, subject to the
provisions of Republic Act No. 10173 (Data
Page 268 of 450
COMMERCIAL LAW
Privacy Act of 2012) and other pertinent
laws.
Power to Coordinate with Other Agencies
SEC is expressly granted the power to give
reasonable notice to and coordinate with the
appropriate regulatory agency prior to any such
publication involving companies under their
special regulatory jurisdiction.
Administration of oath and issuance
of subpoena of Witnesses and
Documents
The SEC, through its designated officer has the
power to:
to administer oaths and affirmations
issue subpoena and subpoena duces tecum
take testimony in any inquiry or investigation,
and
to perform other acts necessary to the
proceedings or to the investigation. [Sec 155,
RCC]
Cease and desist power (Sec. 156)
1. When the SEC has reasonable basis to
believe that a person has violated, or is
about to violate this Code, a rule,
regulation, or order of the Commission, it
may direct such person to desist from
committing the act constituting the
violation.
2. SEC may issue a cease and desist order
ex parte to enjoin an act or practice which
is:
a. fraudulent or
b. can be reasonably expected to
cause significant, imminent, and
irreparable danger or injury to
public safety or welfare.
The ex parte order shall be valid for a
maximum period of 20 days, without
prejudice to the order being made
permanent after due notice and hearing.
3. Thereafter, the Commission may:
a. proceed administratively against such
person in accordance with Section 158
U.P. LAW BOC BUSINESS ORGANIZATIONS
of RCC (to impose administrative
sanctions); and/or
b. transmit evidence to the Department of
Justice (DOJ) for preliminary
investigation or criminal prosecution;
and/or
c. initiate criminal prosecution for any
violation of RCC, rule, or regulation.
Contempt (Sec. 157)
Any person who, without justifiable cause, fails
or refuses to comply with any lawful order,
decision, or subpoena issued by the
Commission shall, after due notice and
hearing, be held in contempt and fined in an
amount not exceeding P30,000
When the refusal amounts to clear and open
defiance of the Commission’s order, decision,
or subpoena, the Commission may impose a
daily fine of P1,000 until the order, decision, or
subpoena is complied with.
Sanctions for violations
Administrative sanctions
After due notice and hearing, when the
Commission finds that any provision of this
Code, rules or regulations, or any of the
Commission’s orders has been violated, the
Commission may impose any or all of the
following sanctions, taking into consideration
the extent of participation, nature, effects,
frequency and seriousness of the violation:
Imposition of a fine ranging from P5,000 to P2
Million, and not more than P1,000 for each day
of continuing violation but in no case to exceed
P2 Million
Issuance of a permanent cease and desist
order;
Suspension or revocation of the certificate of
incorporation; and
Dissolution of the corporation and forfeiture of
its assets under the conditions in Title XIV of
this Code.
Page 269 of 450
COMMERCIAL LAW
Prohibited Acts
1. Unauthorized Use of Corporate Name
(Sec. 159)
Sec. 17 of the RCC states the regulation
regarding corporate names. In the last
paragraph it states that if the corporation
fails to comply with the Commission’s
order, the Commission may hold the
corporation and its responsible directors or
officers in contempt and/or hold them
administratively, civilly and/or criminally
liable under this Code and other applicable
laws and/or revoke the registration of the
corporation.
The crime of “unauthorized use of a
corporate name” may also cover various
situations under Sec. 17. Therefore, a
criminal act arises under Sec. 159 only
when the SEC’s previous order remains
unheeded.
Penalty: The penalty for violations under
this provision ranges from Php10,000 to
Php200,000 pesos.
2. Violation of Disqualification Provision
(Sec. 160)
Despite the knowledge of the existence of
a ground for disqualification as provided in
Section 26 of RCC, a director, trustee or
officer willfully holds office, or willfully
conceals or withholds the existence of
grounds for disqualification, they may be
punished under the Code.
Penalty:
Punished by a fine ranging from Php
10, 000 to Php 200,000 at the court’s
discretion, permanently disqualified
from being a director, trustee, or officer
of any corporation.
If violation is injurious or detrimental
to the public – penalty ranges from
Php 20,000 to Php 400,000.
U.P. LAW BOC BUSINESS ORGANIZATIONS
3. Violation of Duty to Maintain Records,
to Allow their Inspection or
Reproduction (Sec. 161)
The unjustified failure or refusal by the
corporation, or by those responsible for
keeping and maintaining corporate
records, to comply with provisions on the:
1. adoption of by-laws (Sec. 45);
2. books to be kept (Sec. 73);
3. keep list of members and proxies (Sec.
92)
4. records in lieu of meetings (Sec. 128);
and
5. reportorial requirements of
corporations that must be submitted to
the Commissioner (Sec. 177);
6. as well as other pertinent rules and
provisions of RCC on inspection and
reproduction of récords.
Penalty: shall be punished with a fine
ranging from 10,000 to 200,000 pesos.
The penalties imposed under this
section shall be without prejudice to the
Commission’s exercise of its contempt
powers under Section 157 hereof.
4. Willful Certification of Incomplete,
Inaccurate, False, or Misleading
Statements or Reports (Sec. 162)
Any person who willfully certifies a report
required under this Code, knowing that the
same contains incomplete, inaccurate,
false, or misleading information or
statements, is punishable under the RCC.
Penalty:
a. fine ranging from Php 20,000 to Php
200,000 pesos,
b. If wrongful certification is injurious or
detrimental to the public – the auditor
or the person responsible may be fined
ranging from 40,000 to 400,000 pesos
if the report be injurious or detrimental
to the public.
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5. Collusion with the Independent Auditor
(Sec. 163)
An independent auditor who, in collusion
with the corporation’s directors or
representatives:
certifies the corporation’s financial
statements despite its incompleteness
or inaccuracy; failed to give a fair and
accurate presentation of the
corporation’s condition; or
certifies documents despite containing
false or misleading statements
Penalty: shall be penalized with a fine
ranging from 80,000 to 500,000 pesos, or
100,000 to 600,000 pesos if injury was
caused to the public.
6. Obtaining Corporate Registration
Through Fraud (Sec. 164)
Those responsible for the formation of a
corporation through fraud, or who assisted
either directly or indirectly therein shall be
penalized.
Penalty: Fine ranging from 200,000 to
2,000,000 pesos, or 400,000 to 5,000,000
pesos if injurious to the public.
7. Fraudulent Conduct of Business (Sec.
165)
A corporation that conducts its business
through fraud.
Penalty: shall be punished with a fine
ranging from Php 200,000 to Php
2,000,000 pesos, or Php400,000 to
Php5,000,000 pesos if injurious to the
public.
8. Acting as Intermediaries for Graft and
Corrupt Practices (Sec. 166)
A corporation used for fraud, or for
committing or concealing graft and corrupt
practices as defined under Republic Act
No. 3019.
U.P. LAW BOC BUSINESS ORGANIZATIONS
Penalty: shall be penalized with a fine
ranging from Php100,000 to
Php5,000,000 peso.
Should there be a finding that any of its
directors, officers, employees, agents,
or representatives are engaged in graft
and corrupt practices on the
corporation’s failure to install:
safeguards for the transparent and
lawful delivery of services; and
policies, code of ethics, and
procedures against graft and
corruption,
It shall be considered prima facie
evidence of corporate liability under
this section.
9. Engaging Intermediaries for Graft and
Corrupt Practices (Sec. 167)
A corporation that appoints an intermediary
who engages in graft and corrupt practices
for the corporation’s benefit or interest.
Penalty: shall be penalized with a fine
ranging from 100,000 to 1,000,000 pesos.
10. Tolerating Graft and Corrupt Practices
(Sec. 168)
A director, trustee, or officer who:
knowingly fails to sanction, report, or
file the appropriate action with proper
agencies; or
allows or tolerates the graft and corrupt
practices or fraudulent acts committed
by a corporation’s directors, trustees,
officers, or employees
Penalty: shall be penalized with a fine
ranging from 500,000 to 1,000,000 pesos.
11. Retaliation Against Whistleblowers
(Sec. 169)
Any person who knowingly and with intent
to retaliate, commits acts detrimental to a
whistleblower (e.g. interfering with the
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lawful employment or livelihood of the
whistleblower).
Penalty - shall, at the discretion of the
court, be punished with a fine ranging from
100,000 to 1,000,000 pesos.
Whistleblower – refers to any person who
provides truthful information relating to the
commission or possible commission of any
offense or violation under this Code.
12. Other Violations of the Code (Sec. 170)
Violations of any of the provisions of the
Code or its amendments not specifically
penalized shall be punished as well.
Penalty: Fine of not less tan Php10, 000
but not more than Php1,000,000.
If violation is committed by a corporation,
the same may, after notice and hearing be
dissolved in an appropriate proceeding
before the SC. A corporation may be
dissolved as long as:
Dissolution shall not preclude the
institution of appropriate action against
the one responsible; or
Nothing in this section shall be
construed to repeal the other causes
for dissolution of a corporation
Liability for the foregoing offenses shall be
separate from other administrative, civil, or
criminal liabilities.
U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

Penalties
Prohibited acts Penalties Who are liable When the violation is
injurious or
detrimental to the
public
1) Unauthorized Use fine ranging from corporation and its
of Corporate Name P10,000 to P200,000 responsible directors
(Sec. 159) or officers in contempt
and/or hold them
administratively, civilly
and/or criminally liable
under this Code and
other applicable laws
and/or revoke the
registration of the
corporation (Sec. 17)
2) Violation of fine ranging from director, trustee or penalty shall be a fine
Disqualification P10,000 to P200,000 officer of any ranging from P20,000
Provision (Sec. at the discretion of the corporation to P400,000
160) court and shall be
permanently
disqualified from being
a director, trustee or
officer of any
corporation
3) Violation of Duty to fine ranging from corporation, or by fine ranging from
Maintain Records, P10,000 to P200,000 those responsible for P20,000 to P400,000
to Allow their at the discretion of the keeping and
Inspection or court, taking into maintaining corporate
Reproduction (Sec. consideration the records
161) seriousness of the
violation and its
implications.
4) Willful Certification fine ranging from auditor or the fine ranging from
of Incomplete, P20,000 to P200,000 responsible person for P40,000 to P400,000
Inaccurate, False, the certification
or Misleading
Statements or
Reports (Sec. 162)
5) Collusion with the fine ranging from independent auditor in fine ranging from
Independent P80,000 to P500,000 collusion with the P100,000 to P600,000
Auditor (Sec. 163) corporation’s directors
or representatives and
the responsible officer
6) Obtaining fine ranging from those responsible for fine ranging from
Corporate P200,000 to P2M the formation of a P400,000 to P5M
Registration corporation through
Through Fraud fraud, or who assisted
(Sec. 164) directly or indirectly
therein,

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

7) Fraudulent fine ranging from Corporation or person fine ranging from

Conduct of P200,000 to P2M responsible P400,000 to P5M
Business (Sec.
165)
8) Acting as fine ranging from directors, officers,
Intermediaries for P100,000 to P5M employees, agents, or
Graft and Corrupt representatives are
Practices (Sec. engaged in graft and
166) corrupt practices

9) Engaging fine ranging from Corporation,

Intermediaries for P100,000 to intermediary
Graft and Corrupt P1,000,000
Practices (Sec.
167)
10)Tolerating Graft fine ranging from director, trustee, or
and Corrupt P500,000 to P1M officer who knowingly
Practices (Sec. fails to sanction,
168) report, or file the
appropriate action with
proper agencies,
allows or tolerates the
graft and corrupt
practices or fraudulent
acts committed by a
corporation’s directors,
trustees, officers, or
employees
11)Retaliation Against fine ranging from Any person who,
Whistleblowers P100,000 to P1M knowingly and with
(Sec. 169) intent to retaliate,
commits acts
detrimental to a
whistleblower such as
interfering with the
lawful employment or
livelihood of the
whistleblower
12)Other Violations of fine of not less than Corporation
the Code (Sec. P10,000 but not more
170) than P1M. Dissolution shall not
preclude the institution
If the violation is of appropriate action
committed by a for director, trustee, or
corporation, after officer of the
notice and hearing, be corporation
dissolved in
appropriate
proceedings before the
Commission

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

In imposing penalties and additional monitoring and supervision requirements, the Commission shall
take into consideration the size, nature of the business, and capacity of the corporation.
No court below the Court of Appeals shall have jurisdiction to issue a restraining order, preliminary
injunction, or preliminary mandatory injunction in any case, dispute, or controversy that directly or
indirectly interferes with the exercise of the powers, duties and responsibilities of the Commission that
falls exclusively within its jurisdiction.

Who are liable 3. Impose sanctions for the violation of this

1. Directors, Trustees, Officers, or Other
Employees (Sec. 171)
If the offender is a corporation, the penalty
may, at the discretion of the court, be
imposed upon such corporation and/or
upon its directors, trustees, stockholders,
members, officers, or employees
responsible for the violation or
indispensable to its commission.
2. Aiders and Abettors and Other
Secondary Liability (Sec. 172)
Anyone who shall:
Aid. abet, counsel, command, induce,
or
cause any violation of this Code, or any
rule, regulation, or order of the
Commission
Shall hall be punished with a fine not exceeding
that imposed on the principal offenders, at the
discretion of the court, after taking into account
their participation in the offense.
Authority of the Securities and
Exchange Commission (Sec. 179)
1. Exercise supervision and jurisdiction over
all corporations and persons acting on their
behalf, except as otherwise provided under
this Code;
2. Pursuant to Presidential Decree No. 902-A,
retain jurisdiction over pending cases
involving intra-corporate disputes
submitted for final resolution. The
Commission shall retain jurisdiction over
pending suspension of
payment/rehabilitation cases filed as of 30
June 2000 until finally disposed;
Code, its implementing rules and orders of
the Commission;
4. Promote corporate governance and the
protection of minority investors, through,
among others, the issuance of rules and
regulations consistent with international
best practices;
5. Issue opinions to clarify the application of
laws, rules, and regulations;
6. Issue cease and desist orders ex parte to
prevent imminent fraud or injury to the
public;
7. Hold corporations in direct and indirect
contempt;
8. Issue subpoena duces tecum and summon
witnesses to appear in proceedings before
the Commission;
9. In appropriate cases, order the
examination, search and seizure of
documents, papers, files and records, and
books of accounts of any entity or person
under investigation as may be necessary
for the proper disposition of the cases,
subject to the provisions of existing laws;
10. Suspend or revoke the certificate of
incorporation after proper notice and
hearing;
11. Dissolve or impose sanctions on
corporations, upon final court order, for
committing, aiding in the commission of, or
in any manner furthering securities
violations, smuggling, tax evasion, money
laundering, graft and corrupt practices, or
other fraudulent or illegal acts;
12. Issue writs of execution and attachment to
enforce payment of fees, administrative
fines, and other dues collectible under this
Code;
13. Prescribe the number of independent
directors and the minimum criteria in
determining the independence of a
director;

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U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW

14. Impose or recommend new modes by

which a stockholder, member, director, or
trustee may attend meetings or cast their
votes, as technology may allow, taking into
account the company’s scale, number of
shareholders or members, structure, and
other factors consistent with the basic right
of corporate suffrage;
15. Formulate and enforce standards,
guidelines, policies, rules and regulations
to carry out the provisions of this Code; and
16. Exercise such other powers provided by
law or those which may be necessary or
incidental to carrying out the powers
expressly granted to the Commission.

(See also Powers and Functions of the

Commission Sec. 5 of RA 8799 The
Securities Regulation Code)

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