Contract of Partnership

a. Definition (Art. 1767 of the New Civil Code of the Philippines (NCC))
Art. 1767. By the contract of partnership two or more persons bind themselves to contribute money, property,
or industry to a common fund with the intention of dividing the profits among themselves.
Definition: Partnership is a contract whereby two or more persons bind themselves to contribute money,
property or industry to a common fund with the intention of dividing profits among themselves.
b. Nature of Partnership
i. Separate Juridical Personality - (Art. 1768, NCC)
Art. 1768. The partnership has a juridical personality separate and distinct from that of each of the partners
even in case of failure to comply with the requirements of Article 1772, first paragraph.
As a Juridical Person
-A partnership may acquire and possess property of all kinds, as well as incur obligations and bring civil or
criminal actions in conformity with the laws, and regulations of its organization.
Partnership, a juridical person As an independent juridical person, a partnership may enter into
contracts,acquire and possess property of all kinds in its name, as well as incur obligations and bring civil or
criminal actions. Thus, a partnership may be declared insolvent even if the partners are not. It may enter into
contracts and may sue and be sued in its firm name or by its duly authorized representative. It is sufficient that
service of summons be served on any partner.
Partners cannot be held liable for the obligations of the partnership unless it is shown that the legal
fiction of a different juridical personality is being used for a fraudulent, unfair or illegal purpose.

ii. Purpose - (Art. 1767, 1770 NCC)

Art. 1767. The primary purpose must be to obtain profits and to divide the same among the parties.
Art. 1770. A partnership must have a lawful object or purpose, and must be established for the common
benefit or interest of the partners. When an unlawful partnership is dissolved by a judicial decree, the profits
shall be confiscated in favor of the State, without prejudice to the provisions of the Penal Code governing the
confiscation of the instruments and effects of a crime.
iii. Fiduciary Relationship Among Partners – Read: Tocao v. CA GR 127504, October 4,
2000
Partners have a well-defined fiduciary relationship between them. Co-owners do not. Should there be dispute;
the remedy of partners is an action for dissolution, termination and accounting. For co-owners it would be one,
for instance, for non-performance of contract. People can become co-owners without a contract but they
cannot become partners without one.

iv. Liability of Partners

● General partnership: one consisting of general partners who are liable pro rata and subsidiary and
sometimes solidarily w/ their separate property for partnership debts.
● Limited partnership: one formed by two or more persons having as members one or more general
partners and one or more limited partners, the latter not being personally liable for the obligations of the
partnership.

c. Formation
i. Birth
Art. 1784. A partnership begins from the moment of the execution of the contract, unless it is otherwise
stipulated.
ii. Membership (Art. 1767, NCC)
Principle of Delectus Personae (choice of persons) – a person has the right to select persons with whom
he wants to be associated with in partnership.
iii. Object of Partnership (Art. 1767, 1770, 1776 NCC)
Art. 1770. A partnership must have a lawful object or purpose, and must be established for the common
benefit or interest of the partners. When an unlawful partnership is dissolved by a judicial decree, the profits
shall be confiscated in favor of the State, without prejudice to the provisions of the Penal Code governing the
confiscation of the instruments and effects of a crime. Object or purpose of partnership.
The provision of the 1st paragraph reiterates 2 essential elements of a contract of partnership:
1. Legality of the object; and
2. Community of benefit or interest of the partners. The parties possess absolute freedom to choose the
transaction or transactions they must engage in. The only limitation is that the object must be lawful
and for the common benefit of the members. The illegality of the object will not be presumed; it must
appear to be of the essence of the relationship.
Art. 1776. As to its object, a partnership is either universal or particular. As regards the liability of the partners,
a partnership may be general or limited.
As to purpose
Commercial or trading partnership: one formed or the transaction of business.
Professional or non-trading partnership: one formed for the exercise of a profession.
iv. Nature of Contributions (Art. 1767, NCC)
Contribution of money, property, or industry to a common fund:
1. Existence of proprietary interest
2. Proof of contribution
Money: The medium of exchange authorized or adopted by a government as part of its currency.
Property:Any external thing over which the rights of possession, use, and employment are exercised.
Industry: Diligence in the performance of a task. A particular form or branch of productive labor.
v. Formal Requisites (Art. 1771-1774, NCC)
Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are
contributed thereto, in which case a public instrument shall be necessary .
Form of partnership contract
General Rule: No form is required. Thus, the contract may be oral or in writing.
Exception: If real properties or real rights in real properties are contributed regardless of the value. A public
instrument is needed; otherwise, the contract of partnership is void.
REAL RIGHTS: A right that is connected with a thing rather than a person. Real rights include ownership, use,
habitation, usufruct,predial servitude, pledge, and real mortgage.
PUBLIC INSTRUMENTS: A document prepared by a notary public in the presence of the parties who sign it
before witnesses.
Art. 1772. Every contract of partnership having a capital of three thousand pesos or more, in money or
property, shall appear in a public instrument, which must be recorded in the Office of the Securities and
Exchange Commission. Failure to comply with the requirements of the preceding paragraph shall not affect
the liability of the partnership and the members thereof to third persons.
Art. 1773.
Where immovable property contributed, failure to comply w/ the following requisites will render the partnership
contract void:
1. The contract must be in a public instrument;
2. An inventory of the property contributed must be made, signed by the parties, and attached to the
public instrument. Art. 1773 is intended primarily to protect 3rd persons. W/ regard to 3rd person, a de
facto partnership or partnership by estoppel may exist. There is nothing to prevent the court from
considering the partnership agreement an ordinary contract from which the parties’ rights and
obligations to each other may be inferred and enforced.
Art. 1774. Any immovable property or an interest therein may be acquired in the partnership name. Title so
acquired can be conveyed only in the partnership name. Acquisition or conveyance of property by partnership
Since partnership has a juridical personality of its own, it may acquire immovable property in its own name.
Title so acquired can be conveyed only in the partnership name.

vi. Registration (Art. 1772, NCC)

Partnership with capital of P3, 000 or more(Personal property only)
The contract of partnership must appear in a public instrument and must be recorded in the office of the SEC.
Take note that non-compliance with the requirement of execution in a public instrument will not make the
contract void. Hence, it is still valid.
Partnership with capital of below P3, 000(Personal property only)
No form is required. Thus, it may be verbal,
Purpose of registration
Registration is necessary as a condition for the issuance of licenses to engage in business and trade. In this
way, the tax liabilities of big partnerships cannot be evaded and the public can determine more accurately
their membership and capital before dealing with them.
When partnership considered registered
The objective of the law is to make the recorded instrument open to all and to give notice thereof to interested
parties. This objective is achieved from the date the partnership papers are presented to and left for record in
the Commission. This is the effective date of registration. If the certificate of recording is issued on a
subsequent date, it effectively retroactives the date of presentation.

d. Classes of Partnership
i. General Partnership v Limited Partnership – (Art. 1843, NCC)
Art. 1843. A limited partnership is one formed by two or more persons under the provisions of the following
article, having as members one or more general partners and one or more limited partners. The limited
partners as such shall not be bound by the obligations of the partnership.
 General partner Limited partner

Personally liable for partnership obligations Liability extends only to his capital contribution.

Have equal right in management of partnership No share in management of partnership.

May contribute money, property or industry May contribute money and property

Proper party to proceedings Not proper party to proceedings

Interest cannot be assigned to make new partner Interest is assignable with assignee acquiring all
rights of the limited partner

His name may appear in the firm name Name not included in firm name

Prohibited from engaging in a business like No prohibition

partnership’s

His retirement, insolvency and death dissolves the His retirement, insolvency and death does not
partnership dissolve the partnership

ii. Universal Partnership v. Particular Partnership - (Art. 1777-1783, NCC)

Art.1777: A universal partnership may refer to all the present property or to all the profits.
Art. 1778: A partnership of all present property is that in which the partners contribute all the property which
actually belongs to them to a common fund, with the intention of dividing the same among themselves, as well
as all the profits which they may acquire therewith.

Point of Distinction Universal Partnership Particular Partnership

As to subject matter Encompasses all the present property of Determinate things, their use or fruits,
the partners or to all the profits. or a specific undertaking, or the
exercise of profession.

As to object Vague and indefinite. Well defined and limited.

As to Extent of partner’s A universal partner’s participation refers A particular partner’s participation is

participation in the to the whole or entire business. specified or limited to a part of the
business business.

iii. Universal Partnership of Present Property v. Universal Partnership of all Profits - (Art.
1778-1782, NCC)

Point of Distinction Universal Partnership of all Universal Partnership of Profits

Present Property

As to what contributed All the properties contributed plus All profits acquired by the industry
the profits of said contributed or work of the partners.
propertied (not other profits)

Things not allowed to to be Property acquired by inheritance, Profits acquired through chance
contributed legacy, donation cannot be included such as lottery or by lucrative title
by exception except the fruits without employment of any physical
thereof. or intellectual efforts.

As to what passes to the
partnership
All the property actually belonging to
the partners are contributed.
Only the USUFRUCT of the
properties of the partners is
contributed to the partnership,
Ownership is retained by the partner
who contributed the property.

Risk of Loss If universal partnership of ownership If universal partnership of use was

was transferred, partnership will only contributed, the partner will
bear the law. bear the law.

Dissolution Property will not be returned to the Property will be returned to the
partner. partner because the partner
remains the owner of the property.
 iv. Professional Partnership - (Art. 1767, NCC)
Art.1767.Two or more persons may also form a partnership for the exercise of a profession. (1665a)
Profession is "o group of men pursuing a learned art as a common calling in the spirit of public service, no
less a public service because it may incidentally be a means of livelihood."
v. Partnership by Estoppel – (Art. 1825, NCC)
Partner by estoppel: one who is not really a partner but is liable as a partner for the protection of innocent
3rd persons. He is one represented as being a partner but who is not so between the partners themselves.
Estoppel – A preclusion, in law, which prevents a man from alleging or denying a fact, in consequence of his
own previous act, allegation, or denial of a contrary tenor.
Person bound by his representation: A person who holds himself out as a partner in a business, or
consents to his being so held out, is liable on contracts made with third persons who deal with the persons
carrying on the business on the faith of the representation. He is stopped to deny the apparent agency.

e. Kinds of Partners
i. Silent
One who does not take any active part in the business although he may be known to be a partner.
ii. Dormant
One who does not take active part in the business and is not known or held out as a partner. He would be
both a silent and a secret partner.
iii. Capitalist
One who contributes money or property to the common fund.
iv. Industrial
One who contributes only his industry or personal service.
v. General
One whose liability to3rd person extends to his separate property.
vi. Limited
One whose liability to 3rd persons is limited to his capital contribution.

f. Contract of Partnership in Comparison with

i. Corporation - Supreme Court Case: Guy v. Gacott, GR 206147, January 13, 2016

Partnership Corporation

It is created by voluntary agreement of the parties. It is created by the State in the form of a special
charter or by a general enabling law.

There is no time limit except agreement of parties. Not more than fifty years; may be reduced, but never
extended.

It may be liable to strangers with their private It is liable only for payment of their subscribed
property beyond their contribution to the firm. capital stock.

Even if a partner transfers his interest to another, the A transfer of interest makes the transferee a
transferee does not become a partner unless all stockholder, even without the consent of others.
other partners consent.

Generally, partners acting on behalf of the Generally, the stockholders cannot bind the
partnership are agents thereof; consequently, they corporation since they are not agents thereof.
can bind both the firm and the partners.

A partner can sue a partner who mismanages. A stockholder cannot sue a member of the board of
directors who mismanages: the action must be in the
name of the corporation.

A partnership is a national of the country it was
created.
A corporation is a national of the country under
whose laws it was incorporated, except for wartime
purposes or for the acquisition of land, natural
resources and the operation of public utilities in the
Philippines, in which case the veil of corporate
identity is pierced and we go to the nationality of the
controlling stockholders.

The firm becomes a juridical person from time the The firm becomes a juridical person from the time it
contract begins. is registered in the SEC, and all requisites have
been complied with.
Causes of dissolution: death, retirement, insolvency, Such causes do not dissolve a corporation.
civil interdiction, or insanity of a partner.

ii. Joint Venture

Point of Distinction Partnership Joint Venture

Who Is In It A partnership is usually only made up
of persons, two or more, who form a
legally recognized association for the
purpose of operating a business.
A joint venture, on the other hand, can be
individuals or entities such as corporations,
or even governments and businesses. It
can also be individuals, whereas a
partnership is often only individuals.

The Purpose A partnership’s purpose is not limited to
a single project or goal; rather, it is
oriented towards running a business or
long-term enterprise and making a
profit.
Joint ventures, on the other hand, are
designed to accomplish a specific goal.
Each party contributes their share to an
agreed-upon task. Profit may not be on the
list of goals of the joint venture at all. For
example, universities and drug companies
often enter into joint ventures to find new
drugs.

How Each Is Made Partnerships are usually formed with a
partnership agreement or contract
between the individuals who make up
the partnership. The partnership
agreement lays out the terms of the
partnership covering topics such as
sharing in profits and losses, how
partners can leave the partnership, the
percentage of control held by each
partner, and similar issues.
Joint ventures, on the other hand, may not
necessarily have an agreement in place.
Or, if there is an agreement, it is a
short-term and very specific contract that
addresses the particular project that is
going to be undertaken.

How Long Each Partnerships are designed to last for Joint ventures are meant for short-term
Lasts the life of the business. They can run project lifetimes. They are not meant to last
infinitely. forever, just long enough to allow the
parties to reach a particular goal.

How Big Is The Size Partnerships, in contrast, can be huge. Joint ventures are limited in their scope and
And Scope what they can accomplish. This is due to
the duration and size of the agreement on
a project.

Who Is Accountable When a partnership goes wrong and
causes a moral hazard, only the
offending party is faced with fault. Even
though the deal is for the long-term,
this protects partners that have entered
a deal unwittingly before a disaster.
In the case of a joint venture, however,
both parties are seen at fault in the case of
a moral hazard or criminal wrongdoing.
Accountability greatly increases. This
makes joint ventures riskier in the
short-term

iii. Trusts

Partnership Trust

All of the members are principals and are agents of
each other.
The trustee is only a principal and is not an agent.
Only the trustee and not the beneficiaries is
empowered to make contracts to carry on the
business affairs and the only one who has legal title
to the property.

iv. Agency

Partnership Agency

A partner is both a principal and an agent for the firm An agent never acts for himself, but only for his
and the others. principal.
 g. Rules of Management (Art. 1800-1803, NCC)
Art.1800. Who shall manage the partnership?
Either one, some or all of the partners designated as managing partner/s either in the articles of partnership
or after the contract of partnership had already been constituted. If there is no agreement management is
vested in all of the partners.
TWO MODES OF APPOINTMENT
1. Appointment as manager in the articles of partnership: or
2. Appointment as manager made in an instrument other than the articles of partnership.
I.APPOINTMENT AS MANAGER IN THE ARTICLES OF PARTNERSHIP
General Rule: Power is irrevocable without or lawful cause.

Exception: 1. To remove him for just cause, vote of partners having controlling interest is necessary,"
2. To remove him without just cause, there must be unanimity including his own vote.
Reason: This represents a change in the will of the parties a change in the terms of the contract a novation;
so to speak, requiring unanimity"

Extent of power: 1. If he acts in good faith, he may do all acts of administration despite the opposition of
his partners.
2. If he acts in bad faith, he cannot do any act of administration. It must be noted that the
presumption in law is in favor of good faith.
II. APPOINTMENT AS MANAGER MADE IN AN INSTRUMENT OTHER THAN THE ARTICLES OF
PARTNERSHIP
Rule: The power to act may be revoked at any time with just cause by the partners owning the controlling
interest,
Reason: Such appointment is a mere delegation of power; revocable at any time.46
Extent of power: The manager can do all acts of administration.

Art.1801. When Two or More Managing Partners have been Entrusted with the Management
Requisites:
1. Two or more partners are managers:
2. There is no specification of respective duties; and
3. There is no stipulation requiring unanimity, that is, that one of thes shall not act without the consent of
all the others.
General rule: Each one may separately execute all acts of administration.
Exceptions: If any of the managers should oppose:
1. The decision of the majority (per head) of the managing partners shal prevail
2. In case of a tie. the decision of the managing partners owning the controlling interest (more than 50%)
shall prevail.
Note: The right to oppose is not given to non-managers because in appointing their other partners as
managers they have stripped themselves of all participation in the administration.Stipulation Requiring
Unanimity of Action

Art.1802.
General Rule: Unanimous consent of all the managing partners (even if one of the managers is absent or
incapacitated) shall be necessary for the validity the acts and absence or disability of any managing partner
cannot b alleged.
Exception: When there is an imminent danger of grave or irreparable injury to the partnership

Art.1803. Rules When Manner of Management Has Not Been Agreed Upon
1. All the partners shall be considered as managers. Consequently, all partners can do all acts of
administration. If the acts of a partner are opposed by the other partners, the majority (per head) shall
prevail. In case of tie (per head), then the vote of the partners representing the controlling interest shall
prevail.
2. For important alterations in immovable property, unanimity is required.

h. Obligations of the Partners

i. To the Partnership (Art. 1783 NCC)
1. To give their promised contribution
2. Not to convert partnership money to their own use
3. To account and hold as trustees for any profits derived without the consent of the other partners
4. Not to engage in any business which is of the kind in which the partnership is engaged.
 5. Obligation of managing partners to credit to the partnership the payment made by a debtor who owes
them and the partnership,
6. Obligation to share with the other partners the share of the partnership credit which they have received
from an insolvent partnership debtor.
7. Pay for damages suffered by the partnership through their fault.
1. As to his contribution (Art. 1786-1790, NCC)
Art. 1786.Every partner is a debtor of the partnership for whatever he may have promised to contribute
thereto. He shall also be bound for warranty in case of eviction with regard to specific and determinate things
which he may have contributed to the partnership, in the same cases and in the same manner as the vendor
is bound with respect to the vendee. He shall also be liable for the fruits thereof from the time they should
have been delivered, without the need of any demand.
Obligation of every partner
1. The obligation to contribute what had been promised;
The mutual contribution to a common fund is the first test in order to have a contract of
partnership.
The failure to contribute is to make the partner a debtor of the partnership even if there is no
demand. This is an exception to the general rule that there is no delay when there is no demand.
Consequently, in case of failure to deliver the promised contribution, the remedy is specific
performance with interest and damages occasioned thereby and not rescission.
2. The obligation to deliver the fruits thereof; and
If property has been promised, the fruits thereof should also be given. The fruits referred to are
those arising from the time they should have been delivered, without the need of any demand. If the
partner is in bad faith, he is liable not only for the fruits actually produced, but also for those that could
have been produced,
If money has been promised and that partner failed to do so, he becomes a debtor for the
interest and damages from the time he should have complied with his obligation
3. The obligation to warrant
The warranty in case of eviction refers only to specific or determinate things which a partner
contributed to the partnership.

Art. 1787. When the capital or a part thereof which a partner is bound to contribute consists of goods, their
appraisal must be made in the manner prescribed in the contract of partnership, and in the absence of
stipulation, it shall be made by experts chosen by the partners, and according to current prices, the
subsequent changes thereof being for account of the partnership. (n)
APPRAISAL OF GOODS OR PROPERTY CONTRIBUTED
− Appraisal is necessary to determine how much has been contributed by the partners
− The appraisal is made by:
1. Stipulation
2. If there is no stipulation − experts chosen by the partners and according to current prices

Art. 1788 A partner who has undertaken to contribute a sum of money and fails to do so becomes a debtor
for the interest and damages from the time he should have complied with his obligation. The same rule
applies to any amount he may have taken from the partnership coffers, and his liability shall begin from the
time he converted the amount to his own use. (1682)
OBLIGATIONS WITH RESPECT TO CONTRIBUTION OF MONEY (PAR. 1) AND MONEY CONVERTED TO
PERSONAL USE (PAR. 2
1. To contribute on the date due
2. To reimburse any amount he may have taken for his own use
3. To pay the agreed or legal interest, if he fails to pay on time
LIABILITY OF GUILTY PARTNER FOR INTEREST AND DAMAGES
− It will start from the time when the partner should have made the contribution or the time he converted the
money to his own use and not to the time of the judicial or extrajudicial demand
LIABILITY OF PARTNER FOR FAILURE TO RETURN PARTNERSHIP MONEY RECEIVED
− Estafa (Art 315 of the RPC) − if he misappropriate partnership money or property received by him for a
specific purpose
− Mere failure to return is not an act under estafa

Art. 1790. Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the capital
of the partnership. EXTENT OF CONTRIBUTION TO PARTNERSHIP CAPITAL
− Partner can stipulate the contribution of unequal shares to the common fund
− Absence of stipulation, there is a presumption that the contribution is in equal shares
 2. As to Losses (Art. 1791, 1795, NCC)
Art. 1791. If there is no agreement to the contrary, in case of an imminent loss of the business of the
partnership, 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. (n)
OBLIGATION OF CAPITALIST PARTNER TO CONTRIBUTE ADDITIONAL CAPITAL
General Rule: capitalist partner is not bound to contribute more than what he agreed to contribute
Exception: imminent loss of the business
- He is under obligation to contribute an additional share to save the venture
- If he refuses, he shall be obliged to sell his interest to the other partners
Requisites for application of rule
1. Imminent loss of the business
2. Majority of the capitalist partners are of the opinion that an additional contribution to the common fund
would save the business
3. Capitalist refuses to contribute an additional share
4. There is no agreement (Industrial partner is exempted)
Art. 1795. RISK OF LOSS OF THINGS CONTRIBUTED
1. Risk of SPECIFIC AND DETERMINATE THINGS which are NOT FUNGIBLE where THE USE is the only
thing contributed
− Risk of loss: The OWNER of the thing because he remains to be the owner
2. Risk of SPECIFIC AND DETERMINATE THINGS which are NOT FUNGIBLE where THERE IS A
TRANSFER OF OWNERSHIP
− Risk of loss: shall be borne by the PARTNERSHIP
− Reason: because the ownership is transferred to the partnership (res perit domino)
3. FUNGIBLE THINGS (right term should be consumable) or THINGS WHICH CANNOT BE KEPT WITHOUT
DETERIORATING even if ONLY THE USE is contributed
− Risk of loss: PARTNERSHIP
− Reason: because the ownership is intended to be transferred because USE IS IMPOSSIBLE without such
transfer because the thing is CONSUMED OR IMPAIRED
− E.G. Oil, rice, wine
4. WHERE THE THING CONTRIBUTED IS TO BE SOLD
− Risk of loss: Partnership
− Reason: because the partnership cannot sell it without it being the owner
5. THINGS BROUGHT AND APPRAISED IN THE INVENTORY
− Risk of loss: Partnership
− Reason: because it is to be presumed that the parties intended the PRICE to be contributed to the
partnership for the thing appraised. Hence, the PRICE is deemed as the appraised value There is in effect an
IMPLIED SALE
− The parties contributed the PRICE to buy the land (appraised) belonging to the partner

3. As to Partnership Credits (Art. 1792-1793, NCC)

Art. 1792.
OBLIGATION OF MANAGING PARTNER WHO COLLECTS DEBT
General Rule: If there is debt to the partnership and to the managing partner, payment shall be applied to both
credits proportionately Exception: it was received for the account of the partnership only
REQUISITE FOR THE APPLICATION OF THE RULE
1. There are at least 2 debts; one from the partners and the other to the partnership
2. Both debts are demandable
3. The partner who collects is authorized to manage and actually manages the partnership
Art. 1793.
A partner who has received, in whole or in part, his share of a partnership credit, when the other partners
have not collected theirs, shall be obliged, if the debtor should thereafter become insolvent, to bring to the
partnership capital what he received even though he may have given receipt for his share only. (1685a)
OBLIGATIONS OF PARTNER WHO RECEIVES SHARE OF PARTNERSHIP CREDIT
− There is only one credit, the credit in favor of the partnership REQUISITES FOR APPLICATION OF THE
RULE
1. A partner has received, whole or in part, his share of the partnership cred
2. The other partners have not collected their shares
3. The partnership debtor has become insolvent

4. As to Damages (Art. 1794, NCC)

Art. 1794. OBLIGATION OF PARTNER FOR DAMAGES TO PARTNERSHIP
General Rule: Every partner is responsible to the partnership for damages suffered by it through his FAULT
and he cannot compensate it with the PROFITS AND BENEFITS which he may have earned for the
partnership by his industry.
REMEDY OF THE PARTNER HELD LIABLE
− The courts may EQUITABLY LESSEN THIS RESPONSIBILITY if through the EXTRAORDINARY
EFFORTS of the partner in OTHER ACTIVITIES of the partnership, UNUSUAL PROFITS may have been
realized.
COMPENSATION OF DAMAGES WITH PROFITS EARNED FOR PARTNERSHIP BY GUILTY PARTNER
General Rule: There shall be no compensation
Reason:
1. The partner is responsible to SECURE BENEFITS for the partnership. Hence, all the profits earned
shall pertain as a matter of law or right to the partnership
2. Compensation takes place when the negligent partner is both a creditor and debtor of the partnership.
A partner however is a DEBTOR of the partnership for his industry and he shall be liable for the injury
suffered by it caused by his fault. Hence, there cannot be any compensation
Exception: When UNUSUAL PROFITS may have been realized by the partnership thru the extraordinary
efforts of the partner, the courts may MITIGATE OR LESSEN the liability for damages

ii. To the Partners

1. Render Accounting (Art. 1807, NCC)
Art. 1807. Every partner must account to the partnership for any benefit, and 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.
General Rule:
1. Every partner must account to the partnership FOR ANY BENEFIT
2. And hold as TRUSTEE for the partnership any PROFITS derived by him in any transaction connected
with the FORMATION, CONDUCT or LIQUIDATION OF THE PARTNERSHIP or FROM ANY USE BY
HIM of his property
Q: WHAT IS THE NATURE OF THE RELATIONSHIP BETWEEN AND AMONGST PARTNERS?
Fiduciary relationship, that is, of trust and confidence. Each partner is considered in law to be the
CONFIDENTIAL AGENT of the others
Q: NATURE OF THE DUTY OF THE PARTNERS?
Analogous to the duties of the TRUSTEE
Q: WHAT IS THE DUTY OF EACH PARTNER WHEN HE TRANSACTS ANY PARTNERSHIP BUSINESS?
He should always act for the COMMON BENEFIT in all transactions affecting the partnership affairs. He
cannot use or apply exclusively for his own benefit the PARTNERSHIP ASSETS and the results of the
knowledge gained for his individual benefit

2. Capitalist Partners (Art. 1808, NCC)

Art. 1808.The capitalist partners cannot engage for their own account in any operation which is of the kind of
business in which the partnership is engaged, unless there is a stipulation to the contrary. Any capitalist
partner violating this prohibition shall bring to the common funds any profits accruing to him from his
transactions, and shall personally bear all the losses.
Q: When is capitalist partner PROHIBITED from engaging in other business?
When he is engaged in any business which is the same or similar to the business in which the partnership is
engaged
Q: What is the obligation of the partner that violates this prohibition?
1. Bring to the common fund any profits he derived from his transactions
2. If there are losses, the partner should bear it alone

iii. To Third Persons

1. General Liability (Art. 1816, NCC)
Art. 1816. Refers to partnership obligations which refers to the payment of partnership obligations arising
from contracts clearly imposes subsidiary and joint (pro rata) liability for contractual debts owing to third
persons upon all the partners, including industrial partners who ordinarily are not liable for losses. The liability
is subsidiary because the partners cannot be made answerable with their separate property unless the
partnership property has first been exhausted.
Pro rata liability – Literally, pro rata liability means proportionate distribution of liability. In the law of
obligations, the concurrence of two or more debtors in one and the same obligation makes it prima facie a
joint (pro rata) obligation, and the debts is presumed divided into as many equal shares as there are debtors
and each one of them is bound to pay only his share.
Note: Liability as to third persons
Losses as between the partners
Separate obligation of a partner
If a partner, in his own name, enters into a contract with a third person, then it is only that partner who
is liable and not the partnership.
a. Partners as Agents of Partnership (Art. 1818, NCC)
Partner as agent of the partnership
It is the nature of a contract of partnership that it is fiduciary, that is, trust and confidence governed the
partners. Hence, every partner is an agent of the other partners and the partnership.
1. Acts Apparently for Carrying on in the Usual Way the Business of the Partnership
It binds the partnership unless:
a. The partner so acting has in fact no authority to act for the partnership, and
b. The person with whom he is dealing has knowledge of the fact that he has no such authority.
II. Acts Not Apparently for the Carrying on in the Usual Way of Business of the Partnership
It does not bind the partnership, unless authorized by the other partners
III. Acts of ownership
IV. Acts in contravention of a restriction on authority
The act is not binding to the partnership as to persons having knowledge of the restriction.

i. Effects
-Whether a third person has knowledge on the partner’s lack of authority, if the partner’s acts are acts for
apparent carrying on of the business, the Partnership is liable to the third person.
-For acts not apparently for the carrying on of business, even if the third person had no knowledge of the lack
of authority the partnership is not liable.
ii. Doctrine of Apparent Authority
Apparent authority is the power of an agent to act on behalf of a principal, even though not
expressly or impliedly granted. This power arises only if a third party reasonably infers, from the principal's
conduct, that the principal granted such power to the agent.
b. Stipulation to Limit Liability (Art. 1817, NCC)
Art. 1817. Stipulation against liability
A stipulation against liability of all partners for the contracts entered into in the name of the partnership
is void as to third persons. However, it is valid among the partners.

2. Transaction under the Partnership Name (Art. 1815, NCC)

Art. 1815. Every partnership shall operate under a firm name, which may or may not include the name of one
or more of the partners, those who, not being members of the partnership, include their names in the firm
name, shall be subject to liability of a partner
Requirement of the firm name
Meaning of word “firm” – The name, title, or style under which a company transacts business; a partnership of
two or more persons; a commercial house. In its common acceptation, the term implies a partnership. The
term is also used as synonymous with “company,” “house,” and “concern.”
Importance of having a firm name
A partnership must have a firm name under which it will operate. A firm name is necessary to distinguish the
partnership, which has a distinct and separate juridical personality from the individuals composing the
partnership and from other partnerships and entities.
Right of the partners to choose firm name
The partners enjoy the utmost freedom in the selection of the partnership name. As a general rule, they may
adopt any firm name desired.
Use of misleading name – The partners cannot use a name that is identical or deceptively confusingly similar
to that of any existing partnership or corporation or to any other name already protected by law or is patently
deceptive, confusing or contrary to existing laws, as to mislead the public by passing itself off as another
partnership or corporation, or its goods or services as those of such other company.
Liability inclusion of name in the firm name – Persons who, not being partners, include their names in the firm
name do not acquire the rights of a partner but shall be subject to the liability of a partner insofar as 3rd
Persons without notice are concerned. Such persons become partners by estoppel. Art. 1815 does not cover
the case of a limited partner who allows his name to be included in the firm name, or of a person continuing
the business of a partnership after dissolution, who uses the name of the dissolved partnership or the name of
a deceased partner as part thereof.
 3. Conveyance of Partnership Properties (Art. 1819, NCC)
TITLE- Legal evidence of a person's ownership rights in property; an instrument (such as deed) that
constitutes such evidence.69
EQUITABLE INTEREST- An interest held by virtue of an equitable title or claimed on equitable grounds, such
as the interest held by a trust beneficiary.
Real property may be registered or owned in the name of:
1. The partnership:
2. One or more or all the partners;
3. One or more or all the partners; or in a third person in trust for the partnership; and
4. All the partners.
REAL PROPERTY REGISTERED OR OWNED IN THE NAME OF THE PARTNERSHIP (PAR. 1)
The conveyance here was executed in the partnership name.
REAL PROPERTY REGISTERED OR OWNED IN THE NAME OF THE PARTNERSHIP (PAR. 2)
The conveyance here was executed in the partners' name.
TITLE TO REAL PROPERTY IS IN THE NAME OF ONE OR MORE BUT NOT ALL THE PARTNERS (PAR.3)
The partners in whose name the title stands convey the title to such property.
TITLE TO REAL PROPERTY IS IN THE NAME OF ONE OR MORE OR ALL THE PARTNERS, OR IN A
THIRD PERSON IN TRUST FOR THE PARTNERSHIP (PAR.4)
Conveyance was executed by a partner in the partnership name, or in his own name.
TITLE TO REAL PROPERTY IS IN THE NAME OF ALL THE PARTNERS (PAR. 5)
Conveyance executed by all the partners passes all their rights in such property.
4. Admission and Representation of Partners (Art. 1820, NCC)
ADMISSION
A statement in which someone admits that something is true or that he or she has done something
wrong.
An admission by any partner is evidence against the partnership if:
1. The admission must concern partnership affairs; and
2. The admission must be within the scope of his authority.
Note: An admission by a former partner, made after he has retired from the partnership, is not evidence
against the firm.
5. Notice to Partners (Art. 1821, NCC)
The general rule is that notice to a partner is notice to the partnership.
Instances where knowledge of a partner is considered knowledge of the partnership:
1. Knowledge of the partner acting in the particular matter acquired while a partner;
2. Knowledge of the partner acting in the particular matter then present to his mind; and
3. Knowledge of any other partner who reasonably could and should have communicated it to the acting
partner.
Exception: In the case of fraud on the partnership, committed by or with the consent of that partner.
Article 1821 of the Civil Code does not state that there is no need to implead a partner in order to be
bound by the partnership liability. It provides that:
Notice to any partner of any matter relating to partnership affairs, and the knowledge of the
partner acting in the particular matter, acquired while a partner or then present to his mind, and the
knowledge of any other partner who reasonably could and should have communicated it to the acting partner,
operate as notice to or knowledge of the partnership, except in the case of fraud on the partnership,
committed by or with the consent of that partner.
6. Liability of New Partner (Art. 1826, NCC)
Art. 1826. A new partner admitted to an existing partnership is also liable to the obligation existing before he
was admitted, but his liability only extends to his contribution to the partnership UNLESS stipulated.
- A new partner is liable to his separate property when the obligation was incurred when he was already
a partner.

i. Obligation of the Partnership

i. To Partners
1. As to Advances (Art. 1796, NCC)
Art. 1796. The partnership shall be responsible to every partner for the amounts he may have disbursed on
behalf of the partnership and for the corresponding interest, from the time the expenses are made; it shall
also answer to each partner for the obligations he may have contracted in good faith in the interest of the
partnership business, and for the risk inconsequence of its management.
1. Reimburse any amount disbursed by the partners on behalf of the partnership.
2. To answer any obligation contracted in good faith.
3. To answer for risk management.
 2. As to Distribution of Profits/Losses (Art. 1797-1799, NCC)
Art. 1797. RULES FOR DISTRIBUTION OF PROFITS AND LOSSES OF A PARTNERSHIP
1. DISTRIBUTION OF PROFITS
a. According to agreement
The profits shall be distributed in conformity with the agreement.
b. If there is no agreement
1. Capitalist partners in proportion to what he may have contributed to the common fund.
2. Industrial partners - that which is just and equitable under the circumstances
2. DISTRIBUTION OF LOSSES
a. According to agreement
The losses shall be distributed in conformity with the agreement. If the only agreement pertains to the
share of each partner in the profits, the share of each in the losses shall be in the same proportion. However,
the industrial partner shall not be liable for the losses.
b. If there is no agreement:
1. Capitalist partners in proportion to what they may have contributed to the common fund.
2. Industrial partners - not liable for losses.

Art. 1798. THIRD PERSON DESIGNATING THE SHARE OF PARTNERS IN THE PROFITS AND LOSSES
General rule: It is valid.
Exception: It is not valid and it may be questioned if it is manifestly inequitable: unless:
1. A partner began to execute the decision of the third person; or
2. A partner has not questioned the said decision of the third person within a period of 3 months
from the time he had knowledge thereof.
Art. 1799.
General rule: A stipulation excluding one or more partners from any share in the profits and losses is void.
Take note that what is void is the stipulation on and not the contract of partnership. Hence, the profits and
losses shall b distributed as if there was no agreement as discussed in the preceding article.
Also, let it be noted that one of the tests in order to have partnership is the intent of the contracting
parties to divide the profit among themselves.
Exception: An industrial partner is not liable for losses unless he waived the right
Rationale: Why an Industrial Partner is not liable for losses?
While capitalist partners can withdraw their capital, the industrial partner cannot withdraw any labor or industry
he had already exerted Moreover, in a certain sense, he already has shared in the losses in that, if the
partnership shows no profit, this means that he has labored in vain.
3. Partnership Books (Art. 1805, NCC)
Art. 1805. The partnership books shall be kept, subject to any agreement between the partners, at the
principal place of the business of the partnership, and every partner shall at any reasonable hour have access
to and may inspect and copy any of them.
Keeping of partnership books Partner with duty to keep partnership books
The duty to keep true and correct books showing the firm’s accounts, such books being at all times
open to inspection of all members of the firm, primarily rests on the managing or active partner. It is presumed
that the partners have knowledge of the contents of the partnership books and that said books state
accurately the state of accounts, but errors can be corrected.
Rights with the respect to partnership books
Books should be kept at the principal place of business as each partner has the right to free access to
them and to inspect or copy any of them at any reasonable time, even after dissolution. Inspection rights not
absolute can be restrained from using info for other than partnership purposes.
Access to partnership books
Rights can be exercised at any reasonable hour. This means reasonable hours on business days
throughout the year and not merely during some arbitrary period of a few days chosen by the managing
partners.
4. Request for Accounting (Art. 1809, NCC)
Art. 1809. Any partner shall have the right to a formal account as partnership affairs:
1. If he is wrongfully excluded from the partnership business or possession of its property by his
co-partner;
2. If the right exists under the terms of any agreement;
3. Provided by article 1807;
4. Whenever other circumstances render it just and reasonable, Right of the partner to a formal account.
General rule: During the existence of partnership, a partner is not entitled to a formal account of partnership
affairs.
Reason: rights of partner amply protected in arts1805 and 1806. In addition, it would cause much
inconvenience and unnecessary waste of time.
Exception: In the special and unusual situations enumerated under art. 1809. Right of a partner to demand
an accounting w/o bringing about dissolution is a necessary corollary to the right to share in profits. A formal
account is a necessary incident to the dissolution of the partnership.
5. Property Rights
a. Property Rights (Art. 1810, NCC)
Art. 1810. Principal Rights
1. Rights in specific partner property;
2. Interest in partnership;
3. Right to participate in management.
Ownership of certain property Property use by the partnership – Where there is no express agreement that
property used by a partnership constitutes partnership property, such use does not make it partnership
property, and whether it is so depends on the intention of the parties, w/c may be shown by proving an
express agreement or acts of particular conduct. The intent of the parties is the controlling factor.
Property acquired by a partner with partnership funds – Unless a contrary intention appears, property
acquired by a partner in his own name w/ partnership funds is partnership property. However, if the property
was acquired after dissolution but before the winding up of the partnership affairs, it would be his separate
property but he would be liable to account to the partnership for the funds used in its acquisition.
b. Nature of Ownership (Art. 1811, NCC)
A partner is co-owner with his partners of specific partnership property.
c. Incidents of Ownership (Art. 1811, NCC)
A partner, as such, does not actually own any part of partnership property or property owned by the
partnership as a separate business entity, although he does have rights in specific partnership assets.
Article 1811 contemplates TANGIBLE PROPERTY, such as a car, truck, or a piece of land, but not
intangible things such as the beneficial right to a land of the public domain.
A partner is a co-owner with his partners of specific partnership property, but the rules on co-ownership
do not necessarily apply. The legal incidents of this tenancy in partnership are distinctively characteristic of
the partnership relation. They are as follows:
(1) Equal right of possession for partnership purposes. — A partner has an equal right to possess
specific partnership property for partnership purposes. None of the partners can possess and use the
specific partnership property other than for “partnership purposes” (e.g., for his own individual purpose)
without the consent of the other partners.
a) A partner who is wrongfully excluded from the possession of partnership property by his
co-partner has a right to formal account from the latter (Art. 1809[1].), and even apply to a
judicial decree of dissolution.
b) On the death of a partner, his right in specific partnership property VESTS in the surviving
partners, not in the legal representative of the deceased partner (except when he was the last
surviving partner). That is to say, the surviving partners have the right to wind up the business,
and the executor of a deceased partner cannot insist on participating in the winding up process.
c) By agreement, the right to possess specific partnership property may be surrendered, and
this is especially true of a partnership with large membership, where the management and
possession are concentrated in the managing partners
(2) Right not assignable - A partner cannot separately assign his right to specific partnership property
BUT all of them can assign their rights in the same property.
a) A partner’s right in specific partnership property is not assignable because it is impossible to
determine the extent of his beneficial interest in the property until after the liquidation of
partnership affairs.
b) The consent of all the partners, either express or implied, is the source and limit of a partner’s
right to deal with partnership property for any but a partnership purpose.
c) The primary reasons for the non-assignability of a partner’s right in specific partnership property
are that it prevents interference by outsiders in partnership affairs; it protects the right of other
partners and partnership creditors to have partnership assets applied to firm debts; and it is
often impossible to measure or value a partner’s beneficial interest in a particular partnership
asset.
(3) Right limited to share of what remains after partnership debts have been paid - The whole of
partnership property belongs to the partnership considered as a juridical person (Art. 1768.), and a partner
has no interest in it but his share of what remains after all partnership debts are paid. (Art. 1812.)
NOTE: It is clear from the above that although separate creditors of an individual partner may reach the
interest of a partner in the partnership, they cannot go after any specific partner property
ii. To Third Persons
 1. Losses caused by Partners (Art. 1822, NCC)
Art. 1822. Where, by any wrongful act or omission of any partner acting in the ordinary course of the business
of the partnership or with the authority of co- partners, loss or injury is caused to any person, not being a
partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as
the partner so acting or omitting to act.
Partner liable for wrongful act of a partner
The partners are liable for the negligent operation of a vehicle by a partner, acting in the course of business,
which results in a traffic accident. If he is driving a partnership-owned vehicle for purposes of his own, the
acting partner alone is liable it is not a partnership tort.
Partnership may proceed against negligent partner
Where a partnership is liable to a third person, there is a right of indemnity against the partner whose
negligence caused the injuries.

a. Who shall shoulder the losses? (Art. 1824, NCC)

Art. 1824. All partners are liable solidarily with the partnership for everything chargeable to the partnership
under Articles 1822 and 1823.
In essence, 1822, 1823, and 1824, articulate that it is the act of a partner which caused loss or injury to
a third person that makes all other partners solidarily liable with the partnership because of the words "any
wrongful act or omission of any partner acting in the ordinary course of the business," "one partner acting
within the scope of his apparent authority" and "misapplied by any partner while it is in the custody of the
partnership.". The obligation is solidary because the law protects the third person, who in good faith relied
upon the authority of a partner, whether such authority is real or apparent.
A third person who transacted with said partnership can hold the partners solidarily liable for the whole
obligation if the case of the third person falls under Articles 1822 or 1823.
2. Partnership by Estoppel (Art. 1825, NCC)
Partnership by estoppel - Arises if all the partners consented to the misrepresentation of a third person who is
not a real partner. This creates a partnership obligation.
Estoppel – A preclusion, in law, which prevents a man from alleging or denying a fact, in consequence of his
own previous act, allegation, or denial of a contrary tenor.
Person bound by his representation
A person who holds himself out as a partner in a business, or consents to his being so held out, is liable on
contracts made with third persons who deal with the persons carrying on the business on the faith of the
representation. He is stopped to deny the apparent agency.
Note: Partnership by estoppel does not apply when the third person is not deceived. Thus, it is the third
person who has the burden of proving the existence of a partner by estoppel or partnership by estoppel.
3. Liability of New Partner (Art. 1826, NCC)
Art. 1826. A person admitted as a partnerninto an existing partnership is liable for all the obligations of the
partnership arising before his admission as though he had been a partner when such obligations were
incurred, except that this liability shall be satisfied only out of partnership property, unless there is a stipulation
to the contrary.
Incoming partner liable for existing obligations
A newly admitted partner is liable for obligations of the partnership at the time of his admission. The obligation
of the incoming partner shall be satisfied only out of partnership property. This is not a harsh rule because the
incoming partner “partakes of the benefit of the partnership property, and an established business. He has
every means of obtaining full knowledge of protecting himself, because he may insist on the liquidation or
settlement of existing partnership debts. On the other hand, the creditors have no means of protecting
themselves.
j. Dissolution and Winding Up
i. Dissolution v. Winding Up – Art. 1828-1829, NCC)
Art. 1828. The dissolution of a partnership is the change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on as distinguished from the winding up of the business.
WHAT IS DISSOLUTION?
The dissolution of a partnership is the change in the relation of the parties caused by any partner ceasing to
be associated in the carrying on, as might be distinguished from the winding up of, the business. Upon its
dissolution, the partnership continues and its legal personality is retained until the complete winding up of its
business culminating in its termination.
DISSOLUTION VS. WINDING UP VS. PARTITION OR DISTRIBUTION
The dissolution of the partnership did not mean that the juridical entity was immediately terminated and that
the distribution of the assets to its partners should perfunctorily follow. On the contrary, the dissolution simply
effected a change in the relationship among the partners. 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.
THREE FINAL STAGES OF A PARTNERSHIP
Even if partners had agreed to dissolve the partnership, such agreement will not automatically put an end to
the partnership, since the partners still had to sell the goods on hand and collect the receivables from debtors.
In short, the partners will still undergo the process of winding up the affairs of the partnership.
Under the Civil Code, the final stages of a partnership are (1) dissolution: (2) winding-up; and (3) termination.
These stages are distinguished, to wit:
1. Dissolution, Defined
Dissolution is the change in the relation of the partners caused by any partner ceasing to be associated in the
carrying on of the business (182). It is that point of time the partners cease to carry on the business together.
2 Winding Up, Defined
Winding up is the process of settling business affairs after dissolution
Examples of winding up: The paying of previous obligations, the collecting of assets previously
demandable: even the contracting for new business if needed to wind up, such as the contracting with a
demolition company for the demolition of the garage used in a used car partnership.
3 Termination, Defined
Termination is the point in time after all the partnership affairs have been wound up.
IS THE AGREEMENT OF THE PARTNERS AFFECTING LIQUIDATION VALID?
The liquidation of the assets of the partnership following its dissolution is governed by various provisions of
the Civil Code; however, an agreement of the partners, like any other contract, is binding among them and
normally takes precedence to the extent applicable over the Code's general provisions.5

WHAT IS THE MEANING OF "RETIREMENT" IN DISSOLUTION?

The term "retirement" in a generic sense means the dissociation by a partner, inclusive of resignation or
withdrawal, from the partnership that thereby dissolves it.6
Art. 1829. On dissolution the partnership is not terminated, but continues until the winding up of partnership
affairs is completed. (n)
Note: After dissolution, all the transactions of the partnership should only pertain to liquidation or winding up
which will happen over a period of time. For example, the partnership will sell its non-cash assets, collects its
receivables, pay the partnership creditors and thereafter distribute the remainder to the partners
ii. Grounds for Dissolution
1. Voluntary - (Art. 1830, NCC)
Art.1830. KINDS OF DISSOLUTION
1. Extrajudicial dissolution - These are nos. 1 to 7 of the above-stated article.
2. Judicial dissolution - This refers to no. 8 of the above-stated article in relation to Art. 1831 of the New
Civil Code.
1. Without violation of the agreement between the partners:
(a) By the termination of the definite term or particular undertaking specified in the agreement;
Partnership with a fixed term
It is one where the life or period of existence of the partnership has been agreed upon by the partners.
Partnership for a particular undertaking
It is one where it will exist until the purpose is accomplished.
(b) By the express will of any partner, who must act in good faith, when no definite term or
particular undertaking is specified;
Partnership at will
A partnership that does not fix its term is a partnership at will The birth and life of a partnership de will
is predicated on the mutual desire and consent of the partners. The right to choose with whom a person
wishes to associate himself is the very foundation and essence of that partnership.
(c) 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.
(d) By the expulsion of any partner from the business bona fide in accordance with such a power
conferred by the agreement between the partners
2. In contravention of the agreement between the partners, where the circumstances do not permit a
dissolution under any other provision of this article, by the express will of any partner at any time.
3. 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.
4. When a specific thing which a partner had promised to contribute to the partnership, perishes
before the delivery; in any case by the loss of the thing, when the partner who contributed it having
reserved the ownership thereof, has only transferred to the partnership the use or enjoyment of the
same; but the partnership shall not be dissolved by the loss of the thing when it occurs after the
partnership has acquired the ownership thereof.
5. By the death of any partner.
6. By the insolvency of any partner or of the partnership:
Insolvency here means that the liabilities are greater than the assets.
7. By the civil interdiction of any partner:
What is civil interdiction?
Civil interdiction deprives the offender during the time of his sentence of the right to manage his
property and dispose of such property by any act or any conveyance inter vivos.
2. Involuntary – (Art. 1831, NCC)
Art.1831.
Who may petition for dissolution
Dissolution of a partnership may be decreed by the court on application either (1) by a partner or, in case he
has assigned his interest, (2) by his assignee.
1. ON APPLICATION BY OR FOR A PARTNER
a. A partner has been declared insane in any judicial proceeding or is shown to be of unsound mind:
The presumption is in favor of sanity that is why the insanity here must be duly proven in court Take
note that insanity will make a person incapacitded to enter into a contract like a contract of partnership
b. A partner becomes in any other way incapable of performing his part of the partnership contract;
c. A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the
business;
d. A partner wilfully or persistently commits a breach of the partnership agreement, or otherwise so
conducts himself in matters relating to the partnership business that it is not reasonably practicable to
carry on the business in partnership with him;
e. The business of the partnership can only be carried on at a loss;
Take note that the intention and essence of every business partnership is to divide the profits among
themselves.
f. Other circumstances render a dissolution equitable.
This is a catch-all provision for other grounds of judicial dissolution not mentioned above so long as this can
be proven in court
Note: There can be a judicial dissolution if the continuation of the partnership has become inequitable.

iii. Effects of Dissolution – (Art. 1832, 1834-1835, NCC)

1. Remaining Affairs
Art. 1832. Except so far as may be necessary to wind up partnership affairs or to complete transactions
begun but not then finished, dissolution terminates all authority of any partner to act for the partnership:
1. With respect to the partners
a. When the dissolution is not by the act, insolvency or death of a partner.
b. When the dissolution is by such act, insolvency or death of a partner, in cases where article 1833 so
requires.
2. With respect to persons not partners, as declared in article 1834.
General Rule: When partnerships are dissolved, partners cannot engage in new business transactions
because their authority to do so terminates upon occurrence of dissolution.
Exception: For the purposes of winding-up partnership affairs.
2 Cases contrary to General rule:
a. During the Winding Up of business— Transactions relating t o the winding up of business such as
liquidation of partnership assets can be entered into because the partner’s authorities to do so shall
continue.
b. To Complete unfinished transaction dusring dissolution.

2. On Partners
Art.1834. General Rule: Dissolution terminates the authority of the partners to bind partnership.
Exceptions: Any act appropriate for winding-up partnership affairs or completing transactions unfinished at
dissolution.

If the dissolution is not by an act, insolvency, or death, the authority of partners as among themselves is
terminated.
Termination of actual authority of a partner to undertake new business for the partnership.
I. PARTNERSHIP IS LIABLE
1. Act appropriate for winding up partnership affairs;
2. Act for completing transactions unfinished at dissolution.
3. Any transaction which would bind the partnership 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 of the
dissolution;
b. Though he had not so extended credit, had nevertheless known of the partnership prior to
dissolution, and, having no knowledge or notice of dissolution, the fact of dissolution had not been advertised
in a newspaper of general circulation in the place at which the partnership was regularly carried on.
II. PARTNERSHIP IS NOT LIABLE
1. Where the partnership was dissolved because it was UNLAWFUL to carry on the business, unless the act
is appropriate for winding up partnership affairs.
2. Where the partner has become insolvent.
3 Where the partner had no authority to wind up partnership affairs ; except by a transaction with a third
person who is in good faith.
3. Third Persons
If third persons that transacted had no actual knowledge of the dissolution. Persons extending credit prior to
dissolution are entitled to notice of dissolution. If they had no notice or knowledge of dissolution, they may
hold the retired partner for obligations made by continuing partners after dissolution.
The partnership is required to have dissolution be announced in general circulation of the place of operations.
As long as they do this, then it is sufficient notice to all third persons.
4. Involuntary Dissolution – (Art. 1833, NCC)
Art. 1833. Where the dissolution is caused by the act, death or insolvency of a partner, each partner is liable
to his co-partners for his share of any liability created by any partner acting for the partnership as if the
partnership had not been dissolved unless:
1. The dissolution being by act of any partner, the partner acting for the partnership had knowledge of the
dissolution.
2. The dissolution being by the death or insolvency of a partner, the partner acting for the partnership had
knowledge or notice of the death or insolvency.
General Rule: If the cause of dissolution is the death, act, or insolvency of a partner, authority of a partner to
bind ceases upon the knowledge of the dissolution. If dissolution is caused by the act of one of the parties,
co-partners are also liable to contribute towards a liability as if no dissolution has happened, provided that
there is no notice or the partner does not have knowledge of the dissolution.

5. Division on Remaining Properties

Art.1839. No.8 When partnership property and the individual properties of the partners are in possession of a
court for distribution, partnership creditors shall have priority on partnership property and separate creditors
on individual property, saving the rights of lien or secured creditors.
Consider the case of liquidation and the distribution of partnership assets.
Liquidation is when all the assets are converted to cash.
Total assets will include GOODWILL as well as the original CONTRIBUTIONS of the partners.
If the partnership was dissolved in contravention of the agreement
1. The remaining partners have the right to sell partnership property to pay the partnership’s liabilities and
the surplus is distributed to the remaining partners as well.
2. As against the guilty partner for the dissolution of the partnership, the remaining partners have the right
to recover damages for breach.
3. The remaining partners may also continue the business up to end of the stipulated term of the
partnership.

iv. Transfer of Liability of Insolvent Partners

Art.1839. No.9 Where a partner has become insolvent or 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.
c. Those owing to partners by way of contribution. (Transfer to solvent partner, must contribute their own
share to pay-off the liabilities)
v. Order of Preference – Liability (Art. 1839, NCC)
Art.1839. No.2 The liabilities of the partnership shall rank in order of payment, as follows:
a. Those owing to creditors other than partners.
b. Those owing to partners other than for capital and profits.
c. Those owing to partners in respect of capital.
d. Those owing to partners in respect of profits.
k. Limited Partnership
 i. In Comparison with a General Partnership
1. Definition – (Art. 1843, NCC)
● A general partnership is an organizational structure under which the partners in a business have
unlimited personal liability for the obligations of the entity. Under this arrangement, all partners are
assumed to have certain management responsibilities for running the organization.
● Limited partnership (LP) is a type of partnership organization that limits the personal liability of some
partners.
As to liability of the partners
General partnership: one consisting of general partners who are liable pro rata and subsidiary and
sometimes solidarily w/ their separate property for partnership debts.
Limited partnership: one formed by two or more persons having as members one or more general partners
and one or more limited partners, the latter not being personally liable for the obligations of the partnership.

2. Composition – (Art. 1843, NCC)

General partnership Limited partnership

Personally liable for partnership obligations Liability extends only to his capital contribution.

Have equal right in management of partnership No share in management of partnership.

May contribute money, property or industry May contribute money and property

Proper party to proceedings Not proper party to proceedings

Interest cannot be assigned to make new partner Interest is assignable with assignee acquiring all
rights of the limited partner

His name may appear in the firm name Name not included in firm name

Prohibited from engaging in a business like No prohibition

partnership’s

His retirement, insolvency and death dissolves the His retirement, insolvency and death does not
partnership dissolve the partnership

3. Formal Requisites – (Art. 1844, NCC)

ESSENTIAL REQUISITES IN THE FORMATION OF A LIMITED PARTNERSHIP
1. The certificate of limited partnership.It must be signed and sworn to. It must contain all the enumerated
items in the above-stated article.
2. The certificate of limited partnership must be filed in the Office of the Securities and Exchange
Commission.
Note:As compared to general partnership which can be verbal, a limited partnership must always be in writing
(certificate of limited partnership)
There is no limited partnership in case of non-compliance with the above- requirements. However, there can
be a general partnership.
Presumption in favor of a general partnership
A partnership transacting business with third persons is disputably presumed to be a general partnership.
4. Nature of Contributions
a. Limited Partner
Art. 1845. The contributions of a limited partner may be cash or property, but not services.
Limited partners can only contribute money and property and cannot contribute services to the partnership to
protect persons dealing with the firms with frauds.
b. General Partner
The contributions of a general partner may be cash,property, and/ or services or industry.
ii. Rights and Obligations of Partners
1. General
a. Rights (Art. 1850, NCC) and b. Obligations
ART. 1850. A general partner shall all have the rights and powers and be subject to all the restrictions and
liabilities of a partner in a partnership without limited partners. However, without the written consent or
ratification of the specific act by all the limited partners, a general partner or all of the general partners have
no authority to:
1. Do any act in contravention of the certificate.
2. Do any act which would make it impossible to carry on the ordinary business of the partnership.
 3. Confess a judgement against the partnership.
4. Possess partnership property, or assign their rights in specific partnership property, for other than a
partnership purpose.
5. Admit a person as a general partner.
6. Admit a person as a limited partner, unless the right to do so is given in the certificate.
7. Continue the business with partnership property on the death, retirement, insanity, civil interdiction or
insolvency of a general partner, unless the right so to do is given in the certificate.
Note: As a rule, just like the general partners in a general partnership, the general partners in a limited
partnership can do only acts of administration
The above enumerations pertain to acts of ownership. Thus, the general partners must secure the written
consent or ratification by all of the limited partners.
2. Limited
a. Rights (Art. 1851, 1854 NCC)
ART. 1851. Specific Rights of Limited Partners
1. Right to have partnership books kept at the principal place of business.
2. Right to inspect and copy books at a reasonable hour.
3. Right to have on demand true and full information of all things affecting partnership.
4. Right to have a formal account of partnership affairs whenever circumstances render it just and
reasonable.
5. Right to ask for dissolution and winding up by decree of court.
6. Right to receive share of profits and other compensation by way of income.
7. Right to receive return of contributions provided the partnership assets are in excess of all its liabilities.
ART. 1854. Allowable business transaction of a limited partners with partnership
1. To lend money to the partnership
2. To transact business with the partnership
3. To receive on account of resulting claims against the partnership, with the general creditors, a pro rata
shares on assets.
b. Obligations
ART. 1858. A limited partner is liable to the partnership:
1. For the difference between his contribution as actually made and that stated in the certificate as having
been made.
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.
A limited partner holds a 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.
2. Money or other property wrongfully paid or conveyed to him on account of his contribution.
Liabilities of a limited partner may be waved
The requisites are:
1. With consent of all the other partners
2. The waiver or compromise shall not affect the right of partnership creditors who extended credit or
whose claim arose after the filing before a cancellation or amendment of the certificate.
Limited partner liable to partnership for sum returned.
A limited partner whose contribution has been rightfully returned is still liable to the partnership for an amount
not in excess of the sum returned plus interest as may be necessary to pay the claims of persons who
extended credit or whose claims arose before the return.

iii. Order of Preference in Winding Up of Affairs and Liability (Art. 1863, NCC)
ART. 1863. In settling accounts after dissolution the liabilities of the partnership shall be entitled to payment in
the following order:
1. Those to creditors, in the order of priority as provided by law, except those to limited partners on
account of their contributions, and to general partners.
2. Those to limited partners in respect to their share of the profits and other compensation by way of
income on 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.
Subject to any statement in the certificate or to subsequent agreement, limited partners share in the
partnership assets in respect to their claims for capital, and in respect to their claims for profit or for
compensation by way of income on their contribution respectively, in proportion to the respective amounts of
such claims.

Corporation (Enabling Law – BP 68 as Amended by RA No. 11232 - Revised Corporation Code of the
Philippines (RCC))
A. Definition of Corporation – Sec. 2, RCC
Section 2. Corporation Defined. 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 incidental to its
existence.
Definition: 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.

B. Nature of Corporation
a. Composition
1. It is an artificial being.
2. It is created by the operation of law.
3. It has the right of succession.
4. It has only the powers, attributes and properties expressly authorized by law or incident to its
existence.

b. Juridical Personality
Doctrine of Corporate Entity– It is treated by law as a person SEPARATE AND DISTINCT from the investors
or incorporators forming it.
– A corporation has a separate and distinct personality from its shareholders, officers, and directors.
– The corporation is liable for acts or contracts that are entered into in the name of the corporation.
c. Limited Liability Rule
As a rule, a corporation is not liable for the debts of its stockholders, and the latter are not individually liable
for the corporation’s debts. They can lose no more than their investment on the corporation. The stockholder’s
debts or credit is not the debt or credit of the corporation.
Limited liability – veil of corporate fiction applies
VEIL OF CORPORATE FICTION
A corporation has a separate and distinct personality from its shareholders, officers, and directors.
Once said corporate fiction is created, the veil hides the stockholders such that when a corporation incurs
liability, the stockholders are shielded from liability. In so far as the law is concerned, we are only dealing with
the corporation.

C. Formation
a. Components
PARTIES INVOLVED IN THE ORGANIZATION OF A CORPORATION
(1) Incorporators
(2) Corporators
(3) Board of Directors/Trustees
(4) Promoters
(5) Underwriters
(6) Founders
INCORPORATORS
Incorporators are the organizers of the corporation upon its inception. They are mentioned in the AOI
as originally forming and composing the corporation, and who are signatories thereof.
Under the New Code, juridical persons can now be incorporators.
Under the Old Code, only natural persons can be incorporators.
CORPORATORS
Corporators are those who fund the corporation. These refer to the stockholders, investors, and
incorporators themselves. They are people who have interest in the corporation.
Stockholders – in a stock corporation
Members – in a non-stock corporation
BOARD OF DIRECTORS OR TRUSTEES
The Board of Directors or Board of Trustees are the group of people who manage the corporation.
PROMOTERS
The promoters promote the corporation itself. They convince the people to invest. They tell the people
that they are organizing such corporations. However, they are not committed to buy the shares, and are
purely salesmen.
UNDERWRITERS
Underwriters are mostly banking companies. As distinguished from promoters who have no
commitment since they simply promote, underwriters have commitment such that they guarantee the sale of
stocks and if these were not sold, they will be the ones who will buy the shares. The underwriters therefore
assume liability.
FOUNDERS
The founders are those who came about the idea – they are the think tanks of the corporation. As a
matter of fact, they are given privilege. They are entitled to an exclusive right to vote and be voted for, but
limited for 5 years only from the date of inception of the Corporation.
 b. Certificate of Incorporation
SEC. 18. REGISTRATION, INCORPORATION AND COMMENCEMENT OF CORPORATION EXISTENCE
The Certificate of Incorporation is a government issued document that certifies that the company has been
legally enacted and has been granted all the privileges, rights, powers, and responsibilities as set forth in the
jurisdiction’s incorporated statute.
PROCEDURE ON REGISTRATION
1. A person or group of persons desiring to incorporate shall submit the intended corporate name to the
SEC for verification.
2. If the SEC finds that the name is distinguishable (provided the requirements for corporate name are
followed), the name shall be reserved in favor of the incorporators.
3. Incorporators shall submit their articles of incorporation and by-laws to the SEC.
4. If SEC finds that the submitted documents and information are fully compliant with the requirements of
this Code, SEC shall issue the certificate of incorporation.
After the requirements are complied with, the SEC shall now issue the Certificate of Incorporation.
What would the issuance of the Certificate of Incorporation mean?
A: It is considered the birth of the corporation and the corporation commences its juridical personality.
Importance: The COI is the best evidence of the corporation’s existence.
We can now classify ourselves as what kind of corporation?
A: It will now become a de jure corporation – which is a corporation in fact and in law.

c. Articles of Incorporation
The Articles of Incorporation is the document prepared by the incorporators and filed with the Securities
Exchange and Commission to legally document the creation of a corporation.
SEC. 13. CONTENTS OF ARTICLES OF INCORPORATION
General Rule: All corporations shall file with the SEC the AoI, in any of the official languages, duly signed and
acknowledged or authenticated, in such form and manner as be allowed by the Commission.
d. Capital Requirement

D. Classes of Corporation
a. Stock v Non-Stock (Sec. 3, RCC)

Stock Corporation Non-Stock Corporation

● Those which have capital stock divided into
shares and are authorized to distribute to the
holders of such shares, dividends, or
allotments of the surplus profits on the basis
of the shares held.
● It has capital stocks divided into shares and
distributed to the holders.
● A stock corporation is also considered as a
corporation for profit.
● Purpose of dividing shares: Determine the
share in the profits.
● All other corporations; they do not issue
shares and do not distribute profits to its
members.
● However, they still own profits for
expenditures and to improve their facilities.
They cannot distribute the profits to its
members. They have to plough this back to
the corporation for the benefit of the members
in terms of improvement of facilities.

b. Created under RCC v. Special Charter (Sec. 4, RCC)

A corporation is created by operation of law. It acquires a judicial personality either by special law or a general
law. The general law under which a private corporation may be formed or organized is the Corporation Code,
the requirements of which must be complied with by those wishing to incorporate. Only upon such compliance
will the corporation come into being and acquire a juridical personality, thus giving rise to its right to exist and
act as a legal entity. On the other hand, a government corporation is normally created by special law, referred
to often as a charter.
c. Public v. Private

Public Corporation Private Corporation

A corporation organized for the government of a A corporation formed for some private purpose,
portion of the State for the general good and benefit or end.
welfare.

d. De Jure v. De Facto

De Jure Corporation De Facto Corporation

A corporation created in strict or substantial The due incorporation of any corporation claiming in
conformity with the mandatory statutory good faith to be a corporation under this Code, and
requirements for incorporation and the right of which it's right to exercise corporate powers, shall not be
to exist as a corporation cannot be successfully inquired into collaterally in any private suit to which
 attacked or questioned by any party even in a direct
proceeding for that purpose by the state.
such corporation may be made by the solicitor
general in a quo warranto proceeding.
A corporation that exists in fact, but not in law.
Requisites:
1. There is a valid law that deems to establish a
corporation;
2. Substantial compliance with the requirements or a
bona fide attempt to organize a corporation under
such law; and
3. Good faith on the part of the corporation in
exercising corporate powers.

e. Corporation by Estoppel
A group of persons who assume to act as a corporation knowing it to be without authority to do so, who
shall be liable as general partners for debts, liabilities and damages incurred or arising as a result thereof.
Requisites
1. Representation by a group to the public;
2. Knowing that they do not have the authority to act as a corporation; and
3. Third parties contracting with them are induced to believe that they have the authority to act as a
corporation.

f. Domestic v. Foreign

Domestic Corporation Foreign Corporation

A corporation incorporated under the laws of the A corporation is formed, organized or existing under
Philippines. 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.

g. Aggregate v. Sole v. One Person Corporation

Corporation Aggregate Corporation Sole One Person Corporation

A corporation consisting of more
than one member.
A corporation consisting of only
one member for the purpose of
one member for the purpose of
administering and managing, as
trustees, the affairs, property and
temporalities of any religious
denomination, sect or church.
One member or corporator also
but not limited to purely religious
purposes.
A corporation with single
stockholder, provided that only a
natural person, trust, or an estate
may form one-person
corporation.

h. Close Corporation
Close Corporation — limited to selected persons or members of a family.
— This qualification is contained in the Articles of Incorporation (AOI) and the Stock Certificate. The stock
certificate indicates that these holders shall not be allowed to dispose the shares UNLESS he offers it to the
existing holders first.
— IOW, it cannot be an absolute prohibition. Otherwise, it will violate the right of an owner which includes the
right to own, right to possess, and right to dispose.
Relative Prohibition – you are required to offer this to existing stockholders. Only when there are no
existing stockholders that would buy that you can sell it to others.

Disqualifications on the sale of shares of a close corporation can be found in the articles of incorporation, or in
the certificates of stock.
Note: Close corporation – one whose articles of incorporation provide that:
1. All issued stock, exclusive of treasury shares, shall be held by persons not exceeding 20;
2. All issued stock shall be subject to one or more specified restrictions on transfer; and
3. The corporation shall not list in any stock exchange or make any public offering of its stock of any
class.
Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least 2/3 of its
voting stock or voting rights is owned or controlled by another corporation which is not a close corporation.
i. Educational Corporation
Educational corporations shall be governed by special laws and by the general provisions of this code.
-An Educational corporation is a stock or non-stock. Corporations organized to provide Facilities for teaching
or Instruction such corporations normally maintain a regular Faculty and curriculum and normally have a
regular organized body of pupils or students, or attendance at the place where the educational activities are
regularly carried on.
 j. Religious Corporation
Religious Corporations may be incorporated by one or more persons. Such corporations may be classified
into corporations sole and religious societies. Religious corporations shall be governed by this chapter and by
the general provisions on non-stock Corporations insofar as they may be applicable.
E. Corporation as Distinguished from a Contract of Partnership

Point of Comparison PARTNERSHIP CORPORATION

Manner of Creation Created by mere agreement of the Created by law or by operation of

parties law

No. of Incorporators At least 2 persons New: One Person Corporation

Old law: at least 5 incorporators

Commencement of Juridical Moment of execution of the From the date of the issuance of
Personality contract the Certificate of Incorporation by
the SEC

Powers May exercise power authorized by Exercise power only expressly

the partners granted by law or implied from
those granted or incident to its
existence

Management Absence of any agreement, every Power to do business is vested

partner is an agent of the in the Board of Directors or Board
partnership of Trustees

Effect of Mismanagement Partner can sue a co-partner Suit against the member of the
BOD or BOT must be in the name
of the corporation

Rights of Succession No right of succession Has right of succession

Extent of Liability to 3rd Persons Liable personally and subsidiarily Stockholders are liable only to the
for partnership debts to 3rd extent of their investments as
persons represented by the shares
subscribed by them

Transferability of Interest Needs consent of all partners Without prior consent of other
(based on delectus personarum) stockholders

Term of Existence Any period of time New: Perpetual

Old law: 50 years and extendible
for another 50 years

Firm Name For limited partnership, requires May adopt any name as long as it
LTD in its name is not the same or similar to other
registered firm name

Dissolution May be dissolved anytime by the Dissolved only with consent of the
will of any or all partners State

Governing Laws Civil Code Governed by a general law which

is the Revised Corporation Code
or a special charter

F. Nationality of Corporations
a. Control Test
At least 60% of the outstanding capital stock which are entitled to vote are owned by Filipino citizens

I. Gamboa v. Teves, G.R. No 176579, June 28, 2011

II. Roy III v. Herbosa, G.R. No. 207246, November 22 2016
III. Section 2, SEC- Memorandum Circular No. 8
b. Grandfather Rule
If the percentage of Filipino ownership is less than 60%, then only the number of shares corresponding to
such percentage shall be counted as Philippine nationality.

I. Read: Narra Nickel Mining and Dev. Corp. vs. Redmont Consolidated Mines, G.R. No.
195580, Apr. 21, 2014
c. Corporate Juridical Personality:
I. Doctrine of Separate Personality
 The separate juridical personality of the corporation enables it to act as though it were a person. As
an artificial being, it may own properties, transact and commit acts expressly authorized by law or incidental to
its existence.
The separate juridical personality of a corporation means that the liability of the corporation is not
the liability of its shareholders. The liability of a shareholder for the debts of a corporation is limited only to
what the shareholder owes to the corporation. Usually, this is just unpaid capital.
The doctrine of separate corporate personality means that when a business is registered as a
company, it gives to this company a legal distinct entity from its members. It signifies that the company is
“capable of enjoying rights and of being subject to duties which are not the same as those enjoyed or borne
by its members”.
1. Read: Shrimp Specialists, Inc., vs. Fuji-Triumph Agri-Ind’l Corp., G.R. No. 168756,
Dec. 7, 2009
2. Limited Liability for Torts and Crimes
3. Recovery for Damages
a. Read: Filipinas Broadcasting Network v. Ago Medical and
Educational Center, G.R. 141994, January 17, 2005
II. Doctrine of Piercing the Corporate Veil
What is "Piercing the Veil of Corporate Fiction" or "Instrumentality" or "Alter Ego" doctrine?
It is basic in corporation law that a corporation is a juridical entity vested with a legal personality
separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. The
corporate veil should not and cannot be pierced unless it is clearly established that the separate and distinct
personality of the corporation was used to justify a wrong, protect fraud or perpetrate a deception.

Factors for the application of the doctrine of piercing the corporate vell In Concept Builders, Inc. v. NLRC, the
Court enumerated the possible probative factors of identity which could justify the application of the doctrine
of piercing the corporate veil. These are:
(1) Stock ownership by one or common ownership of both corporations
(2) Identity of directors and officers:
(3) The manner of keeping corporate books and records, and
(4) Methods of conducting the business
1. Grounds
2. Test in Determining its Applicability
a. READ: Zambrano v. Philippine Carpet Manufacturing Corp., G.R. No.
224099, June 21, 2017
d. Capital Structure
I. Number and Qualifications of incorporators – (Sec. 5, 10, RCC)
Number of Incorporators
For the purpose of forming a new domestic corporation under the Revised Corporation Code, two (2) or more
persons, but not more than fifteen (15), may organize themselves and form a corporation.
Only a One Person Corporation (OPC) may have a single stockholder, as well as a sole director. Accordingly,
its registration must comply with the corresponding separate guidelines on the establishment of an OPC.
Qualifications of Incorporators
Each incorporator of a stock corporation must own, or be subscriber to, at least one (1) share of the capital
stock. Each incorporatord a nonstock corporation must be a member of the corporation.
The incorporators may be composed of any combination of natural persons/s. SEC-registered partnership/s.
SEC-registered domestic Corporation/s or association/s, as well as foreign corporation/s.
Incorporators who are natural persons must be of legal age, and must sign the Articles of
Incorporation/Bylaws.
II. Subscription Requirements – (Sec. 10, RCC but see also the old requirements provided
under BP 68 for better appreciation)
Section 10. Number and Qualifications of Incorporators.(2nd pag.)
Each incorporator of a stock corporation must own or be a subscriber to at least one (1) share of the
capital stock.
If you are a new corporation, how much should be subscribed?
A: The Revised Corporation Code does not require a minimum subscribed capital stock.
Reason: To attract the formation of more business organizations.
XPN: However, the 25% subscribed capital stock is compulsory when there is an increase in the capital stock.
Thus, it requires that at least 25% must be subscribed, and
25% must be paid-up.
A/N: Under the Old Corporation Code, newly formed corporations were required to have 25% of their ACS
subscribed, of this subscribed capital stock, 25% must be paid-up (paid-up capital stock). However, this
requirement has now been removed under the Revised Corporation Code.
Note: You do not have to pay the subscription immediately. The balance may be due or payable later.

III. Corporate Term – (Sec. 11, RCC)

General Rule: Corporate term shall be perpetual existence
Exception: Unless the corporation, upon a vote of its stockholders representing a majority of its outstanding
capital stock, notifies the Commission that it elects to retain its specific corporate term pursuant to its AoI.
Exception to Exception: Any chance in corporation term is without prejudice to the appraisal right of dissenting
stockholders.
EXTENSION OF CORPORATE TERM
• A corporate term for a specific period may be extended or shortened by amending the AOI, provided that:
1. No extension may be made earlier than 3 years prior to the expiration;
2. If there are justifiable reasons; or
3. Such extension shall take effect only on the day following the original or subsequently expiry date(s).
RULE ON CORPORATION WHOSE TERM EXPIRED
1. They may apply for a revival of its existence together with:
a. All rights & privileges under its certificate; and
b. All of its duties, debt & liabilities existed prior to its revival.
2. Such revival must be approved by the SEC, and shall only be deemed revived upon issuance of
certificate of revival of corporate existence.

When the Corporation was Formed Effect

After 3 February 2019 The corporation shall have a perpetual existence,

unless its AOI provides otherwise.

Before 3 February 2019 The corporation shall be deemed to have a perpetual

existence, unless the corporation, upon a vote of its
stockholders representing a majority of its outstanding
capital stock, notifies the SEC that they intend to
retain its original term pursuant to the corporation’s
AOI.

IV. Classification of Shares – (Sec. 6, RCC)

SEC. 6. CLASSIFICATION OF SHARES.
What are “shares”?
Shares represent the interest or the investment of a stockholder in a corporation.
NOTES: The terms “share” or “stock” may be used interchangeably to refer to shares of stock in a
corporation.
A share of stock is a unit of division of the capital stock of a corporation. The stock represents:
1. The right interest or right of the stockholder in the management of the corporation through the exercise
of his voting rights;
2. The interest or right of the stockholder in the earnings of the corporation in the form of the dividends to
be distributed (for a discussion on dividends, see Sec. 42); and
3. The interest or right of the stockholder in the residual assets of the corporation upon its dissolution.
A stockholder may own a share even if he is not holding a certificate of stock
Shares are classified as:
(1) Common shares
(2) Preferred shares
(3) Par value shares
(4) No-par value shares
(5) Founder’s shares
(6) Redeemable shares
(7) Treasury shares
(8) Convertible shares
(9) Voting shares
(10) Non-voting shares
(11) Shares in escrow
V. Classification of Shares
1. Preferred v. Common Shares (Sec. 6, RCC)

Preferred Shares Common Shares

● Shares having certain rights and privileges
not available to holders of common shares.
● Entitle the holders to a pro rata share in the
profits of the corporation without preference
over the other stockholders.
● They are given voting rights
● The most common type of shares, which
enjoy no preference, but the owners thereof
are entitled to management of the corporation
(via the exclusive right to vote), and to equal
pro-rata division of profits after preference. It
represents a residual ownership interest in
the corporation.

2. Scope of voting rights subject to classification (Sec. 6, RCC)

GEN: No share may be deprived of voting rights.
XPNs:
1. Preferred non-voting shares;
2. Redeemable shares;
3. Shares as provided by the Code (treasury shares)
There shall always be a class/series of shares which have complete voting rights.
What are voting shares?
Shares with a right to vote. There shall always be a class or series of shares which have complete
voting rights.
The Right to Vote in STOCK Corporations
The right to vote is inherent in and incidental to the ownership of corporate stocks. It is settled that
unissued stocks may not be voted or considered in determining whether a quorum is present in a
stockholders' meeting, or whether a requisite proportion of the stock of the corporation is voted to adopt a
certain measure or act. Only stock actually issued and outstanding may be voted.
The Right to Vote in NON-STOCK Corporations
In non-stock corporations, the voting rights attach membership. Members vote as persons, in
accordance with the law and the by-laws of the corporation. Each member shall be entitled to one vote unles
so limited, broadened, or denied in the articles of incorporation or by laws. We hold that when the principle for
determining the quorum for stock corporations is applied by analogy to nonstock corporations, only those are
actual members with voting rights should be counted.
What are non-voting shares?
Shares without a right to vote. The law provides that shares classified and issued as preferred or
redeemable shares may be deprived of voting rights.
What is common stock?
A class of stock entitling the holder to vote on corporate matters, to receive dividends after other claims
and dividends have been paid (especially to preferred shareholders), and to share in assets upon liquidation.
Common stock is often called a capital stock, if it is the corporation's only class of stock outstanding. Also
termed ordinary shares.
Is one which has no preference and entitles the shareholder to a pro rata division of the profits, if any.
The common stock shareholders have complete voting rights.
Instances when holders of non-voting shares are allowed to vote
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
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.
Note:Shares classified both as voting and non-voting shares are entitled to vote in eight instances
enumerated above
3. Founder’s Share (Sec. 7, RCC)
What are founders' shares?
Shares classified as such in the articles of incorporation which may be given certain rights and
privileges (e.g. dividend payments) not enjoyed by the owners of other stocks.
Limitation on founders' shares
The exclusive right to vote and be voted for in the election a directors, if granted, must be for a limited
period not to exceed 5 years from the date of incorporation.
4. Redeemable Shares (Sec. 8, RCC)
What are redeemable shares?
Redeemable shares are shares usually preferred, which by their terms are redeemable at a fixed date,
or at the option of either issuing corporation, or the stockholder, or both at a certain redemption price. A
redemption by the corporation of its stock is, in a sense, a repurchase of it for cancellation.
Limitations on redeemable shares
1. It must be expressly provided in the articles of incorporation;
2. The terms and conditions affecting said shares must be stated both in the articles of incorporation and
in the certificate of stock;
3. It may be deprived of voting rights in the articles of incorporation; and 4. Redemption cannot be made if
it will cause insolvency of the corporation.
What is retained earnings?
A corporation's accumulated income after dividends have been distributed. Also termed earned
surplus; undistributed profit"
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.
Can redeemable shares be reissued?
Redeemable shares, once redeemed are retired unless reissuance is expressly allowed in the articles
of incorporation.
5. Treasure Shares (Sec. 9, RCC)
What are treasury shares?
Treasury shares are shares of stock which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means.
Rights that are denied to the treasury shares
1. Voting rights
2. Right to dividends
Note: Treasury shares sold below par value are not watered stock because watered stock contemplates an
original issuance of shares.
What are watered stocks?
Stocks issued for a consideration less than the par or issued price thereof or in any other form other
than cash valued in excess of its fair value.
Note:Watered stock refers only to original issue of shares but not to a subsequent transfer of such shares by
the corporation. Thus, treasury shares may be sold for less than their par or issued value for they have
already been issued and paid for.

INCORPORATION AND ORGANIZATION

PROMOTERS
The promoters promote the corporation itself. They convince the people to invest. They tell the people
that they are organizing such corporation. However, they are not committed to buy the shares, and are purely
salesmen.
A person who brings about or cause to bring about the formation and organization of a corporation by:
1. Bringing together the incorporators or the persons interested in the enterprise.
2. Procuring subscription or capital for the corporation; and
3. Setting in motion the machinery which leads to the incorporation of the corporation itself.

**NOTES: Promoters are persons who, acting alone, or with others, take initiative in founding and organizing
the business or enterprise of the issuer and received consideration thereof (Sec. 3.10, RA 8799, The
Securities Regulation Code)

LIABILITY OF THE PROMOTER

GEN: The promoter binds himself personally and assumes the responsibility of looking to the proposed
corporation for reimbursement.
XPNs:
1. Express or implied agreement to the contrary
2. Novation, not merely adoption or ratification, of the contract

LIABILITY OF THE CORPORATION FOR THE PROMOTER’S ACTS

GEN: 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.
XPNs: A corporation may be bound by the contract if it makes the contract its own by:
1. Adoption or ratification of the entire contract after corporation
2. Acceptance of the benefits under the contract with knowledge of the terms thereof
3. Performance of its obligation under the contract
Note: The contract must of course be one which is within the powers of the corporation to enter.

SUBSCRIPTION CONTRACT
Section 59. Subscription Contract. – Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a purchase or some other contract.
Subscription Contract
The agreement entered into when subscribing for shares.
Important: Like any other contract, it must have the elements of a contract, namely:
1. Consent – consent of the parties (meeting of the minds)
2. Object or subject matter – in the subscription contract, it pertains to the newly-issued stocks
3. Consideration – in the subscription contract, it shall not be less than the par value or issue value of the
shares. It can be paid through the following means:
a. Cash
b. Property
c. Labor or services actually rendered
d. Amount transferred from URE to capital
e. Shares which are reclassified
How can you become a stockholder?
(1) Subscription of an unissued shares of the corporation
(2) Direct purchase of existing shares from another stockholder
(3) Purchases stock from publicly listed corporations
(4) By exercising stock option
When would you subscribe?
(a) Pre-incorporation subscription – before incorporation
(b) Post-incorporation subscription – after subscription
STOCK OPTIONS
Stock Options
It is a privilege given by a corporation to persons not necessarily stockholders, giving them a period within
which to decide whether or not to buy shares in a company at a specified price.
Do stock options have value?
A: Yes. They are valuable because they give a person the right to buy shares of stock at a specific price. (A/N:
Remember, stock prices fluctuate, so you may have an opportunity to buy shares
of stock at a lower price).
Do not underestimate when you are given an option. The moment the price will increase, you can sell it to
someone interested to buy it even at a higher price. You may make profit out of the option.

STOCK OPTIONS PRE-EMPTIVE RIGHT

Privilege given by the corporation A right given to stockholders by law

Can be given to 3rd parties Only given to existing stockholders

No maximum amount. Depends on the agreement The stockholder has the right to buy newly-issued
between the corporation and the person given the shares in an amount in proportion to him
options.

PRE-INCORPORATION SUBSCRIPTION
Section 60. Pre-incorporation Subscription. – A subscription of shares in a corporation still to be formed
shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other
subscribers consent to the revocation, or 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.
GEN: The individual agrees to subscribe prior to incorporation and said contract is IRREVOCABLE for at least
6 months
XPN: Revocable in the following instances:
(1) ALL of the other subscribers consent to the revocation;
(2) The Corporation fails to incorporate within the same period or
(3) Within a longer period stipulated in the contract of subscription.
**XPN to XPN: Irrevocable after the AOI have been submitted to the Commission (post-incorporation
subscription).
What is the purpose of the irrevocability?
A: To ensure the creation of the corporation. It gives the organizers the chance to organize.
Atty. Espedido: If revocation is allowed within the 6 months, the organization of the corporation will be highly
jeopardized, and nobody might be able to start at all if the subscribers keep on withdrawing. The timetable
and the filing of the articles might be unduly affected.
**RULE ON POST-INCORPORATION SUBSCRIPTION
Under post-incorporation, the law is silent as to the revocability or irrevocability of the subscription, but
actually it is irrevocable.
The moment a subscriber subscribes after the incorporation of a company, he becomes a stockholder
and cannot anymore revoke his subscription. And since he is already a stockholder, he can now enjoy the
rights of a stockholder. The basis for this is Sec. 71 of this Code.
Rights of stockholder:
1. He may check the corporate books;
2. He has the right to vote on shares if he has a voting share;
3. He has the right to dividends when the corporation declares said dividends.
SEC. 12. CAPITAL STOCKS
Section 12. Minimum Capital Stock Not Required of Stock
Corporations. —Stock corporations shall not be required to have a minimum capital stock, except as
otherwise specifically provided by special law.
Authorized Capital Stock-Refers to the maximum amount of capital which the corporation will receive when
it issues all its shares.
Subscribed Capital Stock-Refers to the committed amount of capital which the corporation will receive from
its existing subscribers.
Paid-Up Capital-Refers to the amount of capital which the corporation already received from its subscribers.
This represents the paid portion of the subscribed capital.
If you are a new corporation, how much should be subscribed?
A: The Revised Corporation Code does not require a minimum subscribed capital stock.
Reason: To attract the formation of more business organizations.
Exception: However, the 25% subscribed capital stock is compulsory when there is an increase in the capital
stock. Thus, it requires that at least 25% must be subscribed, and 25% must be paid-up.

CONSIDERATION FOR STOCKS

Section 61. 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:
How do you pay for subscriptions?
A:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its
use and lawful purposes
➢ at a fair valuation equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital;
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion;
7. Shares of stock in another corporation; and/or
8. Other generally accepted form of consideration
MANNER OF PAYMENT
Are you supposed to pay in full?
A: The stockholder may either pay in full but this is not required.
When is balance payable?
A: The balance shall be paid on:
(a) The date indicated in the subscription contract; or
(b) When the BOD calls for payment.
CONTENTS OF THE ARTICLES OF INCORPORATION
CONTENTS OF THE ARTICLES OF INCORPORATION
a. The name of the corporation;
b. The specific purpose or purposes for which the corporation is being formed. Where a corporation has
more than one stated purpose, the articles of incorporation shall indicate the primary purpose and the
secondary purpose or purposes: Provided, That a nonstock corporation may not include a purpose
which would change or contradict its nature as such;
c. The place where the principal office of the corporation is to be located, which must be within the
Philippines;
d. The term for which the corporation is to exist, if the corporation has not elected perpetual existence;
e. The names, nationalities, and residential addresses of the incorporators;
f. The number of directors, which shall not be more than fifteen (15) or the number of trustees which may
be more than fifteen (15);
g. The names, nationalities, and residential addresses of persons who shall act as directors or trustees
until the first regular directors or trustees are duly elected and qualified in accordance with this Code;
h. If it be a stock corporation:
1. the amount of its authorized capital stock
2. number of shares into which it is divided
3. the par value of each,
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;
i. If it be a nonstock corporation
1. the amount of its capital
2. the names, nationalities, and residential addresses of the contributors, and
3. amount contributed by each
j. Such other matters consistent with law and which the incorporators may deem necessary and
convenient.

NON-AMENDABLE ITEMS IN THE AOI

Those matters referring to accomplished facts, except to correct mistakes, such as:
1. Names of incorporators;
2. Names of original subscribers to the capital stock of the corporation and their subscribed and paid up
capital;
3. Names of the original directors;
 4. Treasurer elected by the original subscribers;
5. Members who contributed to the initial capital of the non-stock corporation; or
6. Witnesses to and acknowledgment with AOI.

CORPORATION NAME,LIMITATIONS
**REQUIREMENTS FOR A VALID CORPORATE NAME
(1) Distinguishable from a name already reserved or registered for the use of another corporation.
T/N: A name is not distinguishable even if it contains one or more of the following:
(a) The word “corporation”, “company”, “incorporated”, “limited”, “limited liability”, or an abbreviation of
one of such words; and
(b) Punctations, articles, conjunctions, contractions, prepositions, abbreviations, different tenses,
spacing, or number of the same word or phrase.
(2) One that is not yet protected by law;
(3) Not contrary to law, rules, and regulations.
**EFFECT OF FAILURE TO COMPLY WITH SEC ORDER (in the last paragraph)
The corporation and its responsible directors or officers may be
held:
1. In contempt, and/or
2. Be administratively, civilly and/or criminally liable under the Code and other applicable laws, and/or
3. May result in the revocation of the corporation’s registration
**GROUNDS TO QUESTION CORPORATE NAME
(1) Complainant corporation has acquired prior right over the use of such corporate name; and
(2) Proposed name is either:
a. Identical;’ or
b. Deceptively or confusingly similar to that of any existing corporation or to any other name already
protected by law; or
c. Patently deceptive, confusing or contrary to
existing laws.

REGISTRATION, INCORPORATION AND COMMENCEMENT OF CORPORATION EXISTENCE

After the requirements are complied with, the SEC shall now issue the Certificate of Incorporation.
What would the issuance of the Certificate of Incorporation mean?
A: It is considered the birth of the corporation and the corporation commences its juridical personality.
Importance: The COI is the best evidence of the corporation’s existence.
We can now classify ourselves as what kind of corporation?
A: It will now become a de jure corporation – which is a corporation in fact and in law.
ELECTION OF DIRECTORS OR TRUSTEES
HOW ELECTIONS ARE CONDUCTED
Normally, how do we replace officers?
A: Through an election.
Who calls the meeting?
A: (1) It is called by the secretary
a. On the order of the President
b. By a written demand of the stockholders representing at least a majority of the outstanding
capital stock, or a majority of the members entitled to vote
(2) Called by any stockholder or member of the corporation signing the demand by directly addressing
the stockholders or members – if there is no secretary, or the secretary despite demand, refuses or fails to call
the meeting
**When are the elections held?
A: Elections must be held once every year. The Code does not provide when the first election of directors or
trustees shall be held. It authorizes the corporation to provide in the by-laws the time for the holding of the
annual election of directors or trustees.
Who can elect?
A: Majority of the stockholders
Rule: At all elections of directors or trustees, there must be present, either in person or through a
representative authorized to act by written proxy, the owners of majority of the outstanding capital stock, or if
there be no capital stock, a majority of the members entitled to vote. When so authorized in the bylaws or by a
majority of the board of directors, the stockholders or members may also vote through remote communication
or in absentia. [Section 23, paragraph 2]

Shareholders or members must be present either:

(a) In person;
(b) Through a representative authorized to act by written proxy;
(c) Remote communication or
(d) In absentia
What happens if only a few stockholders appear and there is no quorum?
A: A meeting cannot be validly held because as we said a quorum refers to the number of people required to
validly hold a meeting. To constitute a valid meeting, the majority of the stockholders must be present.
PAGE38
ADOPTION OF BY LAWS
What are bylaws?
A: They are the internal rules and regulations of a corporation.
When should a corporation file its bylaws?
A:
1. Within one (1) month after the receipt of the official notice of the issuance of its certificate of incorporation
from the SEC, or
2. They may be adopted and filed prior to incorporation, together with the AOI.
Note: You can already submit your by-laws even if you have not yet been given the authority to exist.
What are the requisites for the adoption of by-laws?
1. Vote of the stockholders representing at least a majority of the OCS in case of stock corporations or
members in case of non-stock corporations;
2. Approved and signed by all incorporators; and
3. Submitted to the SEC.
What is the binding effect of bylaws to the public?
GEN: It does not bind the public.
XPN: A third person may be bound by the bylaws where has knowledge about it, either actual or constructive.
**NOTES
TIME AND PROCEDURE FOR THE ADOPTION OF BYLAWS
1) PRE-INCORPORATION- Submitted or filed before the SEC together with the AOI. (This is the one now
required in practice; you cannot incorporate without it.)
Requirements:
1. Approved and signed by all incorporators; and
2. Submitted to the SEC together with the AOI.
Additional requirements for banks and other special corporations:
Accompanied by a certificate of the appropriate government agency to the effect that such bylaws or
amendments are in accordance with law.
2) POST-INCORPORATION-Basically, everything that you need to do post-incorporation in order to
commence the transacting of business.
Requirements:
1. Affirmative vote and signature of stockholders representing the majority of the OCS or members in
case of nonstock corporation;
2. Duly certified by the majority of the BOD/BOT; and
3. Filed with SEC, to be attached to the original AOI.
CONTENTS OF BYLAWS
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
stockholdersor members thereof;
c. The required quorum in meetings of stockholders or members and the manner of voting therein;
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.
BINDING EFFECTS
PERSONS BOUND & NOT BOUND BY THE BYLAWS
1. Persons bound by the bylaws:
a. Corporation
b. Directors or trustees
c. Stockholders
2. Persons not bound by the bylaws:
a. Any person who has no actual knowledge of the bylaws of the corporation;
b. Employees of the corporation
AMENDMENT TO BYLAWS
Section 47. Amendment to Bylaws. – A majority of the board of directors or trustees, and the owners of at
least a majority of the outstanding capital stock, or at least a majority of the members of a nonstock
corporation, at a regular or special meeting duly called for the purpose, may amend or repeal the
bylaws or adopt new bylaws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3)
of the members in a nonstock corporation may delegate to the board of directors or trustees the power to
amend or repeal the bylaws or adopt new bylaws: Provided, That any power delegated to the board of
directors or trustees to amend or repeal the bylaws or adopt new bylaws shall be considered as revoked
whenever stockholders owning or representing a majority of the outstanding capital stock or majority of the
members shall so vote at a regular or special meeting.
Whenever the bylaws are amended or new bylaws are adopted, the corporation shall file with the
Commission such amended or new bylaws and, 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.
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.
EFFECT OF NON-USE OF CORPORATE CHARTER AND CONTINUOUS INOPERATION
After the Issuance of the Certificate of Incorporation
(1) The stockholders will convene to elect the Board of Directors.
(2) Once the BOD is elected, they will convene to have set of officers.
Whom do we elect?
A: President, Secretary, Treasurer, all officers listed in the by- laws of the corporation.
EFFECT OF FAILURE TO ORGANIZE AND COMMENCE
Rule: When the corporation does not formally organize and commence its business within five (5) years
FROM the date of its incorporation – the Certificate of Incorporation (COI) will be deemed revoked or
cancelled on the day following the end of the five-year period

EFFECT OF FAILURE TO OPERATE

Rule: If the corporation becomes subsequently inoperative for at least five (5) consecutive years – AFTER
due notice and hearing, the Commission will place the Corporation under delinquent status
NOTE: There is no automatic revocation. The SEC will place the corporation under a delinquent status and
the delinquent corporation shall be given a period of two (2) years to resume the operations and comply with
the prescribed requirements of the Commission.
Once complied – the delinquent status is lifted and the corporation will have de jure status
Failure to comply – cause the revocation of the Corporation’s Certificate of Incorporation

GROUNDS FOR SUSPENSION

(a) The articles of incorporation or any amendment thereto is not substantially in accordance with the form
prescribed herein;
(b) The purpose or purposeps of the corporation 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; and The required
percentage of Filipino ownership of the capital stock under existing laws or the Constitution has not been
complied with.
CORPORATE POWERS
KINDS
1. Express powers
- Those expressly stipulated in the Articles Of Incorporators and in the by-laws.
2. Implied powers
- Powers that are necessary to carry out the express powers.
Examples:
a. Acts in the usual course of business
b. Acts to protect debts owing to a corporation
3. Incidental/Inherent powers
- Powers that are necessary to the existence and operation of the corporation;
- Powers which a corporation can exercise by the mere fact of it being a corporation; or

GENERAL POWERS
SEC. 35. Corporate Powers and Capacity. – Every corporation incorporated under this Code has the power
and capacity:
(1) To sue and be sued in its corporate name
(2) To have perpetual existence unless the certificate of incorporation provides otherwise
(3) Adopt and use a corporeal seal
(4) Amend its Articles of Incorporation
(5) Adopt, amend, or repeal bylaws
(6) Stock corporations – issue or sell stocks to subscribers and sell treasury stocks
Nonstock corporation – admit members to the corporation
(7) Deal with real and personal property, including securities and bonds of other corporations.
(8) Enter into commercial agreeements with natural and juridical persons
(9) Make reasonable donations.
(10) Establish pension, retirement, and other plans for the benefit of its directors, trustees, officers, and
employees.
(11) Other powers essential or necessary to carry out its purpose.

SPECIFIC POWERS (and the required vote of shareholders and board of directors)

(SEC.36) Power to Extend or Shorten Corporate Term.

a. Majority vote of the board of directors or trustees.
b. Vote of At least two-thirds (2/3) of the outstanding capital stock or of its members.

How do we extend or shorten the corporate life?

- The law now presupposes that their term will be perpetual. However, there is still use of this provision
because the corporation has the option to avail of corporate existence or not. It may choose to shorten
the term.
Rules:
1. If issued prior to the effectivity of the New Code – deemed perpetual UNLESS elects to retain original
corporate term
2. If issued under the New Code – perpetual existence UNLESS otherwise specified in the Articles of
Incorporation
RIGHT TO SUCCESSION
Do we still have the right to succession? Is there a need to have the right of succession?
A: Yes. Because there is a difference between succession and
perpetual existence.

(SEC.37) Power to Increase or Decrease Capital Stock; Incur, Create or Increase Bonded
Indebtedness.
a. Majority vote of the board of directors
b. Vote of the two-thirds (2/3) of the outstanding capital stock.

LIMITATION IN THE DECREASE OF CAPITAL STOCK

Up to what extent do you think can you increase or decrease capital stock?
(a) For the increase – no problem, as long as they follow the subscribed capital stock, and the paid-up capital
stock
(b) For the decrease – to the extent that it will not prejudice creditors

What could be the problem if we decrease the capital stock?

- Subscribed capital stock is already part of capital. Thus, if we decrease the capital, we are trying to
return some part of the capital – thus in effect, violating the Trust Fund Doctrine. It will prejudice the
rights of the corporate creditors.
(SEC.38) Power to Deny Pre-emptive Right.
a. Vote of the Stockholders representing two-thirds (2/3) of the outstanding capital stock.
GEN: Pre-emptive right is a preferential right granted to the existing stockholders to subscribe to the newly
issued stocks before it is being offered to the public.
Reason: In order for the existing stockholders to protect their interest in the corporation and the shares that
they hold representing their ownership. It is to allow the stockholders to retain the extent of their power.
XPN: Stockholders are denied their pre-emptive right in the following instances:
(1) When it is expressly prohibited under the Articles of Incorporation
(2) Shares issued in compliance with the laws requiring stock offerings or minimum ownership by the public
a. When the corporation decides to go public, the SEC requires the corporation to earmark some
shares for the employees (salary deduction, easy instalment payment)
b. Under existing laws – earmark existing shares to the public ( At least 20% must be sold to the
public)
(3) Shares to be issued in exchange of properties to retire existing debts

(SEC.39) Power to Sell or Dispose Corporate Assets.

a. Majority vote of its board of directors or trustees.
b. Vote of At least two-thirds (2/3) of the outstanding capital stock.
GEN: A corporation can dispose its assets by a majority vote of its board of directors or trustees.
XPN: If the disposition of all or substantially all assets of the corporation, the following requisites must be
present:
(1) Vote of the majority of the board
(2) Authorized by the stockholders representing 2/3 of the outstanding capital stock
XPN to the ratification of the stockholders:
a. Necessary in the usual and regular course of business of the corporation; or
b. Proceeds of the sale or other disposition of property and assets shall be appropriated for the
conduct of its remaining business.

TEST FOR DETERMINING WON 2/3 VOTES IS REQUIRED:

If it will render the corporation incapable of continuing its business – based on jurisprudence, this refers to
disposition of at least 80% of its assets.

(SEC. 40) Power to Acquire Own Shares.

GEN: A corporation is not allowed to acquire its shares.
Reason: Because it is in effect liquidating, to the damage and prejudice of its creditors. If the corporation buys
out the shares of the stockholders, we are trying to liquidate which is a violation of the Trust Fund Doctrine.
Sooner or later, there will be no more stockholders since the corporation is buying out the shares. If all the
stockholders get back all their investment – there will no longer be any investments for the corporation to
continue to operate.
XPN:
(1) Prevent fractional shares arising from stock dividends In distributing stock dividends based on the amount,
there will be an instance where 1/2 or ¼ share is given. Instead of giving fractional shares, the corporation will
just buy it back.
(2) Satisfy delinquent shares
(3) Pay dissenting stockholders – in the exercise of their appraisal right, which means that when the
stockholder does not agree with the decision of the board, it may exercise such right and the corporation shall
be compelled to buy-back the shares Condition for the exceptions to apply: There must be unrestricted
retained earnings.
ADVANTAGES AND DISADVANTAGES
If the corporation reacquires the shares and you are one of the remaining stockholders whose shares
were not reacquired, will you be happy?
A: It depends.
Advantageous
If the company is expected to earn profits, then they would have bigger dividends because of the fewer
stockholders who will be dividing the profits.
Disadvantageous
If the company expecting losses, then only a few stockholders will be sharing the losses, which is prejudicial
on their part. Also, if shares were bought back using other shares, then the shares used as payment could
have been used as stock dividends.
(SEC. 41) Power to Invest Corporate Funds in Another Corporation or Business or for Any Other
Purpose.

a. Vote of the majority of the Board of Directors or Trustees.

b. Vote of the stockholders representing two-thirds (2/3) of the outstanding capital stock.

Our TEST is the PRINCIPAL PURPOSE. A company may invest so long as it is within the bounds of the
primary purpose. Otherwise, it requires a vote of the MAJORITY OF THE BOARD AND 2/3 vote of the
stockholders representing the OUTSTANDING CAPITAL STOCK.
Note: Other than the primary purpose, THERE IS NO NEED FOR RATIFICATION IF THE NEW
BUSINESS WILL BE:
(1) Necessary accomplish its primary purpose
(2) It falls under the express, implied, inherent, and apparent powers of the corporation
(3) There is a logical relationship to the primary business or if it is in furtherance of the business

(SEC. 42) Power to Declare Dividends.

REQUIREMENTS FOR THE DECLARATION OF DIVIDENDS
I. Existence of unrestricted retained earnings.
II. Resolution of the board of directors.
III. For stock dividends, additional requirements:
a. Approval by 2/3 of the OCS
b. Sufficient number of authorized unissued shares for distribution to stockholders

DIVIDENDS
What are dividends?
- These are part of the PROFITS distributed as shares to the stockholders. If there are no profits, there
are no dividends.
GEN: The Board has the sole authority to declare dividends. The declaration of dividends is the sole
prerogative of the board.
XPN: The Board may be compelled to issue dividends when the retained earnings of the corporation
EXCEED 100% of their paid-in capital stock.

XPN to XPN: A corporation may not be compelled to declare dividends even if the profits exceed 100% of the
paid-in capital in the following instances:
(1) When justified by definite corporate expansion projects or programs approved by the board of
directors
(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
(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.

How are dividends payable?

- It depends. There are several ways that dividends can be paid: whether in cash, property, stock or a
combination of any of the three.
Can the stockholders demand for the declaration of dividends?
- No. The decision to declare dividends lies with the Board. The Board has the power to manage the
corporation. Hence, when the corporation has profits, it is the Board who decides what to do with it.
The Board, using its discretion, may not declare dividends but rather use it for business expansion
projects.
Exception: When there is improper accumulation of profits. This happens when the corporation retains
surplus profits in excess of 100% of its paid-in capital stock. In such case, the shareholders may demand for
the declaration of dividends.

When will dividends be taxed on the side of the shareholder?

- It depends on the type of dividend that will be received:
1. Cash dividend → the stockholder is liable for tax since it is income already.
2. Stock dividend → it is not yet taxable, even though they already have value. It is not considered income
because there is no transfer of cash.
(A) CASH DIVIDENDS
a. Majority vote of the Board of Directors
Rule: If there are delinquent shares, the cash dividends shall be applied to the unpaid subscription which is
due and demandable of the shareholder – OFFSET.

(B) STOCK DIVIDENDS

a. majority vote of the BOD
b. Two-thirds (⅔) vote of the stockholders representing the outstanding capital stock
Rule: It shall be withheld from the delinquent stockholders UNTIL their unpaid subscription is fully paid.
Offsetting in cash dividends does not apply in stock dividends. You cannot issue any stock dividends UNTIL
the unpaid stock are fully paid.

(SEC. 43) Power to Enter into Management Contract.

VOTE REQUIREMENTS
a. Majority of the vote of the board of directors;
b. Stockholders owning at least the majority of the OCS, or majority of the members, of both the
managing and the managed corporation, at a meeting duly called for the purpose.
c. Stockholders of the managed corporation owning at least two thirds (2/3) of the total outstanding
capital stock entitled to vote, or by at least two thirds (2/3) of the members in the case of a non-stock
corporation, in cases of:
a. Interlocking stockholders
b. Interlocking directors
MANAGEMENT CONTRACT
An agreement under which a corporation delegates the management of its affairs to another corporation for a
certain period. Two corporations are involved: (1) the managing corporation and the (2) managed corporation
GEN: Management contract is entered into by a MAJORITY vote of the Board of Directors and stockholders
of both the managing and managed corporation
XPN: Approved by the stockholders of the managed corporation owning at least 2/3 of the outstanding
capital stock or of members in two instances:
(1) The stockholder representing the same interest of both managing and managed corporation owns
or control MORE THAN 1/3 of the outstanding capital stock entitled to vote of the managing corporation; and
(2) Majority of the members of the BOD of the managing corporation also constitutes majority of the
members of the BOD of the managed corporation .

(SEC. 44) Ultra Vires Act of the Corporation

An act of a corporation is ultra vires when the corporation acts beyond the scope of the powers
and purposes provided to it by: Its charter document. The laws authorising its formation.
Ultra Vires Act
One not within the express, implied and incidental powers of the corporation, conferred by the RCC or the
AOI.
Consequence of an Ultra Vires Act
Merely voidable, which may be enforced by performance, ratification, or estoppel. (De Leon)

What is the effect of an ultra vires act?

- An ultra vires act is an unenforceable act. Since it is not enforceable, the contract is not binding to the
corporation.
RESOLVING ULTRA VIRES ACTS
How do we resolve ultra vires acts?
GEN: It is not binding.
XPN:
NASA PDF
RATIFICATION OF ULTRA VIRES ACTS RULES:
(A) Illegal ultra vires acts – cannot be ratified
(B) Unauthorized ultra vires act – can be cured through a ratification by a vote of 2/3 of the
stockholders representing the outstanding capital stock so long as it DOES NOT AFFECT THIRD PARTIES.
TRUE OR FALSE
1. All illegal acts are ultra vires acts – TRUE
2. All ultra vires acts are illegal acts – FALSE, because they may also be unauthorized acts.

DOCTRINE OF INDIVIDUALITY OF SUBSCRIPTION

A subscription is one (1) entire and indivisible whole contract. It cannot be divided into portions.
Section 63. Issuance of Stock Certificates. – No certificate of stock shall be issued to a subscriber until the
full amount of the subscription together with interest and expenses (in case of delinquent shares), if any is
due, has been paid.

DOCTRINE OF EQUALITY OF SHARES

The doctrine 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.
Each share shall be equal in all respects to every other share, except as otherwise provided in the AOI and
stated in the certificate of stock.

THE TRUST FUND DOCTRINE

The Trust Fund Doctrine means that the capital stock, properties and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors.
The assets of a corporation as represented by its capital stock are "trust funds" to be maintained unimpaired
and to be used to pay corporate creditors.
There can be no distribution of such assets among the stockholders without provision being first made for the
payment of the corporate debts.

G. STOCKHOLDERS & MEMBERS

i. Fundamental rights of Stockholders
1. He may check the corporate books;
2. He has the right to vote on shares if he has a voting share;
3. He has the right to dividends when the corporation declares said dividends.
Fundamental - a central or primary rule or principle on which something is based.
(1) the right to elect director
(2) the right to sell shares
- It does not mean that these rights are fundamental rights in the constitutional law sense of being
- these rights are fundamental in the corporate law sense that mergers and charter amendments are
fundamental transactions, and in the dictionary sense that they are primary, basic, principal, and deep-rooted.
- Shareholders should not be entitled to run the business.
- directors should not be permitted to interfere with the fundamental rights of the shareholder.

ii. Participation in Management

1. PROXY
An instrument that refers to the authority given by the stockholder to another to represent the former
during a meeting.
Rule: Proxies shall be in writing, signed, and filed by the stockholder in any form authorized in the bylaws.
VALIDITY AND EFFECTIVITY OF A PROXY
It shall be valid only for the meeting for which it is intended UNLESS otherwise provided in the proxy
form. However, no proxy shall be valid and effective for a period longer than 5
years.
A PROXY CANNOT BE SUBSTITUTED
A proxy cannot be substituted by reason of the trust and confidence reposed upon the person given
the authority to represent the other. The authority cannot be delegated.
REVOCATION OF PROXY
Illustration. A proxy was declared and recognized as the appropriate proxy holder. However, when he
went to the meeting, the stockholder who gave him the proxy was also there. Who is entitled to vote?
A: The Stockholder votes. It would constitute a revocation of proxy because the rule says that proxies are
generally revocable
– expressly or impliedly.

Important: The presence of the stockholder in the meeting is an implied revocation.

2. VOTING TRUST AGREEMENT

It is an agreement in writing whereby one or more stockholders of a stock corporation transfer his or
their shares upon a trustee or trustees for the purpose of conferring to the latter the right to vote and other
rights pertaining to the shares for a period not exceeding five years at any time.

Management may influence a group of stockholders, telling them that “this is how you should vote”. In
order to ensure that they will abide by the agreement on how to vote, they may execute a voting agreement.
They could designate any or some to cast their vote on behalf of all the other signatories to that voting
agreement.
 If the management could have this, more or less they can predetermine the outcome of the
results/vote. This is a way of PREDICTING the outcome of the results of any issue that may require approval
during a stockholders meeting.

What happens to these voting rights?

A: The stockholder transfers his voting rights to another (trustee).

RIGHTS OF A TRUSTEE IN A VOTING TRUST AGREEMENT

(1) The right to vote
(2) The right to be voted upon
(3) The right to be represented
(4) Right of inspection of all corporation books and records
Important: Basically, all the rights of the stockholders because he has the legal title except the right to
dividends because the beneficial ownership is retained by the trustor.
In contrast, the proxy holder has limited rights in attending the meeting (e.g. right to vote) because the
proxy holder has no legal title of the shares of stock.
TERM OF VTA
Voting Trust Agreement is valid for a period not exceeding five (5) years at any one time. Once expired,
everything will be returned to the real and lawful stockholder (trustor).
3. CASES WHEN STOCKHOLDER’S ACTION IS REQUIRED
i.By a majority vote of the board of directors or trustees.
1. Election of directors/trustees(Sec. 24, CC)
2. Management contract(Sec. 44, CC)
3. Adoption of by-laws(Sec. 46, CC)
4. Amendment or repeal of by-laws(Sec. 48, CC)
5. Fixing the issued price of no-par value shares, if BOD is not authorized by thearticles of
incorporation(Sec. 62, CC)

ii. By a two-thirds of the total outstanding capital stock vote.

a. Amendment of articles of incorporation.
b. Removal of directors/trustees(Sec. 28, CC)
c. Ratification of a contract of self-dealing directors(Sec. 32, CC)
d. Ratification of an act of a disloyal director(Sec. 34, CC)
e. Extension or shortening of corporate term(Sec. 37, CC)
f. Increase or decrease of capital stock(Sec. 38, CC)
g. Incur, create or increase bonded indebtedness(Sec. 38, CC)
h. Denial of pre-emptive right(Sec. 39, CC)
i. Sale, lease, exchange, mortgage, pledge or disposal of all or substantially all of corporate assets(Sec.
40, CC)
j. Investment of corporate funds in another corporation or business or for any other purpose other than
the primary purpose(Sec. 42, CC)
k. Issuance of stock dividends(Sec. 43, CC)
l. Managed corporation in a management contract
NO STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Any action required or permitted to be taken by the stockholders of the corporation (if the corporation has
more than one stockholder at such time) must be effected at a duly called annual or special meeting of
stockholders of the corporation and may not be effected by any consent in writing by such stockholders.

4. MANNER OF VOTING
Rule: Stockholder or members in all meetings of stockholders or members may vote:
(1) In person
(2) By proxy
(3) Through remote communication or in absentia when authorized:
(a) in the bylaws or
(b) by a majority vote of the BOD
Section 54. Right to Vote of Secured Creditors and Administrators.
GEN: 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.
XPN: UNLESS the secured creditor is expressly given by the stockholder-grantor such right in writing which is
recorded in the appropriate corporate books.
(Secured creditor any creditor or lender associated with an issuance of a credit product that is backed by
collateral.)
(Security interest is a legal claim on collateral that has been pledged, usually to obtain a loan, that gives a
creditor the right to repossession.)
- It is still the pledgor who has the right to participate. Even if the pledgee has the possession of the
certificate, there is no ownership that is being transferred, UNLESS the pledgor grants the pledgee the right to
vote.
- Executors, administrators, receivers, and other legal representatives duly appointed by the court may
attend and vote on behalf of the stockholders or members without need of any written proxy.
Section 55. Voting in Case of Joint Ownership of Stock.
GEN: The consent of all the co-owners shall be necessary in voting shares of stock owned jointly by two (2)
or more persons.
When the shares are owned in an "and/or" capacity by the holders thereof, any one of the joint owners can
vote said shares or appoint a proxy therefor
XPN: Unless there is a written proxy, signed by all the co owners, authorizing one (1) or some of them or any
other person to vote such share or shares.
Section 56. Voting Right for Treasury Shares.
Rule: Treasury shares shall have no voting right as long as such shares remain in the Treasury.
Reason: If they were given voting powers, the directors would vote for themselves, thereby perpetuating their
position in the board.
Section 57. Manner of Voting; Proxies. (Na topic na sa ii. Participation in management 1. Proxy)
Rule: Stockholder or members in all meetings of stockholders or members may vote:
(1) In person
(2) By proxy -
(3) Through remote communication or in absentia when authorized:
(a) in the bylaws or
(b) by a majority vote of the BOD
Section 58. Voting Trusts. (Na topic na sa ii. Participation in management 2. Voting Trust Agreement)
Section 59. Subscription Contract. (Na topic na last meeting)
Subscription Contract - The agreement entered into when subscribing for shares.
Section 60. Pre-incorporation Subscription. (Na topic na last meeting)
GEN: The individual agrees to subscribe prior to incorporation and said contract is IRREVOCABLE for at least
6 months XPN: Revocable in the following instances:
1. ALL of the other subscribers consent to the revocation;
2. The Corporation fails to incorporate within the same period or
3. Within a longer period stipulated in the contract of subscription.
Irrevocable after the AOI have been submitted to the Commission (post-incorporation subscription)
Section 61. 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:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for
its use and lawful purposes
➢ at a fair valuation equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital;
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion;
7. Shares of stock in another corporation; and/or
8. Other generally accepted form of consideration
Section 62. Certification Of Stock & Transfer Of Shares
The capital stock of corporations shall be divided into shares for which certificates signed by the president or
vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the bylaws.
Shares of stock so issued are personal property and may be transferred by delivery of the certificate or
certificates endorsed by the owner, his attorney in-fact, or any other person legally authorized to make the
transfer.
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of
the corporation.
Section 63. Issuance of Stock Certificates.
No certificate of stock shall be issued to a subscriber until the full amount of the subscription together with
interest and expenses (in case of delinquent shares), if any is due, has been paid.
Section 64. Liability of Directors for Watered Stocks. – A director or officer of a corporation who: (a) consents
to the issuance of stocks for a consideration less than its par or issued value; (b) consents to the issuance of
stocks for a consideration other than cash, valued in excess of its fair value; or (c) having knowledge of the
insufficient consideration, does not file a written objection with the corporate secretary, shall be liable to the
corporation or its creditors, solidarily with the stockholder concerned for the difference between the value
received at the time of issuance of the stock and the par or issued value of the same.
WATERED STOCKS - Stocks which are sold at less than the par value. You pay less for more stocks. If you
were able to subscribe to a water stock, the value paid will not reflect the actual value of the shares.
Section 65. Interest on Unpaid Subscriptions. – Subscribers to stocks shall be liable to the corporation for
interest on all unpaid subscriptions from the date of subscription, if so required by and at the rate of interest
fixed in the subscription contract. If no rate of interest is fixed in the subscription contract, the prevailing legal
rate shall apply.
Section 66. Payment of Balance of Subscription. – Failure to pay on such a date shall render the entire
balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance,
unless a different interest rate is provided in the subscription contract.
How does the BOD call for the payment of the balance of the subscription?
A call is made by a resolution of the BOD in a meeting where there is a quorum, and approved by majority of
the directors present in said meeting.
Section 67. Delinquency Sale. – The board of directors may, by resolution, order the sale of delinquent stock
and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time
and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date
the stocks become delinquent.
(If the stockholders fail to pay within 30 days from date specified, the stocks become delinquent.)
Section 68. When Sale May be Questioned.
QUESTIONING OF AUCTION SALE
If there is irregularity in the conduct of the sale, the same may be questioned.
When can you question the conduct of the auction sale?
Within 6 months from the date of sale.

iii. Proprietary Rights

1. APPRAISAL RIGHTS
Sec. 80. When the Right of Appraisal May Be Exercised.-- Any stockholder of a corporation shall have the
right to dissent and demand payment of the fair value of the shares in the following instances:
(a) In case an amendment to the articles of incorporation has the effect of changing or restricting the
rights
(b) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets
(c) In case of merger or consolidation; and
(d) In case of investment of corporate funds for any purpose other than the primary purpose of the
corporation.
Section 81. Instances of Appraisal right. – Any stockholder of a corporation shall have the right to dissent
and demand payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or restricting the
rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to
those of outstanding shares of any class, or of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially
all of the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation. (n)
Sec. 82. Effect Of Demand And Termination Of Right.
All rights accruing to such shares, including voting and dividend rights, shall be suspended if the dissenting
stockholder is not paid the value of the said shares within thirty (30) days after the award, the voting and
dividend rights shall immediately be restored.
Sec. 83. When Right To Payment Ceases.
Such demand for payment is withdrawn with the consent of the corporation,
or if the proposed corporate action is abandoned or rescinded by the corporation or
disapproved by the Commission where such approval is necessary,
or if the Commission determines that such stockholder is not entitled to the appraisal right

Sec. 84. Who Bears Costs Of Appraisal.

The costs and expenses of appraisal shall be borne by the corporation.
Unless the fair value ascertained by the appraisers is approximately the same as the price which the
corporation may have offered to pay the stockholder, in which case they shall be borne by the latter. (Borne
by the stockholder)
In the case of an action to recover such fair value. All costs and expenses shall be assessed against the
corporation, unless the refusal of the stockholder to receive payment was unjustified.
Sec. 85. Notation On Certificates; Rights Of Transferee.
Within ten (10) days after demanding payment for shares held, a dissenting stockholder shall submit the
certificates of stock representing the shares to the corporation for notation that such shares are dissenting
shares. Failure to do so shall, at the option of the corporation, terminate the rights under this Title.

2. RIGHT TO INSPECT
RIGHT TO INSPECT BOOKS AND RECORDS
What are your rights as a stockholder?
A: A stockholder has the right to inspect such books and records at reasonable hours on business days.
Can you also just request to have a copy?
A: Yes, but the stockholder shoulders the expenses.
Important: The right as provided in the Code refers only to the right to inspect but not the right to copy. If you
want to have a copy, you have to pay for the copy.
Otherwise, can you ask to just bring it to your house?
A: No. This cannot be done and is also dangerous because there may be delicate matters contained in the
books or records.
Take note: The right to inspect does not include the right to take it out even for a few hours.
Can the stockholder authorize his boyfriend to inspect the
corporate books?
A: Yes. There is no prohibition. There is nothing wrong with it as long as the boyfriend is duly authorized
* *NOTES
CORPORATE BOOKS
1. Records of all business transactions (i.e. accounting books, ledgers, journals)
 2. Minutes Book for Stockholders – minutes of meetings of stockholders
3. Minutes Books for Directors or Trustees – minutes of meetings of the BOD or BOT
4. Stock and Transfer Book
CORPORATE RECORDS
1. Charter documents:
a. AOI
b. Bylaws
c. Amendments, if any
2. Reports filed with the SEC:
a. General Information Sheets (GIS), and
b. All other reports required under the Securities Regulation Code (SRC)
3. PREEMPTIVE RIGHT
GEN: Pre-emptive right is a preferential right granted to the existing stockholders to subscribe to the newly
issued stocks before it is being offered to the public.
Reason: In order for the existing stockholders to protect their interest in the corporation and the shares that
they hold representing their ownership. It is to allow the stockholders to retain the extent of their power.
XPN: Stockholders are denied their pre-emptive right in the following instances:
(1) When it is expressly prohibited under the Articles of Incorporation
(2) Shares issued in compliance with the laws requiring stock offerings or minimum ownership by the public
a. When the corporation decides to go public, the SEC requires the corporation to earmark some
shares for the employees (salary deduction, easy instalment payment)
b. Under existing laws – earmark existing shares to the public ( At least 20% must be sold to the
public)
(3) Shares to be issued in exchange of properties to retire existing debts
4. RIGHTS TO DIVIDENDS
Section 42. Power to Declare Dividends.
What are dividends?
These are part of the PROFITS distributed as shares to the stockholders. If there are no profits, there are no
dividends.
GEN: The Board has the sole authority to declare dividends. The declaration of dividends is the sole
prerogative of the board.
XPN: The Board may be compelled to issue dividends when the retained earnings of the corporation
EXCEED 100% of their paid-in capital stock.
TYPES OF DIVIDENDS
(1) Cash dividends
(2) Property dividends
(3) Stock dividends
` (4) Combination of the different kinds of dividends
Section 70. Effect of Delinquency.
– No delinquent stock shall be voted for, be entitled to vote, or be represented at any stockholder’s meeting,
nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends
Section 82. Effect of Demand and Termination of Right.
From the time of demand for payment of the fair value of a stockholder’s shares until either the abandonment
of the corporate action involved or the purchase of the said shares by the corporation,n- dividend rights,
shall be suspended
if the dissenting stockholder is not paid the value of the said shares within thirty (30) days after the award, the
voting and dividend rights shall immediately be restored.
Section. 83. When Right to Payment Ceases.
If, however, such demand for payment is withdrawn with the consent then the right of the stockholder to be
paid the fair value of the shares shall cease, all dividend distributions which would have accrued on the
shares shall be paid to the stockholder.

iv. Remedial rights

1. Individual suit
Individual suits are filed when the cause of action belongs to the individual stockholder personally, and not to
the stockholders as a group or to the corporation, e.g., denial of right to inspection and denial of dividends to
a stockholder.
Florente v Florente, GR No. 174909, January 20, 2016
2. Representative suit
If the cause of action belongs to a group of stockholders, such as when the rights violated belong to preferred
stockholders, a class or representative suit may be filed to protect the stockholders in the group.
Florente v Florente, GR No. 174909, January 20, 2016
3. Derivative suit
is an action filed by stockholders to enforce a corporate action. A derivative suit, therefore, concerns a wrong
to the corporation itself.
Florente v Florente, GR No. 174909, January 20, 2016

v. Obligation of stockholders
1. Liability to the corporation for unpaid subscription:
2. Liability to the corporation for interest on unpaid subscription if so required by the bylaws;
 3. Liability to the creditors of the corporation for unpaid subscription:
4. Liability for watered stock
5. Liability for dividends unlawfully paid:
6. Liability for failure to create corporation

vi. Meetings
1. Regular or special (Secs. 48-49, RCC)
Section 48. Kinds of Meetings.
– Meetings of directors, trustees, stockholders, or members may be regular or special.
Section 49. Regular and Special Meetings of Stockholders or Members.
WHEN MEETINGS ARE CONDUCTED
Regular Meeting Special Meeting

(1) Held annually on a At any time deemed

date fixed in the bylaws; necessary by the
or BOD/BOT or as provided
(2) On any date after for in the bylaws.
April 15 of every year, as
determined by the
BOD/BOT.
Why are regular meetings held only after April 15?
For purposes of filing income tax returns. By that time, the financial statements are already done. All
the data, information, figures are already available.
Unless the bylaws provide for a longer period, the stock and transfer book or membership book shall
be closed at least twenty (20) days for regular meetings and seven (7) days for special meetings BEFORE the
scheduled date of the meeting.
POSTPONEMENT OF REGULAR MEETINGS
GEN: Written notice and reason thereof shall be sent to ALL stockholders at least 2 weeks prior to the date of
meeting.
XPN: A different period is required under the bylaws, law, or regulation.
UNJUST REFUSAL TO CALL A MEETING
-when there is unjust refusal to call a meeting, a stockholder can petition the Commission to order the conduct
of a meeting.
2. Notice (Sec. 49, RCC)
Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member:
WHEN GIVEN (NOTICE OF MEETING)
Regular Meeting Special Meeting

Sent to all stockholders At least one week prior

of record at least 21 to the meeting, a written
days prior to the notice shall be sent to all
meeting unless a stockholders, unless a
different period is different period is
required in the bylaws, provided for in the
law or regulation. bylaws, law or regulation.

CONTENTS OF A NOTICE OF MEETING

1. Shall state the time and place of the meeting;
2. The agenda for the meeting;
3. A proxy form which shall be submitted to the corporate secretary within a reasonable time prior to the
meeting;
4. 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
5. When the meeting is for the election of directors or trustees, the requirements and procedure for
nomination and election.
6. The minutes of the most recent regular meeting

3. Place and Time of Meetings (Sec. 50, RCC)

Stockholders’ or members’ meetings, whether regular or special, shall be held in the principal office of the
corporation as set forth in the articles of incorporation, or, if not practicable, in the city or municipality
where the principal office of the corporation is located: Provided, That any city or municipality in Metro
Manila, Metro Cebu, Metro Davao, and other Metropolitan areas shall, for purposes of this section, be
considered a city or municipality.
Notice of meetings shall be sent through the means of communication provided in the bylaws, which shall
state the time, place and purpose of the meetings.

4. Minutes and Agenda of Meetings (Sec. 49, RCC)

The minutes of the most recent regular meeting which shall include, among others:
a. A description of the voting and vote tabulation procedures used in the previous meeting;
b. A description of the opportunity given to stockholders or members to ask questions and a record of the
questions asked and answers given;
c. The matters discussed and resolutions reached;
d. A record of the voting results for each agenda item;
e. A list of the directors or trustees, officers and stockholders or members who attended the meeting; and
f. Such other items that the Commission may require in the interest of good corporate governance and
the protection of minority stockholders;
Reason for including the minutes of the previous meeting:
The minutes of the previous meeting must be attached and must be accompanied by the notices because
these will require the approval.
This is important because should there be conflict in the future, they could always refer back to the minutes.
These will be in the custody of the secretary. The secretary among others shall take hold of the AOI, bylaws,
all resolutions approved, minutes of the meeting approved.

5. Remote communication (Sec. 49, RCC)

The right to vote of stockholders or members may be exercised in person, through a proxy, or when so
authorized in the bylaws, through remote communication or in absentia.
The Commission shall issue the rules and regulations governing participation and voting through remote
communication or in absentia,

vii. Board of Directors and Trustees

1. Repository of Corporate Powers (Sec. 23, RCC)
COLEGIO MEDICO-FARMACEUTICO DE FILIPINAS, INC., PETITIONER, V. LILY LIM AND ALL PERSONS
CLAIMING UNDER HER, RESPONDENT, GR 212034, July 02, 2018
2. Tenure, qualifications and disqualifications of directors (Sec. 22, RCC)
TENURE/TERM
a. Directors shall be elected for a term of one (1) year from among the holders of stocks registered in
corporation's book
b. Trustees shall be elected for a term not exceeding three (3) years
QUALIFICATIONS FOR DIRECTORS
1. For a stock corporation, ownership of at least 1 share of the capital stock of the corporation his own
name.
2. For a non-stock corporation, only members of the corporation can be elected.
3. The director or trustee must be capacitated.
4. The director or trustee must be of legal age.
5. Must not possess any of the disqualifications
Note: Majority of the directors must be residents of the Philippines. Majority, not all. There Is No Citizenship
requirement, except for nationalized industries. Even foreigners can be voted as directors.
DISQUALIFICATIONS OF DIRECTORS
Section 26. Disqualification of Directors, Trustees or Officers. - 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 RegulationCode";
(b) Found administratively liable for any offense involving fraudulent acts; and
(c) By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct
similartothose enumerated in paragraphs (a) and (b) above.

*Republic Act 8799, otherwise known as The Securities Regulation Code, was enacted as landmark
legislation seeking the achievement of a free market that is self-regulating.

*Fraudulent Act means any action that is determined to be fraudulent, or involve other willful or intentional
misconduct, or involve a breach of the duty of loyalty to the Company or its stockholders, oran action or
omission not in good faith or which involves intentional misconduct.

3. Corporations vested with public interest (Sec. 22, RCC)

The board of the following corporations vested with public interest shall have independent directors
constituting at least twenty percent (20%) of such board:
(a) Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise known as
"TheSecuritiesRegulation Code", namely those whose:
➢ securities are registered with the Commission,
➢ corporations listed with an exchange or,
➢ Corporations with assets of at least Fifty million pesos (50,000,000.00) and having two hundred(200)or
more holders of shares, each holding at least one hundred (100) shares of a class of its equity shares;
(b) Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service business,
preneed,trust and insurance companies and other financial intermediaries; and
(c) Other corporations engaged in businesses vested with public interest similar to the above, as may be
determined by the Commission, after taking into account relevant factors which are germane to the objective
and purpose of requiring the election of an independent director, such as the extent of minority ownership,
type of financial products or securities issued or offered to investors, public interest involved in the nature of
business operations, and other analogous factors.

4. Independent directors (Sec. 22, RCC)

An independent director is a person who apart from shareholdings and fees received from any
business or other relationship which could, or could reasonably be received to materially interfere with the
exercise of independent judgment in carrying out the responsibilities as a director.
They are persons believed to be of independent mind. No relationship at all with the corporation except
for some token shareholdings.
Note: Independent directors must be elected by the shareholders present or entitled to vote in absentia
during the election of directors.
Note: 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 membership and other requirements that the Commission will prescribed to strengthen their
independence and align with international best practices.
Note: Independent Directors shall make up at least 20% of the board such that when there are 10 members
of the BOD, it requires at least two independent directors.

5. Election (Sec. 23, RCC)

SUMMARY OF ELECTION
(1) The election must be by ballot if requested by any voting stockholder. Hence, voting by viva voce roll call
(raising hands) is valid except when there is a request that it be by ballot.
(2) Stockholders shall have the right to vote the number of shares of stock standing in their own names(1
share = 1 vote) as long as 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.
6. Removal (Sec. 27, RCC)
General Rule: Removal of directors or trustees may be with or without cause.
Exception: Removal without cause may not be used to deprive minority stockholders or membersoftheright of
representation to which they may be entitled under Section 23 of this Code.
REQUISITES FOR REMOVAL
1. The removal should take place at a regular or special meeting duly called for the purpose;
2. The director or trustee can only be removed by a vote of the stockholders representing at least 2/3 of
the outstanding capital stock or 2/3 of the members entitled to vote in case of non-stock corporations
3. There must be a previous notice to stockholders or members of the corporation of the intention
propose such removal at the meeting; and
4. The special meeting of the stockholders or members of a corporation for the purpose of removal must
be called by the secretary on order of the president or on the written demand of the stockholders
representing or holding at least a majority of the outstanding capital stock or a majority of the members
entitled to vote.

7. Filing of vacancies (Sec. 28, RCC)

Cause of Vacancies: DARI-DREI
1. Death
2. Abandonment
3. Resignation
4. Incapacity
5. Disqualification
6. Removal
7. Expiration of Term
8. Increase in the number of Directors/Trustees
RULES IN FILLING UP VACANCIES
(A) For Removal
Filled up by the stockholders or members in a regular or special meeting called for that purpose
When – same day of the meeting authorizing the removal
(B) For Expiration of Term
Filled up by the stockholders or members in a regular or special meeting called for that purpose-
When – not later than the day of such expiration at a meeting called for that purpose either through a special
or regular meeting
(C) For Increase in the Number of Directors or Trustees
Filled up by the stockholders or members in a
(a) regular or special meeting called for that purpose or in the same meeting
(b) When – in the same meeting authorizing the increase of directors or trustees if so stated in the
notice of the meeting
(D) For other causes (DARID; death, abandonment, resignation, incapacity, disqualification)
Filled up by at least the majority of the remaining directors or trustees if still constitutingaquorum– existing
board will fill the vacancy
When – not later than 45 days from the time the vacancy arose
8. Compensation of directors (Sec. 29, RCC)
GEN: The directors or trustees shall not receive any compensation in their capacity as such.
XPN:
(1) Reasonable per diems
(2) As stipulated in their by-laws fixing their compensation
(3) Voted upon by the stockholders representing the majority of the outstanding capital stocks
XPN to XPN: A vote of at least of the majority of the outstanding capital stock or majority of the members
entitled to vote grants the directors compensation in a meeting specifically called for that purpose.
9. Disloyalty
a. Business Judgment Rule
Meaning: the board of directors of a corporation is given the freedom to conduct business and is protected
from the courts digging into their business deals or decisions due to unfair or unwarranted allegations.
Under the business judgement rule, a court will not prosecute a director for his or her decisions if it can be
shown that they were made:
➢ Rationally
➢ In good faith
➢ With the understanding that they were acting in a way that was good for the business
Note: Directors who assented to the patently unlawful act cannot be liable if such act is drawn from a
justifiable reason such as the business judgment rule.
b. Solidary Liability for Damages (Sec. 30, RCC)
NATURE OF LIABILITY
As such, directors or trustees shall be liable solidarily for all damages suffered by the corporation,the
stockholders, or members and other persons.
In the case of acquiring conflict of interest – the 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.
REQUISITES: Before a director or officer of a corporation can be held personally liable for corporate
obligations,however, the following requisites must concur:
1. The complainant must allege in the complaint that the director or officer assented to patently
unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and
2. The complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith.

10. Personal liabilities (Sec. 30, RCC)

LIABILITY OF DIRECTORS
The directors/trustees are liable to the corporation for the commission of the following:
(1) Knowingly and willfully vote or assent to patently unlawful acts
(2) Guilty of gross negligence or bad faith
(3) Acquire any personal or pecuniary interest in conflict of duty in conducting the affairs of the
corporation

11. Responsibility for Crimes

It clarified the obligations of corporate directors and officers, and expressed in statutory language established
principles and doctrines. There are three duties of the directors, trustees and officers of a corporation: the
duty of obedience, the duty of diligence and the duty of loyalty. Duty of obedience means that they will direct
the affairs of the corporation only in accordance with the purposes for which it was organized.
12. Special fact doctrine
Special facts doctrine is a term used in corporate law to describe the fiduciary duty of a corporate officer to
shareholders to disclose information during a transaction involving a stock transfer. This duty arises because
of the superior knowledge the officer holds by virtue of his or her position.
This "special facts or special circumstances" rule meant that although directors generally had no duty to
disclose material facts when trading with shareholders, as the majority rule held, a duty might arise where
there were special circumstances, such as 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) and a failure to
disclose significant facts that materially affected the price of the stock.
13. Inside information
Insider information is a fact about a public company's plans or finances that has not yet been revealed to
shareholders and that could give an unfair advantage to its possessors if acted upon. Buying or selling stock
based on insider information can be a criminal offense.
Insider information is usually available to executives working within or close to a public company.
Inside information” is information not generally available that a reasonable person would expect to have
a material effect on the price or value of financial products. it consists of deductions, conclusions or
inferences made or drawn from the readily observable matter.
14. Contracts (Sec. 31, RCC)
Summary: In the case of self-dealing directors, it is not considered wrong in itself. However, if any of the
conditions under the law is lacking, the contract entered into can be voided at the option of the corporation.
GEN: A contract of the Corporation with 1 or more of its directors, trustees, officers, or their spouses and
relatives within the 4th civil degree of consanguinity or affinity is VOIDABLE, at the option of the corporation
XPN: The contract is held valid provided that the following conditions are present:
1. Presence of the director or trustee in the BOD meeting in which contract is approved was not
necessary to constitute a quorum for such meeting;
2. Vote of such director or trustee was not necessary for the approval of the contract
3. The contract is fair and reasonable under the circumstances
4. 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
5. In case of an officer, the contract has been previously authorized by the board of directors.

15. Between corporations with interlocking directors (Sec.32, RCC)

INTERLOCKING DIRECTOR
Interlocking director refers to a director of two corporations having a transaction with each other
GEN: A contract between two (2) or more corporations having interlocking directors shall not be invalidated
on that ground alone.
XPN:
1. Cases of fraud; and
2. Contract is not fair and reasonable

Note: In the case of an interlocking director who has a substantial interest in one corporation and a nominal
interest in another corporation, the provisions of the Self-Dealing Directors shall apply. The following
requisites must be present, namely:
1. Presence of the director is not necessary to constitute
a quorum
2. Vote is not necessary to approve the contract
3. Contract is fair and reasonable
16. Executive and other special committees (Sec. 34, RCC)
Executive Committee
Committee which exercises powers within the competence of the Board that requires authority under the
by-laws. The Board cannot just create their own executive committee if such committee will be exercising the
powers of the Board.
Special Committee
Can be created by the Board even without the authority under the by-laws. Any other committee exercising a
mere recommendatory power whose actions require ratification and confirmation by the board. It cannot
approve resolutions on its own. The reason here is that the Board is the corporation’s governing body, clearly
upholding the power to exercise the corporation’s prerogatives in managing the corporation’s business affairs.

17. Meetings
a. Regular and Special Meetings (Sec. 52, RCC)
Regular Meeting Special Meeting

When Held Held anytime upon:

monthly (a) The call of the
unless the president; or
bylaws (b) As provided for in the
provide bylaws.
otherwise.

Notice GEN: Notice of regular or special meetings

of stating the date, time and place of the
Meeting meeting must be sent to every director or
trustee at least two (2) days prior to the
scheduled Meeting.
XPN: A longer time is provided in the
bylaws.

How May be done electronically or other means

conduct as allowed by the Commission.
ed T/N: Teleconferencing is now very
common and is now the standard way.
Reasons why SEC allows teleconferencing:
1. In order to take advantage of the advances of technology;
2. To save time for the busy members of the board. As long as the minutes will reflect the true and
accurate information, the BOD or BOT don’t have to conduct a physical meeting.

NO REPRESENTATION ALLOWED IN A BOARD MEETING

Directors or trustees cannot attend or vote by proxy at board meetings. This is because a director’s presence
is personal due to his qualification and expertise.

b. Who presides (Sec. 53, RCC)

Section 53. Who Shall Preside at Meetings. – 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.

c. Quorum (Sec. 52, RCC)

Section 51. Quorum in Meetings. – Unless otherwise provided in this Code or in the bylaws, a quorum shall
consist of the stockholders representing a majority of the outstanding capital stock or a majority of the
members in the case of nonstock corporations.

Quorum is the number of shareholders needed in order to validly conduct a meeting.

2 KINDS OF QUORUM
(1) Simple quorum – 50% + 1
(2) Qualified Quorum – any number greater than the simple quorum

Illustration. Quorum in a non-stock corporation

10 members in a non-stock corporation in order to hold a meeting. Before the meeting, 3 already died.
What will be our quorum?
A: The quorum is 4 because the remaining members are only 7. In a non-stock corporation, the dead
members cannot be represented.

Note: In so far as non-stock corporations are concerned, quorum is based on the majority of the living
members.

d. Remote communication (Sec. 52, RCC)

Section 52 allows directors or trustees who cannot physically attend to participate and vote through
remote communication. However, directors or trustees cannot participate or vote in such meetings by
proxy.

Under Section 52 of the RCC for conduct of regular and special meetings of board of directors or trustees,
directors and trustees may attend such meetings in person or through remote communication or in absentia.
However, directors and trustees are still expressly prohibited to attend or vote through proxy.
The attendance of both the stockholders and the directors and trustees through remote communication or in
absentia is counted for purposes of quorum.

e. Rule on abstention (Sec. 52, RCC)

Abstention is a term in election procedure for when a participant in a vote either does not go to vote (on
election day) or, in parliamentary procedure, is present during the vote, but does not cast a ballot.
A majority of the directors or trustees as stated in the articles of incorporation shall constitute a quorum to
transact corporate business, and every decision reached by at least a majority of the directors or trustees
constituting a quorum, except for the election of officers which shall require the vote of a majority of all the
members of the board, shall be valid as a corporate act.

viii. Capital Affairs

1. Certificate of stocks (Sec. 62, RCC)
It is a written instrument signed by the proper officer of a corporation stating or acknowledging that the person
named therein is the owner of a designated number of shares of stock.
SIGNATURES REQUIRED IN A CERTIFICATE OF STOCK
(1) Signed by the president or vice-president
(2) Countersigned by the secretary or assistant secretary
NATURE OF CERTIFICATE OF STOCKS
(1) It is a personal property
(2) It is transferable
(3) It is NOT a negotiable instrument

Watered stocks (Sec. 61, 64, RCC)

2.
WATERED STOCKS
These are stocks sold or issued at a price less than the stocks’ par value. The value of these shares is
diluted, in that the public is not apprised of the real value of the corporation.

Stocks which are sold at less than the par value. You pay less
for more stocks. If you were able to subscribe to a water stock, the value paid will not reflect the actual value
of the shares.

How could water stocks exist?

1. When the value of the thing that you used in paying the stocks is lower than the par value of the share–
discounted stocks
2. Did not pay anything at all – bonus stocks
3. Consideration is valued in excess of its fair value

What is the effect of watered shares?

A: Watered stocks are not merely ultra vires, but they are illegal per se, and they cannot be ratified by any
vote of the shareholders, or by resolution of the BOD. However, if they are sold to a third party, then it should
be honoured by the corporation as a valued stock if the third parties acquired it in good faith.

WATERED STOCKS IS APPLICABLE ONLY TO NEWLY ISSUED SHARES (VIRGIN SHARES)

3. Payment of balance of subscription (Sec. 66, RCC)

**NOTES
How does the BOD call for the payment of the balance of the subscription?
A: A call is made by a resolution of the BOD in a meeting where there is a quorum, and approved by the
majority of the directors present in said meeting.
What is the effect of the failure to pay after a call, or upon the lapse of the date specified in the
subscription contract?
A: The BOD may issue another board resolution declaring said subscriptions delinquent.

4. Sale of delinquent shares (Sec. 67, RCC)

PROCEDURE FOR DELINQUENCY SALE
1. Resolution by the BOD for the order of sale of delinquent stocks, specifying the following:
a. Amount due on each subscription
b. Accrued interest
c. Date, time, and place of sale which shall not be less than 30 days nor more than 60 days from
the date the stocks become delinquent
2. Notice of Sale with a copy of the Resolution shall be sent to every delinquent stockholder either:
a. Personally
b. By registered mail, or
c. Through other means provided in the bylaws
3. Publication of Notice of Sale
a. once a week for two (2) consecutive weeks
b. in a newspaper of general circulation in the province or city where the principal office of the
corporation is located
4. Sale at a public auction to the bidder who shall offer to pay the full amount of the balance on the
subscription together with accrued interest, costs of advertisements and expenses of sale for the
smallest number of shares or fraction of a share.
NoteThe Board may decline any bidder.

5. Alienation of shares (Secs. 68-71, RCC)

Section 68. When Sale May be Questioned.
No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the
notice of sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain such action 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. No such action shall be maintained unless a complaint is filed within six (6)
months from the date of sale.

QUESTIONING OF AUCTION SALE

If there is irregularity in the conduct of the sale, the same may
be questioned.
When can you question the conduct of the auction sale?
A: Within 6 months from the date of sale.

Section 69. Court Action to Recover Unpaid Subscription.

Nothing in this Code shall prevent the corporation from collecting through court action, the amount due on
any unpaid subscription, with accrued interest, costs and expenses.

Section 70. Effect of Delinquency.

No delinquent stock shall be voted for, be entitled to vote, or be represented at any stockholder’s meeting, nor
shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in
accordance with the provisions of this Code, until and unless payment is made by the holder of such
delinquent stock for the amount due on the subscription with accrued interest, and the costs and expenses of
advertisement, if any.

Section 71. Rights of Unpaid Shares, Nondelinquent.

Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a
stockholder.

EFFECTS OF DELINQUENCY
As to the stockholder, he will no longer enjoy the following rights:
1. Right to vote
2. Right to be voted for;
3. Right of representation at any stockholder's meeting;
4. Not entitled to any of the rights of a stockholder
➢ EXCEPT the right to dividends in accordance with the provisions of this Code
5. Stocks will be considered delinquent and shall be subject to delinquency sale

6. Corporate books and records

a. Records to be kept at principal office (Sec. 73, RCC)
REASON FOR THE CORPORATION TO KEEP THE BOOKS AND RECORDS
It is the best evidence used in cases where conflicts need to be resolved in a corporation. It is a proof of the
corporation’s transactions. Also, it is considered as a prima facie (accepted as correct until proved otherwise)
official evidence of the corporation.

BOOKS TO BE KEPT
What are these books and records?
A: Every corporation shall keep and carefully preserve at its principal office all information relating to the
corporation including, but not limited to:
a. The articles of incorporation and bylaws of the corporation and all their amendments;
b. The current ownership structure and voting rights of the corporation, including:
I. lists of stockholders or members
II. group structures
III. intra-group relations
IV. ownership data, and
V. beneficial ownership;
c. The names and addresses of all the members of the board of directors or trustees and the executive
officers;
d. A record of all business transactions;
e. A record of the resolutions of the board of directors or trustees and of the stockholders or members;
f. Copies of the latest reportorial requirements submitted to the Commission; and
g. The minutes of all meetings of stockholders or members, or of the board of directors or trustees.

What are the books to be kept?

1. Articles of Incorporation
2. By-laws
3. Stock and transfer books
4. Stock certificates
5. Minutes of the stockholders meeting
6. Minutes of the board meeting
 7. Records of all business transactions of the corporation (journals, ledgers, financial statements)

b. Right to inspect corporate books (Sec. 73, RCC)

INSPECTION OF CORPORATE RECORDS
The corporate records are open to inspection by any director, trustee, shareholder, or member of the
corporation in person or by representative at reasonable hours on business days, and a demand in writing
may be made by such director, trustee, shareholder or member at their expense, for copies of such records or
excerpts from said records.

There are matters that are not covered by the right to inspect however. For instance, a corporation engaged in
the manufacturing of goods can keep the formula of its goods secret.

Reasonable Hours on Business Days

(Throwback to Nego)

When is a day considered a business day considering that we have call centers now?
Atty. Amago: Follow government service hours. M-F, 8AM-
5PM.

REQUISITES FOR THE EXERCISE OF THE RIGHT TO INSPECT

1. It must be exercised at reasonable hours on business days.
2. The stockholder must not have improperly used any information he secured through any previous
examination.
3. The demand is made in good faith or for a legitimate purpose.
WHO CANNOT INSPECT
A requesting party who is not a stockholder or member of record, or is a competitor, director, officer,
controlling stockholder or otherwise represents the interest of a competitor.

c.Effect of refusal to inspect corporate books (Sec. 73, RCC)

LIABILITY FOR REFUSAL TO ALLOW INSPECTION OR PRODUCTION OF RECORDS
Who can be liable?
A:
1. Any officer or agent of the corporation who shall refuse to allow the inspection or production of records
shall be liable;
2. Any director who allows or approves the refusal shall also be guilty of an offense punishable under
Sec. 161 of the Revised Corporation Code.

REMEDIES OF A STOCKHOLDER REFUSED INSPECTION

If the corporation or its officers refuse to allow a stockholder to inspect, is the filing of a case the only
option of a stockholder?
A: No. An aggrieved party may report such denial or inaction to the Commission.
Sec. 73 of the RCC after all provides:
“If the corporation denies or does not act on a demand for inspection and/or reproduction, the
aggrieved party may report such to the Commission. Within five (5) days from receipt of such report,
the Commission shall conduct a summary investigation and issue an order directing the inspection or
reproduction of the requested records.”

Within 5 days from the receipt of such a report, the SEC shall conduct a summary investigation, and issue
an order directing the inspection/reproduction of the requested records.

VALID DEFENSES FOR REFUSAL

1. The person demanding to examine and copy excerpts from the corporation’s records and minutes has
improperly used any information secured through any prior examination of the records or minutes of
such corporation or any other corporation;
2. The person demanding to examine was not acting in good faith or for a legitimate purpose in making
the demand;
3. The person demanding is a competitor, or a director, officer, controlling stockholder or representative of
the interests of a competitor.

7. Dissolution and liquidation

 a. Modes of dissolution (Sec. 133-138, RCC)
SEC. 133. Methods of Dissolution.
A corporation formed or organized under the provisions of this Code may be dissolved voluntarily or
involuntarily.

Modes of dissolution
1. Voluntary dissolution
a. By the vote of the board of directors or trustees and the resolution adopted by the stockholders
or members where no creditors are affected;
b. By the judgment of the SEC after hearing of petition for voluntary dissolution where creditors are
affected;
c. By amending the articles of incorporation to shorten the corporate term;
d. In case of a corporation sole, by submitting to the SEC a verified declaration of the dissolution
for approval; and
e. In case of merger or consolidation.
2. Involuntary dissolution
a. By expiration of corporate term provided for in the articles of incorporation:
b. By legislative enactment:
c. Upon receipt of a lawful court order dissolving the corporation.
d. By failure to formally organize and commence its business within 5 years from the date of
incorporation;
e. If a corporation has commenced its business but subsequently becomes inoperative for a period
of at least five (5) consecutive years, the SEC may, after due notice and hearing, place the
corporation under delinquent status. A delinquent corporation shall have a period of two (2)
years to resume operations and comply with all requirements that the SEC shall prescribe.
Failure to comply with the requirements and resume operations within the period given by the
SEC shall cause the revocation of the corporation's certificate of incorporation; and
f. By order of the SEC on grounds under existing laws.

Note: The requirements for dissolution mandated by the Corporation Code should be strictly complied with.

b. Methods of liquidation (Sec. 139, RCC)

General Rule: Every corporation whose charter expires pursuant to its articles of incorporation, is annulled
by forfeiture, or whose corporate existence is terminated in any other manner, shall nevertheless remain as a
body corporate for three (3) years after the effective date of dissolution,for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and close its affairs, dispose of and convey its
property, and distribute its assets, but not for the purpose of continuing the business for which it was
established.

Exception: Except for banks, which shall be covered by the applicable provisions of Republic Act No. 7653,
otherwise known as the "New Central Bank Act", as amended, and Republic Act No. 3591, otherwise known
as the "Philippine Deposit Insurance Corporation Charter", as amended.

Note: Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and
liabilities

General Rule: Upon the winding up of corporate affairs, any asset distributable to any creditor or stockholder
or member who is unknown or cannot be found shall be escheated in favor of the national government.

Exception: In case of distribution of assets in nonstock corporations.

ix. Other Corporation

1. Non-stock corporation (Sec. 86-94, RCC)
Non-stock corporation
Is one where no part of its income is distributable as dividends to its members, trustees, or officers. Any profit
which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or
proper, be used for the furtherance of the purpose or purposes for which the corporation was organized

SEC. 87. Purposes.

Nonstock corporations may be formed or 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.

Characteristics of a non-stock corporation

1. It does not have capital stock divided into shares.
2. No part of its income during its existence is distributable as dividends to its members, trustees, or
officers.
3. As a general rule, it is not empowered to engage in business with the object of making income or
profits directly or indirectly. However, it is not prohibited to make income or profits as an incident to its
operation;
4. There is non-transferability of membership.
5. The right to vote of members may be limited, broadened, or even denied in the articles of incorporation
or the by-laws.
6. Non-stock corporations may, through their articles of incorporation or their by-laws, designate their
governing boards by any name other than as board of trustees.
7. By-laws may provide that the members may hold their meetings at any place even outside the place
where the principal office of the corporation is located, provided that such place is within the
Philippines.
8. A non-stock corporation is not allowed to distribute any of its assets or any incidental income or profit
made by the corporation during its existence.
9. A non-stock corporation cannot be converted into a stock corporation by mere amendment of its
articles of incorporation because the conversion would change the corporate nature from non-profit to
profit.

CHAPTER I (MEMBERS)
SEC. 88. Right to Vote.
The right of the 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 bylaws. Unless so limited. broadened, or denied, each member,
regardless of class, shall be entitled to one (1) vote.

Unless otherwise provided in the articles of incorporation or the bylaws, a member may vote by proxy, in
accordance with the provisions of this Code. The bylaws may likewise authorize voting through remote
communication and/or in absentia.

In stock corporations, shareholders may generally transfer their shares. Thus, on the death of a shareholder,
the executor or administrator duly appointed by the Court is vested with the legal title to the stock and entitled
to vote it. Until a settlement and division of the estate is effected, the stocks of the decedent are held by the
administrator or executor.

On the other hand, membership in and all rights arising from a nonstock corporation are personal and
non-transferable, unless the articles of incorporation or the by-laws of the corporation provide otherwise. In
other words, the determination of whether or not "dead members are entitled to exercise their voting rights
(through their executor or administrator), depends on those articles of incorporation or by-laws.

SEC. 89. Non Transferability of Membership.

Membership in a nonstock corporation and all rights arising therefrom are personal and non transferable,
unless the articles of incorporation or the bylaws otherwise provide.

SEC. 90. Termination of Membership.

Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or
the bylaws. Termination of membership shall extinguish all rights of a member in the corporation or in its
property,unless otherwise provided in the articles of incorporation or the bylaws.

Requirements for termination of membership

1. Notice to the member; and
2. Opportunity to be heard.

CHAPTER II (TRUSTEES AND OFFICERS0

SEC. 91. Election and Term of Trustees.
The number of trustees shall be fixed in the articles of incorporation or bylaws which may or may not be more
than fifteen (15). They shall hold office for not more than three (3) years until their successors are elected and
qualified. Trustees elected to fill vacancies occurring before the expiration of a particular term shall hold office
only for the unexpired period.

Except with respect to independent trustees of nonstock corporations vested with public interest, only a
member of the corporation shall be elected as trustee.

Unless otherwise provided in the articles of incorporation or the bylaws, the members may directly elect
officers of a nonstock corporation.

Note: The number of trustees shall be fixed in the articles of incorporation or bylaws which may or may not be
more than fifteen (15) They shall hold office for not more than three (3) years until their successors are
elected and qualified.

SEC. 92. List of Members and Proxies, Place of Meetings. The corporation shall, at all times, keep a list of
its members and their proxies in the form the Commission may require. The list shall be updated to reflect the
members and proxies of record twenty (20) days prior to any scheduled election. The bylaws may provide that
the members of a nonstock corporation may hold their regular or special meetings at any place even outside
the place where the principal office of the corporation is located: Provided, That proper notice is sent to all
members indicating the date, time and place of the meeting: Provided, further, That the place of meeting shall
be within Philippine territory.

Note: The corporation shall, at all times, keep a list of members and their proxies in the form the SEC may
require

Note: The bylaws may provide that the members of a nonstock corporation may hold their regular or special
meetings at any place even outside the place where the principal office of the corporation is located: however,
it shall be within Philippine territory.

CHAPTER III (DISTRIBUTION OF ASSETS IN NONSTOCK CORPORATIONS)

SEC. 93. Rules of Distribution.

The assets of a nonstock corporation undergoing the process of dissolution for reasons other than those set
forth in Section 139 of this Code shall be applied and distributed as follows:
a. All liabilities and of the corporation shall be paid, satisfied and discharged, or adequate provision shall
be made therefor;
b. Assets held by the corporation upon a condition. requiring return, transfer or conveyance, and which
condition occurs by reason of the Missolution, shall be returned, transferred or conveyed in accordance
with such requirements;
c. Assets received and held by the corporation subject to limitations permitting their use only for
charitable, religious, benevolent, educational or similar purposes, but not held upon a condition
requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed
to one (1) or more corporations, societies or organizations engaged in activities in the Philippines
substantially similar to those of the dissolving corporation according to a plan of distribution adopted
pursuant to this Chapter;
d. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in
accordance with the provisions of the articles of incorporation or the bylaws, to the extent that the
articles of incorporation or the bylaws determine the distributive rights of members, or any class or
classes of members, or provide for distribution; and
e. In any other case, assets may be 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. 94. Plan of Distribution of Assets.
A plan providing for the distribution of assets, consistent with the provisions of this Title, may be adopted by a
nonstock corporation in the process of dissolution in the following manner:

a. The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution
and directing the submission thereof to a vote at a regular or special meeting of members having voting
rights;
 b. Each member entitled to vote shall be given a written notice setting forth the proposed plan of
distribution or a summary thereof and the date, time and place of such meeting within the time and in
the manner provided in this Code for the giving of notice of meetings; and
c. Such plan of distribution shall be adopted upon approval of at least two-thirds (2/3) of the members
having voting rights present or represented by proxy at such meeting.
Note: The Plan Of Distribution Of Assets may be adopted by a majority vote of the board of trustees and
approval of 2/3 of the members having voting rights present or represented by proxy at the meeting during
which said plan is adopted.

Stock corporation vs. Non-stock corporation

Stock corporation Non-stock corporation

Has capital stock divided into shares. Has no capital stock.

Organized for profit. Not organized for profit.

Profits are distributed to the stockholders through Profits are not distributed to members.
dividends. members.

Directors cannot exceed 15 in number. Trustees may exceed 15 in number.

The term of a director is 1 year. The term of a trustee is not more than 3 years.

Officers are elected by the board of directors. Officers may be directly elected by the members
unless otherwise provided in articles of incorporation
or by-laws.

Stockholders' meetings shall be held in the city or Members' meetings may be held at any place
municipality where the principal office of the outside the principal office of the corporation
corporation is located, and if practicable in the provided it shall be within the Philippines.
principal office.

Shares may be transferred by the stockholder with Membership is personal in character and is not
or without the consent of the corporation. transferable unless allowed by the articles of
incorporation or by-laws.

2. Educational corporation (Sec. 105-165, RCC)

SEC. 105. Incorporation.
Educational corporations shall be governed by special laws and by the general provisions of this Code.

SEC. 106. Board of Trustees.

Trustees of Educational institutions organized as nonstock corporations shall not be less than five (5) nor
more than fifteen (15): Provided, That the number of trustees shall be in multiples of five (5).

Unless otherwise provided in the articles of incorporation or bylaws, the board of trustees of incorporated
schools, colleges, or other institutions of learning shall, as soon as organized, so classify themselves that the
term of office of one-fifth (1/5) of their number shall expire every year. 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.
A majority of the trustees shall constitute a quorum for the transaction of business. The powers and authority
of trustees shall be defined in the bylaws.

For institutions organized as stock corporations, the number and term of directors shall be governed by the
provisions on stock corporations.

Composition of the Board

1. Non-stock educational corporation
The board of trustees shall not be less than 5 nor more than 15 provided that the number of trustees
shall be in multiples of 5 (either 5 or 10 or 15 only).
2. Stock educational corporation
 The board of directors shall be the same as in ordinary stock corporation which is not less than 5 and
not more than 15.

General rule: The board of trustees shall, as soon as organized, so classify themselves that the term of office
of 1/5 of their number shall expire every year.

Exception: Unless otherwise provided in its articles of incorporation or by-laws.

1. One person corporation

a. Excepted corporation (Sec. 116, RCC)
SEC. 116. One Person Corporation.
One Person Corporation (OPC)
A One Person Corporation is a corporation with a single stockholder who can only be a natural person,
trust or estate.
The incorporator of an OPC being a natural person must be of legal age.
As an incorporator, the "trust" as used by the law does not refer to a trust entity, but the subject being
managed by a trustee.
If the single stockholder is a trustee, administrator, executor. guardian, conservator, custodian or other
person exercising fiduciary duties, proof of authority to act on behalf of the trust or estate must be submitted
at the time of incorporation.

Note: Only a natural person, trust, or an estate may form a One Person Corporation. In case of a natural
person, the incorporator must be of legal age.

Who are not allowed to form OPCs?

1. Banks and quasi-banks,
2. Preneed,
3. Trust
4. Insurance,
5. Public and publicly-listed companies, and
6. Non-chartered government-owned and-controlled corporations.

General Rule:
A natural person who is licensed to exercise a profession may not organize as a One Person
Corporation for the purpose of exercising such profession.

Exception:
Unless otherwise provided under special laws.

Foreign National
A foreign natural person may put up an OPC, subject to the applicable capital requirement and
constitutional and statutory restrictions on foreign participation in certain investment areas or activities.

Terms of Existence
The term of the existence of the OPC shall be perpetual. However.in case of the trust or estate, its
term of existence shall be co-terminous with the existence of the trust or estate.
The OPC under the name of the estate may be dissolved upon proof of Partition, such as Order of
Partition issued by the Court in case of Judicial Settlement and Deed of Extrajudicial Settlement in case of
summary settlement of the estate.
The OPC under the name of the Trustee may be dissolved upon proof of termination of the trust.

b. Capital stock requirement (Sec. 117, RCC)

SEC. 117. Minimum Capital Stock Not Required for One Person Corporation. -
General Rule:
A One Person Corporation shall not be required to have a minimum authorized capital stock.
Exception:
Unless otherwise provided by special law.
Further, unless otherwise required by applicable laws or regulations, no portion of the authorized
capital is required to be paid-up at the time of incorporation.

c. Articles of incorporation and by-laws (Sec. 118-119, RCC)

SEC. 118. Articles of Incorporation.
Note:
The One Person Corporation shall file its Articles of Incorporation in accordance with the requirements
of Section 14 of the Revised Corporation Code of the Philippines.
It shall likewise substantially contain the following:
1. If the single stockholder is a trust or an estate, the name, nationality, and residence of the trustee,
administrator, executor, guardian, conservator, custodian, or other person exercising fiduciary duties
together with the proof of such authority to act on behalf of the trust or estate; and
2. Name, nationality, residence of the nominee and alternate nominee, and the extent, coverage and
limitation of the authority. 3

SEC. 119. Bylaws. The One Person Corporation is not required to submit and file corporate bylaws Only
Articles of Incorporation is needed.

d. Corporate Name (Sec. 120, RCC)

SEC. 120. Display of Corporate Name. The letters "OPC" should be indicated by the One Person
Corporation either below or at the end of its corporate name.

e. Corporate structure and officers (Sec. 121-122, RCC)

SEC. 121. Single Stockholder as Director, President.
The single stockholder shall be the sole director and president of the OPC.

SEC. 122. Treasurer, Corporate Secretary, and Other Officers.

Within fifteen (15) days from the issuance of its certificate of incorporation, the One Person Corporation
shall appoint a treasurer, corporate secretary, and other officers as it may deem necessary, and notify the
Commission thereof within five (5) days from appointment.
The single stockholder muy not be appointed as the corporate secretary but may assume the role of a
treasurer. The single stockholder who assumes the position of the Treasurer shall post a surety bond.

f. Nominee (Sec. 124, 125, RCC)

SEC. 124. Nominee and Alternate Nominee.
The single stockholder is required to designate a nominee and an alternate nominee named in the
Articles of Incorporation who shall replace the single stockholder in the event of death and incapacity of the
single stockholder. The nominee and the alternate nominee shall take the place of the single stockholder as
director and shall manage the corporation's affairs.
The written consent of both the nominee and alternate nominee shall be attached to the application for
incorporation. Such consent may be withdrawn in writing any time before the death or incapacity of the single
stockholder.

SEC. 125. Term of Nominee and Alternate Nominee.

Incapacity or Death of the Single Stockholder
In case the single stockholder becomes incapacitated, the nominee can take over the management of
the OPC as director and president. At the end of the incapacity, the single stockholder can resume the
management of the OPC.
In case of death or permanent incapacity of the single stockholder, the nominee will take over the
management of the OPC until the legal heirs of the single stockholder have been lawfully determined and the
heirs have agreed among themselves who will take the place of the deceased? Nominee's inability,
incapacity, death, or refusal to discharge the functions as director and manager of the corporation
The alternate nominee shall sit as director and manage the One Person Corporation only for the same
term and under the same conditions applicable to the nominee.

g. Liability (Sec. 130, RCC)

SEC. 130. Liability of Single Shareholder.
Where the single stockholder cannot prove that the property of the DPC independent of the
stockholder's personal property, the stockholder shall be jointly and severally liable for the debts and other
liabilities of the OPC.
The principles of piercing the corporate veil applies with equal force to OPC as with other corporations.

h.Conversion (Secs. 131-132, RCC)

SEC. 131. Conversion from an Ordinary Corporation to a One Person Corporation. -
 When a single stockholder acquires all the stocks of an ordinary stock corporation, the latter may apply
for conversion into a One Person Corporation.
If the application for conversion is approved, the SEC shall issue a certificate of filing of amended
articles of incorporation reflecting the conversion.
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 conversion.

SEC. 132. Conversion from a One Person Corporation to an Ordinary Stock Corporation. -
A One Person Corporation may be converted into an ordinary stock corporation after due notice to the
SEC of such fact and of the circumstances leading to the conversion. If all requirements have been complied
with, the Commission shall issue a certificate of filing of amended articles of incorporation reflecting the
conversion

Note: 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.

In case of death of the single stockholder

In case of death of the single stockholder, the nominee or alternate nominee shall transfer the shares
to the duly designated legal heir or estate and notify the SEC of the transfer
Within 60 days from the transfer of the shares the legal heirs shall notify the SEC of their decision to
either wind up and dissolve the OPC or convert it into an ordinary stock corporation.

2. Foreign Corporation
a. Bases of authority over foreign corporation
SEC. 140. Definition and Rights of Foreign Corporations. For purposes -
Foreign corporation
It is one 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.

Requisites:
1. It must be formed, organized, or existing undel any laws other than those of the Philippines; and
2. The laws of the country where the corporation was organized allow Filipino citizens and corporations to
do business in its own country or state

Under Article 123 of the Corporation Code (Now section 140, Revised Corporation Code), a foreign
corporation must first obtain a license and a certificate from the appropriate government agency before it can
transact business in the Philippines Where a foreign corporation does business in the Philippines without the
proper license, it cannot maintain any action or proceeding before Philippine courts as provided under Section
133 of the Corporation Code (Now section 150, Revised Corporation Code).

Note: By securing a license, which is a legal requirement to lawfully engage in business in the Philippines, the
foreign entity would be giving assurance that it will abide by the decisions of our courts, even if adverse to it.

b. Necessity of a license to do business (Secs. 141-143, RCC)

SEC. 141. Application to Existing Foreign Corporations. -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 license, subject to the provisions of this
Code and other special laws.

SEC. 142. Application for a License. - A foreign corporation applying for a license to transact business in
the Philippines shall submit to the Commission a copy of its articles of incorporation and bylaws, certified in
accordance with law, and their translation to an official language of the Philippines, if necessary. The
application shall be under oath and, unless already stated in its articles of incorporation, shall specifically set
forth the following:
(a) The date and term of incorporation;
(b) The address, including the street number, of the principal office of the corporation in the country or
state of incorporation;
(c) 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;
(d) The place in the Philippines where the corporation intends to operate;
 (e) 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;
(f) The names and addresses of the present directors and officers of the corporation;
(g) 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;
(h) 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;
(i) A statement of the amount actually paid in; and
(j) Such additional information as may be necessary or appropriate in order to enable the Commission to
determine whether such corporation is entitled to a license to transact business in the Philippines, and
to determine and assess the fees payable.

Personality to sue (Sec. 145, RCC)

c.
Ways of serving summons
When summons is served on a foreign juridical entity, there are three prescribed ways:
1. Service on its resident agent designated in accordance with law for that purpose;
2. Service on the government official designated by law to receive summons if the corporation does not
have a resident agent; and
3. Service on any of the corporation's officers or agents within the Philippines.

Purpose of summons
The purpose of summons is not only to acquire jurisdiction over the person of the defendant, but also
to give notice to the defendant that an action has been commenced against it and to afford it an opportunity to
be heard on the claim made against it.

Note: The requirements of the rule on summons must be strictly followed otherwise the trial court will not
acquire jurisdiction over the defendant.

Suability of foreign corporations

d.
SEC. 146. Law Applicable. -
General Rule: A foreign corporation lawfully doing business in the Philippines shall be bound by all laws,
rules and regulations applicable to domestic corporations of the same class.

Exceptions:
1. Except those which provide for the creation, formation, organization or dissolution of corporations; or
2. Except those which fix the relations, liabilities, responsibilities, or duties of stockholders, members, or
officers of corporations to each other or to the corporation.

SEC. 148. Amended License.

A foreign corporation authorized to transact business in the Philippines shall obtain an amended license:
1. In the event it changes its corporate name; or
2. Desires to pursue other or additional purposes in the Philippines.

SEC. 149. Merger or Consolidation Involving a Foreign Corporation Licensed in the Philippines. - One
or more foreign corporations authorized to transact business in the Philippines may merge or consolidate with
any domestic corporation or corporations if permitted under Philippine laws and by the law of its incorporation:
Provided, That the requirements on merger or consolidation as provided in this Code are followed.
Note: One or more foreign corporations authorized to transact business in the Philippines may merge or
consolidate with any domestic corporation or corporations if permitted under Philippine laws and by the law of
its incorporation.

e.Instances when foreign corporations without license may be allowed to sue (Sec. 150,
RCC)
General Rule: The aforementioned provision prevents an unlicensed foreign corporation "doing business" in
the Philippines from accessing our courts.
Exception: The exception to this rule is the doctrine of estoppel.

In a number of cases, however, we have held that an unlicensed foreign corporation doing business in
the Philippines may bring suit in Philippine courts against a Philippine citizen or entity who had contracted
with and benefited from said corporation. Such a suit is premised on the doctrine of estoppel. A party is
estopped from challenging the personality of a corporation after having acknowledged the same by entering
into a contrad with it. This doctrine of estoppel to deny corporate existence and capacity applies to foreign as
well as domestic corporations. The application of this principle prevents a person contracting with a foreign
corporation from later taking advantage of its noncompliance with the statutes chiefly in cases where such
person has received the benefits of the contract.

A foreign corporation doing business in the Philippines without license may sue in Philippine courts a
Filipino citizen or a Philippine entity that had contracted with and benefited from it. A party is estopped from
challenging the personality of a corporation after having acknowledged the same by entering into a contract
with it. The principle is applied to prevent a person contracting with a foreign corporation from later taking
advantage of its noncompliance with the statutes, chiefly in cases where such person has received the
benefits of the contract."
x. Merger and Consolidation
1. Definition and concept
What is a merger?
A merger is a union whereby one or more existing corporations are absorbed by another corporation that
survives and continues the combined business.
What is consolidation?
A consolidation is the union of two or more existing entities to form a new entity called the consolidated
corporation.
2. Distinguish: constituent and consolidated corporation
Constituent corporation means an existing corporation that is participating in the merger or consolidation
with one or more other corporations
Consolidated corporations in the union of two or more corporate body, whereby, their one properties,
powers, rights, and privileges inure to, and their duties and obligations devolve upon, a new organization.
3. Plan of merger or consolidation (Sec. 75, RCC)
SEC. 75. Plan of Merger or Consolidation. - Two (2) or more corporations may merge into a single
corporation which shall be one of the constituent corporations or may consolidate into a new single
corporation which shall be the consolidated corporation.
The board of directors or trustees of each corporation, party to the merger or consolidation, shall
approve a plan of merger or consolidation setting forth the following:
(a) The names of the corporations proposing to merge or consolidate, hereinafter referred to as the
constituent corporations;
(b) The terms of the merger or consolidation and the mode of carrying the same into effect;
(c) A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of
merger; and, in case of consolidation, all the statements required to be set forth in the articles of
incorporation for corporations organized under this Code; and
(d) Such other provisions with respect to the proposed merger or consolidation arei deemed necessary or
desirable.

4. Articles of merger or consolidation (Sec. 77, RCC)

SEC. 77. Articles of Merger or Consolidation. After the approval by the stockholders or members as
required by the preceding section, articles of merger or articles of consolidation shall be executed by each of
the constituent corporations, to be signed by the president or vice president and certified by the secretary or
assistant secretary of each corporation setting forth:

(a) The plan of the merger or the plan of consolidation;

(b) As to stock corporations, the number of shares outstanding, or in the case of nonstock corporations,
the number of members;
(c) As to each corporation, the number of shares or members voting for or against such plan, respectively;
(d) The carrying amounts and fair values of the assets and liabilities of the respective companies as of the
agreed cut-off date;
(e) The method to be used in the merger or consolidation of accounts of the companies;
(f) The provisional or pro-forma values, as merged or consolidated, using the accounting method; and
(g) Such other information as may be prescribed by the Commission.

For a valid merger or consolidation, the approval by the securities and exchange commission SEC of
the articles of merger or consolidation is required.

5. (Secs. 76, 78, 79, RCC)

SEC. 78. Effectivity of Merger or Consolidation.
The merger shall only be effective upon the issuance of a certificate of merger by the SEC, subject to its prior
determination that the merger is not inconsistent with the Corporation Code or existing laws. Where a party to
the merger is a special corporation governed by its own charter, the Code particularly mandates that a
favorable recommendation of the appropriate government agency should first be obtained s
Consolidation becomes effective not upon mere agreement of the members but only upon issuance of
the certificate of consolidation by the SEC. When the SEC, upon processing and examining the articles of
consolidation, is satisfied that the consolidation of the corporations is not inconsistent with the provisions of
the Corporation Code and existing laws, it issues a certificate of consolidation which makes the reorganization
official The new consolidated corporation comes into existence and the constituent corporations dissolve and
cease to exist.

SEC. 79. Effects of Merger or Consolidation. : -The merger or consolidation shall have the following
effects:
(a) 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;
(b) The separate existence of the constituent corporations shall cease, except that of the surviving or the
consolidated corporation;
(c) The surviving or the consolidated corporation shall possess all the rights, privileges, immunities, and
powers and shall besubject to all the duties and liabilities of a corporation organized under this Code;
(d) The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and
franchises of each constituent corporation; and all real or 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
(e) 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.
Ordinarily, in the merger of two or more existing corporations, one Ordinarily, in the merger of two or
more existing corporations, one of the combining corporations survives and continues the combined business,
while the rest are dissolved and all their rights, properties and liabilities are acquired by the surviving
corporation. Although there is a dissolution of the absorbed corporations, there is no winding up of their affairs
or liquidation of their assets, because the surviving corporation automatically acquires all their rights,
privileges and powers, as well as their liabilities.