Professional Documents
Culture Documents
PARTNERSHIP
PARTNERSHIP
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Co-ownership or co-possession
a. As a debt by
installments or otherwise. There is co-ownership whenever the
ownership of an undivided thing or right
belongs to different persons.
b. As wages of an employee or rent to
a landlord.
Clear intent to derive profits from
operation of business
c. As an annuity to a widow or Co-ownership does not of itself establish the
representative of a deceased existence of a partnership, although it is one
partner. of its essential elements. This is true even if
profits are derived from the joint ownership.
d. As interest on a loan, though the The profits must be derived from the
amount of payment vary with the operation of business by the members of
profits of the business. the association and not merely from
property ownership. The law does not imply
e. As the consideration for the sale of a partnership between co-owners because
a goodwill of a business or other of the fact that they develop or operate a
property by installments or common property, since they may rightfully
otherwise. do this by virtue of their respective titles.
There must be a clear intent to form a
partnership.
In general, to establish the existence of a
partnership, all of its essential features or
characteristics must be shown as being Existence of fiduciary relationship
present. In case of doubt, art.1769 shall
apply. This article seeks to exclude from the Partners have a well-defined fiduciary
category of partnership certain features relationship between them. Co-owners do
enumerated herein which, by themselves, not. Should there be dispute; the remedy of
are not indicative of the existence of a partners is an action for dissolution,
partnership. termination and accounting. For co-owners
it would be one, for instance, for
nonperformance of contract. People can
Persons not partners as to each other
become co-owners without a contract but
Persons who are partners as between
they cannot become partners without one.
themselves are partners as to third persons.
Generally, the converse is true: if they are
not partners between themselves, they Persons living together without benefit of
cannot be partners as to third persons. marriage
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partners are not precluded as against the Where immovable property or real rights
guilty partners from recovering their share are contributed
of the profits. Execution of public instrument necessary for
validity of contract of partnership. To affect
Effect of subsequent illegality 3rd persons, the transfer of real property to
of partnership business the partnership must be duly registered in
Contract will not be nullified. Where the the Registry of Property.
business for which the partnership is formed
is legal when the partnership is entered When partnership agreement covered by
into, but afterward becomes illegal, an the Statute of Frauds
accounting may be had as to the business An agreement to enter in a partnership at a
transacted prior to such time. future time, which by its terms is not to be
performed w/in a year from the making
Community of interest between the thereof is covered by the Statute of Frauds.
partners for business purposes Such agreement is unenforceable unless it is
The salient features of an ordinary in writing or at least evidenced by some
partnership are a community of interest in note or memorandum.
profits and losses, a community of interest
in the capital employed, and a community Partnership implied from conduct
of power in administration. This community Binding effect
of interest is the basis of the partnership Existence of partnership may be implied
relation. However, although every from the acts or conduct of the parties, as
partnership is founded on a community of well as from other declarations, and such
interest, e very community of interest does implied contract would be as binding as a
not necessarily constitute a partnership. written and express contract.
Property used in the business may belong to
one or more partners, so that there is no
Ascertainment of intention of parties In
joint property, other than joint earnings. To
determining whether a particular
state that partners are co-owners of a
transaction constitutes a partnership, as
business is to state that they have the
between the parties, the intention as
power if ultimate control. But partners may
disclosed by the entire transaction, and as
agree upon concentration of management,
gathered from the facts and from the
leaving some of their members entirely
language employed by the parties as well as
inactive or dormant. Only one of these
their conduct, should be ascertained.
features, profit-sharing, seems to be
absolutely essential. But a mere sharing of
profits of itself does not of necessity Conflict between intention and terms
constitute a partnership. The court must of contract
consider all the essential elements in light of If the parties intend a general partnership,
the facts of the particular case before they are general partners although their
deciding whether a partnership exists. purpose is to avoid the creation of such a
relation.
Art. 1771. A partnership may be constituted
in any form, except where immovable Art. 1772. Every contract of partnership
property or real rights are contributed having a capital of three thousand pesos or
thereto, in which case a public instrument more, in money or property, shall appear in
shall be necessary .Form of partnership a public instrument, which must be
contract recorded in the Office of the Securities and
Exchange Commission. Failure to comply
with the requirements of the preceding
General rule
paragraph shall not affect the liability of the
No special form required for validity or
partnership and the members thereof to
existence of the contract of partnership.
third persons. Registration of partnership
Contract maybe made orally or in writing
regardless of the value of the contributions.
Partnership with capital of P3, 000 or more
Requirements:
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Art. 1773. A contract of partnership is void, Since partnership has juridical personality of
whenever immovable property is its own, it may acquire immovable property
contributed thereto, if an inventory of said in its own name. Title so acquired can be
property is not made, signed by the parties, conveyed only in the partnership name.
and attached to the public instrument.
Partnership with contribution of immovable Art. 1775. Associations and societies, whose
property articles are kept secret among the
members, and wherein any one of the
Where immovable property contributed, members may contract in his own name
failure to comply w/ the following with third persons, shall have no juridical
requisites will render the partnership personality, and shall be governed by the
contract void: provisions relating to co-ownership. Secret
1. The contract must be in a public partnerships without juridical personality
instrument;
2. An inventory of the property What is the meaning by association?
contributed must be made, signed by 1. : a group of persons who share
the parties, and attached to the public common interests or a common
instrument. Art. 1773 is intended purpose and who are organized with
primarily to protect 3rd persons. W/ varying degrees of formality c
regard to 3rdpersons, a de facto
partnership or partnership by estoppel Partnership relation is created only by the
may exist. There is nothing to prevent voluntary agreement of the partners. It is
the court from considering the essential that the partners are fully
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informed not only of the agreement but of continued after the end of the term or
all matters affecting the partnership. Secret undertaking w/o express agreement.
partnerships are not by nature partnerships. Partnership with a fixed term: one w/c the
Secret partnerships shall be governed by the term for w/c the partnership is to exist is
provisions relating to coownership. fixed or agreed upon or one formed for a
particular undertaking.
Importance of giving publicity to articles of
partnership As to the legality of its existence De jure
It is essential that the arts of partnership be partnership: one w/c has complied w/ all
given publicity for the protection not only of the legal requirements for its establishment.
the members themselves but also 3 rd De facto partnership: one w/c has failed to
persons from fraud and deceit. A member comply w/ all the legal requirements for its
who transacts business for the secret establishment.
partnership in his own name becomes
personally bound to 3rd persons unaware of
As to representation to others Ordinary or
the existence of such association.
real partnership: one w/c actually exists
Partnership liability may still result,
among the partners and also as to 3rd
however, in cases of estoppel.
persons.
Ostensible partnership or partnership or
Art. 1776. As to its object, a partnership is partnership by estoppel: one w/c in reality is
either universal or particular. As regards the not a partnership, but is considered a
liability of the partners, a partnership may partnership only in relation to those who, by
be general or limited. Classifications of their conduct or admission, are precluded to
partnership deny or disprove its existence.
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5. Managing partner: one who manages Art. 1778. A partnership of all present
the entity. property is that in which the partners
6. Liquidating partner: one who takes contribute all the property which actually
charge of the winding up of partnership belongs to them to a common fund, with
affairs upon dissolution. the intention of dividing the same among
7. Partner by estoppel: one who is not themselves, as well as all the profits they
really a partner but is liable as a partner may acquire therewith.
for the protection of innocent 3rd
persons. He is one represented as being Art. 1779. In a universal partnership of all
a partner but who is not so between the present property, the property which
partners themselves. belongs to each of the partners at the time
8. Continuing partner: one who continues of the constitution of the partnership
the business of a partnership after it has becomes the common property of all the
been dissolved by reason of the partners, as well as all the profits which they
admission of a new partner, or the may acquire there with. A stipulation for the
retirement, death or expulsion of one or common enjoyment of any other profits
more partners. may also be made; but the property which
9. Surviving partner: one who remains the partners may acquire subsequently by
after a partnership has been dissolved inheritance, legacy or donation cannot be
by the death of any partner. included in such stipulation, except the
fruits thereof.
10. Subpartner: one who, not being a
member of the partnership, contracts
w/ a partner w/reference to the latter’s Universal partnership of all present
share in the partnership. property explained
A universal partnership of profits is one w/c
comprises all that the partners may acquire
Other classifications
by their industry or work during the
1. Ostensible partner: one who takes
existence of the partnership and the
active part and known to the public as a
usufruct of movable or immovable property
partner.
w/c each of the partners may possess at the
2. Secret partner: one who takes active time of the celebration of the contract. In
part in the business but is not known to this kind of partnership, the following
be a partner by outside parties nor held become the common property of all the
out as a partner by the other partners. partners:
He is an actual partner.
3. Silent partner: one who does not take Property w/c belonged to each of them at
any active part in the business although the time of the constitution of the
he may be known to be a partner. partnership;
4. Dormant partner: one who does not Profits w/c they may acquire from the
take active part in the business and is property contributed.
not known or held out as a partner. He
would be both a silent and a secret
Contribution of future property
partner.
General rule: future properties cannot be
5. Original partner: one who is a member contributed. The very essence of the
of the partnership from the time of its contract of partnership that the properties
organization. contributed be included in the partnership
6. Incoming partner: a person lately, or requires the contribution of things
about to be, taken into an existing determinate. The position of a partner is like
partnership as a member. that of a donor, and donations cannot
7. Retiring partner: one withdrawn from comprehend future property. Thus,
the partnership; a withdrawing partner. property subsequently acquired by
Art. 1777. A universal partnership may 1.inheritance; 2. Legacy; or 3. Donation
refer to all the present property or to all cannot be included by stipulation except the
the profits. fruits thereof. Hence, any stipulation
including property so acquired is void.
Profits from other sources (not from
properties contributed) will become
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common property only is there’s a Art. 1782. Persons who are prohibited from
stipulation. giving each other any donation or advantage
cannot enter into a universal partnership.
Art. 1780. A universal partnership of profits Limitations upon the right to form a
comprises all that the partners may acquire partnership
by their industry or work during the
existence of the partnership. Movable or Persons who are prohibited by law to give
immovable property which each of the donations cannot enter into a universal
partners may possess at the time of the partnership for the reason that each of the
celebration of the contract shall continue to partners virtually makes a donation. To
pertain exclusively to each, only the allow it would be permitting them to do
usufruct passing to the partnership. indirectly what the law expressly prohibits.
A partnership formed in violation of this
Universal partnership of profits explained A article is null and void. Consequently, no
universal partnership of profits is one w/c legal personality is acquired. A husband and
comprises all that the partners may acquire wife, however, may enter into a particular
by their industry or work during the partnership or be members thereof.
existence of the partnership and the Relevant provisions:
usufruct of movable or immovable property
w/c each of the partners may possess at the Art. 87: Donations between spouses during
time of the celebration of the contract. marriage void, except moderate gifts on
occasion of family rejoicing. Also applies to
Ownership of present and future property those living together as husband and wife
The partners retain their ownership over w/o valid marriage. Art. 739: The following
their present and future property. What donations are void: Those made between
passes to the partnership are the profits or persons who are guilty of adultery or
income and the use or usufruct of the same. concubinage at the time of the donation (no
Consequently, upon dissolution, such need for conviction; preponderance of
property is returned to the partners who evidence only required);
own it. Those made between persons found guilty
of the same criminal offense,
Profits acquired through chance inconsideration thereof;
Since the law only speaks of profits w/c the c.)Those made to a public officer or his wife,
partners may acquire by their industry or descendants and ascendants, by reason of
work, profits acquired purely by chance are his office.
not included.
Art. 1783. A particular partnership has for
Fruits of property subsequently acquired its object determinate things, their use or
Fruits of property subsequently acquired by fruits, or a specific undertaking, or the
the partners do not belong to the exercise of a profession or vocation.
partnership. Such profits, however, may be
included by express stipulation. Particular partnership explained A
particular partnership is one w/c is neither a
Art. 1781. Articles of universal partnership, universal partnership of present property
entered into without specification of its nor a universal partnership of profits. The
nature, only constitute a universal fundamental difference between a
partnership of profits. universal partnership and a particular
partnership lies in the scope of their subject
Presumption in favor of universal matter or object. In the former, the
partnership of profits object is vague and indefinite,
Reason for presumption: universal contemplating a general business w/ some
partnership of profits imposes less degree of continuity, while in the latter, it is
obligations on the partners, since they limited and well-defined, being confined
preserve the ownership of their separate to an undertaking of a
property. single, temporary, or ad hoc nature.
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Business of partnership need not be Art. 1785. When a contract for a fixed term
continuing in nature or particular undertaking is continued after
The carrying on of a business of a continuing the termination of such term or particular
nature is not essential to constitute a undertaking without any express
partnership. An agreement to undertake a agreement, the rights and duties of the
particular piece of work or a single partners remains the same as they were at
transaction or a limited number of such termination, so far as is consistent with
transactions and immediately divide the a partnership at will.
resulting profits would seemt o fall w/in the
meaning of the term “partnership” as used A continuation of the business by the
in the law. partners or such of them as habitually acted
therein during the term, without any
Rule under American law settlement or liquidation of the partnership
The above is not true under the Uniform affairs, is prima facie evidence of a
Partnership Act w/c does not include joint continuation of the partnership.
ventures w/c exists for a single transaction What is a prima facie evidence?
or a limited number of transactions. (c) Prima facie evidence
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3. Shall answer to the partnership for the Industrial partner is one who contributes
fruits of the properties whose delivery his industry or labor in the partnership.
he delayed from the date he should
have contributed it up to actual delivery Industrial partner barred from engaging in
without necessity of any demand; business
4. Shall preserve said properties with the To prevent any conflict of interest between
diligence of a good father of a family the industrial and the partnership, and to
pending their delivery to the insure faithful compliance by said partner
partnership; with his prestation.
5. And shall indemnify the partnership for
any damage caused it by the retention Art. 1790. Unless there is a stipulation to the
of said properties or by the delay in contrary, the partners shall contribute equal
their contribution. shares to the capital of the partnership.
Art. 1787. When the capital or part thereof Art. 1791. If there is no agreement to the
which a partner is bound to contribute contrary, in case of an imminent loss of the
consists of goods, their appraisal must be business of the partnership, any partner
made in the manner prescribed in the who refuses to contribute an additional
contract of partnership, and in the absence share to the capital, except an industrial
of stipulation, it shall be made by experts partner, to save the venture, shall be
chosen by the partners, and according to obliged to sell his interest to the other
current prices, the subsequent changes partners.
thereof being for the account of the
partnership.
Art. 1792. If a partner authorized to manage
collects a demandable sum, which was
Art. 1788. A partner who has undertaken to owed to him in his own name, from a
contribute a sum of money and fails to do so person who owned the partnership another
becomes a debtor for the interest and sum also demandable, the sum thus
damages from the time he should have collected shall be applied to the two credits
complied with his obligation. in proportion to their amounts, even though
he may have given a receipt for his own
The same rule applies to any amount he credit only; but should he have given it for
may have taken from the partnership the account of the partnership credit, the
coffers, and his liability shall begin from the amount shall be fully applied to the latter.
time he converted the amount to is own
use. The provisions of this article are understood
to be without prejudice to the right granted
Liability of partner for estafa to the debtor by Art. 1252, but only if the
Failure to return the money taken, there is personal credit of the partner should be
the element of fraudulent appropriation of more onerous to him.
the money delivered to a partner with
specific instructions for the use of the Requisites:
partnership, then estafa is committed under 1. Two existing debts
the Revised Penal Code. 2. Both debts must be demandable
3. The one who collected the debt is a
Art. 1789. An industrial partner cannot partner who is authorized to manage
engage in any business for himself, UNLESS and is actually managing the
the partnership expressly permits him to do partnership
so; and if he should do so, the capitalist
partners may either exclude him from the
Art. 1793. A partner who has received, in
firm or avail themselves of the benefits
whole or in part, his share of a partnership
which he may have obtained in violation of
credit, when the other partners have not
this provision, with a right to damages in
collected theirs, shall be obliged, if the
either case.
debtor should thereafter become insolvent,
to bring to the partnership capital what he
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received even though he may have given by the partner as the ownership thereof is
receipt for his share only. not transferred to the partnership. This
follows the general rule that the thing
Art. 1794. Every partner is responsible to perished with the owner.
the partnership for damages suffered by it
through his fault, and he cannot Things fungible or perishable
compensate them with the profits and If the things contributed are fungible or
benefits which he may have earned for the cannot be kept without deteriorating
partnership by his industry. However, the (perishable) like wine, oil, etc., even if they
courts may equitably lessen this are contributed only for the use of the
responsibility if through the partner’s partnership, the risk of loss shall be for the
extraordinary efforts in other activities of account of the partnership for the latter
the partnership, unusual profits have been cannot make use of them without their
realized. getting consumed or presumed.
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share of each in the losses shall be in the Unless agreed upon, the industrial partner
same proportion. shall receive such share in the profits as may
In the absence of stipulation, the share of be just and equitable under the
each partner in the profits and losses shall circumstances. As for the losses, the
be in proportion to what he may have industrial partner is not liable. However,
contributed, but the industrial partner shall under Art. 1816, if the partnership has a
not be liable for the losses. As for the contractual debt and it cannot pay, the
profits, the industrial partner shall receive industrial partner equally with the capitalist
such share as may be just and equitable partners, can be compelled by the creditor
under the circumstances. If besides his to pay his pro rata share out of his own
services he has contributed capital, he shall property or assets.
also receive a share in the profits in
proportion to his capital. Art. 1798. If the partners have agreed to
entrust to a third person the designation of
Rules in profit sharing: the share of each one in the profits and
1. The partners share the profits in losses, such designation may be impugned
accordance with the ratio established by only when it is manifestly inequitable. In no
their contract. case may a partner who has begun to
2. If there is no such stipulation in the execute the decision of the third person, or
partnership contract, then: who has not impugned the same within a
period of three months from the time he
1. If all are capitalist partners they
had knowledge thereof, complain of such
have the profits in proportion to
decision.
their capital contributions;
2. If there are capitalist as well as
The designation of profits and losses cannot
industrial partners, the industrial
be entrusted to one of the partners.
partner get a share each that is
just and equitable while the
capitalist partners divide the Reason for the provision
remainder in proportion to their Admittedly, the designation of profits and
capital contributions; and losses cannot be entrusted to one of the
3. If there is a capitalist-industrial partners as the fulfillment of a contract
partner, he gets a share in the cannot be left to one of the contracting
profits as an industrial partner and parties. It may, however, be entrusted to a
an additional share in proportion to third person by common interest.
his capital contribution to be
determined as in (b), above. Art. 1799. A stipulation which excludes one
or more partners from any share in the
Rules in loss sharing: profits or losses is void.
1. The stipulation in the partnership
agreement regarding loss sharing must Stipulation to exclude a partner from
be followed. profits and losses is void
2. If there is no such agreement, but the The law does not allow a provision in the
contract provides for a profit sharing contract of partnership excluding one or
ration, the profit sharing ratio shall also more partners from sharing in the profits
be the loss sharing ration. and losses. The reason is that a partnership
3. In the absence of loss sharing and profit is organized for the common benefit or
sharing stipulations in the contract, then interest of the partners.
the loss shall be borne by the partners
in proportion to their capital Reason for exclusion of industrial partner
contributions; but a purely industrial An industrial partner is not liable for losses
partner is exempted from participation because if the partnership fails to realize
in the loss. any profits, the industrial partner would
have contributed his labor in vain.
Share of industrial partner in profits and Furthermore, the industrial partner cannot
losses withdraw the work already done by him for
the partnership.
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controlling interest shall decide the matter. The requirement of written authority refers
Where respective duties of two or more evidently to formal and unusual written
managing partners not specifies. contracts.
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Art. 1804. Every partner may associate managing or active partner. It is presume
another person with him in his share, but that the partners have knowledge of the
the associates shall not admitted into the contents of the partnership books and that
partnership without the consent of all other said books state accurately the state of
partners, even of the partner having an accounts, but errors can corrected.
associate should be a manager of
subpartnership nature Rights with the respect to partnership
books
The partnership formed between a Books should kept at the principal place of
member of a partnership and a third business as each partner has the right to
Person for a division of the profits coming to free access to them and to inspect or copy
him from the partnership enterprise is any of them at any reasonable time, even
termed subpartnership. after dissolution. Inspection rights not
It is a partnership within a partnership and is absolute can restrained from using info for
distinct and separate from the main or other than partnership purpose.
principal partnership.
Access to partnership books
Rights can exercise at any reasonable hour.
Right of the person associated with the
This means reasonable hours on business
partnership’s share
days throughout the year and not merely
Subpartnership agreements do not affect
during some arbitrary period of a few days
the composition, existence, or operations of
chosen by the managing partners.
the firm. The subpartners are
partners interest,
Art. 1806. Partners shall render on demand
true and full information of all things
However, in the absence of the mutual affecting the partnership to any partner or
assent of all the parties, a subpartner does the legal representative of any deceased
not become a member of the partnership, partner or of any partner under legal
even if the other partners know about the disability. Duty to render information, there
agreement. Not being a member of the must be no concealment between partners
partnership, he does not acquire the rights in all matters affecting the partnership.
of a partner nor is he liable for its debts. Information must use only for partnership
purpose. Not just on demand but partner
Reason for the rule also has duty of voluntary disclosure.
Partnership is based on mutual trust and However, duty to render info does notarise
confidence among the partners. Inclusion of with respect to matters appearing in
new partner would be a modification of the partnership books since each partner has
original contract of partnership requiring the right to inspect those. Good faith not
unanimous consent of all the partners. only requires that a partner should not
Prohibition applies even if person associated make a false statement but also that he
is already a partner. should abstain from any false concealment.
Art. 1805. The partnership books shall be Art. 1807. Every partner must account the
kept, subject to any agreement between the partnership for any benefit, and hold as
partners, at the principal place of the trustee for it any profits derived from him
business of the partnership, and every without the consent of the partners from
partner shall at any reasonable hour have any transaction connected with the
access to and may inspect and copy any of formation, conduct, or liquidation of the
them. partnership or from any use by him of his
property.
Keeping of partnership books Partner with
duty to keep partnership books The relation between the partners is
The duty to keep true and correct books essentially fiduciary involving trust and
showing the firm’s accounts, such books confidence, each partner considered in law,
being at all times open to inspection of all as he is, in fact, the confidential agent of the
members of the firm, primarily rests on the
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business secrets and clientele of firm to its 1. Right to reimbursement for amounts
prejudice. advanced to partnership and to
indemnification for risks inconsequence
Art. 1809. Any partner shall have the right of management (art. 1796).
to a formal account as partnership affairs: 2. Right of access and inspection of
partnership books (art. 1805).
1. If he is wrongfully excluded from the 3. Right to true and full information of all
partnership business or possession of things affecting partnership (art. 1806).
its property by his co-partner; 4. Right to formal account of partnership
affairs under certain circumstances (art.
1809).
2. If the right exists under the terms of any
agreement; 5. Right to have partnership dissolved also
under certain conditions (arts.
18301831).
3. Provided by article 1807;
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remains unsatisfied, the court may resort to The term is also used as synonymous with
other courses of action notwithstanding the “company,” “house,” and
issuance of the charging order. “concern.”
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Article 1816 applies in cases where third relieved from liability to third persons for
party creditors are concerned as it falls the debts of the partnership.
under the heading of section 3. “Obligations Art. 1818. Every partner is an agent of the
of the Partners with Regard to Third partnership for the purpose of its business,
Persons.” Article 1797 applies only where and the act of every partner, including the
the issue is among the partners as it falls execution in the partnership name of any
under the heading of Section 1, Chapter 2, instrument, for apparently carrying on in
which states: “Obligations of the Partners the usual way the business of the
Among Themselves.” The pro rata liability of partnership of which he is a member binds
partners to third persons under Article 1816 the partnership, unless the partner so acting
being a clear mandate of the law, any has in fact no authority to act for the
stipulation changing or modifying such partnership in the particular matter, and the
liability is void except as among the person with whom he is dealing has
partners. knowledge of the fact that he has no such
liability.
Refers to partnership obligations Article
1816 which refers to the payment of An act of a partner which is not apparently
partnership obligations arising from for the carrying on of business of the
contracts clearly imposes subsidiary and partnership in the usual way does not bind
joint (pro rata) liability for contractual debts the partnership unless authorized by the
owing to third persons upon all the other partners.
partners, including industrial partners who
ordinarily are not liable for losses. The
Except when authorized by the other
liability is subsidiary because the partners
partners or unless they have abandoned the
cannot be made answerable with their
business, one or more but less than all the
separate property unless the partnership
partners have no authority to:
property has first been exhausted.
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Partner liable for wrongful act of a partner from tort or conversion, the liability is
The partners are liable for the negligent solidary.
operation of a vehicle by a partner, acting in
the course of business, which results in a Business partners solidarily liable Arts.
traffic accident. 1711 and 1712 of the New Civil Code and
Sec. 2 of the Workmen’s Compensation Act
If he is driving a partnership-owned vehicle reasonably indicate that in compensation
for purposes of his own, the acting partner cases, the liability of business partners
alone is liable it is not a partnership tort. should be merely joint and not solidary, and
one of them happens to be insolvent, the
Partnership may proceed against negligent amount awarded to the dependents of the
partner deceased employee would only be partially
Where a partnership is liable to a third satisfied, which is evidently contrary to the
person, there is a right of indemnity against intent and purpose of the law to give full
the partner whose negligence caused the protection to the employee.
injuries.
Art. 1825. When a person, by words
Art. 1823. The partnership is bound to make spoken
good the loss: or written or by conduct, represents
himself, or consents to another
1. Where one partner acting within representing him to anyone, as a partner
the scope of his apparent authority receives in
money or property of a third person and an existing partnership or with one or
misapplies it. more
persons not actual partners, he is liable to
2. Where the partnership in the course
any such persons to whom such
of its business receives money or property
representation has been made, who has,
of a third person and the money or property
so received is misapplied by any partner on
while it is in the custody of the partnership. the faith of such representation, given
credit to the actual or apparent
Partnership bound by partner’s breach of partnership,
trust and if he has made such representation or
The partnership is liable for the conversion consented to its being made in a public
(misappropriation) of money or property manner he is liable to such person, whether
entrusted to the partnership by a third the representation has or has not been
person. The effect under Article 1824 is the made or communicated to such person so
same whether by the partnership and giving credit by or with the knowledge of
subsequently misappropriated by a partner. the apparent partner making the
representation or consenting to its being
Art. 1824. All partners are liable solidarily made:
with the partnership for everything
chargeable to the partnership under 1. When a partnership liability results, he
Articles 1822 and 1823. is liable as though he were an actual
member of the partnership.
Law imposes solidary liability
The law imposes solidary liability upon the 2. When no partnership liability results, he
partners and the partnership in cases of is liable pro rata with the other persons,
torts and acts of conversion by a partner as if any, so consenting to the contract or
provided in Art. 1824. It may be stated that representation as to incur liability,
the liability of a partner for a debt of the otherwise separately.
partnership depends upon whether the
debts is contractual or it arises from tort or When a person has been thus represented
conversion. If it arises from contract, the to be a partner in an existing partnership, or
liability is subsidiary and pro rata; if it arises with one or more persons not actual
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partnership agreement and if the expelled copartners and all claiming through
partner is discharged from all partnership them in respect of their interests in
liabilities, either by payment or agreement the partnership, to have the value
under the second paragraph of article 1835, of his interest in the partnership,
he shall receive in cash only the net amount less any damage caused to his
due him from the partnership. copartners by the dissolution,
ascertained and paid to him in cash,
When dissolution is caused in contravention or the payment secured by a bond
of the partnership agreement the rights of approved by the court, and to be
the partners shall be as follows: released from all existing liabilities
of the partnership; but in
ascertaining the value of the
1. Each partner who has not caused
partner's interest the value of the
dissolution wrongfully shall have:
good-will of the business shall not
be considered.
a. All the rights specified in the first
paragraph of this article. Rights of partners upon dissolution
1. Dissolution is caused without violation
b. The right, as against each partner of the agreement.
who has caused the dissolution 2. In contravention of the agreement.
wrongfully, to damages breach of
the agreement.
If partnership is dissolved without violation
of the agreement
2. The partners who have not caused the 1. All partners may have the property sold
dissolution wrongfully, if they all desire for payment of partnership liabilities.
to continue the business in the same 2. If there is surplus, after paying the
name either by themselves or jointly liabilities of the firm, it shall be given in
with others, may do so, during the cash to the partners.
agreed term for the partnership and for
that purpose may possess the
partnership property, provided they If the partnership was dissolved in
secure the payment by bond approved contravention of the agreement
by the court, or pay any partner who 1. The remaining partners have the right
has caused the dissolution wrongfully, to sell partnership property to pay the
the value of his interest in the partnership’s liabilities and the surplus
partnership at the dissolution, less any is distributed to the remaining partners
damages recoverable under the second as well.
paragraph, No. 1 (b) of this article, and 2. As against the guilty partner for the
in like manner indemnify him against all dissolution of the partnership, the
present or future partnership liabilities. remaining partners have the right to
recover damages for breach.
3. A partner who has caused the 3. The remaining partners may also
dissolution wrongfully shall have: continue the business up to end of the
stipulated term of the partnership.
a. If the business is not continued
under the provisions of the second Art. 1838. Where a partnership contract is
paragraph, No. 2, all the rights of a rescinded on the ground of the fraud or
partner under the first paragraph, misrepresentation of one of the parties
subject to liability for damages in thereto, the party entitled to rescind is,
the second paragraph, No. 1 (b), of without prejudice to any other right,
this article. entitled:
b. If the business is continued under 1. To a lien on, or right of retention of, the
the second paragraph, No. 2, of this surplus of the partnership property
article, the right as against his after satisfying the partnership liabilities
to third persons for any sum of money
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b. The contributions of the partners a. Those owing to separate creditors. necessary for
the payment of all the
liabilities specified in No. 2. b. Those owing to partnership
creditors.
2. The liabilities of the partnership shall rank in order of payment, as follows: c. Those owing
to partners by way of contribution.
a. Those owing to creditors other than
partners. Rules for settling accounts between the
partners
b. Those owing to partners other than 1. The assets of the partnership for capital and
profits. 2. Liabilities of the partnership
3. Application of assets
c. Those owing to partners in respect 4. Contribution by the partners of capital.
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4. The partners shall contribute, as capital and profits such as loans given provided by article
1797, the amount by the partners or advances for necessary to satisfy the liabilities.
business expenses
2. Those owing for the return of the
5. An assignee for the benefit of creditors capital contributed by the partners or any person
appointed by the court 4. The share of the profits, if any, due to
shall have the right to enforce the each partner
contributions specified in the preceding
number. Order of application of partner who become insolvent or his estate his
6. Any partner or his legal representative insolvent, the claims against his separate shall have
the right to enforce the property
contributions specified in No. 4, to the 1. Those owing to separate creditors extent of the
amount which he has paid 2. Those owing to partnership creditors
in excess of his share of the liability. 3. Those owing to partners by way of
contribution
2. When all but one partner retire and The liability of a third person becoming a
assign (or the representative of a partner in the partnership continuing the
deceased partner assigns) their rights in business, under this article, to the creditors
partnership property to the remaining of the dissolved partnership shall be
partner, who continues the business satisfied out of the partnership property
without liquidation of partnership only, unless there is a stipulation to the
affairs, either alone or with others. contrary.
3. When any partner retires or dies and When the business of a partnership after
the business of the dissolved dissolution is continued under any
partnership is continued as set forth in conditions set forth in this article the
Nos. 1 and 2 of this article, with the creditors of the dissolved partnership, as
consent of the retired partners or the against the separate creditors of the retiring
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ART. 1848. A limited partner shall become 6. Admit a person as a limited partner,
liable as a general partner unless, in unless the right so to do is given in the
addition to the exercise of his rights and certificate.
powers as a limited partner, he takes part in
the control of the business. Limited partner 7. Continue the business with partnership
has no control in business property on the death, retirement,
A limited partner is excluded from any insanity, civil interdiction or insolvency
active voice in the control of the affairs of of a general partner, unless the right so
the firm. to do is given in the certificate.
Limited partner cannot perform acts of
administration Powers of general partner in limited
Limited partners may not perform any act of partnership
administration with respect to the interests The general partner shall have all the right
of the partnership, not even in the capacity and powers and be subject to all the
of agents of the managing partners. restrictions and liabilities of a partner in a
ART. 1849. After the formation of a limited partnership without limited partners.
partnership, additional limited partners may
be admitted upon filling an amendment to ART. 1851. A limited partner shall have the
the original certificate in accordance with same rights as a general partner to:
the requirements of Article 1865.
1. Have the partnership books kept at the
The writing to amend a certificate principal place of business of the
1. Shall conform to the requirements of partnership, and at a reasonable hour to
Article 1844 as far as necessary to set inspect and copy any of them.
forth clearly the change in the
certificate which it is desired to make.
2. Have on demand true and full
2. Be signed and sworn to by all members, information of all things affecting the
and an amendment substituting a partnership, and a formal account of
limited partner. partnership affairs whenever
ART. 1850. A general partner shall all have circumstances render it just and
the rights and powers and be subject to all reasonable.
the restrictions and liabilities of a partner in
a partnership without limited partners.
3. Have dissolution and winding up by
However, without the written consent or
decree of court.
ratification of the specific act by all the
limited partners, a general partner or all of
the general partners have no authority to: A limited partner shall have the right to
receive a share of the profit or other
compensation by way of income and to the
1. Do any act in contravention of the
return of his contribution as provided in
certificate.
Articles 1856 and 1857.
2. Do any act which would make it
impossible to carry on the ordinary
Rights of limited partner
business of the partnership.
It has lesser rights than a general partner. It
may exercise rights similar to a general
3. Confess a judgement partner.
against the partnership.
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In the absence of any statement in the 2. For any unpaid contribution which he
certificate to the contrary or the consent of agreed in the certificate to make in the
all members, a limited partner, irrespective future at the time and on the conditions
of the nature of his contribution, has only stated in the certificate.
the right to demand and receive cash in
return for his contribution. A limited partner holds a trustee for the
partnership:
A limited partner may have the partnership 1. Specific property stated in the
dissolved and its affairs wound up when: certificate as contributed by him, but
which was not contributed or which has
1. He rightfully but unsuccessfully been wrongfully returned.
demands the return of his contribution.
2. Money or other property wrongfully
2. The other liabilities of the partnership paid or conveyed to him on account of
have not been paid, or the partnership his contribution.
property is insufficient for their
payment as required by the first The liabilities of a limited partners as set
paragraph, No. 1, and the limited forth in this article can be waived or
partner would otherwise be entitled to compromised only by the consent of all
the return of his contribution. members; but a waiver or compromise shall
not affect the right of a creditor of a
Conditions of a limited partner entitled to partnership who extended credit or whose
return of his contribution claim arose after the filling and before a
1. All liabilities of the partnership have cancellation or amendment of the
been paid or there are assets sufficient certificate, to enforce such liabilities.
to pay partnership liabilities.
2. The consent of all the partners is When a contributor has rightfully received
obtained. the return in whole or in part of the capital
3. The certificate is cancelled or so of his contribution, he is nevertheless liable
amended as to set forth the withdrawal to the partnership for any sum, not in
or reduction of the contribution. excess of such return with interest,
necessary to discharge its liabilities to all
creditors who extended credit or whose
When limited partner may demand return claims arose before such return.
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shall be entitled to payment in the following 5. A general partner retires, dies, becomes
order: insolvent or insane, or is sentenced to
1. Those to creditors, in the order of civil interdiction and the business is
priority as provided by law, except continued under article 1860.
those to limited partners on account of
their contributions, and to general 6. There is a change in the character of the
partners. business of the partnership.
4. Those to general partners other than for 9. A time is fixed for the dissolution of the
capital and profits. partnership, or the return of a
contribution, no time having been
5. Those to general partners in respect to specified in the certificate.
profits.
10. The members desire to make a change
6. Those to general partners in respect to in any other statement in the certificate
capital. in order that it shall accurately
represent the agreement among them.
Subject to any statement in the certificate
or to subsequent agreement, limited Art. 1865. The writing to amend a certificate
partners share in the partnership assets in shall:
respect to their claims for capital, and in
respect to their claims for profit or for 1. Conform to the requirements of article
compensation by way of income on their 1844 as far as necessary to set forth
contribution respectively, in proportion to clearly the change in the certificate
the respective amounts of such claims. which it is desired to make.
Art. 1864. The certificate shall be cancelled 2. Be signed and sworn to by all members,
when the partnership is dissolved or all and an amendment substituting a
limited partners cease to be such. A limited partner or adding a limited or
certificate shall be amended when: general partner shall be signed also by
the member to be substituted or
1. There is a change in the name of the added, and when a limited partner is to
partnership or in the amount or be substituted, the amendment shall
character of the contribution of any also be signed by the assigning limited
limited partner. partner.
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3. Composed of an aggregate
of individuals.
4. Distribute profits to those who
contribute to capital.
5. May be organized only when there is a
law authorizing it.
6. Subject to income tax.
Point of
Partnership Corporation
Comparison
Manner of By By law or
Creation operation of
mere law
agreement
of the
parties
Number of By a Requires at
Parties minimum of least five (5)
two (2) incorporators
persons
Commence- Generally From the date
ment of from the of the
Juridical moment of issuance
Personality execution of of the
certificate of
the contract
incorporation
of the
Securities and
Exchange
Commission
(SEC)
Powers May Can
exercise
powers exercise only
authorized the
by partners powers
provided the expressly
same are granted by
not contrary law or
to law, incident to its
morals, existence.
good
customs,
public policy
or
public order.
Management When it is It is vested in
not agreed the board of
upon, each directors
partner is an or
agent of the trustees.
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succession
Extent of Partners Stockholders
Liability to (except are liable only
Advantages of a corporate form of business organizations Third Persons limited to the extent
partners) are of their
1. The capacity to hold property, to contract, to sue and
liable investments
be sued as a legal unit or distinct entity.
personally as
2. Exemption of shareholders from individual liability. and represented
3. Continuity of existence in spite of death or 1. Q u subsidiarily
a s i
by the shares
-
changes of members. for
subscribed by
4. Transferability of shares. partnership
them.
debts to
5. Centralized management under a board of
third persons.
directors.
6. Standardized methods of organization, Transferability A A stockholder
management and finance for the protection of interest has the right
partner to transfer his
of shareholders and creditors under
cannot shares
statutory regulations.
transfer without the
interest so as prior consent
Disadvantages of a corporate form of business to make a of the other
organizations partner
stockholders.
1. The limited liability of the stockholders without the
serves to limit the credit available to the consent of all
other
corporation.
existing
2. The transferability of shares permits the
partners.
uniting of incompatible and conflicting
Term of May be May not be
interests in one enterprise.
existence established formed for a
3. The minority stockholders are usually
for any period term in excess
subservient to the wishes of the majority. of of 50 years
4. In big corporations, the stockholders’ voting time extendible to
rights have become largely theoretical stipulated not more than
because of widespread ownership, by the 50 years.
lukewarmness and disinterest in partners.
management, inertia, and inaccessible Firm name A A corporation
meeting places.
may adopt a
5. In large corporations, management and limited firm name
control has been separated from ownership. partnership is provided it is
6. By and large corporations are subject to required to not identical
governmental restrictions, controls, and add the word or deceptively
report requirements not imposed on other ‘Ltd.’ to its similar to any
forms of business organizations. name. registered
7. Corporate sphere of activity is limited in the firm name or
transaction of its business to the state of contrary to
the organization. existing laws.
8. The corporate form involves “double Dissolution May be May only be
taxation” on corporation income. dissolved at dissolved with
any time by the consent of
Sec. 3. Classes of corporations. – Corporations the will of any the state.
formed or organized under this Code may be or all
stock or non-stock corporations. Corporations partners.
which have capital stock divided into shares and Governing Civil Code Corporation
are authorized to distribute to the holders of Laws Code
such shares dividends or allotments of the meaning “as if”, are entities that are not
surplus profits on the basis of shares held are absolutely corporations but are considered
stock corporations. All other corporations are as if they were. Eg. Public boards created by
non-stock corporations. law
2. Quasi-public – are entities engaged in
Other kinds of corporations rendering basic services of such public
importance as to entitle them to certain
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privileges like eminent domain or use of the provisions of this Code, insofar as they are
public property. Eg. Electric, gas, water and applicable.
telephone companies.
3. Government-owned or controlled – are Sec. 5. Corporators and incorporators,
entities organized by the government or stockholders, and members. – Corporators are
corporations of which the government is a those who compose a corporation, whether as
majority stockholder. Eg. Philippine Air Lines stockholders or members. Incorporators are
4. Domestic – one incorporated under those stockholders or members mentioned in
Philippine laws. the articles of incorporation as originally
5. Foreign – one formed, organized, or existing forming and composing the corporation and
under any laws other than those of the who are signatories thereof.
Philippines.
6. Corporation aggregate – one composed of Corporators in a stock corporation are called
more than one member or corporator. stock-holders or shareholders. Corporators in a
non-stock corporation are called members.
7. Corporation sole – consists of one member
or corporator and his successors.
8. Religious corporations, sole or aggregate – Components of a Corporation
organized, either as sole or aggregate, to 1. Corporators – are those who composed a
administer properties of the church. corporation, whether as stockholders of
9. Ecclesiastical – organized for religious members. The term includes incorporators,
purposes. stockholders or members.
10. Lay – organized for a purpose other than 2. Incorporators – are those stockholders or
religious members mentioned in the articles of
incorporation as originally forming and
11. Eleemosynary – organized for charitable
composing the corporation and who are
purposes.
signatories thereof.
12. Civil – are those than ecclesiastical and
3. Stockholders or shareholders – are those
eleemosynary, whether public or private.
corporators in a stock corporation.
13. Close – one wherein all the outstanding
4. Members – are those corporators in a non-
stock is owned by the persons who are
stock corporation.
active in management and conduct of the
business. 5. Promoters – is a self-constituted organizer
who finds an enterprise or venture and
14. Open – one in which all the members or
helps to attract investors, form a
corporations have a vote in the election of
corporation and launch it in business, all
the directors and other officers.
with a view to promotion profits.
15. Multi-national – one having been created or
organized in one state conducts business or
Promotion – is the act of procuring the initial
activities across national boundaries and but
finances and the making of all preparations
subject to the legal sanctions of the
necessary to launch a corporation.
countries in which they operate.
16. Non-profit – organized without
contemplation of gains, profits or dividends Activities of a promoter
to their members on invested capital. 1. The discovery and investigation of a
promising business opportunity.
17. De Jure – one created in strict or substantial
conformity with the statutory requirements 2. The formulation of business and financial
for incorporation and whose right to exist as plans.
a corporation cannot be successfully 3. Assembling the enterprise by negotiations
attacked even in a direct proceeding for that and obtaining some control over the subject
purpose by the State. matter by option or contracts made on
behalf of the proposed corporation or on his
Sec. 4. Corporations created by special laws or own credit.
charters. – Corporations created by special laws 4. The making of arrangements for financing
or charters shall be governed primarily by the the enterprise and the floatation of
provisions of the special law or charter creating securities.
them or applicable to them, supplemented by 5. Arrange tactful and painless methods for
getting his own reward for the task of
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Shares of capital stock issued without par Except as provided in the immediately
value shall be deemed fully paid and preceding paragraph, the vote necessary to
nonassessable and the holder of such shares approve a particular corporate act as
shall not be liable to the corporation or to provided in this Code shall be deemed to
its creditors in respect thereto: Provided; refer only to stocks with voting rights.
That shares without par value may not be
issued for a consideration less than the
Definition
value of five (P5.00) pesos per share:
A “stock” or share of stock is one of the
Provided, further, That the entire
units into which the capital stock has been
consideration received by the corporation
divided. It represents the interest or right
for its no-par value shares shall be treated
that the holder of the stock or stockholder
as capital and shall not be available for
has in the corporation.
distribution as dividends.
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Definition
Redeemable (“Callable”) shares of stock Sec. 11. Corporate term. – A corporation
which are usually preferred are frequently shall exist for a period not exceeding fifty
issued subject to redemption at the option (50) years from the date of incorporation
of either the corporation, the stockholder, unless sooner dissolved or unless said
or both, at a definite price representing period is extended. The corporate term as
premium above the amount originally paid. originally stated in the articles of
incorporation may be extended for periods
Sinking fund refers to a fund set-up by the not exceeding fifty (50) years in any single
corporation where cash is gradually set instance by an amendment of the articles of
aside in order to accumulate the amount incorporation, in accordance with this Code;
necessary to meet the redemption price of Provided, That no extension can be made
redeemable shares of specified dates in the earlier than five (5) years prior to the
future. original or subsequent expiry date(s) unless
there are justifiable reasons for an earlier
extension as may be determined by the
Sec. 9. Treasury shares. - Treasury shares
Securities and Exchange Commission.
are shares of stock which have been issued
and fully paid for, but subsequently
reacquired by the issuing corporation by Sec. 12. Minimum capital stock required of
purchase, redemption, donation or through stock corporations. – Stock corporations
some other lawful means. Such shares may incorporated under this Code shall not be
again be disposed of for a reasonable price required to have any minimum authorized
fixed by the board of directors. (n) capital stock except as otherwise specifically
provided for by special law, and subject to
the provisions of the following section.
Definition
Treasury shares are owned by the
Sec.13. Amount of capital stock to be
corporation having been reacquired by the
subscribed and paid for purpose of
issuing corporation by “purchase,
incorporation. – At least twenty-five
redemption, donation or through some
percent (25%) of the authorized capital
other lawful means.” It has no voting rights
stock as stated in the articles of
or rights as to dividends or distributions.
incorporation must be subscribed at the
time of incorporation, and at least
TITLE II - INCORPORATION AND twentyfive percent (25%) of the total
ORGANIZATION OF PRIVATE subscription must be paid upon
CORPORATIONS subscription, the balance to be payable on a
Definition date or dates fixed in the contract of
Incorporation is the act of creating a subscription without need of call, or in the
corporation. absence of fixed date or dates, upon call for
payment by the board of directors:
Sec. 10. Number and qualifications of Provided, however, that in no case shall the
incorporators. – Any number of natural paid-up capital be less than five thousand
persons not less than five (5) but not more (P5,0000) pesos.
than fifteen (15), all of legal age and a
majority of whom are residents of the Amount to be subscribed and paid
Philippines, may form a private corporation Illustration:
for any lawful purpose or purposes. Each of If X, Inc. has authorized capital stock
the incorporators of s stock corporation of P100, 000 divided into 1,000 shares with
must own or be a subscriber to at least one par value of P100.00 per share, it must be
(1) share of the capital stock of the shown that at least P25, 000 or 250 shares
corporation. of the authorized capital stock must be
subscribed. Of the total subscription of P25,
Qualifications of incorporators 000, at least P6, 250.00 or 25% of total
1. Must be a natural person. subscription must be paid. It is not
2. Must be of legal age. necessary that each subscriber pay
Twentyfive percent (25%) on his
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stock is required, the abuse of the privileges 6. Under the Retail Trade Nationalization
of a corporation would be minimized. law “no person who is not a citizen of
the Philippines, and no association,
Capital stock requirements under the partnership, or corporation the capital
special laws of which is not wholly owned by citizens
1. In case of mining and agricultural of the Philippines, shall engage directly
incorporation, or corporation organized or indirectly in the retail trade business.
for the purpose of the disposition ,
exploitation, development or utilization 7. Only vessels of domestic ownership are
of natural resources of the Philippines, authorized to engage in coastwise
as well as corporation organized for the shipping in the Philippines. Vessels are
operations of public utilities, the considered of domestic ownership when
Constitution provides that at least 60 % such ownership is vested in some one or
of the capital stock of such corporation more of the following: (1) Citizens of the
must be owned by citizens of the Philippines; (2) any corporation or any
Philippines. company composed wholly of the
citizens of the Philippines; (3) any
2. The Insurance Code provide that “no corporation or company created under
domestic insurance company shall, if a the laws of the Philippines, provided at
stock corporation, engage in business in least 75% of the capital stock thereof or
the Philippines unless posses of a paid of any interested in said capital is wholly
up capital stock equal to at least two owned by the citizens of the Philippines.
million pesos”. Where the insurance
company is to engage in insurance Sec.14. Contents of articles of the
business it must have a “paid-up capital incorporations. – All corporation organized
stock of at least five million pesos” to be under this Code shall file with the Securities
invested in securities specified by law, and Exchange Commission articles of
which securities are to be deposited incorporation in any of the official
with the Insurance languages, duly signed and acknowledged by
Commissioner. all of the incorporators containing
substantially the following matters, except
as otherwise prescribed by this Code or by
3. The Financing Company Act requires
special laws:
that “at least sixty per centum of the
capital of financing companies must be
owned by citizens of the Philippines and 1. The name of the corporation.
shall have a paid-up capital of not less
than five hundred thousand pesos”. 2. The specific purpose or purposes for
which the corporation is being
4. Commercial banks are required to have incorporated. Where the corporation
a paid-up capital of 100 million pesos. have more than one stated purpose, the
When a commercial bank having licence article of incorporation shall state which
to operate an expanded foreign the primary is and which is/are the
currency deposit system it must have a secondary purpose or purposes:
paid-up capital of at least 150 million Provided, That a non-stock corporation
pesos and when a commercial bank is may not include a purpose which would
authorized to engage in universal change or contradict its nature as such.
banking it must have a paid up capital of
at least 500 million pesos. 3. The place where the principal office of
the corporation is to be located, which
5. The New Constitution provides that: must be within the Philippines.
“The ownership and management of
mass media shall be limited to citizens 4. The term for which the corporation is to
of the Philippines or to corporations or exist.
association wholly-owned and manage
by such citizen”. 5. The names, nationalities and residences
of the incorporators.
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ownership and in other instances where 2. 25% of the subscription has been fully
Filipino Citizens are required. paid in actual cash or property.
6. Number of directors and trustees. 3. The paid-up capital being not less than
The number of the director and trustees P5,000.00.
must not be less than five (5) nor more
than fifteen (15). SEC Policy
Property as subscription payment –
7. Names, nationalities and residences of Generally, all forms of tangible properties
directors. are acceptable for purposes of payment to
A majority of the directors or trustees of all subscription provided that the three test of
corporation organized under this Code paid-up capital determination are complied
must be a residents citizens of the with, i.e., ownership, existence and valuable,
Philippines. subject to certain restrictions as may be
imposed by law.
8. Amount of authorized capital stock.
A stock corporation must state the SEC adopted the policy that
“amount of its authorized capital stock in discourages the inclusion of intangible assets
lawful money of the Philippines, the as goodwill, lease-hold rights, or timber
number of shares into which it is divided, concession rights, payment of such
and in case the shares are par value shares, properties Motor vehicle, real estate
the par value of each, the names, properties and navigable vessels in payment
nationalities, and residences of the original of pre-incorporation subscription, increases
subscribers, and the amount subscribed of capital stock or in exchange for additional
and paid by each on his subscription, and if issuance of shares are allowed only by the
some or all the shares are without par SEC provided that:
value, such fact must be stated”. 1. There has been a proof of valid
transfer;
9. Non-stock Corporation. The 2. All taxes due from the properties
Corporation Code requires the articles of has been paid; and
the non-stock corporation to states: the 3. Such properties have been
amount of its capital, the names, reasonably valued.
nationalities and residences of its
contributors and the amount contributed
Papers to accompany articles with SEC
by each. A non-stock corporation may have
The SEC requires the following papers to be
capital but it has no authorized capital
submitted to it with the articles of
stock.
incorporation:
1. A verification slip executed by the
10. Inclusion of other matters. The
Chief of the Record Section states
articles of incorporation “may include
that the proposed name of the
other matters that is not inconsistent with
corporation has been verified and
law and which the incorporators may deem
found to be distinct/ not similar to
necessary and convenient”.
the names of already existing
corporation or those pending
Sworn Statement of the Treasurer The registration.
Securities and Exchange Commission shall 2. Written undertaking to change
not accept the articles of incorporation of corporate name in case there is a
any stock corporation unless accompanied person, firm or entity with a prior
by a sworn statement of the Treasurer right to the use of said name or one
elected by the subscribers showing that at similar to it.
least:
3. Sworn statement of assets and
liabilities, duly executed under oath
1. 25% of the authorized capital stock has by the corporate treasurer together
been subscribed. with the amount P50.00 to defray
publication expenses.
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Sec. 20. De Facto corporation. – The due One who assumes an obligation to an
incorporation any corporation claiming in ostensible corporation as such cannot resist
good faith to be a corporation under this performance thereof on the ground that
Code, and its right to exercise corporate there was in fact no corporation.
powers, shall not be inquired into
collaterally in any private suit to which such Estoppel – It is preclusion, which prevent a
corporation may be a party. Such inquiry man from denying a fact in consequences of
may be made by the Solicitor General in a his own previous act, allegations, or denial
quo warranto proceeding. of a contrary tenor. The object of the
principle of estoppel is to prevent injustice
De facto corporation – generally refer to to an otherwise innocent person.
organizations exercising corporate power
under colour of a more or less legally Sec. 22. Effect of non-use of corporate
constituted corporation. charter and continuous in operation of a
corporation. – If a corporation does not
Elements of De facto corporation formally organize and commence the
1. Existence of a valid law under which a transaction of its business or the
corporation can be organized. construction of its works within two (2)
2. An attempt in good faith to incorporate. years from the date of its incorporation, its
3. Actual exercise of incorporate powers. corporate powers cease and the corporation
shall be deemed dissolved. However, if a
corporation has commenced the transaction
Quo warranto – an inquiry made into the of its business but subsequently becomes
right of a corporation to conduct business. continuously inoperative for a period of at
least five (5) years, the same shall be ground
Illustration for the suspension or revocation of its
Seven competent individual organized a corporate franchise or certificate of
corporation by filing the articles of incorporation.
incorporation and securing a certificate of
incorporation with the SEC. However, the This provision shall not apply if the failure to
addresses of two of the original subscribers organize, commence the transactions of its
were omitted in the articles of businesses or the construction of its works,
incorporation. In suit filed by X, a creditor, or to continuously operate is due to causes
against the corporation he alleged that the beyond the control of the corporation as
corporation has no valid existence and may be determined by the Securities and
sought to hold the seven incorporators (also Exchange Commission.
directors) liable personally on the obligation.
X’s allegation that the corporation had no
Organization
valid existence would constitute a collateral
(side) attack in a private suit. Only the The idea of organization in reference to
Solicitor General as government lawyer may corporations means executive structure,
raise the question by quo warranto election of officers, providing for
proceeding. (Literally by “what right”). subscription and payment of capital,
adoption of by-laws, and other steps
necessary to endow the legal entity with
Sec. 21. Corporation by estoppel. – All capacity to transact business for which it
persons who assume to act as a corporation was created.
knowing it to be without authority to do so
shall be liable as general partners for all
debts, liabilities and damages incurred or
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The Grant of corporate existence, conferred The directors, once elected, become the
by the issuance of certificate of representatives of the corporation itself, not
incorporation, is subject to two subsequent its stockholders. The directors of a nonstock
conditions, to wit: corporation are required to be members
1. The corporation must thereof and like stock corporations
“formally organize”. “majority of the directors and trustees of all
2. The corporation must actually begin the corporations organized under the
“transaction of its business”. Corporation Code must be residents citizen
of the Philippines”. There are some special
corporation not organized with the
Failure to comply with either or both of
Corporation Code where directors are
these conditions within two (2) years from
required to be citizens of the Philippines.
the date of its incorporation, its corporate
They are as follows:
power cease and the corporation must be
1. Bank and banking institution, at least
deemed dissolved.
2/3 of the members of the board of
directors shall be citizen of the
Sec. 23. The board of directors or trustees. –
Philippines.
Unless otherwise provided in this Code, the
corporate powers of all corporation formed 2. Rural banks, every member of the board
under this Code shall be exercised , all of directors shall be citizens of the
business conducted and all property of such Philippines.
corporations controlled and held by the 3. Domestic air carrier, the directing head
board of directors or trustees to be elected or 2/3 of the board of directors and
from among the holders of stock, or where other managing officers shall be citizens
there is no stock, from among the of the Philippines.
members of the corporation, who shall hold 4. Registered investments companies, the
office for one (1) year and until their directors thereof must be Filipino
successors are elected and qualified. citizen.
5. Private development banks, all the
Every director must own at least one (1) members of the board of directors shall
share of the capital stock of the corporation be citizen of the Philippines.
of which he is a director, which share shall 6. In case of financing corporation, at least
stand in his name on the books of the 2/3 of all members of the board of
corporation. Any director who ceases to be directors shall be citizen of the
the owner of at least one (1) share of the Philippines.
capital stock of the corporation of which he
is the director shall thereby cease to be a
Sec. 24. Election of directors or trustees. –
director. Trustees of non-stock corporations
At all elections of directors or trustees, there
must be members thereof. A majority of the
must be present, either in person or by
directors or trustees of all corporations
representative authorized to act by written
organized under this Code must be residents
proxy, the owners of the majority of the
of the Philippines.
outstanding capital stock, or if there be no
capital stock, a majority of the members
Qualifications of directors entitled to vote. The election must be by
1. He must own at least one (1) share of ballot if requested by any voting stockholder
the capital stock of the corporation in or member. In stock corporations, every
his name. stockholder entitled to vote shall have the
2. Majority of the directors must be a right to vote in person or by proxy the
resident citizen of the Philippines. number of shares of stock standing, at the
3. A director must not have been convicted time fixed in the by-laws, in his own name
by final judgement of an offense on the stock books of the corporation, or
punishable by imprisonment exceeding where the by-laws are silent, at the time of
six (6) years or a violation of the the election; and said shareholder may vote
provisions of the Corporation Code such number of shares for as many persons
committed within five (5) years prior to as there are directors to be elected or he
the date of election or appointment. may cumulate said shares and give one
candidate as many votes as the number of
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directors to be elected multiplied by the giving the former 300 and the latter 200
number of his shares shall equal, or he may provided that the total number of votes
distribute them on the same principle cast by him does not exceed 500 votes.
among as many candidate as he shall see fit;
Provided, That the total number of votes Voting of sequestered shares of stock
cast by him shall not exceed the numbers of It has been held that the “Presidential
shares owned by him as shown in the books Commission on Good Government may
of the corporation multiplied by the whole properly exercise the prerogative to vote
number of directors to be elected: Provided, sequestered stock of corporation, granted to
however, that no delinquent stocks shall be it by the President of the Philippines xxx
voted. Unless otherwise provided in the pending the outcome of proceeding to
articles of incorporation, or in the by- laws, determine the ownership of sequestered
members of corporation which have no shares of stock. xxx Substitution of directors
capital stock may cast as many votes as is not be done without reason or rhyme, and
there are trustees to be elected but may not undertaken only when essential to prevent
cast more than one vote for one candidate. disappearance or wastage of corporate
Candidates receiving the highest number of property, and always under such
votes shall be declared elected. Any meeting circumstance as assure that replacements
of the stockholders or members called for are truly processed of competence,
an election may adjourn from day to day or experience and probity.
from time to time but not sine die or
definitely if, for any reason, no election is
Sec. 25. Corporate officers, quorum. –
held, or if there are not present or
Immediately after their election, the
represented by proxy, at the meeting, the
directors of a corporation must formally
owners of the majority of the outstanding
organized by the election of a president,
capital stock, or if there be no capital stock,
who shall be a director, a treasurer who
a majority of the members entitled to vote.
may or may not be a director, a secretary
who shall be a resident citizen of the
Methods of voting Philippines, and such other officers as may
The voting methods which may be resorted be provided for in the by-laws. Any two (2)
to by a voting stockholder are as follows: or more positions may be held concurrently
1. Straight voting. by the same person, except that no one shall
2. Cumulative voting for one candidate. act as president and secretary or as
3. Cumulative voting by distribution. president and treasurer at the same time.
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4. Other officers provided for in the salaries, bonus plans and pensions,
bylaws. determining dividend policy, selecting
auditors, and dealing questions with labor
Three levels of corporate control and company policy.
1. The board of director which is
responsible for the corporate policies President
and the general management of the The president must be a director of the
business affairs of the corporation. corporation. The powers of the president of
2. The officers, who in theory execute the a corporation are vested in him by law or
policies lay down by the board , but in the by-laws; otherwise, he has no power
practice often have wide latitude in over the corporate property and business
determining the course of business than has any other director. However, he
operations. may be given actual authority to make
3. Stockholders who like amendments of particular contracts, or to execute
the articles of incorporation. conveyances, borrow money, execute
mortgages, and do other acts, by the
charter, the by-laws, resolutions of directors
Teleconferencing of Board Members In the
or their informal acquiescence.
Philippines, teleconferencing and
videoconferencing of members of board of
directors of private corporation is a reality, Vice- President
in light of the Republic Act No. 8792.The In the absence of the president, or if the
Securities and Exchange Commission issued office of the president becomes vacant, as a
SEC Memorandum Circular No. 15, on rule, the vice president elected and
November 30, 2001, providing the appointed by the shareholders or directors
guidelines to be complied with related to has authority to act in his stead, and to
such conferences. Thus, the court agrees perform the duties of the office.
with the RTC that persons in the Philippines
may have a teleconference with a group of Secretary
persons in South Korea relating to business A secretary must be a resident citizen of the
transactions or corporate governance. Philippines. It is generally its duty to make
and keep corporate records; to make proper
Directors and officers distinguished The entries of the votes, resolution and
officers of a corporation, unlike the proceedings of the shareholders and
directors, are true agent of the corporation. directors in the management of the
Each officer may bind the corporation by his corporation, and of all other matters
individual acts within the actual or apparent required to be entered in the records. The
scope of authority. On the other hand, a secretary is the ministerial officer who
director has no authority to act for the cannot bind the corporation unless he is
corporation. authorized to do so.
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and the board of directors in a suitable elective officials are ineligible to become
manner. officers and/or directors of any cooperative.
Quorum – signifies the number of persons The SEC ruled that firms engage in wholly or
belonging to a corporation required to partially nationalized activities, aliens are
transact business. banned from being appointed to
management position such as president,
Section 25 of the Corporation Code vice-president, treasurer, auditor, secretary,
requires more people than a simple majority etc. of said companies. However, they can
to form a quorum. If no such defining be elected directors in preparation to their
number is determined, a quorum is a simple allowable participation or share in the
majority. capital of such activities, in accordance with
the Commonwealth Act No. 108, as
amended by PD 715, otherwise known as
Directors cannot vote by proxy
the Anti- Dummy Law.
The directors cannot vote by proxy but must
personally present, and act by themselves.
Sec. 28. Removal of director or trustees. –
Any director or trustee of the corporation
Sec. 26. Report of election of directors, may be removed from office by a vote of the
trustees and officers. – Within thirty (30) stockholders holding or representing at least
days after the election of the officers, two- thirds (2/3) of the outstanding capital
trustees and directors of the corporation, stock, or if the corporation be a nonstock
the secretary, or any other officer of the corporation , by a vote of at least two- thirds
corporation shall submit to the Securities (2/3) of the members entitled to vote:
and Exchange Commission, the names, Provided, That such removal shall take place
nationalities and residences of the directors, either at a regular meeting of the
trustees and officers elected. corporation or at the special meeting called
Should a director, trustee or officer die, for the purpose, and in either case, after
resign or in any manner cease to hold office, previous notice to stockholders or members
his heirs in case of his death, the secretary of the corporation of the intention to
or any other officer of the corporation, or propose such removal at the meeting. A
the director, trustee or officer himself, shall special meeting of the stockholders or
immediately report such fact to the members of the corporation for the purpose
Securities and Exchange Commission. of removal of directors or trustees, or any of
them, must be called by the secretary on
Sec. 27. Disqualification of directors, order of the president or on the written
trustees or officers. – No person convicted demand of the stockholders representing or
by final judgement of an offense punishable holding at least a majority of the
by imprisonment for a period exceeding six outstanding capital stock, or, if it be a non-
(6) years, or a violation of this Code, stock corporation, on the written demand of
committed within five (5) years prior to the a majority of the members entitled to vote.
date of his election or appointment, shall Should the secretary failed to refuse to call
qualify as a director, trustee or officer of any the special meeting upon such demand, or
corporation. fail or refuse to give the notice, or if there is
no secretary, the call for the meeting may be
Sec. 27 of the Corporation Code is an addressed directly to the stockholders or
additional safeguard that only upright and members of any by any stockholder or
honest individuals be entrusted with member of the corporation signing the
management of the corporate affairs. demand. Notice of the time and place of
such meeting, as well as the intention to
propose such removal, must be given by
A director of a cooperative who is
publication or by written notice as
subsequently elected as member of the
prescribed in this Code. The vacancy
Sangguniang Panglungsod (City Council)
resulting from removal pursuant to this
becomes automatically disqualified from
section may be filled by election at the same
continuing as such director by virtue of the
meeting without further notice, or at any
clear mandate of PD No. 269 providing that
regular or at any special meeting called for
except for “barrio captains and councillors”
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the purpose after giving notice as prescribed directors or trustees, if still constituting a
in this Code. Removal may be with or quorum; otherwise, said vacancies must be
without cause: Provided, That removal filled by the stockholders in a regular or
without cause may not be used to deprived special meeting called for that purpose. A
minority stockholders or members of the director or trustee so elected to fill the
right of representation to which they may be vacancy shall be elected only for the
entitled under Section 24 of this Code. unexpired term of his predecessor in office.
Directors representing minority may not be Sec. 30. Compensation of directors. – In the
removed without cause. The power to absence of any provision in the by-laws
removed director or trustee even without fixing their compensation, the directors shall
cause given to shareholders or members not receive any compensation, as such
may not be used to deprived minority directors, except for reasonable per diems:
shareholders or members of the right of Provided, however, That any such
representation to which they may be compensation (other than pier diems) may
entitled under Section 24 of the Corporation be granted to directors by the vote of the
Code. Cumulative voting of directors in a stockholders representing at least a majority
stock corporation is mandatory and cannot of the outstanding capital stock at a regular
be dispensed with in the by-laws. Being a or special stockholders’ meeting. In no case
statutory right, the stockholders cannot be shall the total yearly compensation of
deprived of the use of cumulative voting. directors, as such directors, exceed ten
percent (10%) of the net income before
May the result of the duly held election of income tax of the corporation during the
directors be altered by mere agreement of preceding year.
the directors?
The Securities and Exchange Commission Sec. 31. Liability of directors, trustees or
ruled that: “An agreement by which director officers. – Directors or trustees who willfully
is reposed in any body except majority of and knowingly vote for or assent to patently
stockholders is in violation of ‘public policy’ unlawful acts of the corporation or who are
and ‘enforceable’ ”. guilty of gross negligence or bad faith in
directing the affairs of the corporation or
The Securities and Exchange Commission acquire any personal or pecuniary interest in
has jurisdiction or authority to “hear and conflict with their duty as such directors, or
decide cases” involving controversies in the trustees shall be liable jointly and severally
election or appointments of directors, for all damages resulting therefrom suffered
trustees, officers or managers of such by the corporation, its stockholders or
corporations, partnerships or associations. members and other persons.
Controversy concerning removal of directors
or trustees may also be heard by the SEC. When a director, trustee or officer attempts
to acquire or acquires, in violation of his
Sec. 29. Vacancies in the office of director duty, any interest adverse to the
or trustee. – Any vacancy occurring in the corporation in respect of any matter which
board of directors or trustees other than by has been reposed in him in confidence, as to
removal by the stockholders or members or which equity imposes a disability upon him
by expiration of term, may be filled by the to deal in his own behalf, he shall be liable
vote of at least a majority of the remaining as a trustee for the corporation and must
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account for the profits which otherwise Director disqualified to vote if he has
would have accrued to the corporation. personal interest
A director is disqualified to vote at a meeting
Directors are trustees of the board if he has any personal interest
It is well-stated rule in corporate law that in a matter before the board; in such case,
directors of corporations are trustees and his vote cannot be counted in making up a
are required to act in the utmost good faith. quorum.
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invalidated on that ground alone; Provided, undivided loyalty on the part of the
That if the interest of the interlocking fiduciaries. If there is a presented to a
director in one corporation or corporations corporate officer or director a business
is merely nominal, he shall be subject to the opportunity which the corporation is
provisions of the preceding section insofar financially able to undertake, is from its
as the latter corporation or corporations are nature, in the line of the corporation’s
concerned. business and is of practical advantage to it,
Stockholdings exceeding is one in which the corporation will be
twenty percent (20%) of the outstanding brought into conflict with that of his
capital stock shall be considered substantial corporation, the law will not permit him to
for purposes of interlocking directors. seize the opportunity for himself.
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upon such terms and conditions and for at least a majority of the trustees in office
such consideration, which may be money, will be sufficient authorization for the
stocks, bonds or other instruments for the corporation to enter into any transaction
payment of money or other property or authorized by this section.
consideration, as its board of directors or
trustees may deem expedient, when Sec. 41. Power to acquire own shares. – A
authorized by the vote of the stockholders stock corporation shall have the power to
representing at least two-thirds (2/3) of the purchase or acquire its own shares for a
outstanding capital stock; or in case of legitimate corporate purpose or purposes,
nonstock corporation, by the vote of at least including but not limited to the following
two-thirds (2/3) of the members, in a cases: Provided, That the corporation has
stockholders’ or members’ meeting duly unrestricted retained earnings in its books
called for the purpose. Written notice of the to cover the shares to be purchased or
proposed action and of the time and place acquired:
of the meeting shall be addressed to each
stockholder or member at his place of
1. To eliminate fractional shares arising out
residence as shown on the books of the
of stock dividends.
corporation and deposited to the addressee
in the post office with the postage prepaid,
or served personally: Provided, That any 2. To collect or compromise an
dissenting stockholder may exercise his indebtedness to the corporation, arising
appraisal right under the conditions out of unpaid subscription, in a
provided in this Code. delinquency sale, and to purchase
delinquent shares sold during said sale.
A sale or other disposition shall be
deemed to cover substantially all the 3. To pay dissenting or withdrawing
corporate property and assets if thereby the stockholders entitled to payment for
corporation would be rendered their shares under the provisions of this
incapable of continuing the business or Code.
accomplishing the purpose for which it was
incorporated. Sec. 42. Power to invest corporate funds in
another corporation or business or for any
After such authorization or approval by the other purpose. – Subject to the provisions of
stockholders or members, the board of this code, a private corporation may invest
directors or trustees may, nevertheless, in its funds in any other corporation or
its discretion, abandon such sale, lease, business or for any purpose other than the
exchange, mortgage, pledge or other primary purpose for which it was organized
disposition of property and assets, subject when approved by a majority of the board
to the rights of third parties under any of directors or trustees and ratified by the
contract relating thereto, without further stockholders representing at least twothirds
action or approval by the stockholders or (2/3) of the outstanding capital stock, or by
members. at least two-thirds (2/3) of the members in
the case of non-stock corporations, at a
stockholders’ or members’ meeting duly
Nothing in this section is intended to restrict called for the purpose. Written notice of the
the power of any corporation, without the proposed investment and the time and place
authorization by the stockholders or of the meeting shall be addressed to each
members, to sell, lease, exchange, stockholder or member at his place of
mortgage, pledge or otherwise dispose of residence as shown on the books of the
any of its property and assets if the same is corporation and deposited to the addressee
necessary in the usual and regular course of in the post office with postage prepaid, or
business of said corporation or if the served personally; Provided, That any
proceeds of the sale or other disposition of dissenting stockholder shall have appraisal
such property and assets be appropriated right as provided in this Code: Provided,
for the conduct of its remaining business. however, That were the investment by the
corporation is reasonably necessary to
In non-stock corporations, where there are accomplish its primary purpose as stated in
no members with voting rights, the vote of the articles of incorporation, the approval of
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the stockholders or members shall not be the separate property of the individual
necessary. stockholders.
Sec. 43. Power to declare dividends. – The Surplus profits – Surplus or net profits of a
board of directors of a stock corporation corporation is the difference between the
may declare dividends out of the total present value of its assets, after
unrestricted retained earnings which shall deducting losses and liabilities, and the
be payable in cash, in property, or in stock amount of its capital stock. (11 Fletcher,
to all stockholders on the basis of Sec. 5335)
outstanding stock held by them: Provided,
That any cash dividends due on delinquent Basis of dividend declaration
stock shall first be applied to the unpaid
The board of directors of a stock corporation
balance on the subscription plus costs and
may declare dividends on the basis of
expenses, while stock dividends shall be
outstanding stock held by the stockholders.
withheld from the delinquent stockholder
The basis therefore is the stockholder’s total
until his unpaid subscription is fully paid:
subscription and not on the amount paid by
Provided, further, That no stock dividend
him on the subscription. This is for the
shall be issued without the approval of
reason that his entire subscription
stockholders representing not less than two-
represents his holding in the corporation for
thirds (2/3) of the outstanding capital stock
which he pays interests on any unpaid
at a regular or special meeting duly called
portion. (SEC Opinion, Dec.
for the purposes.
17, 1973)
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Liquidating dividend involves the corporation for a period of time provided for
distribution of assets by a corporation to its in the agreement.
stockholders upon dissolution.
Effects of Management contracts Contracts
Sec. 44. Power to enter into a management by which the board of directors delegates
contract. – No corporation shall conclude a the power of supervision and management
management contract with another to another person or corporation for a
corporation unless such contract shall have specified period are invalid if they involve a
been approved by the Board of Directors surrender by the board of its power and duty
and by stockholders owning at least the of supervision and control.
majority of the outstanding capital stock, or
by at least majority of the members in the Management prerogatives
case of a non-stock corporation, of both the An owner of a business enterprise is given
managing and the managed corporation, at considerable margin in managing his
a meeting duly called for the purpose: business because it is deemed important to
Provided, That (a) where a stockholder or society as a whole that he should succeed.
stockholders representing the same interest
of both the managing and the managed
corporations own and control more than Sec. 45. Ultra vires acts of corporations. –
one-third (1/3) of the total outstanding No corporation under this Code shall
capital stock entitled to vote of the possess or exercise any corporate powers
managing corporation; or (b) where the except those conferred by this Code or by its
majority of the members of the Board of articles of incorporation and except such as
Directors of the managing corporation also are necessary or incidental to the exercise of
constitute a majority of the members of the the powers so conferred.
Board of Directors of the managed
corporation, then the management contract Intra vires – The acts of a corporation within
must be approved by the stockholders of its express or implied powers. Ultra vires –
the managed corporation owning of at least The acts of a corporation outside its express
two-thirds (2/3) of the total outstanding or implied powers.
capital stock entitled to vote, or by at least
two-thirds (2/3) of the members in case of a
It denotes some act or transaction on the
non-stock corporation. No management
part of a corporation which, although not
contract shall be entered into for a period
unlawful or contrary to public policy of
longer than five years for any one term.
executed by an individual, is yet beyond the
legitimate powers of the corporation as they
The provisions of the next preceding are defined by the statute under which it is
paragraph shall apply to any contract formed, or which are applicable to it, or by
whereby a corporation undertakes to its charter or incorporation papers.
manage or operate all or substantially all of
the business of the other corporation,
whether such contracts are called service Admittedly, if the contract is executed on
contracts, operating agreements or both sides neither party can maintain an
otherwise: Provided, however, That such action to set aside the transaction or to
service contracts or operating agreements recover what has been parted with. The
which relate to the exploration, courts will not interfere in such a case to
development, exploitation or utilization of deprive either the corporation or the other
natural resources may be entered into for part of money or property acquired under
such periods as may be provided by the the contract. On the other hand, the great
pertinent laws or regulations. weight of authority is to consider executor
contracts as unenforceable.
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either part of what has been acquired the stockholders representing at least a
under it. majority of the outstanding capital stock, or
2. If the contract is executor on both sides, of at least a majority of the outstanding
as a rule either party can maintain an capital stock, or of at least a majority of the
action for its non-performance. members, in the case of non-stick
3. Where the contract is executor on side corporations, shall be necessary. The bylaws
only, and has been fully performed on shall be signed by the stockholders or
the other, the courts differ as whether members voting for them and shall be kept
an action will lie on the contract against in the principal office of the corporation,
the party who has received benefits of subject to the inspection of the stockholders
performance under it. Majority of the or members during office hours; and a copy
courts hold that the party who has thereof, duly certified to by a majority of the
received benefits from the performance directors or trustees and countersigned by
is stopped” to set up that the contract the secretary of the corporation, shall be
us ultra vires to defeat an action on the filed with the Securities and Exchange
contract. There is, however, a rule which Commission which shall be attached to the
is widely recognized by the courts that original articles of incorporation.
ultra vires. “Should not be allowed to
prevail, when involved for or against the Notwithstanding the provisions of the
corporation, where it will defeat the preceding paragraph, by-laws may be
ends of justice or work a legal wrong. adopted and filed prior to incorporation; in
such case, such by-laws shall be approved
and signed by all the incorporators and
Acts which are ultra vires are voidable but
submitted to the Securities and Exchange
may be ratified. In order that such ultra
Commission, together with the articles of
vires may be ratified it must be shown that
incorporation.
1. The act was consummated or executed.
2. No creditors are prejudiced or they have
given their consent thereto. In all cases, by-laws shall be effective only
upon the issuance by the Securities and
3. The right of the public or the state are
Exchange Commission of a certification that
not involved.
the by-laws are not inconsistent with the
4. All of the stockholders consent thereto. Code.
A corporation, like an individual, may ratify The Securities and Exchange Commission
and thereby render binding upon it the shall not accept for filing the by-laws or any
originally authorized acts of its officers or amendment thereto of any bank, banking
other agents. This is true because the institution, building and loan association,
questioned investment is neither contrary to trust company, insurance company, public
law, morals, public order or public policy. It utility, educational institution or other
is a corporate transaction or contract which special corporations governed by special
is within the corporate powers but which is laws, unless accompanied by a certificate of
defective from a purported failure to the appropriate government agency to the
observe in its execution the requirement of effect that such by-laws or amendments are
the law that the investment must be in accordance with law.
authorized by the affirmative vote of the
stockholders holding 2/3 of the voting
Necessity of by-laws The corporation must
power.
adopt the code of bylaws for its internal
government.
Sec. 46. by-laws Adoption. – Every
corporation formed under this code, must,
Corporation has inherent power to adopt
within one month after receipt of official
by-laws
notice of the issuance of its certificate of
One of its legal incidents and is usually
incorporation by the Securities and
expressly granted by law of the charter
Exchange Commission, adopt a new code of
subject to such limitations as may be
by-laws for its government not inconsistent
contained in the statute or the charter,
with this code. For the adoption of by-laws
subject to such limitations as may be
by the corporation the affirmative vote of
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contained in the statute or charter, and the which are merely provisions for the
general requirements of validity. If a government of a corporation and notice of
corporation fails to file its by-laws within the them will not be presumed.
period required by law its certificate of
incorporation may be suspended or even Sec 47. Contents of by-laws. – Subject to the
revoked. provisions of the Constitution, this Code,
other special laws, and the articles of
Section 46 allows the adoption and filing of incorporation, a private corporation may
the by-laws before incorporation provided provide in its by-laws for:
the same is approved by all the
incorporators and submitted to the 1. The time, place and manner of calling
Securities and Exchange Commission and conducting regular or special
together with the articles of incorporation. meetings of the directors or trustees.
By-laws cannot provide for unreasonable 2. The time and manner of calling and
restriction conducting regular or special meetings
Restriction upon the traffic in stock must of the stockholders or members.
have their source in legislative enactment,
as the corporation itself cannot create such
3. The required quorum in meetings of
impediments. By-laws are created for
stockholders or members and the
protection and not for restriction.
manner of voting therein.
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Constitution, the Corporation Code, other employed in the service of a rival company
special laws and the articles of to be ineligible for the corporation’s Board
incorporation. of Directors. An amendment which renders
ineligible, or if elected, subjects to removal,
A corporation which has failed to file its a director if he be also a director in a
bylaws within the prescribed period does corporation whose business is in
not ipso facto lost its powers as such. competition with or is antagonistic to the
other corporation is valid. This is based upon
the principle that where the director is so
Sec. 48. Amendments to by-laws. – The
employed in the service of a rival company,
board of directors or trustees, by a majority
he cannot serve both, but must betray one
vote thereof, and the owners of at least a
or the other. Such an amendment advances
majority of the outstanding capital stock, or
the benefit of the corporation and is good.
at least a majority of the members of a
nonstock corporation, at a regular or special
meeting duly called for the purpose, may Meetings Necessity
amend or repeal any by-laws or adopt new A majority of the stockholders or members
by-laws. The owners of 2/3 of the can bind the corporation only at a meeting
outstanding capital stock or 2/3 of the regularly held and conducted. To constitute
members in a non-stick corporation may a legal meeting, so as to render the acts and
delegate to the repeal any by-laws or adopt vote of the majority binding the meeting
new by-laws: provided, that any power must be regularly called by one having
delegated to the board of directors or authority. In the absence of provision to the
trustees shall be considered as revoked contrary such authority exists in the
whenever stockholders owning or directors or managing agents.
representing a majority of the outstanding
capital stock or a majority of the members in Sec. 49. Kinds of Meeting. – Meetings of
non-stock corporations, shall so vote at a directors, trustees, stockholders, or
regular or special meeting. members may be regular or special.
Whenever any amendment or new by-laws Sec. 50. Regular and special meetings of
are adopted, such amendment or new stock holders or members. – Regular
bylaws shall be attached to the original meetings of stockholders or members shall
bylaws in the office of the corporation, and a be held annually on a date fixed in the
copy thereof, duly certified under oath by bylaws, or if not so fixed, on any date in
the corporate secretary and a majority of April of every year as determined by the
the directors or trustees, shall be filed with board of directors or trustees: Provided, that
the Securities and Exchange Commission, written notice of regular meetings shall be
the same to be attached to the original sent to all stockholders or members of
articles of incorporation and original bylaws. record at least 2 weeks prior to the meeting,
unless a different period is required by the
Amender or new by-laws shall only be by-laws.
effective upon the issuance by the SEC of a
certification that the same are not Special meetings of stockholders or
inconsistent with this code. members shall be held at any time deemed
necessary or as provided in the by-laws:
The authority to make or adopt the original Provided, however, that at least 1 week
by-laws of a corporation cannot be given to written notice shall be sent to all stock
the board of directors or trustees. The holders or members, unless otherwise
stockholders of a stock corporation or the provided in the by-laws.
members of the non-stick corporation adopt
or make the original by-laws. Notice of any meeting may be waived,
expressly or impliedly, by any stockholder or
An amendment of by-law renders member.
stockholder ineligible as director It is well-
settled xxx that corporations have the power Whenever, for any cause, there is no person
to make by-laws declaring a person authorized to call a meeting, the SEC, upon
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When there is no person authorized to call Quorum – Signifies the number of persons
a meeting belonging to a corporation required to
A stockholder or member may petition the transact business. Within the meaning of
SEC upon showing of good cause, to call a section 52 above, a quorum shall consist of
meeting and directing the petitioner the stockholders representing a majority of
(stockholder or member) to give notice the outstanding capital stock or a majority of
required by the Code and the by-laws. The the members in the case of non-stock
petitioning stockholder or member shall corporations.
preside at such meeting until at least a
majority of the stockholders or members Sec. 53. Regular of special meetings of
present have chosen one of their numbers directors or trustees. – The meetings shall
as presiding officer. be held monthly, unless the by-laws provide
otherwise.
Sec. 51. Place and time of meetings of
stockholders or members. – Stockholders’ or Special meetings of the board of directors or
members’ meetings, whether regular or trustees may be held at any time upon the
special, shall be held in the city or call of the president or as provided in the by-
municipality where the principal office of laws
the corporation is located, and if practicable
in the principal office of the corporation: Meetings of directors or trustees of
Provided, that Metro Manila shall, for the corporations may be held anywhere in or
purposes of his section, be considered a city outside of the Philippines, unless the bylaws
or municipality provide otherwise. Notice of regular or
special meetings stating the date, time and
Notice of meetings shall be in writing, and place of the meeting must be sent to every
the time and place thereof stated therein. director or trustee at least 1 day prior to the
All proceedings had and any business scheduled meeting, unless otherwise
transacted at any meeting of the provided in the by-laws. A director or
stockholders or members, if within the trustee may waive this requirement, either
powers or authority of the corporation, shall expressly or impliedly.
be valid even of the meeting be improperly
held or called, provided all the stockholders Sec. 54. Who shall preside at meetings. –
or members of the corporation are present The president shall preside at all meeting of
or duly represented at the meeting.
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the directors or trustees as well as of the of the joint owner can vote said shares or
stockholders or members, unless the bylaws appoint a proxy therfor.
provide otherwise.
If share are owned by 2 or more persons
The meetings of directors or trustees may be jointly, the right to vote is in them jointly,
held anywhere in the by-laws. Notice of and , in order that the shares may be voted,
regular or special meetings of directors or they must agree upon the vote. This rule of
trustees must be sent to them at least 1 day joint action applies to shares held by several
prior to the scheduled meeting, unless the executors or trustees, in the absence of
by-laws provided otherwise. provision for a majority vote if the
fiduciaries disagree.
Sec. 55. Right to vote of pledgors,
mortgagors and administrators. – In case of Sec. 57. Voting right for treasury share. –
pledged or mortgaged share in stock Treasury shares shall have no voting right as
corporations, the pledgor or mortgagor shall long as such stock remains in the treasury.
have the right to attend and vote at
meetings of stockholders, unless the pledge Treasury shares have no voting rights.
or mortgagee is expressly given such right in
writing which is recorded on the appropriate
Sec. 58. Proxies. – Stockholders and
corporate books by the pledgor or
members may vote in person or by proxy in
mortgagor.
all meetings of stock holders or members.
Proxies shall be in writing, signed by the
Executors, administrators, receivers and stock holder or member and filed before the
other legal representatives duly appointed scheduled meeting with the corporate
by the court may attend and vote in behalf secretary. Unless otherwise provided in the
of the stockholders or members without proxy, it shall be valid only for the meeting
need of any written proxy. for which it is intended. No proxy shall be
valid and effective for a period longer than
The pledgor or mortgagor of shatem in the five years at any one time.
absence of agreement to the contrary, if the
shate remain in his name on the books of Proxy – In corporate law, is a person who
the corporation has the right to attend and votes for and this represents the
vote at meetings of stockholders. stockholders or members.
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the share for a period not exceeding 5 years in the name of the trustee or trustees shall
at any one time: Provided, that in the case thereby be deemed cancelled and new
of a voting trust specifically required as a certificates of stock shall be reissued in the
condition in a loan agreement, said voting name of the transferors.
trust may be for a period exceeding 5 years
but shall automatically expire upon full The voting trustee or trustees may vote by
payment of the loan. A voting trust proxy unless the agreement provides
agreement must be in writing and notarized, otherswise.
and shall specify the terms and conditions
thereof. A certified copy of such agreement
Concept of voting trusts
shall be filed with the corporation and with
the SEC: otherwise, said agreement is A voting trust is an agreement by which
ineffective and unenforceable. The stockholders surrender their voting power
certificate or of stock covered by the voting and place it irrevocably in the hands of
trust agreement shall be cancelled and new others for a definite period of time. In
one shall be issued in the name of the exchange for the certificates of stock the
trustee or trustees stating that they are trustee delivers to the stockholder voting
issued pursuant to said agreement. In the trust certificates.
books of the corporation, it shall be noted
that the transfer in the name of the trustee Limitations on voting trust agreement
or trustees is made pursuant to said voting 1. It shall be for a period not exceeding 5
trust agreement. years but if required under a loan
agreement, the period may be for more
The Trustee or trustees shall be execute and than 5 years but shall automatically
deliver to the transferors voting trust cease upon full payment of the loan.
certificates, which shall be transferable in 2. It must be in writing and notarized.
the same manner and with the same effect 3. It shall not be entered into to
as certificates of stock. circumvent laws on monopolies and
restraint of trade, nor shall it be entered
The voting trust agreement filed with the into purposes of fraud.
corporation shall be subject to examination 4. It shall be filed with the corporation and
by any stockholder of the corporation in the with SEC otherwise it shall be ineffective
same manner as any other corporate book and unenforceable.
or record: Provided, That both the transferor 5. It shall be subject to examinations by
and the trustee or trustees may exercise the any stockholder in the same manner as
right of inspection of all corporate books any other corporate book or record.
and records in accordance with the 6. Parties to the voting trust agreement
provisions of this code. shall be bound by all the provisions of
said agreement.
Any other stock holder may transfer his
shares to the same trustee or trustees upon Sec. 60. Subscription contract. – Any
the terms and conditions stated in the contract for the acquisition of unissued
voting trust agreement, and there upon shall stock in an existing corporation or a
be bound by all the provisions of said corporation still to be formed shall be
agreement. deemed a subscription within the meaning
of this Title, notwithstanding the fact that
No voting trust agreement shall be entered the parties refer to it as a purchase or some
into for the purpose of circumventing the other contract.
law against monopolies and illegal
combinations in restraint of trade or used How can a person become a shareholder in
for purposes of fraud. a stock corporation?
1. By subscription contract with an existing
Unless expressly renewed, all rights granted corporation for the acquisition of
in a voting trust agreement shall unissued shares.
automatically expire at the end of the 2. By purchase from the corporation of
agreed period, and the voting trust treasury shares.
certificates as well as the certificates of stick
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Power to issue shares is lodged in the board Subscription for shares of stock of a
of directors and no stockholders’ meeting is corporation still to be formed shall be
necessary to consider it because additional irrevocable for a period of at least 6 months
issuance of shares of stock does not need from the date of subscription, unless:
approval of the stockholders. The “Board of
1. All subscribers consent to
Trustees shall, in of stock of the corporation
its revocation.
and shall prescribe the form of
2. The incorporation fails to materialize
the certificate of stock of corporation.”
within 6 months or a longer period as
agreed upon.
Kinds of Subscription:
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Right to Transfer shares of stock Who are liable for watered stocks? Both
1. By delivering the certificate, duly consenting director or officer and the
indorsed on the back. stockholder concerned for the whole
2. By delivering the certificate amount of difference.
accompanied by a separate assignment.
3. Where stock is levied on in execution of Trust Fund Theory – involves an implied
judgment, by delivering the certificate promise to the corporation to pay the par
coupled with an assignment by the value of the shares in money or its
sheriff who conducted the levy. equivalent, supplementing it by a legal
restriction against release or fictitious
4. Transfer by sale of delinquent shares.
payment of this obligation to the prejudice
of creditors.
Liabilities of a stockholders
1. Liability to the corporation for unpaid
Sec. 66. Interest on unpaid subscriptions. –
subscription
Subscribers for stock shall pay to the
2. Liability to the corporation for interest corporation interest on all unpaid
on unpaid subscription subscriptions from the date of subscription,
3. Liability to creditors of the corporation if so required by, and at the rate of interest
on unpaid subscription fixed in the by-laws. If no rate of interest is
4. Liability for watered stock fixed in the by-laws, such rate shall be
5. Liability for dividends unlawfully paid deemed to be the legal rate.
6. Liability for failure to
create a corporation Sec. 67. Payment of balance of
subscription. – Subject to the provisions of
Sec. 65. Liability of directors for watered the contract of subscription, the board of
stocks. – Any director or officer of a directors of any stock corporation may at
corporation consenting to the issuance of any time declare due and payable to the
stocks for a consideration less than its par or corporation unpaid subscriptions to the
issued value or for a consideration in any capital stock and may collect the same or
form other than cash, valued in excess of its such percentage thereof, in either case with
fair value, or who, having knowledge accrued interest, if any, as it may deem
thereof, does not forthwith express his necessary.
objection in writing and file the same with
the corporate secretary, shall be solidarily, Payment of any unpaid subscription or any
liable with the stockholder concerned to the percentage thereof, together with the
corporation and its creditors for the interest accrued, if any, shall be made on
difference between the fair value received the date specified in the contract of
at the time of issuance of the stock and the subscription or on the date stated in the call
par or issued value of the same. made by the board. Failure to pay on such
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date shall render the entire balance due and stated in the call made by the board of
payable and shall make the stockholder directors.
liable for interest at the legal rate on such
balance, unless a different rate of interest is When does the stock become delinquent? A
provided in the by-laws, computed from stock becomes delinquent upon failure of
such date until full payment. If within thirty the holder to pay the unpaid subscription or
(30) days from the said date no payment is balance thereof within 30 days from the
made, all stocks covered by said subscription date specified in the contract of subscription
shall thereupon become delinquent and or on the date stated in the call.
shall be subject to sale as hereinafter
provided, unless the board of directors
Call – a declaration officially made by a
orders otherwise.
corporation usually expressed in the form of
a resolution of the board of directors
Remedies to enforce payment of stock requiring payment of all or a certain
subscription prescribed portion of a subscriber's stock
1. Extra-judicial sale at public auction – subscription.
Permits the corporation to put up
unpaid stock for sale and dispose of it
Requisites for a valid call
for the account of the delinquent
1. It must be made in the manner
subscribers (governed by sections 67-69
prescribed by law.
of the Corporation Code of the
2. It must be made by the board of
Philippines).
directors.
2. Judicial action by court action (provided
3. It must operate uniformly upon all
under Section 70)
shares.
3. Denying a stockholder delinquent for
unpaid subscription the right to vote
(under section 71)
Sec. 68. Delinquency sale. – The board of
4. Collection from cash dividends and
directors may, by resolution, order the sale
withholding stock dividends (under
of delinquent stock and shall specifically
Section 43)
state the amount due on each subscription
plus all accrued interest, and the date, time
Sanctions on stock delinquent and place of the sale which shall not be less
1. Rights denied to stockholder shall not be than thirty (30) days nor more than sixty
voted or be entitled to vote or (60) days from the date the stocks become
representation at any stockholders' delinquent.
meeting, nor entitled the holder thereof
to any of the rights of a stockholder Notice of said sale, with a copy of the
except the right to dividends. resolution, shall be sent to every delinquent
2. Right given to the corporation. stockholder either personally or by
3. The corporation has the right to apply registered mail. The same shall furthermore
cash dividends due on delinquent stock be published once a week for two (2)
to the unpaid balance on the consecutive weeks in a newspaper of
subscription plus cost and expenses. general circulation in the province or city
where the principal office of the corporation
While stock dividends, corporation to is located.
withhold the same from the delinquent
stockholder until his unpaid subscription is Unless the delinquent stockholder pays to
fully paid. the corporation, on or before the date
specified for the sale of the delinquent
When is the balance of subscription stock, the balance due on his subscription,
payable? plus accrued interest, costs of advertisement
1. On the date specified in the contract of and expenses of sale, or unless the board of
subscription. directors otherwise orders, said delinquent
stock shall be sold at public auction to such
2. In the absence of any specified date in
bidder who shall offer to pay the full amount
the contract of subscription, on the date
of the balance on the subscription together
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except the right to be voted for or be and evidence which he may deem
entitled to representation at any necessary.
stockholders' meeting. He shall still receive
dividends. But delinquent stocks shall be 2. After verifying the affidavit and other
subject to delinquency sale. information and evidence with the
books of the corporation, said
Effects of Stocks declared delinquent: corporation shall publish a notice in a
1. Cannot be voted for or be entitled to newspaper of general circulation
vote in corporate meetings or be published in the place where the
represented by proxy at any corporation has its principal office, once
stockholders’ meeting. a week for three (3) consecutive weeks
2. The holder of delinquent stock is not at the expense of the registered owner
entitled to exercise the rights of a of the certificate of stock which has
stockholder (i.e. to inspect books and been lost, stolen or destroyed. The
records, etc.). notice shall state the name of said
3. The holder of delinquent stocks is corporation, the name of the registered
entitled to dividends. Section 43 owner and the serial number of said
provides however, that “ any cash certificate, and the number of shares
dividends due on delinquent stock shall represented by such certificate, and that
first be applied to the unpaid balance on after the expiration of one (1) year from
the subscription plus costs and expense, the date of the last publication, if no
while stock dividends shall be withheld contest has been presented to said
from the delinquent stockholder until corporation regarding said certificate of
his unpaid subscription is fully paid”. stock, the right to make such contest
shall be barred and said corporation
shall cancel in its books the certificate of
Sec. 72. Rights of unpaid shares. – Holders stock which has been lost, stolen or
of subscribed shares not fully paid which are destroyed and issue in lieu thereof new
not delinquent shall have all the rights of a certificate of stock, unless the registered
stockholder. owner files a bond or other security in
lieu thereof as may be required,
SEC. 72 Before unpaid shares become effective for a period of one
delinquent, the holder thereof is not (1) year, for such amount and in such form
considered to have violated any contract and with such sureties as may be
with the corporation, and, therefore, he has satisfactory to the board of directors, in
all the rights of a stockholder which rights which case a new certificate may be issued
include the right to vote. even before the expiration of the one (1)
year period provided herein: Provided,
Sec. 73. Lost or destroyed certificates. – The That if a contest has been presented to
following procedure shall be followed for said corporation or if an action is pending
the issuance by a corporation of new in court regarding the ownership of said
certificates of stock in lieu of those which certificate of stock which has been lost,
have been lost, stolen or destroyed: stolen or destroyed, the issuance of the
new certificate of stock in lieu thereof
1. The registered owner of a certificate of shall be suspended until the final decision
stock in a corporation or his legal by the court regarding the ownership of
representative shall file with the said certificate of stock which has been
corporation an affidavit in triplicate lost, stolen or destroyed.
setting forth, if possible, the
circumstances as to how the certificate Except in case of fraud, bad faith, or
was lost, stolen or destroyed, the negligence on the part of the corporation
number of shares represented by such and its officers, no action may be brought
certificate, the serial number of the against any corporation which shall have
certificate and the name of the issued certificate of stock in lieu of those
corporation which issued the same. He lost, stolen or destroyed pursuant to the
shall also submit such other information procedure above-described.
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SEC. 73 The registered owner of certificates to examine and copy excerpts from its
of stock in a corporation or his legal records or minutes, in accordance with the
representative shall file with the corporation provisions of this Code, shall be liable to
an affidavit setting forth how certificate such director, trustee, stockholder or
were lost, stolen or destroyed, the number member for damages, and in addition, shall
of shares represented by each certificate, be guilty of an offense which shall be
the serial numbers of the certificate and punishable under Section 144 of this Code:
name of the corporation which issued the Provided, That if such refusal is made
same. pursuant to a resolution or order of the
board of directors or trustees, the liability
The affidavit shall be verified Corporation under this section for such action shall be
shall publish a notice in a newspaper in imposed upon the directors or trustees who
general circulation published in the place voted for such refusal: and Provided,
where the corporation has its principal office further, That it shall be a defense to any
for 3 consecutive weeks. action under this section that the person
demanding to examine and copy excerpts
from the corporation's records and minutes
After 1 year from the date of the last
has improperly used any information
publication, if no contest presented to the
secured through any prior examination of
corporation, corporation shall cancel in the
the records or minutes of such corporation
books the lost certificates and issue new
or of any other corporation, or was not
certificates.
acting in good faith or for a legitimate
purpose in making his demand.
Sec. 74. Books to be kept; stock transfer
agent. – Every corporation shall keep and
Stock corporations must also keep a book to
carefully preserve at its principal office a
be known as the "stock and transfer book",
record of all business transactions and
in which must be kept a record of all stocks
minutes of all meetings of stockholders or
in the names of the stockholders
members, or of the board of directors or
alphabetically arranged; the installments
trustees, in which shall be set forth in detail
paid and unpaid on all stock for which
the time and place of holding the meeting,
subscription has been made, and the date of
how authorized, the notice given, whether
payment of any installment; a statement of
the meeting was regular or special, if special
every alienation, sale or transfer of stock
its object, those present and absent, and
made, the date thereof, and by and to
every act done or ordered done at the
whom made; and such other entries as the
meeting. Upon the demand of any director,
by-laws may prescribe. The stock and
trustee, stockholder or member, the time
transfer book shall be kept in the principal
when any director, trustee, stockholder or
office of the corporation or in the office of
member entered or left the meeting must
its stock transfer agent and shall be open for
be noted in the minutes; and on a similar
inspection by any director or stockholder of
demand, the yeas and nays must be taken
the corporation at reasonable hours on
on any motion or proposition, and a record
business days.
thereof carefully made. The protest of any
director, trustee, stockholder or member on
any action or proposed action must be No stock transfer agent or one engaged
recorded in full on his demand. The records principally in the business of registering
of all business transactions of the transfers of stocks in behalf of a stock
corporation and the minutes of any corporation shall be allowed to operate in
meetings shall be open to inspection by any the Philippines unless he secures a license
director, trustee, stockholder or member of from the Securities and Exchange
the corporation at reasonable hours on Commission and pays a fee as may be fixed
business days and he may demand, writing, by the Commission, which shall be
for a copy of excerpts from said records or renewable annually: Provided, That a stock
minutes, at his expense. corporation is not precluded from
performing or making transfer of its own
Any officer or agent of the corporation who stocks, in which case all the rules and
shall refuse to allow any director, trustees, regulations imposed on stock transfer
stockholder or member of the corporation
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Sec.93. Place of meetings. – The by-laws 1. All liabilities and obligations of the
may provide that the members of a corporation shall be paid, satisfied and
nonstock corporation may hold their regular discharged, or adequate provision shall
or special meetings at any place even be made therefore.
outside the place where the principal office
of the corporation is located: Provided, That 2. Assets held by the corporation upon a
proper notice is sent to all members condition requiring return, transfer or
indicating the date, time and place of the conveyance, and which condition occurs
meeting: and Provided, further, That the by reason of the dissolution, shall be
place of meeting shall be within the returned, transferred or conveyed in
Philippines. accordance with such requirements.
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similar purposes, but not held upon a upon some trust, public or private, in which
condition requiring return, transfer or case the claims of the state, the
conveyance by reason of the dissolution, beneficiaries, or of the founder and his
shall be transferred or conveyed to one successors may have to be considered. A
or more corporations, societies or non-stock (non-profit) corporation may not
organizations engaged in activities in the ordinarily organize as a stock corporation,
Philippines substantially similar to those authorized to issue shares of stock, but may
of the dissolving corporation according issue membership certificates which do not
to a plan of distribution adopted entitle to the holder to dividends.
pursuant to this Chapter.
Sec. 96. Definition and applicability of Title.
4. Assets other than those mentioned in – A close corporation, within the meaning of
the preceding paragraphs, if any, shall this Code, is one whose articles of
be distributed in accordance with the incorporation provide that:
provisions of the articles of
incorporation or the by-laws, to the 1. All the corporation's issued stock of all
extent that the articles of incorporation classes, exclusive of treasury shares,
or the by-laws, determine the shall be held of record by not more than
distributive rights of members, or any a specified number of persons, not
class or classes of members, or provide exceeding twenty (20).
for distribution.
2. All the issued stock of all classes shall be
5. In any other case, assets may be subject to one or more specified
distributed to such persons, societies, restrictions on transfer permitted by this
organizations or corporations, whether Title.
or not organized for profit, as may be
specified in a plan of distribution 3. The corporation shall not list in any
adopted pursuant to this Chapter. stock exchange or make any public
offering of any of its stock of any class.
Sec. 95. Plan of distribution of assets. – A Notwithstanding the foregoing, a
plan providing for the distribution of assets, corporation shall not be deemed a close
not inconsistent with the provisions of this corporation when at least two-thirds
Title, may be adopted by a non-stock (2/3) of its voting stock or voting rights
corporation in the process of dissolution in is owned or controlled by another
the following manner: corporation which is not a close
corporation within the meaning of this
The board of trustees shall, by majority vote, Code.
adopt a resolution recommending a plan of
distribution and directing the submission Any corporation may be incorporated as a
thereof to a vote at a regular or special close corporation, except mining or oil
meeting of members having voting rights. companies, stock exchanges, banks,
Written notice setting forth the proposed insurance companies, public utilities,
plan of distribution or a summary thereof educational institutions and corporations
and the date, time and place of such declared to be vested with public interest in
meeting shall be given to each member accordance with the provisions of this Code.
entitled to vote, within the time and in the The provisions of this Title shall primarily
manner provided in this Code for the giving govern close corporations: Provided, That
of notice of meetings to members. Such plan the provisions of other Titles of this Code
of distribution shall be adopted upon shall apply suppletorily except insofar as this
approval of at least twothirds (2/3) of the Title otherwise provides.
members having voting rights present or
represented by proxy at such meeting. Sec. 97. Articles of incorporation. – The
articles of incorporation of a close
Distribution of assets of non-stock corporation may provide:
corporations to the members on dissolution
is not forbidden, unless it holds its assets
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analogous otherwise than technically to a exercising any voting rights, the shares
partnership. There seems to be no greater held by them shall be voted as therein
objection to retaining the right of choosing provided, or as they may agree, or as
one’s associates in a corporation than in a determined in accordance with a
firm.” procedure agreed upon by them.
3. No provision in any written agreement
Reasons for restriction on shares of stock In signed by the stockholders, relating to
a close corporation, the identity of the other any phase of the corporate affairs, shall
stockholders is important to each; the be invalidated as between the parties on
incorporators have confidence in one the ground that its effect is to make
another which they may not have in an them partners among themselves.
outsider. Furthermore, the incorporators
may feel that the success of the enterprise 4. A written agreement among some or all
depends upon the retention of the of the stockholders in a close
personnel who formed it, or they may be corporation shall not be invalidated on
manufacturing under secret processes which the ground that it so relates to the
they do not want outsiders to learn. In the conduct of the business and affairs of
family corporation it is often the desire of he the corporation as to restrict or
father to pass the corporation to his son interfere with the discretion or powers
without interference from other outside the of the board of directors: Provided, That
family. Any one of these factors may induce such agreement shall impose on the
the incorporators to attempt to restrict the stockholders who are parties thereto
transfer of stock. the liabilities for managerial acts
imposed by this Code on directors.
Effect of the transfer of stock in breach of
qualifying conditions 5. To the extent that the stockholders are
Unless “consented to by all the stockholders actively engaged in the management or
or if the close corporation has amended its operation of the business and affairs of
articles of incorporation,” a transfer of a close corporation, the stockholders
shares of stock in breach of qualifying shall be held to strict fiduciary duties to
conditions would justify the corporation each other and among themselves. Said
through the corporate secretary to refuse to stockholders shall be personally liable
register the transfer of stock. Such transfer for corporate torts unless the
need not be for value, hence it may be the corporation has obtained reasonably
result of a donation. adequate liability insurance.
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If a director's meeting is held without proper Rule and Exceptions when board meeting
call or notice, an action taken therein within unnecessary
the corporate powers is deemed ratified by
General Rule: the directors of a corporation
a director who failed to attend, unless he
cannot act individually or separately in order
promptly files his written objection with the
to bind the corporation. They must act as a
secretary of the corporation after having
board at a meeting duly called for the
knowledge thereof.
purpose.
Sec. 102. Pre-emptive right in close
Exception: Section 101. It enumerates the
corporations. - The pre-emptive right of
instances when a board at a meeting is
stockholders in close corporations shall
unnecessary or even if improperly held
extend to all stock to be issued, including
would be valid. The by-laws, however, may
reissuance of treasury shares, whether for
provided otherwise or a stockholder may file
money, property or personal services, or in
his written objection in writing after having
payment of corporate debts, unless the
knowledge of the action taken by the
articles of incorporation provide otherwise.
directors.
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denomination, sect or church must file with elder, duly certified to be correct by any
the Securities and Exchange Commission notary public.
articles of incorporation setting forth the
following: From and after the filing with the Securities
and Exchange Commission of the said
1. That he is the chief archbishop, bishop, articles of incorporation, verified by affidavit
priest, minister, rabbi or presiding elder or affirmation, and accompanied by the
of his religious denomination, sect or documents mentioned in the preceding
church and that he desires to become a paragraph, such chief archbishop, bishop,
corporation sole. priest, minister, rabbi or presiding elder shall
become a corporation sole and all
2. That the rules, regulations and discipline temporalities, estate and properties of the
of his religious denomination, sect or religious denomination, sect or church
church are not inconsistent with his theretofore administered or managed by
becoming a corporation sole and do not him as such chief archbishop, bishop, priest,
forbid it. minister, rabbi or presiding elder shall be
held in trust by him as a corporation sole,
for the use, purpose, behalf and sole benefit
3. That as such chief archbishop, bishop,
of his religious denomination, sect or
priest, minister, rabbi or presiding elder,
church, including hospitals, schools,
he is charged with the administration of
colleges, orphan asylums, parsonages and
the temporalities and the management
cemeteries thereof.
of the affairs, estate and properties of
his religious denomination, sect or
church within his territorial jurisdiction, Need for by-laws
describing such territorial jurisdiction. No need for by-laws since the business is
conducted by only one man.
4. The manner in which any vacancy
occurring in the office of chief Power to acquire and alienate property Sec.
archbishop, bishop, priest, minister, 113. Acquisition and alienation of property.
rabbi of presiding elder is required to be – Any corporation sole may purchase and
filled, according to the rules, regulations hold real estate and personal property for its
or discipline of the religious church, charitable, benevolent or
denomination, sect or church to which educational purposes, and may receive
he belongs. bequests or gifts for such purposes. Such
corporation may sell or mortgage real
5. The place where the principal office of property held by it by obtaining an order for
the corporation sole is to be established that purpose from the Court of First Instance
and located, which place must be within of the province where the property is
the Philippines. situated upon proof made to the satisfaction
of the court that notice of the application for
leave to sell or mortgage has been given by
The articles of incorporation may include
publication or otherwise in such manner and
any other provision not contrary to law for
for such time as said court may have
the regulation of the affairs of the
directed, and that it is to the interest of the
corporation.
corporation that leave to sell or mortgage
should be granted. The application for leave
Sec. 112. Submission of the articles of to sell or mortgage must be made by
incorporation. – The articles of petition, duly verified, by the chief
incorporation must be verified, before filing, archbishop, bishop, priest, minister, rabbi or
by affidavit or affirmation of the chief presiding elder acting as corporation sole,
archbishop, bishop, priest, minister, rabbi or and may be opposed by any member of the
presiding elder, as the case may be, and religious denomination, sect or church
accompanied by a copy of the commission, represented by the corporation sole:
certificate of election or letter of Provided, That in cases where the rules,
appointment of such chief archbishop, regulations and discipline of the religious
bishop, priest, minister, rabbi or presiding denomination, sect or church, religious
society or order concerned represented by
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nameplate, now tell me if one employee did That rule is applicable if it is the directors
not have such a nameplate you are going to winding up the corporation.
dissolve a corporation because that is a legal if the corporation is under
requirement? receivership, it is the receiver who may wind
It has to be a serious violation! But in one up the affair of the corporation. But if it is
case, the SC dissolved a corporation which the trustee that will not apply, the trust will
was engaging in banking without subsist until the affairs of the corporation
authorization from the monetary board, it are wound up and until any creditor can sue
was accepting deposits from the public, the the trustee provided that the applicable
court considered that as a serious violation. prescriptive period has not yet lapsed. So if
When a minority stockholder files a case and his cause of action is based on a written
asks to dissolve the corporation, the court contract he has ten (10) years to sue the
said that that is a harsh remedy unless the trustee.
situation is really beyond redemption you The Court has said that the remedy there if
should not impose that remedy. The the three years will end and there are still
corporation has three years after it should pending cases, is for the board to appoint a
have been dissolved for the purpose of trustee but more recent jurisprudence has
winding up its affairs. The SEC has said the fashioned a practicable solution to that the
three year period should be counted from lawyer handling the cases may
the time the dissolution was approved by be considered as trustee of the corporation
the SEC even if the directors and and therefore the cases will not be abated
stockholders pass a resolution dissolving the but should continue.
corporation that is not effective until it has In one case, the SC held that the directors
been approved by the SEC. may be considered as trustees after three
For three years, the corporation will years so that they can continue to wind up
continue to exist it will no longer be a going the affairs of the corporation and in effect
concern but only for the purpose of winding the three year period has
up that is why the SC has said that the become ineffectual.
corporation cannot for example renew its
contract of lease because it is no longer a What are the various methods
going concern. of dissolving corporations? Sec. 117.
During the three year period, it should Methods of dissolution. – A corporation
devote its time prosecuting and defending formed or organized under the provisions of
law suits, winding up its affairs disposing its this Code may be dissolved voluntarily or
properties so they can be used to pay off its involuntarily.
creditors and to distribute balance to the
stockholders.
Voluntary
There are two ways of providing for the
Requirements where no creditors
winding up of its affairs under the law. This
are affected.
is voluntary either the directors themselves
may take care of winding up the affairs of
the corporation or they may appoint a Sec. 118. Voluntary dissolution where no
trustee like when Ford Philippines decided creditors are affected. – If dissolution of a
to close its subsidiary here one of the last corporation does not prejudice the rights of
acts of the BOD was to pass a resolution any creditor having a claim against it, the
appointing Ricardo Romulo as trustee dissolution may be effected by majority vote
vesting upon him legal title to all the assets of the board of directors or trustees, and by
of Ford Philippines to be used to pay off its a resolution duly adopted by the affirmative
creditors and to dispose of its properties of vote of the stockholders owning at least
Ford Philippines. to distribute the balance as two-thirds (2/3) of the outstanding capital
liquidating dividends. stock or of at least two-thirds (2/3) of the
members of a meeting to be held upon call
Supposed to be, this was the rule before if
of the directors or trustees after publication
any case is not finished within the three year
of the notice of time, place and object of the
period, the case will be abated whether the
meeting for three (3) consecutive weeks in a
corporation is plaintiff or whether it
newspaper published in the place where the
is defendant but recent
principal office of said corporation is
jurisprudence has rendered that obsolete.
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submit to the Securities and Exchange 10. Such additional information as may be
Commission a copy of its articles of necessary or appropriate in order to
incorporation and by-laws, certified in enable the Securities and Exchange
accordance with law, and their translation to Commission to determine whether such
an official language of the Philippines, if corporation is entitled to a license to
necessary. The application shall be under transact business in the Philippines, and
oath and, unless already stated in its articles to determine and assess the fees
of incorporation, shall specifically set forth payable.
the following:
Attached to the application for license shall
1. The date and term of incorporation. be a duly executed certificate under oath by
the authorized official or officials of the
2. The address, including the street jurisdiction of its incorporation, attesting to
number, of the principal office of the the fact that the laws of the country or state
corporation in the country or state of of the applicant allow Filipino citizens and
incorporation. corporations to do business therein, and
that the applicant is an existing corporation
in good standing. If such certificate is in a
3. The name and address of its resident
foreign language, a translation thereof in
agent authorized to accept summons
English under oath of the translator shall be
and process in all legal proceedings and,
attached thereto.
pending the establishment of a local
office, all notices affecting the
corporation. The application for a license to transact
business in the Philippines shall likewise be
accompanied by a statement under oath of
4. The place in the Philippines where the
the president or any other person
corporation intends to operate.
authorized by the corporation, showing to
the satisfaction of the Securities and
5. The specific purpose or purposes which Exchange Commission and other
the corporation intends to pursue in the governmental agency in the proper cases
transaction of its business in the that the applicant is solvent and in sound
Philippines: Provided, That said purpose financial condition, and setting forth the
or purposes are those specifically stated assets and liabilities of the corporation as of
in the certificate of authority issued by the date not exceeding one (1) year
the appropriate government agency. immediately prior to the filing of the
application.
6. The names and addresses of the present
directors and officers of the corporation. Foreign banking, financial and insurance
corporations shall, in addition to the above
7. A statement of its authorized capital requirements, comply with the provisions of
stock and the aggregate number of existing laws applicable to them. In the case
shares which the corporation has of all other foreign corporations, no
authority to issue, itemized by classes, application for license to transact business in
par value of shares, shares without par the Philippines shall be accepted by the
value, and series, if any. Securities and Exchange Commission
without previous authority from the
8. A statement of its outstanding capital appropriate government agency, whenever
stock and the aggregate number of required by law.
shares which the corporation has issued,
itemized by classes, par value of shares,
shares without par value, and series, if Section 126. Issuance of a license. – If the
any. Securities and Exchange Commission is
satisfied that the applicant has complied
9. A statement of the amount actually paid with all the requirements of this Code and
in. other special laws, rules and regulations, the
Commission shall issue a license to the
applicant to transact business in the
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Philippines for the purpose or purposes the securities at the time they were
specified in such license. Upon issuance of deposited. The Securities and Exchange
the license, such foreign corporation may Commission may, from time to time, allow
commence to transact business in the the licensee to substitute other securities for
Philippines and continue to do so for as long those already on deposit as long as the
as it retains its authority to act as a licensee is solvent. Such licensee shall be
corporation under the laws of the country or entitled to collect the interest or dividends
state of its incorporation, unless such license on the securities deposited. In the event the
is sooner surrendered, revoked, suspended licensee ceases to do business in the
or annulled in accordance with this Code or Philippines, the securities deposited as
other special laws. aforesaid shall be returned, upon the
licensee’s application therefor and upon
proof to the satisfaction of the Securities
Within sixty (60) days after the issuance of
and Exchange Commission that the licensee
the license to transact business in the
has no liability to Philippine residents,
Philippines, the license, except foreign
including the Government of the Republic of
banking or insurance corporation, shall
the Philippines.
deposit with the Securities and Exchange
Commission for the benefit of present and
future creditors of the licensee in the Definition
Philippines, securities satisfactory to the Transacting business means the carrying on
Securities and Exchange Commission, of the operations of the corporation, or
consisting of bonds or other evidence of some portion of them, in the usual and
indebtedness of the Government of the regular course of the prosecution of the
Philippines, its political subdivisions and corporate enterprise for profit.
instrumentalities, or of government-owned
or controlled corporations and entities, The Corporation Code outlines the
shares of stock in “registered enterprises” as procedural requirements for the application
this term is defined in Republic Act No. and issuance of a license before a foreign
5186, shares of stock in domestic corporation may transact business in the
corporations registered in the stock Philippines. Except in the case of foreign
exchange, or shares of stock in domestic banking, financial and insurance
insurance companies and banks, or any corporations and other subject to special
combination of these kinds of securities, laws, rules and regulations, if the applicant
with an actual market value of at least one foreign corporation has complied with all
hundred thousand (P100,000.) pesos; the requirements of issuance of a license,
Provided, however, That within six (6) the SEC shall issue such license and
months after each fiscal year of the licensee, thereafter the foreign corporation may
the Securities and Exchange Commission transact business in the Philippines.
shall require the licensee to deposit
additional securities equivalent in actual
Republic Act No. 5455. Regulates the entry
market value to two (2%) percent of the
of foreign investments whenever foreign
amount by which the licensee’s gross
equity participation exceeds 30 percent of
income for that fiscal year exceeds five
the capital stock.
million (P5,000,000.00) pesos. The Securities
and Exchange Commission shall also require
deposit of additional securities if the actual Under Republic Act no. 5455 “doing
market value of the securities on deposit has business includes”:
decreased by at least ten (10%) percent of a. Soliciting orders, purchases, service
their actual market value at the time they contracts, opening offices whether
were deposited. The Securities and called liaison offices or branches.
Exchange Commission may at its discretion b. Appointing representatives or
release part of the additional securities distributors who are domiciled in the
deposited with it if the gross income of the Philippines or who in any calendar year
licensee has decreased, or if the actual stay in the Philippines for a period or
market value of the total securities on periods totalling one hundred eighty
deposit has increased, by more than ten days or more.
(10%) percent of the actual market value of
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transmit by mail a copy of such summons or corporation shall, within sixty (60) days after
other legal process to the corporation at its the amendment becomes effective, file with
home or principal office. the Securities and Exchange Commission,
The sending of such copy by the and in the proper cases with the appropriate
Commission shall be necessary part of and government agency, a duly authenticated
shall complete such service. All expenses copy of the articles of incorporation or by-
incurred by the Commission for such service laws, as amended, indicating clearly in
shall be paid in advance by the party at capital letters or by underscoring the change
whose instance the service is made. In case or changes made, duly certified by the
of a change of address of the resident agent, authorized official or officials of the country
it shall be his or its duty to immediately or state of incorporation. The filing thereof
notify in writing the Securities and Exchange shall not of itself enlarge or alter the
Commission of the new address. purpose or purposes for which such
corporation is authorized to transact
business in the Philippines.
The SEC shall require as a condition
precedent to the issuance of the license to
transact business in the Philippines by any Section 131. Amended license. – A foreign
foreign corporation that such corporation corporation authorized to transact business
file with the SEC, a written power of in the Philippines shall obtain an amended
attorney designating some person who must license in the event it changes its corporate
be a resident of the Philippines, on whom name, or desires to pursue in the
any summons and other legal processes may Philippines other or additional purposes, by
be served in all actions or other legal submitting an application therefor to the
proceedings against such corporation. Securities and Exchange Commission,
favorably endorsed by the appropriate
Section 129. Law applicable. – Any foreign government agency in the proper cases.
corporation lawfully doing business in the Section 132. Merger or consolidation
Philippines shall be bound by all laws, rules involving a foreign corporation licensed in
and regulations applicable to domestic the Philippines. – One or more foreign
corporations of the same class, except such corporations authorized to transact business
only as provide for the creation, formation, in the Philippines may merge or consolidate
organization or dissolution of corporations with any domestic corporation or
or those which fix the relations, liabilities, corporations if such is permitted under
responsibilities, or duties of stockholders, Philippine laws and by the law of its
members, or officers of corporations to each incorporation: Provided, That the
other or to the corporation. requirements on merger or consolidation as
provided in this Code are followed.
Licensed foreign corporations lawfully doing
business in the Philippines shall be subject Whenever a foreign corporation authorized
to our laws just like domestic corporations to transact business in the Philippines shall
of the same class. be a party to a merger or consolidation in its
home country or state as permitted by the
law of its incorporation, such foreign
Philippine laws will not apply when it refers
corporation shall, within sixty (60) days after
to the creation, formation, organization or
such merger or consolidation becomes
dissolution of corporations or such as fux
effective, file with the Securities and
the relations, liabilities, responsibilities, or
Exchange Commission, and in proper cases
duties of stockholders, members, or officers
with the appropriate government agency, a
of corporations to each other or to the
copy of the articles of merger or
corporation.
consolidation duly authenticated by the
proper official or officials of the country or
Section 130. Amendments to articles of state under the laws of which merger or
incorporation or by-laws of foreign consolidation was effected: Provided,
corporations. – Whenever the articles of however, That if the absorbed corporation is
incorporation or by-laws of a foreign the foreign corporation doing business in
corporation authorized to transact business the Philippines, the latter shall at the same
in the Philippines are amended, such foreign
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Unlicensed foreign corporations doing 6. Failure to pay any and all taxes, imposts,
business in the Philippine do not have the assessments or penalties, if any, lawfully
capacity to sue before the local court is well- due to the Philippine Government or
established. any of its agencies or political
subdivisions.
A foreign corporation which is not licensed
to transact business therein can maintain an 7. Transacting business in the Philippines
action in the courts of the Philippines for the outside of the purpose or purposes for
purpose of protecting its reputation, which such corporation is authorized
corporate name and goodwill. under its license.
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