Professional Documents
Culture Documents
1
3. The sharing of gross returns does not partnership, they become subject to
of itself establish a partnership, liabilities of partners (doctrine of
whether or not the persons sharing estoppel).Whether or not the parties call
them have a joint or common right or their relationship or believe it to be a
interest in any property from which the partnership is immaterial. Thus, with the
returns are derived. exception of partnership by estoppel, a
partnership cannot exist as to third persons
4. The receipt by a person of a share of the if no contract of partnership has been
profits of a business is prima facie entered into between the parties
evidence that he is a partner in the themselves.
business, but no such inference shall be
drawn if such profits were received in Co-ownership or co-possession
payment: There is co-ownership whenever the
ownership of an undivided thing or right
a. As a debt by installments or belongs to different persons.
otherwise.
Clear intent to derive profits from operation of
b. As wages of an employee or rent to business
a landlord. Co-ownership does not of itself establish
the existence of a partnership, although it is
c. As an annuity to a widow or one of its essential elements. This is true
representative of a deceased even if profits are derived from the joint
partner. ownership. The profits must be derived
from the operation of business by
d. As interest on a loan, though the the members of the association and
amount of payment vary with the not merely from property ownership. The
profits of the business. law does not imply a partnership between
co-owners because of the fact that they
e. As the consideration for the sale of develop or operate a common property,
a goodwill of a business or other since they may rightfully do this by virtue of
property by installments or their respective titles. There must be a clear
otherwise. intent to form a partnership.
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
property is not made, signed by the parties, be 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, failure members may contract in his own name
to comply w/ the following requisites will with third persons, shall have no juridical
render the partnership contract void: personality, and shall be governed by the
1. The contract must be in a public provisions relating to co-ownership. Secret
instrument; partnerships without juridical personality
2. An inventory of the property
contributed must be made, signed by Partnership relation is created only by the
the parties, and attached to the public voluntary agreement of the partners. It is
instrument. Art. 1773 is intended essential that the partners are fully
primarily to protect 3rd persons. W/ informed not only of the agreement but of
regard to 3rdpersons, a de facto all matters affecting the partnership. Secret
partnership or partnership by estoppel partnerships are not by nature
may exist. There is nothing to prevent partnerships. Secret partnerships shall be
the court from considering the governed by the provisions relating to co-
partnership agreement an ordinary ownership.
contract from which the parties’ rights
and obligations to each other may be Importance of giving publicity to articles of
inferred and enforced. partnership
It is essential that the arts of partnership be
When inventory is not required given publicity for the protection not only of
An inventory is required only whenever the members themselves but also 3rd
immovable property is contributed. If not persons from fraud and deceit. A member
contributed or if personal property, no who transacts business for the secret
inventory required. partnership in his own name becomes
personally bound to 3rd persons unaware of
Importance of making inventory of real the existence of such association.
property in a p a r t n e r s h i p Partnership liability may still
An inventory is very important in a result, however, in cases of estoppel.
partnership to how much is due from each
partner to complete his share in the Art. 1776. As to its object, a partnership is
common fund and how much is due to each either universal or particular. As regards the
of them in case of liquidation. The execution liability of the partners, a partnership may
of a public instrument of partnership would be general or limited. Classifications of
be useless if there is no partnership
As to extent of its subject matter not avowed or made known to the public by
1. Universal partnership. (Art. 1777) any of the partners.
a. Universal partnership of all present Open or notorious partnership: one whose
property. (Art. 1778) existence is avowed or made known to the
b. Universal partnership of profits. public by the members of the firm.
(Art. 1780)
2. Particular partnership. (Art. 1783) As to purpose
Commercial or trading partnership: one
As to liability of the partners formed or the transaction of business.
General partnership: one consisting of
general partners who are liable pro rata and Professional or non-trading partnership:
subsidiary and sometimes solidarily w/ their one formed for the exercise of a profession.
separate property for partnership debts.
Kinds of partners
Limited partnership: one formed by two or Under the Civil Code
more persons having as members one or 1. Capitalist partner: one who contributes
more general partners and one or more money or property to the common
limited partners, the latter not being fund.
personally liable for the obligations of the 2. Industrial partner: one who contributes
partnership. only his industry or personal service.
3. General partner: one whose liability to
As to duration 3rd persons extends to his separate
Partnership at will: one in w/c no time is property.
specified and is not formed for a particular 4. Limited partner: one whose liability to
undertaking or venture and w/c may be 3rd persons is limited to his capital
terminated at any time by mutual contribution.
agreement of the partners, or by the will of 5. Managing partner: one who manages
any one partner alone; or one for a fixed the entity.
term or particular undertaking w/c is 6. Liquidating partner: one who takes
continued after the end of the term or charge of the winding up of partnership
undertaking w/o express agreement. affairs upon dissolution.
Partnership with a fixed term: one w/c the 7. Partner by estoppel: one who is not
term for w/c the partnership is to exist is really a partner but is liable as a partner
fixed or agreed upon or one formed for a for the protection of innocent 3rd
particular undertaking. persons. He is one represented as being
a partner but who is not so between
As to the legality of its existence the partners themselves.
De jure partnership: one w/c has complied 8. Continuing partner: one who continues
w/ all the legal requirements for the business of a partnership after it
its establishment. has been dissolved by reason of the
De facto partnership: one w/c has failed to admission of a new partner, or the
comply w/ all the legal requirements for its retirement, death or expulsion of one
establishment. or more partners.
9. Surviving partner: one who remains
As to representation to others after a partnership has been dissolved
Ordinary or real partnership: one w/c by the death of any partner.
actually exists among the partners and also 10. Subpartner: one who, not being
as to 3rd persons. a member of the partnership, contracts
Ostensible partnership or partnership or w/ a partner w/reference to the latter’s
partnership by estoppel: one w/c in reality share in the partnership.
is not a partnership, but is considered a
partnership only in relation to those who, Other classifications
by their conduct or admission, are 1. Ostensible partner: one who takes
precluded to deny or disprove its existence. active part and known to the public as a
partner.
As to publicity 2. Secret partner: one who takes active
Secret partnership: one wherein the part in the business but is not known to
existence of certain persons as partners is be a partner by outside parties nor held
out as a partner by the other partners. Property w/c belonged to each of them at
He is an actual partner. the time of the constitution of the
3. Silent partner: one who does not take partnership;
any active part in the business although Profits w/c they may acquire from the
he may be known to be a partner. property contributed.
4. Dormant partner: one who does not
take active part in the business and is Contribution of future property
not known or held out as a partner. He General rule: future properties cannot be
would be both a silent and a secret contributed. The very essence of the
partner. contract of partnership that the properties
5. Original partner: one who is a member contributed be included in the partnership
of the partnership from the time of its requires the contribution of things
organization. determinate. The position of a partner is like
6. Incoming partner: a person lately, or that of a donor, and donations cannot
about to be, taken into an existing comprehend future property. Thus,
partnership as a member. property subsequently acquired by
7. Retiring partner: one withdrawn from 1.inheritance; 2. Legacy; or 3. Donation
the partnership; a withdrawing partner. cannot be included by stipulation except
Art. 1777. A universal partnership may the fruits thereof. Hence, any stipulation
refer to all the present property or to including property so acquired is void.
all the profits. Profits from other sources (not from
properties contributed) will become
Art. 1778. A partnership of all present common property only is there’s a
property is that in which the partners stipulation.
contribute all the property which actually
belongs to them to a common fund, with Art. 1780. A universal partnership of profits
the intention of dividing the same among comprises all that the partners may acquire
themselves, as well as all the profits they by their industry or work during
may acquire therewith. the existence of the partnership. Movable
or immovable property which each of the
Art. 1779. In a universal partnership of all partners may possess at the time of the
present property, the property which celebration of the contract shall continue to
belongs to each of the partners at the time pertain exclusively to each, only the
of the constitution of the partnership usufruct passing to the partnership.
becomes the common property of all the
partners, as well as all the profits which Universal partnership of profits explained
they may acquire there with. A stipulation A universal partnership of profits is one w/c
for the common enjoyment of any other comprises all that the partners may acquire
profits may also be made; but the property by their industry or work during the
which the partners may acquire existence of the partnership and the
subsequently by inheritance, legacy or usufruct of movable or immovable property
donation cannot be included in such w/c each of the partners may possess at the
stipulation, except the fruits thereof. time of the celebration of the contract.
Universal partnership of all present property Ownership of present and future property
explained The partners retain their ownership over
A universal partnership of profits is one w/c their present and future property. What
comprises all that the partners may passes to the partnership are the profits or
acquire by their industry or work during the income and the use or usufruct of the same.
existence of the partnership and the Consequently, upon dissolution, such
usufruct of movable or immovable property property is returned to the partners who
w/c each of the partners may possess at the own it.
time of the celebration of the contract. In
this kind of partnership, the following Profits acquired through chance
become the common property of all the Since the law only speaks of profits w/c
partners: the partners may acquire by their industry
or work, profits acquired purely by chance
are 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 exercise of a profession or vocation.
the partnership. Such profits, however, may
be included by express stipulation. Particular partnership explained
A particular partnership is one w/c is
Art. 1781. Articles of universal partnership, neither a universal partnership of present
entered into without specification of its property nor a universal partnership of
nature, only constitute a universal profits. The fundamental difference
partnership of profits. between a universal partnership and a
particular partnership lies in the scope of
Presumption in favor of universal partnership of their subject matter or object. In the former,
profits the 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 to
preserve the ownership of their separate an undertaking of a single, temporary,
property. or ad hoc nature.
Art. 1782. Persons who are prohibited from Business of partnership need not be continuing
giving each other any donation or in nature
advantage cannot enter into a universal The carrying on of a business of a continuing
partnership. Limitations upon the right to nature is not essential to constitute a
form a partnership partnership. An agreement to undertake a
particular piece of work or a single
Persons who are prohibited by law to give transaction or a limited number of
donations cannot enter into a universal transactions and immediately divide the
partnership for the reason that each of the resulting profits would seemt o fall w/in the
partners virtually makes a donation. To meaning of the term “partnership” as used
allow it would be permitting them to do in the law.
indirectly what the law expressly prohibits.
A partnership formed in violation of this Rule under American law
article is null and void. Consequently, no The above is not true under the Uniform
legal personality is acquired. A husband and Partnership Act w/c does not include joint
wife, however, may enter into a particular ventures w/c exists for a single transaction
partnership or be members thereof. or a limited number of transactions.
Relevant provisions:
Joint venture
Art. 87: Donations between spouses during While a joint venture is not a formal
marriage void, except moderate gifts on partnership in the legal or technical sense,
occasion of family rejoicing. Also applies both are governed, subject to certain
to those living together as husband and wife qualifications, practically by the same rules
w/o valid marriage. or principles of partnership. This is logical
Art. 739: The following donations are void: since in a joint venture, like in
Those made between persons who are a partnership, there is a community of
guilty of adultery or concubinage at the interest in the business and a mutual right
time of the donation (no need for of control and an agreement to share jointly
conviction; preponderance of evidence only in profits and losses.
required);
Those made between persons found guilty Corporation as a partner
of the same criminal offense, While under the Philippine Civil Code, a
inconsideration thereof; joint venture is a form of partnership w/ a
c.)Those made to a public officer or his wife, legal personality separate and distinct from
descendants and ascendants, by reason of the parties composing it, and should thus
his office. be governed by the law of partnership,
the Supreme Court has recognized the
distinction between these two business
forms, and has held that although a have contributed it up to actual delivery
corporation cannot enter into a partnership without necessity of any demand;
contract, it may, however, engage in a joint 4. Shall preserve said properties with the
venture if the nature of the venture is diligence of a good father of a family
authorized by its charter. pending their delivery to the
partnership;
Art. 1784. A partnership begins from the 5. And shall indemnify the partnership for
moment of the execution of the contract, any damage caused it by the retention
unless it is otherwise stipulated. (1679) of said properties or by the delay in
their contribution.
Art. 1785. When a contract for a fixed term
or particular undertaking is continued after Art. 1787. When the capital or part thereof
the termination of such term or particular which a partner is bound to contribute
undertaking without any express consists of goods, their appraisal must be
agreement, the rights and duties of the made in the manner prescribed in the
partners remains the same as they were at contract of partnership, and in the absence
such termination, so far as is consistent with of stipulation, it shall be made by experts
a partnership at will. chosen by the partners, and according to
current prices, the subsequent changes
A continuation of the business by the thereof being for the account of the
partners or such of them as habitually acted partnership.
therein during the term, without any
settlement or liquidation of the partnership Art. 1788. A partner who has undertaken to
affairs, is prima facie evidence of a contribute a sum of money and fails to do
continuation of the partnership. so becomes a debtor for the interest and
damages from the time he should have
Partnership at will is one in which no term complied with his obligation.
of existence has been fixed and which may
be terminated at the will of any partners. The same rule applies to any amount he
may have taken from the partnership
Art. 1786. Every partner is a debtor of the coffers, and his liability shall begin from the
partnership for whatever he may have time he converted the amount to is own
promised to contribute thereto. use.
He shall also be bound for warranty in case Liability of partner for estafa
of eviction with regard to specific and Failure to return the money taken, there is
determinate things which he may have the element of fraudulent appropriation of
contributed to the partnership, in the same the money delivered to a partner with
cases and in the same manner as the specific instructions for the use of the
vendor is bound with respect to the vendee. partnership, then estafa is committed under
He shall also be liable for the fruits thereof the Revised Penal Code.
from the time they should have been
delivered, without the need of any demand. Art. 1789. An industrial partner cannot
engage in any business for himself, UNLESS
Obligations of partners to contribute: the partnership expressly permits him to do
1. Shall deliver at the beginning of the so; and if he should do so, the capitalist
partnership or, if a different date has partners may either exclude him from the
been agreed upon, at the stipulated firm or avail themselves of the benefits
time the properties he agreed to which he may have obtained in violation of
contribute; this provision, with a right to damages in
2. Shall answer for eviction, in case the either case.
partnership is deprived of the
ownership of any specific property he Industrial partner is one who contributes
contributed; his industry or labor in the partnership.
3. Shall answer to the partnership for the
fruits of the properties whose delivery Industrial partner barred from engaging in
he delayed from the date he should business
To prevent any conflict of interest between compensate them with the profits and
the industrial and the partnership, and to benefits which he may have earned for the
insure faithful compliance by said partner partnership by his industry. However, the
with his prestation. courts may equitably lessen this
responsibility if through the partner’s
Art. 1790. Unless there is a stipulation to extraordinary efforts in other activities of
the contrary, the partners shall contribute the partnership, unusual profits have been
equal shares to the capital of the realized.
partnership.
Partner liable for damages caused the
Art. 1791. If there is no agreement to the partnership
contrary, in case of an imminent loss of the Art. 1794 follows the general rule of
business of the partnership, any partner contracts that where a person is at fault in
who refuses to contribute an additional the fulfillment of his obligations he shall be
share to the capital, except an industrial liable for the payment of damages. The
partner, to save the venture, shall be partner’s fault, however, must be
obliged to sell his interest to the other determined in accordance with the
partners. circumstances of person, time and place.
Art. 1793. A partner who has received, in Risk of Specific and determinate things
whole or in part, his share of a partnership The risk of specific and determinate things
credit, when the other partners have not which are not fungible, like a boat, only the
collected theirs, shall be obliged, if the use of which is contributed, shall be borne
debtor should thereafter become insolvent, by the partner as the ownership thereof is
to bring to the partnership capital what he not transferred to the partnership. This
received even though he may have given follows the general rule that the thing
receipt for his share only. perished with the owner.
Art. 1797. The profits and losses shall be Share of industrial partner in profits and losses
distributed in conformity with the Unless agreed upon, the industrial partner
agreement. If only the share of each partner shall receive such share in the profits as may
in the profits has been agreed upon, the be just and equitable under the
share of each in the losses shall be in the circumstances. As for the losses, the
same proportion. industrial partner is not liable. However,
In the absence of stipulation, the share of under Art. 1816, if the partnership has a
each partner in the profits and losses shall contractual debt and it cannot pay, the
be in proportion to what he may have industrial partner equally with the capitalist
contributed, but the industrial partner shall partners, can be compelled by the creditor
not be liable for the losses. As for the to pay his pro rata share out of his own
profits, the industrial partner shall receive property or assets.
such share as may be just and equitable
under the circumstances. If besides his Art. 1798. If the partners have agreed to
services he has contributed capital, he shall entrust to a third person the designation of
the share of each one in the profits and partner’s capital contribution.
losses, such designation may be impugned
only when it is manifestly inequitable. In no Appointed as manager after the constitution of
case may a partner who has begun to the partnership
execute the decision of the third person, or Partner appointed in arts of partnership
who has not impugned the same within a may execute all acts of administration
period of three months from the time he notwithstanding the opposition of the other
had knowledge thereof, complain of such partners, unless he should act in bad faith.
decision. His power is revocable only upon just and
lawful cause and upon the vote of the
The designation of profits and losses cannot partners representing the controlling
be entrusted to one of the partners. interest.
Reason: revocation represents change in
Reason for the provision terms of contract.
Admittedly, the designation of profits and In case of mismanagement: Usual remedies
losses cannot be entrusted to one of the allowed by law including dissolution.
partners as the fulfillment of a contract
cannot be left to one of the contracting Appointment as manager after the
parties. It may, however, be entrusted to a constitution of the partnership
third person by common interest. Appointment may be revoked at any time for
any cause what so ever.
Art. 1799. A stipulation which excludes one
or more partners from any share in the Reason: revocation not founded on a
profits or losses is void. change of will on the part of the partners.
Appointment not condition of contract. It is
Stipulation to exclude a partner from profits merely a simple contract of agency, which
and losses is void may be revoking at any time. It is believe
The law does not allow a provision in the that the vote for revocation must also
contract of partnership excluding one or represent the controlling interest.
more partners from sharing in the profits
and losses. The reason is that a partnership Scope of the power of the managing partner
is organized for the common benefit or General rule: partner appointed as manager
interest of the partners. has all the powers of a general agent as well
as all the incidental powers necessary to
Reason for exclusion of industrial partner carry out the object of the partnership in
An industrial partner is not liable for losses the transaction of its business.
because if the partnership fails to realize Exception: When powers of manager is
any profits, the industrial partner would specifically restricted. A managing partner
have contributed his labor in vain. may not bind the partnership by contract
Furthermore, the industrial partner cannot foreign to its business.
withdraw the work already done by him for
the partnership. Compensation for service rendered
Partner Generally not entitle to
Art. 1800. The partner who has been compensation, In the absence of an
appointed manager in the articles of the agreement to the contrary, each member of
partnership may execute all acts of the the partnership assumes the duty to give his
administration despite the opposition of his time, attention, and skill to the
partners, unless he should act in Bad faith., management of its affairs, as may be
and his powers is irrevocable without the reasonably necessary to the success of the
just or lawful cause. The vote of the common enterprise; and for this service a
partners representing the controlling share of the profits is his only
interest shall be necessary for such compensation. In managing partnership
revocation of power. A power granted after affairs, a partner is practically taking care of
the partnership has constituted may his own interest or managing his own
revoked at any time. Each partner has a business. In the absence of any prohibition
right to an equal voice in the conduct of the in the arts. Of partnership for the payment
partnership business. This right is not of salaries to general partners, there is
dependent on the amount or size of the
nothing to prevent the partners to enter respective duties;
into a collateral verbal agreement to that 3. There is no stipulation that one of them
effect. shall not act without the consent of all
EXCEPTIONS: In proper cases, the law may the others.
imply a contract for compensation;
1. A partner engaged by his co-partners to
perform services not required of him in ART. 1802 In case it should have been
fulfilment of the duties and in capacity stipulated that none of the managing
other than that of a partner. partner shall act without the consent of the
2. When there is extraordinary neglect on others, the concurrence of all shall be
the part of one partner to perform his necessary for validity of the acts, and the
duties, imposing entire burden on absence or disability of any one of them
remaining partner. cannot alleged, unless there is imminent
3. One partner may employ the other danger of grave or irreparable injury to the
to do work for him outside of and partnership.
independent of the co-partnership.
4. Partners exempted by terms of When unanimity of action stipulated
partnership from rendering services concurrence necessary for validity of acts
may demand pay for services rendered. The partners may stipulate that none of the
5. Where one partner is entrusted with managing partners shall act without the
management and devotes his whole consent of the others. In such a case, the
time and devotion at the instance of the unanimous consent of all the managing
other partners who are attending to partners shall be necessary for the validity
their individual business and giving no of their acts. This consent is
time or attention to the partnership so indispensable that neither absence nor
business. disability of any one of them may allege as
excuse to dispense with requirement.
Exception: When there is imminent danger
Art. 1801. If two or more partners have of grave or irreparable injury to the
been intrusted with the management of the partnership then a partner may act alone
partnership without the specification of without consent of partner who is absent or
their respective duties or without the under disability.
stipulation that one of them shall not act
without the consent of all others, each one Consent of managing partners not necessary in
separately execute all acts of administration, routine transactions
but if anyone of them should oppose the act The requirement of written authority refers
of each other, the decision of the majority evidently to formal and unusual written
shall prevail. In the case of tie the partners contracts.
owning the controlling interest shall decide
the matter. Where respective duties of two Art. 1803. When the manner of
or more managing partners not specifies. management has not agreed upon, the
following rules shall observed:
Each one may separately perform acts of
administration 1. All partners shall be considered agents
1. If one or more of the managing partners and whatever any one of them may do
shall oppose the acts of the others, then alone shall bind the partnership without
the decision of the majority of the prejudice to the provision of article
managing partners shall prevail. Right to 1801
oppose can be exercise only by those
entrusted with mgt. 2. None of the partners may, without the
2. In case of tie, matter shall be decided by consent of others, make any important
the vote of the partners owning the alteration in the immovable property of
controlling interest. the partnership, even if it may be useful
to the partnership, but if there ids
REQUISITES FOR APPLICATION OF RULE refusal of the consent by the other
1. Two or more partners have been partners is manifestly prejudicial to the
appointed as managers; interest of the partnership, the court’s
2. There is no specification of their intervention may be sought.
Rules when manner of the management that not become a member of the partnership,
has not agreed upon all partners considered as even if the other partners know about the
managers and agents agreement. Not being a member of
All partners shall have equal rights in the the partnership, he does not acquire the
mgmt. and conduct of partnership affairs. All rights of a partner nor is he liable for its
of them shall considered mgrs. and agents debts.
and whatever any one of them may do
alone shall bind the partnership. If there is Reason for the rule
timely opposition, however, the matter shall Partnership is based on mutual trust and
decided by majority vote. In case of tie, confidence among the partners. Inclusion of
vote of partners representing controlling new partner would be a modification of the
interest. original contract of partnership requiring
unanimous consent of all the partners.
Unanimous consent required for alteration of Prohibition applies even if person
immovable property associated is already a partner.
The consent need not be express. It may
presume from the fact of knowledge of the Art. 1805. The partnership books shall be
alteration without interposing any kept, subject to any agreement between the
objection. Prohibition only applies partners, at the principal place of the
to immovable property because of the business of the partnership, and every
greater importance of this kind of property, partner shall at any reasonable hour have
and the alteration thereof must be access to and may inspect and copy any of
important. This would be an act of strict them.
dominion. If refusal to give consent is
manifestly prejudicial to the interest of the Keeping of partnership books
partnership, court intervention maybe Partner with duty to keep partnership
sought. Consent may presume from silence books
(lack of opposition despite knowledge).If The duty to keep true and correct books
alteration is necessary for preservation of showing the firm’s accounts, such books
the property, consent of the other partners being at all times open to inspection of all
not required. members of the firm, primarily rests on the
managing or active partner. It is presume
Art. 1804. Every partner may associate that the partners have knowledge of the
another person with him in his share, but contents of the partnership books and that
the associates shall not admitted into the said books state accurately the state
partnership without the consent of all other of accounts, but errors can corrected.
partners, even of the partner having an
associate should be a manager of Rights with the respect to partnership books
subpartnership nature Books should kept at the principal place of
business as each partner has the right to
The partnership formed between a free access to them and to inspect or copy
member of a partnership and a third any of them at any reasonable time, even
Person for a division of the profits coming to after dissolution. Inspection rights not
him from the partnership enterprise is absolute can restrained from using info
termed subpartnership. for other than partnership purpose.
It is a partnership within a partnership and
is distinct and separate from the main or Access to partnership books
principal partnership. Rights can exercise at any reasonable hour.
This means reasonable hours on business
Right of the person associated with the days throughout the year and not merely
partnership’s share during some arbitrary period of a few days
Subpartnership agreements do not chosen by the managing partners.
affect the composition, existence, or
operations of the firm. The subpartners are Art. 1806. Partners shall render on demand
partners interest, true and full information of all things
affecting the partnership to any partner or
However, in the absence of the mutual the legal representative of any deceased
assent of all the parties, a subpartner does
partner or of any partner under legal i.e. the winding up of partnership affairs
disability. Duty to render information, there is completed.
must be no concealment between partners
in all matters affecting the partnership. Duty to account for secret and similar profits
Information must use only for partnership The duty of a partner to account as a
purpose. Not just on demand but partner fiduciary operates to prevent from making a
also has duty of voluntary disclosure. secret profit out of the operation of the
However, duty to render info does notarise partnership and from carrying on the
with respect to matters appearing in business for his private advantage or a
partnership books since each partner has business in competition w/ the firm w/o
the right to inspect those. Good faith not consent of other partners. Violation may be
only requires that a partner should not ground for dissolution.
make a false statement but also that he
should abstain from any false concealment. Duty to account for earnings accruing even after
termination of partnership
Art. 1807. Every partner must account the If a partner uses info obtained by him from
partnership for any benefit, and hold as the partnership for his own account w/o the
trustee for it any profits derived from him consent of the other partners, he is liable to
without the consent of the partners from account for any benefit he might obtain.
any transaction connected with the
formation, conduct, or liquidation of the Duty to make full disclosure of information
partnership or from any use by him of his belonging to partnership
property. A partner is also subject to the fiduciary
duty of undivided loyalty and complete
The relation between the partners disclosure of info of all things affecting the
is essentially fiduciary involving trust and partnership. By Information is meant
confidence, each partner considered in law, information, which can be used for the
as he is, in fact, the confidential agent of the purposes of the partnership. Info cannot
others. The duties of a partner are use for a partner’s private gain – even if
analogous to those of a trustee. after termination.
Duty to act for common benefit Duty not to acquire interest or right adverse to
Cannot use and apply exclusively to own partnership
individual benefit partnership assets or If partner does, he holds it in trust for the
results of knowledge and info gained in benefit of the partnership and must account
character of partner. Managing partners to the firm for the profits of the transaction,
particularly owe a fiduciary duty to inactive unless it appears that the others consented
partners.
Art. 1808. The Capitalist partners cannot
Duty begins during the formation of engage for their own account in any
partnership operation, which is of the kind of business
Principle of good faith applies not only in which the partnership is engaged, unless
during partnership but during the there is a stipulation to the contrary. Any
negotiations leading to the formation of the capitalist partner violating this prohibition
partnership. Also, a person who agreed w/ shall bring to the common funds any profit
another to form a partnership has the accruing to him from his transactions, and
obligation to account for commissions and shall personally bear all the losses.
discounts received in acquiring property for
the future partnership. Prohibition against partner engaging the
business
Duty continues even after the dissolution of the Prohibition relative – Prohibition against
partnership capitalist partner to engage in business is
Duty of partner to act w/ utmost good faith relative, unlike the industrial partner who is
towards his co-partners continues absolutely prohibited from engaging in any
throughout the entire life of the partnership business for himself. Capitalist partner is
even after dissolution for whatever reason only prohibited from engaging for his own
or whatever means, until the relationship is account in any operation which is the same
terminated,
as or similar to the business in which the Art. 1810. The property rights of a partner
partnership is engaged and which is are:
competitive w/ said business 1. His rights in specific partnership
VIOLATION – Obligation to bring to property;
common fund any profits derived and in
case of losses, he shall bear them alone. 2. His interest in the partnership;
Partners, however, by stipulation may
permit it. The law permits him to carry on a 3. His right to participate in the
business not connected or competing with management, extent of property rights
that of the partnership. Law is silent on of a partner.
whether he can engage in same line of
business for the account of another. Principal Rights
Prohibition still applies because of fiduciary 1. Rights in specific partner property;
position imposing duties of utmost good 2. Interest in partnership;
faith. He may not carry on any other 3. Right to participate in management.
business in rivalry w/ the partnership.
RELATED RIGHTS
Reason for prohibition 1. Right to reimbursement for amounts
Fiduciary nature of relationship imposes advanced to partnership and to
obligation of utmost good faith. Rule indemnification for risks inconsequence
prevents use of info obtained in course of management (art. 1796).
of transaction of partnership business or 2. Right of access and inspection of
because of connection w/ firm regarding partnership books (art. 1805).
business secrets and clientele of firm to its 3. Right to true and full information of all
prejudice. things affecting partnership (art. 1806).
4. Right to formal account of partnership
Art. 1809. Any partner shall have the right affairs under certain circumstances (art.
to a formal account as partnership affairs: 1809).
5. Right to have partnership dissolved also
1. If he is wrongfully excluded from the under certain conditions (arts. 1830-
partnership business or possession of 1831).
its property by his co-partner;
Partnership property and partnership
2. If the right exists under the terms of any capital distinguished
agreement;
Partnership Partnership
3. Provided by article 1807; property capital
Changes Variable: its Constant: it
4. Whenever other circumstances render value value may vary remains
it just and reasonable, Right of the from day today unchanged as
partner to a formal account. w/ the
changes in amount is fix
General rule: During existence of market value by agreement
partnership, a partner is not entitled to a of the
formal account of partnership affairs. partners, and
Reason: rights of partner amply protected in is not
arts1805 and 1806. In addition, it would affected by
cause much inconvenience and unnecessary fluctuations in
waste of time. the value of
the
Exception: In the special and unusual partnership
situations enumerated under art. 1809. property,
Right of partner to demand an accounting although it
w/o bringing about dissolution is may be
a necessary corollary to right to share in increased and
profits. A formal account is a necessary decreased by
incident to the dissolution of the
partnership.
partne rus n; animous
consent of
the partners. 2. A partner’s right in specific partnership
Assets Includes not The property is not assignable except in
Included only the aggregate connection with the assignment of rights of
original of the all the partners in the same property;
capital individual
contributions, contributions 3. A partner’s right in specific partnership
but also all made by the property is not subject to attachment or
property partners in execution, except on a claim against the
subsequently establishing partnership;
acquired or continuing
because of the 4. A partner’s right in specific partnership
the partnership. property is not subject to legal support
partnership under art. 291 nature of a partner’s right in
or w/ specific partnership property
partnership
funds, Art. 1811 contemplates tangible property
including but not intangible things. A partner is a co-
partnership owner w/ his partners of specific
name and partnership property, but the rules on co-
goodwill. ownership do not necessarily apply. The
legal incidents of this tenancy in partnership
Ownership of certain property are distinctively characteristic of the
Property use by the partnership – Where partnership relation. They are as follows:
there is no express agreement that property
used by a partnership constitutes Equal rights of possession - Ordinarily, a
partnership property, such use does not partner has an equal right to possess
make it partnership property, and whether specific partnership property for partnership
it is so depends on the intention of the purposes. None of the partner scan
parties, w/c may be shown by proving an possesses and uses the specific
express agreement or acts of particular partnership property other than for
conduct. The intent of the parties is the partnership purposes w/o the consent
controlling factor. of the other partners. Should any of them
Property acquired by a partner with use the property for his own benefit, he
partnership funds – Unless a contrary must account, like a stranger, to the others
intention appears, property acquired by a for the profits derived there from or the
partner in his own name w/ partnership value of his wrongful possession or
funds is partnership property. However, occupation. A partner wrongfully excluded
if the property was acquired after from possession of partnership property
dissolution but before the winding up of the by a co-partner has a right to formal
partnership affairs, it would be his separate account and may even apply for a
property but he would be liable to account judicial decree of dissolution. On the death
to the partnership for the funds used in its of a partner, his right in specific partnership
acquisition. property vests in the surviving partners. By
agreement, the right to possess specific
Art. 1811. A partner is co-owner with his partnership property may surrender. In the
partners of specific partnership property. absence of special agreement, however,
The incidents of this co-ownership are such neither partner separately owns, or has the
that; exclusive right of possession of any
partnership property or any proportional
1. A partner, subject to the provision of this part thereof. Each has dominion over
title and any agreement between the the entire partnership property. The
partner, has an equal right with his partners possession of partnership property by one
to possess specific partnership property for partner is the possession of all until his
partnership purposes; but he has no right to possession becomes adverse. A partner
possess such property for any other cannot initiate title by adverse possession
purpose without the consent of his until and unless he makes an adverse claim.
partnership and not to the partners.
Right not assignable - A partner cannot However, their interest in the partnership is.
separately assign his right to specific The method of reaching a judgment
partnership property but all of them can debtor’s interest in partnership property is
assign their rights in the same property. specifically set forth in art.1814.
Rights of partner under exemption laws Liability inclusion of name in the firm name
A partner cannot claim any right under the – Persons who, not being partners, include
homestead laws or exemption laws when their names in the firm name do not acquire
specific partnership property is attached for the rights of a partner but shall be subject
partnership debt. W/ respect, however, to to the liability of a partner insofar as 3rd
the partner’s interest in the partnership as Persons without notice are concerned. Such
distinguished from his interest in specific persons become partners by estoppel. Art.
partnership property, the partner may avail 1815 does not cover the case of a limited
himself of the exemption laws after partner who allows his name to be included
partnership debts have been paid. A in the firm name, orof a person continuing
partner’s interest or share in the the business of a partnership after
partnership property is really his property. dissolution, who uses the name of the
dissolved partnership or the name of
Art. 1815. Every partnership shall operate a deceased partner as part thereof.
under a firm name, which may or may not
include the name of one or more of the Art. 1816. All partners, including industrial
partners, those who, not being members of ones, shall be liable pro rata with all their
the partnership, include their names in the property and after all the partnership assets
firm name, shall be subject to liability of a have been exhausted, for the contracts
partner which may be entered into in the name and
for the account of the partnership, under its
Requirement of the firm name signature and by a person authorized to act
Meaning of word “firm” – The name, title, for the partnership. However, any partner
or style under which a company transacts may enter into a separate obligation to
business; a partnership of two or more perform a partnership contract.
persons; a commercial house. In its
common acceptation, the term implies a Article 1816 distinguished from article 1787
partnership. The term is also used as
Article 1816 applies in cases where third Art. 1818. Every partner is an agent of the
party creditors are concerned as it falls partnership for the purpose of its business,
under the heading of section 3. “Obligations and the act of every partner, including the
of the Partners with Regard to Third execution in the partnership name of any
Persons.” Article 1797 applies only where instrument, for apparently carrying on in
the issue is among the partners as it falls the usual way the business of the
under the heading of Section 1, Chapter 2, partnership of which he is a member binds
which states: “Obligations of the Partners the partnership, unless the partner so
Among Themselves.” The pro rata liability of acting has in fact no authority to act for the
partners to third persons under Article 1816 partnership in the particular matter, and
being a clear mandate of the law, any the person with whom he is dealing has
stipulation changing or modifying such knowledge of the fact that he has no
liability is void except as among the such liability.
partners.
An act of a partner which is not apparently
Refers to partnership obligations for the carrying on of business of the
Article 1816 which refers to the payment of partnership in the usual way does not bind
partnership obligations arising from the partnership unless authorized by the
contracts clearly imposes subsidiary and other partners.
joint (pro rata) liability for contractual debts
owing to third persons upon all the Except when authorized by the other
partners, including industrial partners who partners or unless they have abandoned the
ordinarily are not liable for losses. The business, one or more but less than all the
liability is subsidiary because the partners partners have no authority to:
cannot be made answerable with their
separate property unless the partnership 1. Assign the partnership property in trust
property has first been exhausted. for creditors or on the assignee’s
promise to pay the debts of the
Pro rata liability – Literally, pro rata liability partnership.
means proportionate distribution of liability.
In the law of obligations, the concurrence of 2. Dispose of the goodwill of the business.
two or more debtors in one and the same
obligation makes it prima facie a joint (pro 3. Do any other act which would make it
rata) obligation, and the debts is presumed impossible to carry on the ordinary
divided into as many equal shares as there business of a partnership.
are debtors and each one of them is bound
to pay only his share. 4. Confess a judgment.
Industrial partner cannot exempt himself from 6. Submit a partnership claim or liability to
liability to third persons arbitration.
Each one of the industrial partners is liable
to third persons for the debts of the firm 7. Renounce a claim of the partnership.
and if he has paid such debts out of his
private property during the life of the No act of a partner in contravention of a
partnership, when its affairs are settled he is restriction on authority shall bind the
entitled to credit for the amount so paid, partnership to persons having knowledge of
and if its results that there is not enough the restriction.
property in the partnership to pay him, then
the capitalist partners must pay him. Our Art. 1819. Where title to real property is in
conclusion is that neither on principle nor the partnership name, any partner may
on authority can the industrial partner be convey title to such property by a
relieved from liability to third persons for conveyance executed in the partnership
the debts of the partnership. name; but the partnership may recover such
property unless the partner's act binds the
partnership under the provisions of the
first paragraph of article 1818, or unless partnership, except in the case of fraud on
such property has been conveyed by the the partnership, committed by or with the
grantee or a person claiming through such consent of that partner.
grantee to a holder for value without
knowledge that the partner, in making the Notice to partner is notice to partnership
conveyance, has exceeded his authority. Clearly a third person desiring to give notice
to a partnership of some matter pertaining
Where title to real property is in the name to the partnership business need not
of the partnership, a conveyance executed communicate with all of the partners. If
by a partner, in his own name, passes the notice is delivered to a partner, that is an
equitable interest of the partnership, effective communication to the partnership.
provided the act is one within the authority
of the partner under the provisions of the Knowledge before becoming partner
first paragraph of Article 1818. Where the knowledge or notice had been
received by the partner before he became a
Where title to real property is in the name partner, and his partners are ignorant of
of one or more but not all the partners, and this, and he is not the partner acting in the
the record does not disclose the right of the particular matter, there is no doubt that
partnership, the partners in whose name there has been neither knowledge of nor
the title stands may convey title to such notice to the partnership.
property, but the partnership may recover
such property if the partners’ act does not Art. 1822. Where, by any wrongful act
bind the partnership under the provisions or omission of any partner acting in the
of the first paragraph of Article 1818, unless ordinary course of the business of the
the purchaser or his assignee, is a holder for partnership or with the authority of co-
value, without knowledge. partners, loss or injury is caused to any
person, not being a partner in the
Where the title to real property is in the partnership, or any penalty is incurred, the
name of one or more or all the partners, or partnership is liable therefor to the same
in a third person in trust for the partnership, extent as the partner so acting or omitting
a conveyance executed by a partner in the to act.
partnership name, or in his own name,
passes the equitable interest of the Partner liable for wrongful act of a partner
partnership, provided the act is one within The partners are liable for the negligent
the authority of the partner under the operation of a vehicle by a partner, acting in
provisions of the first paragraph of Article the course of business, which results in a
1818. traffic accident.
Art. 1821. Notice to any partner of any Art. 1823. The partnership is bound to
matter relating to partnership affairs, and make good the loss:
the knowledge of the partner acting in the
particular matter, acquired while a partner 1. Where one partner acting within the
or then present to his mind, and the scope of his apparent authority receives
knowledge of any other partner who money or property of a third person and
reasonably could and should have misapplies it.
communicated it to the acting partner,
operate as notice to or knowledge of the
2. Where the partnership in the course of and if he has made such representation or
its business receives money or property consented to its being made in a public
of a third person and the money or manner he is liable to such person, whether
property so received is misapplied by the representation has or has not been
any partner while it is in the custody of made or communicated to such person so
the partnership. giving credit by or with the knowledge of
the apparent partner making the
Partnership bound by partner’s breach of representation or consenting to its being
made:
trust
Art. 1836. Unless otherwise agreed, the b. The right, as against each partner
partners who have not wrongfully dissolved who has caused the dissolution
the partnership or the legal representative wrongfully, to damages breach of
of the last surviving partner, not insolvent, the agreement.
has the right to wind up the partnership
affairs, provided, however, that any partner, 2. The partners who have not caused the
his legal representative or his dissolution wrongfully, if they all desire
to continue the business in the same If the partnership was dissolved in
name either by themselves or jointly contravention of the agreement
with others, may do so, during the 1. The remaining partners have the right
agreed term for the partnership and for to sell partnership property to pay the
that purpose may possess the partnership’s liabilities and the surplus
partnership property, provided they is distributed to the remaining partners
secure the payment by bond approved as well.
by the court, or pay any partner who 2. As against the guilty partner for the
has caused the dissolution wrongfully, dissolution of the partnership, the
the value of his interest in the remaining partners have the right to
partnership at the dissolution, less any recover damages for breach.
damages recoverable under the second 3. The remaining partners may also
paragraph, No. 1 (b) of this article, and continue the business up to end of the
in like manner indemnify him against all stipulated term of the partnership.
present or future partnership liabilities.
Art. 1838. Where a partnership contract is
3. A partner who has caused the rescinded on the ground of the fraud or
dissolution wrongfully shall have: misrepresentation of one of the parties
thereto, the party entitled to rescind is,
a. If the business is not continued without prejudice to any other right,
under the provisions of the second entitled:
paragraph, No. 2, all the rights of a
partner under the first paragraph, 1. To a lien on, or right of retention of, the
subject to liability for damages in surplus of the partnership property
the second paragraph, No. 1 (b), of after satisfying the partnership
this article. liabilities to third persons for any sum
of money paid by him for the purchase
b. If the business is continued under of an interest in the partnership and for
the second paragraph, No. 2, of this any capital or advances contributed by
article, the right as against his co- him.
partners and all claiming through
them in respect of their interests in 2. To stand, after all liabilities to third
the partnership, to have the value persons have been satisfied, in the place
of his interest in the partnership, of the creditors of the partnership for
less any damage caused to his co- any payments made by him in respect
partners by the dissolution, of the partnership liabilities.
ascertained and paid to him in cash,
or the payment secured by a bond 3. To be indemnified by the person guilty
approved by the court, and to be of the fraud or making the
released from all existing liabilities representation against all debts and
of the partnership; but in liabilities of the partnership.
ascertaining the value of the
partner's interest the value of the Right of partner to rescind contract of
good-will of the business shall not partnership
be considered. If one is induced by fraud or
misrepresentation to become a partner, the
Rights of partners upon dissolution contract is voidable. If the contract is
1. Dissolution is caused without violation annulled, the injured party is entitled to
of the agreement. restitution. Here, the fraud or
2. In contravention of the agreement. misrepresentation vitiates consent.
However, until the partnership contract is
If partnership is dissolved without violation of annulled by a proper action in court, the
the agreement partnership relations exist and
1. All partners may have the property sold the defrauded partner is liable for all
for payment of partnership liabilities. obligations to third persons.
2. If there is surplus, after paying the 1. Right of injured partner where
liabilities of the firm, it shall be given in partnership contract rescinded
cash to the partners.
2. Right of retention of partnership 7. The individual property of a deceased
property partner shall be liable for the
3. Right to be subrogated in place of contributions specified in No. 4.
creditors of partnership
4. Right to be indemnified by the guilty 8. When partnership property and the
partner against all liabilities of the individual properties of the partners are
partnership. in possession of a court for distribution,
partnership creditors shall have priority
Art. 1839. In settling accounts between the on partnership property and separate
partners after dissolution, the following creditors on individual property, saving
rules shall be observed, subject to any the rights of lien or secured creditors.
agreement to the contrary:
9. Where a partner has become insolvent
1. The assets of the partnership are: or his estate is insolvent, the claims
against his separate property shall rank
a. The partnership property. in the following order:
3. When any partner retires or dies and The use by the person or partnership
the business of the dissolved continuing the business of the partnership
partnership is continued as set forth in name, or the name of a deceased partner as
Nos. 1 and 2 of this article, with the part thereof, shall not of itself make the
consent of the retired partners or the individual property of the deceased partner
representative of the deceased partner, liable for any debts contracted by such
but without any assignment of his right person or partnership.
in partnership property.
Dissolution of a partnership by change of
4. When all the partners or their members
representatives assign their rights in Causes
partnership property to one or more 1. New partner is admitted
third persons who promise to pay the 2. Partner retires
debts and who continue the business 3. Partner dies
of the dissolved partnership. 4. Partner withdraws
5. Partner is expelled from partnership
5. When any partner wrongfully causes a 6. Other partners assign their rights
dissolution and the remaining partners to sole remaining partner
continue the business under the 7. All the partners assign their rights in
provisions of article 1837, second partnership property to third persons.
paragraph, No. 2, either alone or with *Any change in membership dissolves a
others, and without liquidation of the partnership and creates a new one
partnership affairs. *When a business of a dissolved
partnership is continued by former or
without new partners, the old creditors are person or partnership continuing the
creditors of the person or partnership that is business, at the date of dissolution, in the
continuing the business. absence of any agreement to the contrary.
Art. 1841. When any partner retires or dies, Right to demand an accounting of partnership
and the business is continued under any of affairs must be directed against
the conditions set forth in the preceding 1. Winding-up partners
article, or in article 1837, second paragraph, 2. Surviving partners
No. 2, without any settlement of accounts 3. The person the partnership continuing
as between him or his estate and the the business
person or partnership continuing the
business, unless otherwise agreed, he or his Art. 1843. A limited partnership is one
legal representative as against such person formed by two or more persons under the
or partnership may have the value of his provisions of the following article, having as
interest at the date of dissolution members one or more general partners and
ascertained, and shall receive as an ordinary one or more limited partners. The limited
creditor an amount equal to the value of his partners as such shall not be bound by the
interest in the dissolved partnership with obligations of the partnership.
interest, or, at his option or at the option of
his legal representative, in lieu of interest, General partner Limited partner
the profits attributable to the use of his Personally liable for Liability extends
right in the property of the dissolved partnership only to his capital
partnership; Provided, That the creditors of obligations contribution.
the dissolved partnership as against the Have equal right in No share in
separate creditors, or the representative of management of management of
the retired or deceased partner, shall have partnership partnership.
priority on any claim arising under this May contribute May contribute
article, as provided article 1840, third money, property or money and property
paragraph. industry
Proper party to Not proper party to
Rights of retiring of properties of deceased, proceedings proceedings
partner when business continued Interest cannot be Interest is assignable
To have the value of the interest of the assigned to make new with assignee
retiring partner or deceased partner in the partner acquiring all rights of
partnership determined as of the date of the limited partner
dissolution. His name may Name not included
appear in the firm in firm name
To receive thereafter, as an ordinary name
creditor, an amount equal to the value of his Prohibited from No prohibition
share in the dissolved partnership with engaging in a
interest, or, at his option, in place of business like
interest, the profits attributable to the use partnership’s
of his right. His retirement, His retirement,
insolvency and death insolvency and
General Rule dissolves the death does not
When partner retires from the partnership, partnership dissolve the
he is entitled to the payment of what may partnership
be due to him after liquidation.
Exception Characteristics of limited partnership
No liquidation needed when there is 1. Must be formed in accordance with the
settlement as to what retiring partner shall requirements of the law.
receive. 2. There must be one or more general
partners who control the management
Art. 1842. The right to an account of his of the business.
interest shall accrue to any partner, or his 3. There must be one or more limited
legal representative as against the winding partners contributing to the capital and
up partners or the surviving partners or the
sharing in the profits but have nothing l. The right, if given, of one or more of
to do with the management. the limited partners to priority over
4. Obligations of the partnership must be other limited partners, as to
paid out of common fund and in the contributions or as to
separate properties of the general compensation by way of income,
partners. and the nature of such priority.
Art. 1844. Two or more persons desiring to m. The right, if given, of the remaining
form a limited partnership shall: general partner or partners to
continue the business on the death,
1. Sign and swear to a certificate, which retirement, civil interdiction,
shall state — insanity or insolvency of a general
partner.
a. The name of the partnership,
adding thereto the word "Limited". n. The right, if given, of a limited
partner to demand and receive
b. The character of the business. property other than cash in return
for his contribution.
c. The location of the principal place
of business. 2. File for record the certificate in the
Office of the Securities and Exchange
d. The name and place of residence of Commission.
each member, general and limited
partners being respectively A limited partnership is formed if there has
designated. been substantial compliance in good faith
with the foregoing requirements.
e. The term for which the partnership
is to exist. Qualifications of limited partnership
f. The amount of cash and a 1. The partners must sign and swear to a
description of and the agreed value certificate of limited partnership
of the other property contributed 2. Must file for record the certificate in
by each limited partner. the office of the Securities and
Exchange Commission
g. The additional contributions, if any,
to be made by each limited partner Art. 1845. The contributions of a limited
and the times at which or events on partner may be cash or property, but not
the happening of which they shall services.
be made.
Limited partners can only contribute money
h. The time, if agreed upon, when the and property and cannot contribute
contribution of each limited partner services to the partnership to protect
is to be returned. persons dealing with the firms with frauds.
i. The share of the profits or the other Art. 1846. The surname of a limited partner
compensation by way of income shall not appear in the partnership name
which each limited partner shall unless:
receive by reason of his
contribution. 1. It is also the surname of a general
partner.
j. The right, if given, of a limited
partner to substitute an assignee as 2. Prior to the time when the limited
contributor in his place, and the partner became such, the business has
terms and conditions of the been carried on under a name in which
substitution. his surname appeared.
k. The right, if given, of the partners to A limited partner whose surname appears
admit additional limited partners. in a partnership name contrary to the
provisions of the first paragraph is liable as
a general partner to partnership creditors A limited partner is excluded from any
who extend credit to the partnership active voice in the control of the affairs of
without actual knowledge that he is not a the firm.
general partner. Limited partner cannot perform acts of
administration
Limited partner’s surname is not included in the Limited partners may not perform any act of
firm name provided these circumstances administration with respect to the interests
1. If the surname of general partner is the of the partnership, not even in the capacity
same with limited partner’s of agents of the managing partners.
2. If the limited partner’s surname was ART. 1849. After the formation of a limited
included and was carried on the new partnership, additional limited partners may
partnership be admitted upon filling an amendment to
*If the limited partner’s surname was the original certificate in accordance with
included in the firm name, he is liable as a the requirements of Article 1865.
general partner.
The writing to amend a certificate
Art. 1847. If the certificate contains a false 1. Shall conform to the requirements of
statement, one who suffers loss by reliance Article 1844 as far as necessary to set
on such statement may hold liable any forth clearly the change in the
party to the certificate who knew the certificate which it is desired to make.
statement to be false: 2. Be signed and sworn to by all members,
and an amendment substituting a
1. At the time he signed the certificate. limited partner.
ART. 1850. A general partner shall all have
2. Subsequently, but within a sufficient the rights and powers and be subject to all
time before the statement was relied the restrictions and liabilities of a partner in
upon to enable him to cancel or amend a partnership without limited partners.
the certificate, or to file a petition for its However, without the written consent or
cancellation or amendment as provided ratification of the specific act by all the
in article 1865. limited partners, a general partner or all of
the general partners have no authority to:
Liability for false statement in certificate
Under this provision, any partner to 1. Do any act in contravention of the
the certificate containing a false statement certificate.
is liable provided the following requisites 2. Do any act which would make it
are present: impossible to carry on the ordinary
1. He knew the statement to be false at business of the partnership.
the time he signed the certificate, or
subsequently, but having sufficient time 3. Confess a judgement against the
to cancel or amend it or file a petition partnership.
for its cancellation or amendment, he
failed to do so. 4. Possess partnership property, or assign
2. The person seeking to enforce liability their rights in specific partnership
has relied upon the false statement in property, for other than a partnership
transacting business with the purpose.
partnership.
3. The person suffered loss as a result of 5. Admit a person as a general partner.
reliance upon such false statement.
6. Admit a person as a limited partner,
ART. 1848. A limited partner shall become unless the right so to do is given in the
liable as a general partner unless, in certificate.
addition to the exercise of his rights and
powers as a limited partner, he takes part in 7. Continue the business with partnership
the control of the business. property on the death, retirement,
Limited partner has no control in business insanity, civil interdiction or insolvency
of a general partner, unless the right so
to do is given in the certificate.
3. Non-participation in the management
Powers of general partner in limited partnership of the business.
The general partner shall have all the right
and powers and be subject to all the ART. 1853. A person may be a general
restrictions and liabilities of a partner in a partner and a limited partner in the same
partnership without limited partners. partnership at the same time, provided that
this fact shall be stated in the certificate
ART. 1851. A limited partner shall have the
same rights as a general partner to: provided for in Article 1844.
1. Have the partnership books kept at the A person who is a general, and also at the
principal place of business of the same time a limited partner, shall have all
partnership, and at a reasonable hour the rights and powers and be subject to all
to inspect and copy any of them. restrictions of a general partner; except
that, in respect to his contribution, shall
2. Have on demand true and full
information of all things affecting the have the rights against the other members
partnership, and a formal account of which he would have had if he were not also
partnership affairs whenever a general partner.
circumstances render it just and
reasonable. ART. 1854. A limited partner also may loan
money to and transact other business with
3. Have dissolution and winding up by the partnership and unless he is also a
decree of court. general partner, receive on account of
resulting claims against the partnership,
A limited partner shall have the right to with general creditors, a pro rata share of
receive a share of the profit or other the assets. No limited partner shall in
compensation by way of income and to the respect to any such claim:
return of his contribution as provided in
Articles 1856 and 1857. 1. Receive or hold as collateral security any
partnership property.
Rights of limited partner
It has lesser rights than a general partner. It 2. Receive from a general partner or the
may exercise rights similar to a general partnership any payment, conveyance,
partner. or release from liability, if at the time
the assets of the partnership are not
ART. 1852. Without prejudice to the sufficient to discharge partnership
provisions of Article 1848, a person who has liabilities to persons not claiming as
contributed to the capital of a business general or limited partners.
conducted by a person or partnership
erroneously believing that he has become a The receiving of collateral security, or a
limited partner in a limited partnership, is payment, conveyance, or release in
not, by reason of his exercise of the rights of violation of the foregoing provisions is a
a limited partner, a general partner with the fraud on the creditors of the partnership.
person or in the partnership carrying on the
business, or bound by the obligations of Loans and business transactions with limited
such person or partnership; provided that partners
on ascertaining the mistake he promptly A limited partner is allowed to loan money
renounces his interest in the profits of the to the firm; transact other business with the
business, or other compensation by way of partnership, and receive a pro rata share in
income. the assets with general creditors.
Conditions for exemption from liability Limited partner not allowed to hold collateral
1. Prompt renunciation of interest and/ or security
income upon ascertaining the mistake. A limited partner may not receive
2. Non-inclusion of limited partner’s name partnership property as collateral security.
in the firm name.
ART. 1855. Where there are several limited the return of the contribution or for the
partners the members may agree that one dissolution of the partnership.
or more of the limited partners shall have a
priority over other limited partners as to the In the absence of any statement in the
return of their contributions, as to their certificate to the contrary or the consent of
compensation by way of income, or as to all members, a limited partner, irrespective
any other matter. If such an agreement is of the nature of his contribution, has only
made it shall be states in the certificate, and the right to demand and receive cash in
in the absence of such a statement all the return for his contribution.
limited partners shall stand upon equal
footing. A limited partner may have the partnership
dissolved and its affairs wound up when:
ART. 1856. A limited partner may receive
from the partnership the share of the 1. He rightfully but unsuccessfully
profits or the compensation by way of demands the return of his contribution.
income stipulated for in the certificate;
provided, that after such payment is made, 2. The other liabilities of the partnership
whether from the property of the have not been paid, or the partnership
partnership or that of a general partner, the property is insufficient for their
partnership assets are in excess of all payment as required by the first
liabilities of the partnership except liabilities paragraph, No. 1, and the limited
to limited partners on account of their partner would otherwise be entitled to
contributions and to general partners. the return of his contribution.
ART. 1857. A limited partner shall not Conditions of a limited partner entitled to
receive from a general partner or out of return of his contribution
partnership property any part of his 1. All liabilities of the partnership have
contributions until: been paid or there are assets sufficient
to pay partnership liabilities.
1. All liabilities of the partnership, except 2. The consent of all the partners is
liabilities to general partners and to obtained.
limited partners on account of their 3. The certificate is cancelled or so
contributions, have been paid or there amended as to set forth the withdrawal
remains property of the partnership or reduction of the contribution.
sufficient to pay them.
When limited partner may demand return
2. The consent of all members is had, 1. The partnership is dissolved
unless the return of the contribution 2. The date specified for its return has
may be rightfully demanded under the arrived
provisions of the second paragraph. 3. If no term is specified, after six months’
notice in writing to all other partners.
3. The certificate is cancelled or so
amended as to set forth the withdrawal Limited partner to receive cash
or reduction. It will be noted that the limited partner has
a right to demand and receive cash only in
Subject to the provisions of the first return for his contribution even when he
paragraph, a limited partner may rightfully contributed property.
demand the return of his contribution:
ART. 1858. A limited partner is liable to the
1. On the dissolution of a partnership. partnership:
2. When the date specified in the 1. For the difference between his
certificate for its return has arrived. contribution as actually made and that
stated in the certificate as having been
3. After he has given six months’ notice in made.
writing to all other members, if no time
is specified in the certificate, either for 2. For any unpaid contribution which he
agreed in the certificate to make in the
future at the time and on the return of his contribution, to which his
conditions stated in the certificate. assignor would otherwise be entitled.
A limited partner holds a trustee for the An assignee shall have the right to become a
partnership: substituted partner if all the members
1. Specific property stated in the consent thereto or if the assignor, being
certificate as contributed by him, but thereunto empowered by the certificate,
which was not contributed or which has gives the assignee that right.
been wrongfully returned.
An assignee becomes a substituted limited
2. Money or other property wrongfully partner when the certificate is
paid or conveyed to him on account of appropriately amended in accordance with
his contribution. Article 1865.
The liabilities of a limited partners as set The substituted limited partner has all the
forth in this article can be waived or rights and powers, and is subject to all the
compromised only by the consent of all restrictions and liabilities of his assignor,
members; but a waiver or compromise shall except those liabilities of which he was
not affect the right of a creditor of a ignorant at the time he became a limited
partnership who extended credit or whose partner and which could not be ascertained
claim arose after the filling and before a for the certificate.
cancellation or amendment of the
certificate, to enforce such liabilities. The substitution of the assignee as a limited
partner does not release the assignor from
When a contributor has rightfully received liability to the partnership, under article
the return in whole or in part of the capital 1847 and 1858.
of his contribution, he is nevertheless liable
to the partnership for any sum, not in Limited partner’s interest assignable
excess of such return with interest, A limited partner’s interest in the
necessary to discharge its liabilities to all
partnership is assignable. The assignee,
creditors who extended credit or whose
claims arose before such return. however, of a limited partner’s interest does
not necessarily become a substituted
Limited partner liable to partnership for sum limited partner.
returned
A limited partner whose contribution has ART. 1860. The retirement, death,
been rightfully returned is still liable to the insolvency, insanity or civil interdiction of a
partnership for an amount not in excess of general partner dissolves the partnership,
the sum returned plus interest as may be unless the business is continued by the
necessary to pay the claims of persons who remaining general partners:
extended credit or whose claims arose
before the return. 1. Under a right so to do stated in the
certificate.
ART. 1859. A limited partner’s interest is
assignable. 2. With the consent of all members.
A substitute limited partner is a person It must be observed that the death, etc., of
admitted to all the rights of a limited a general partner dissolves the partnership
partner who has died or has assigned his while the death of a limited partner does
interest in a partnership. not cause the dissolution of the firm, unless
there is only one limited partner.
An assignee, who does not become a
substituted limited partner, has no right to ART. 1861. On the death of a limited
require any information or account of the partner his executor or administrator shall
partnership transactions or to inspect the have all the rights of a limited partner for
partnership books; he is only entitled to the purpose of settling his estate, and such
receive the share of the profits or other power as the deceased had to constitute his
compensation by way of income, or the assignee a substituted limited partner.
contribution respectively, in proportion to
The estate of a deceased limited partner the respective amounts of such claims.
shall be liable for all his liabilities as a
limited partner. Art. 1864. The certificate shall be cancelled
when the partnership is dissolved or all
ART. 1862. On due application to a court of limited partners cease to be such.
competent jurisdiction by any creditor of a A certificate shall be amended when:
limited partner, the court may charge the
interest of the indebted limited partner with 1. There is a change in the name of the
payment of the unsatisfied amount of such partnership or in the amount or
claim, and may appoint a receiver, and character of the contribution of any
make all other orders, directions, and limited partner.
inquiries which the circumstances of the
case may require. 2. A person is substituted as a limited
partner.
The interest may be redeemed with the
separate property of any general partner, 3. An additional limited partner is
but may not be redeemed with partnership admitted.
property.
4. A person is admitted as a general
The remedies conferred by the first partner.
paragraph shall not be deemed exclusive of
others which may exist. 5. A general partner retires, dies, becomes
insolvent or insane, or is sentenced to
ART. 1863. In settling accounts after civil interdiction and the business is
dissolution the liabilities of the partnership continued under article 1860.
shall be entitled to payment in the following
order: 6. There is a change in the character of the
1. Those to creditors, in the order of business of the partnership.
priority as provided by law, except those
to limited partners on account of their 7. There is a false or erroneous statement
contributions, and to general partners. in the certificate.
3. Those to limited partners in respect to 9. A time is fixed for the dissolution of the
the capital of their contributions. partnership, or the return of a
contribution, no time having been
4. Those to general partners other than for specified in the certificate.
capital and profits.
10. The members desire to make a change
5. Those to general partners in respect to in any other statement in the certificate
profits. in order that it shall accurately represent
the agreement among them.
6. Those to general partners in respect to
capital. Art. 1865. The writing to amend a certificate
shall:
Subject to any statement in the certificate
or to subsequent agreement, limited 1. Conform to the requirements of article
partners share in the partnership assets in 1844 as far as necessary to set forth
respect to their claims for capital, and in clearly the change in the certificate
respect to their claims for profit or for which it is desired to make.
compensation by way of income on their
2. Be signed and sworn to by all members,
and an amendment substituting a
limited partner or adding a limited or Art. 1866. A contributor, unless he is a
general partner shall be signed also by general partner, is not a proper party to
the member to be substituted or proceedings by or against a partnership,
added, and when a limited partner is to except where the object is to enforce a
be substituted, the amendment shall limited partner's right against or liability to
also be signed by the assigning limited the partnership.
partner.
Art. 1867. A limited partnership formed
The writing to cancel a certificate shall be under the law prior to the effectivity of this
signed by all members. Code, may become a limited partnership
under this Chapter by complying with the
A person desiring the cancellation or provisions of article 1844, provided the
amendment of a certificate, if any person certificate sets forth:
designated in the first and second
paragraphs as a person who must execute 1. The amount of the original contribution
the writing refuses to do so, may petition of each limited partner, and the time
the court to order a cancellation or when the contribution was made.
amendment thereof.
2. That the property of the partnership
If the court finds that the petitioner has a exceeds the amount sufficient to
right to have the writing executed by a discharge its liabilities to persons not
person who refuses to do so, it shall order claiming as general or limited partners
the Office of the Securities and Exchange by an amount greater than the sum of
Commission where the certificate is the contributions of its limited partners.
recorded, to record the cancellation or A limited partnership formed under the law
amendment of the certificate; and when the prior to the effectivity of this Code, until or
certificate is to be amended, the court shall unless it becomes a limited partnership
also cause to be filed for record in said under this Chapter, shall continue to be
office a certified copy of its decree setting governed by the provisions of the old law.
forth the amendment.
CORPORATIONS
A certificate is amended or cancelled when TITLE I - GENERAL PROVISIONS
there is filed for record in the Office of the DEFINITIONS AND CLASSIFICATIONS
Securities and Exchange Commission, where
the certificate is recorded: Sec. 1. Title of the Code. – This Code shall
be known as “The Corporation Coder of the
1. A writing in accordance with the Philippines”.
provisions of the first or second
paragraph. Sec. 2. Corporation defined. - A corporation
is an artificial being created by operation of
2. A certified copy of the order of the law having the right of succession and the
court in accordance with the provisions powers, attributes and properties expressly
of the fourth paragraph. authorized by law or incident to its
existence.
3. After the certificate is duly amended in
accordance with this article, the Definition
amended certified shall thereafter be A corporation is an artificial being created by
for all purposes the certificate provided operation of law having the right of
for in this Chapter. succession and the powers, attributes and
properties expressly authorized by law or
A certificate is considered cancelled or incident to its existence.
amended when there is filed for record
1. A writing to amend the certificate; or Attributes
2. A certified copy of the order of the 1. It is an artificial being.
court in the event of an unjustified 2. It is created by operation of law.
refusal of a partner to sign the writing. 3. It has the right of succession.
4. It has only the powers, attributes and partnership.
properties expressly authorized by law Right of No right of Possesses
or incident to its existence. Succession succession right of
succession
Extent of Partners Stockholders
Similarities between a partnership and a
Liability to (except are liable only
corporation
Third Persons limited to the extent
1. Juridical personality separate and partners) of their
distinct from the individuals composing are liable investments
it. personally as
2. Act only through its agents. and represented
3. Composed of an aggregate of subsidiarily by the shares
individuals. for subscribed by
4. Distribute profits to those who partnership them.
contribute to capital. debts to
third
5. May be organized only when there is a
persons.
law authorizing it.
Transferability A partner A stockholder
6. Subject to income tax. of interest cannot has the right
transfer to transfer his
Distinctions between a partnership and a interest so shares
corporation as to make a without the
partner prior consent
Point of without the of the other
Partnership Corporation consent of stockholders.
Comparison
Manner of By mere By law or all other
Creation agreement operation of existing
of the law partners.
parties Term of May be May not be
Number of By a Requires at existence established formed for a
Parties minimum of least five (5) for any term in excess
two (2) incorporators period of of 50 years
persons time extendible to
Commence- Generally From the date stipulated by not more than
ment of from the of the the 50 years.
Juridical moment of issuance of partners.
Personality execution of the certificate Firm name A limited A corporation
the contract of partnership may adopt a
incorporation is required firm name
of the to add the provided it is
Securities and word ‘Ltd.’ not identical
Exchange to its name. or deceptively
Commission similar to any
(SEC) registered firm
Powers May exercise Can exercise name or
powers only the contrary to
authorized powers existing laws.
by partners expressly Dissolution May be May only be
provided the granted by dissolved at dissolved with
same are law or any time by the consent of
not contrary incident to its the will of the state.
to law, existence. any or all
morals, partners.
good Governing Civil Code Corporation
customs, Laws Code
public policy
or public Advantages of a corporate form of business
order. organizations
1. The capacity to hold property, to
Management When it is It is vested in contract, to sue and be sued as a legal
not agreed the board of unit or distinct entity.
upon, each directors or
2. Exemption of shareholders from
partner is an trustees.
agent of the individual liability.
3. Continuity of existence in spite of death 2. Quasi-public – are entities engaged in
or changes of members. rendering basic services of such public
4. Transferability of shares. importance as to entitle them to certain
5. Centralized management under a board privileges like eminent domain or use of
of directors. public property. Eg. Electric, gas, water
6. Standardized methods of organization, and telephone companies.
management and finance for the 3. Government-owned or controlled – are
protection of shareholders and creditors entities organized by the government
under statutory regulations. or corporations of which the
government is a majority stockholder.
Disadvantages of a corporate form of business Eg. Philippine Air Lines
organizations 4. Domestic – one incorporated under
1. The limited liability of the stockholders Philippine laws.
serves to limit the credit available to 5. Foreign – one formed, organized, or
the corporation. existing under any laws other than those
2. The transferability of shares permits the of the Philippines.
uniting of incompatible and conflicting 6. Corporation aggregate – one composed
interests in one enterprise. of more than one member or
3. The minority stockholders are usually corporator.
subservient to the wishes of the 7. Corporation sole – consists of one
majority. member or corporator and his
4. In big corporations, the stockholders’ successors.
voting rights have become largely 8. Religious corporations, sole or
theoretical because of widespread aggregate – organized, either as sole or
ownership, lukewarmness and aggregate, to administer properties of
disinterest in management, inertia, and the church.
inaccessible meeting places. 9. Ecclesiastical – organized for religious
5. In large corporations, management and purposes.
control has been separated from 10. Lay – organized for a purpose other
ownership. than religious
6. By and large corporations are subject to 11. Eleemosynary – organized for charitable
governmental restrictions, controls, and purposes.
report requirements not imposed on 12. Civil – are those than ecclesiastical and
other forms of business organizations. eleemosynary, whether public or
7. Corporate sphere of activity is limited in private.
the transaction of its business to the 13. Close – one wherein all the outstanding
state of the organization. stock is owned by the persons who are
8. The corporate form involves “double active in management and conduct of
taxation” on corporation income. the business.
14. Open – one in which all the members or
Sec. 3. Classes of corporations. – corporations have a vote in the election
Corporations formed or organized under of the directors and other officers.
this Code may be stock or non-stock 15. Multi-national – one having been
corporations. Corporations which have created or organized in one state
capital stock divided into shares and are conducts business or activities across
authorized to distribute to the holders of national boundaries and but subject to
such shares dividends or allotments of the the legal sanctions of the countries in
surplus profits on the basis of shares held which they operate.
are stock corporations. All other 16. Non-profit – organized without
corporations are non-stock corporations. contemplation of gains, profits or
dividends to their members on invested
Other kinds of corporations capital.
1. Quasi-corporations – from the word 17. De Jure – one created in strict or
“quasi”, meaning “as if”, are entities substantial conformity with the
that are not absolutely corporations but statutory requirements for
are considered as if they were. Eg. incorporation and whose right to exist
Public boards created by law as a corporation cannot be successfully
attacked even in a direct proceeding for 2. The formulation of business and
that purpose by the State. financial plans.
3. Assembling the enterprise by
Sec. 4. Corporations created by special negotiations and obtaining some
laws or charters. – Corporations created by control over the subject matter by
special laws or charters shall be governed option or contracts made on behalf of
primarily by the provisions of the special the proposed corporation or on his own
law or charter creating them or applicable credit.
to them, supplemented by the provisions of 4. The making of arrangements for
this Code, insofar as they are applicable. financing the enterprise and the
floatation of securities.
Sec. 5. Corporators and incorporators, 5. Arrange tactful and painless methods
stockholders, and members. – Corporators for getting his own reward for the task
are those who compose a corporation, of promotion out of the prospective
whether as stockholders or members. investors and for reimbursement for his
Incorporators are those stockholders or expenses, contracts, and services
members mentioned in the articles of without frightening away those who are
incorporation as originally forming and expected to provide the funds.
composing the corporation and who are
signatories thereof. General rule: A corporation is not bound by
any agreement made by a promoter.
Corporators in a stock corporation are called Exception to the rule: Unless and until the
stock-holders or shareholders. Corporators corporation approves the agreement.
in a non-stock corporation are called
members. Sec. 6. Classification of shares. – The
shares of stock of stock corporations may be
Components of a Corporation divided into classes or series of shares, or
1. Corporators – are those who composed both, any of which classes or series of
a corporation, whether as stockholders shares may have such rights, privileges or
of members. The term includes restrictions as may be stated in the articles
incorporators, stockholders or of incorporation: Provided, That no share
members. may be deprived of voting rights except
2. Incorporators – are those stockholders those classified and issued as “preferred” or
or members mentioned in the articles “redeemable” shares, unless otherwise
of incorporation as originally forming provided in this Code: Provided, further,
and composing the corporation and That there shall always be a class or series
who are signatories thereof. of shares which have complete voting rights.
3. Stockholders or shareholders – are Any or all of the shares or series of shares
those corporators in a stock may have a par value or have no par value
corporation. as may be provided for in the articles of
4. Members – are those corporators in a incorporation: Provided, however, That
non-stock corporation. banks, trust companies, insurance
5. Promoters – is a self-constituted companies, public utilities, and building and
organizer who finds an enterprise or loan associations shall not be permitted to
venture and helps to attract investors, issue no-par value shares of stock.
form a corporation and launch it in
business, all with a view to promotion Preferred shares of stock issued by any
profits. corporation may be given preference in the
distribution of the assets of the corporation
Promotion – is the act of procuring the in case of liquidation and in the distribution
initial finances and the making of all of dividends, or such other preferences as
preparations necessary to launch a may be stated in the articles of
corporation. incorporation which are not violative of the
provisions of this Code: Provided, That
Activities of a promoter preferred shares of stock may be issued only
1. The discovery and investigation of a with a stated par value. The board of
promising business opportunity. directors, where authorized in the articles of
incorporation, may fix the terms and
conditions of preferred shares of stock or 8. Dissolution of the corporation.
any series thereof: Provided, That such
terms and conditions shall be effective Except as provided in the immediately
upon the filing of a certificate thereof with preceding paragraph, the vote necessary to
the Securities and Exchange Commission. approve a particular corporate act as
provided in this Code shall be deemed to
Shares of capital stock issued without par refer only to stocks with voting rights.
value shall be deemed fully paid and non-
assessable and the holder of such shares Definition
shall not be liable to the corporation or to A “stock” or share of stock is one of the
its creditors in respect thereto: Provided; units into which the capital stock has been
That shares without par value may not be divided. It represents the interest or right
issued for a consideration less than the that the holder of the stock or stockholder
value of five (P5.00) pesos per share: has in the corporation.
Provided, further, That the entire
consideration received by the corporation A stock certificate certifies that one is a
for its no-par value shares shall be treated holder or owner of a certain number of
as capital and shall not be available for shares of stock in the corporation. It is a
distribution as dividends. mere documentary evidence of the holder’s
ownership of shares and a convenient
A corporation may, furthermore, classify its instrument for the transfer of title.
shares for the purpose of insuring
compliance with constitutional or legal Classes or series of shares of stock subject to
requirements. restrictions
1. Shares shall not be deprived of voting
Except as otherwise provided in the articles rights except preferred or redeemable
of incorporation and stated in the certificate shares but non-voting shares must still
of stock, each share shall be equal in all be entitles to vote on matters specified
respects to every other share. in the last paragraph of Section 6 like
Where the articles of incorporation provide matters relating to amendment of the
for non-voting shares in the cases allowed articles of incorporation and dissolution
by this Code, the holders of such shares of the corporation.
shall nevertheless be entitled to vote on the 2. Where non-voting shares are provided
following matters: for there must always be a class or
series of shares with complete voting
1. Amendment of the articles of rights.
incorporation. 3. Banks, trust companies, insurance
companies, public utilities, and building
2. Adoption and amendment of by-laws. and loan associations shall not be
permitted to issue no-par value shares
3. Sale, lease, exchange, mortgage, pledge of stock.
or other disposition of all or 4. Preferred shares of stock which may be
substantially all of the corporate given preference in the distribution of
property. assets in case of liquidation and
distribution of dividends or other
4. Incurring, creating or increasing bonded preferences may be issued only with
indebtedness. stated par value.
5. The terms and conditions of preferred
5. Increase or decrease of capital stock. shares or series thereof may be fixed by
the board of directors only when
6. Merger or consolidation of the authorized by the articles of
corporation with another corporation or incorporation the effectivity thereof
other corporations. shall be reckoned from the filing of
certificate with the SEC.
7. Investment of corporate funds in 6. Shares without par value may not be
another corporation or business in issued for a consideration less than the
accordance with this Code. value of five (P5.00) pesos per share.
7. Unless otherwise provided by law the 4. Incurring, creating or increasing bonded
rights, privileges or restrictions on indebtedness;
classes or series of shares must be 5. Increase or decrease of capital stock;
stated in the articles of incorporation 6. Merger or consolidation of the
and in the stock certificates. corporation with another corporation
or other corporations;
Classes or series of shares 7. Investment of corporate funds in
1. Voting and Non-Voting Shares; another corporation of business in
General rule: Every member of a non- accordance with the Corporation Code;
stock corporation and every legal owner and
of shares in a stock corporation, has a 8. Dissolution of the corporation.
right to be present and vote at all
corporate meetings. Sec. 7. Founders’ shares. – Founders' shares
Exception to the rule: Unless there is a classified as such in the articles of
stipulation in contrary. incorporation may be given certain rights
2. Par Value and No-Par Value Shares and privileges not enjoyed by the owners of
Par value is the given fixed or definite other stocks, provided that where the
value of a share in the articles of exclusive right to vote and be voted for in
incorporation. the election of directors is granted, it must
3. Common and Preferred Shares. be for a limited period not to exceed five (5)
Preferred shares of stock may be: (a) years subject to the approval of the
preferred as to assets; (b) preferred as Securities and Exchange Commission. The
to dividends. Preferred as to dividends five-year period shall commence from the
may either be cumulative or non- date of the aforesaid approval by the
cumulative, or participating or non- Securities and Exchange Commission.
participating
4. Promotion Shares – are such stocks Definition
issued to those who may originally own Founders’ shares, generally common stock,
the mining ground or valuable rights are given to the founders or promoters of a
connected therewith, in consideration corporation in payment of money expended
of their deeding the same to the mining or services rendered in the promotion of it.
company when the company is
incorporated, or it may mean such stock Sec. 8. Redeemable shares. – Redeemable
as is issued to promoters. shares may be issued by the corporation
5. Shares of Escrow – are shares subject to when expressly so provided in the articles
an escrow agreement, that is, an of incorporation. They may be purchased or
agreement under which the shares are taken up by the corporation upon the
deposited by the grantor or his agent expiration of a fixed period, regardless of
with a third person, to be delivered by the existence of unrestricted retained
the depositary to the vendee or earnings in the books of the corporation,
subscriber only upon the happening of and upon such other terms and conditions
certain conditions. as may be stated in the articles of
6. Founder’s Shares; incorporation, which terms and conditions
7. Redeemable “Callable” Shares; must also be stated in the certificate of
8. Treasury Shares; stock representing said shares.
9. Other shares classified to comply with
constitutional or legal requirements. Definition
Redeemable (“Callable”) shares of stock
Instances when non-voting shares may vote which are usually preferred are frequently
1. Amendment of the articles of issued subject to redemption at the option
incorporation; of either the corporation, the stockholder,
2. Adoption and amendment of by-laws; or both, at a definite price representing
3. Sale, lease, exchange, mortgage, pledge premium above the amount originally paid.
or other disposition of all or
substantially all of the corporate Sinking fund refers to a fund set-up by the
property; corporation where cash is gradually set
aside in order to accumulate the amount
necessary to meet the redemption price of
redeemable shares of specified dates in the extension as may be determined by the
future. Securities and Exchange Commission.
Sec. 9. Treasury shares. - Treasury shares Sec. 12. Minimum capital stock required of
are shares of stock which have been issued stock corporations. – Stock corporations
and fully paid for, but subsequently incorporated under this Code shall not be
reacquired by the issuing corporation by required to have any minimum authorized
purchase, redemption, donation or through capital stock except as otherwise
some other lawful means. Such shares may specifically provided for by special law, and
again be disposed of for a reasonable price subject to the provisions of the following
fixed by the board of directors. (n) section.
10. Such other matters are not inconsistent 3. Principal office of the Corporation.
with law and which the incorporators The principal office of the corporation must
may deem necessary and convenient. be within the Philippines. It is where the
books of the corporation are kept and its
The Securities and Exchange Commission officers usually and ordinarily meet for the
shall not accept the articles of incorporation purpose of managing the affairs and
of any stock corporation unless transactions of the business of the
accompanied by a sworn statement of the corporation.
Treasurer elected by the subscriber
showing that at least 25% of the authorized 4. Terms of Existence of the Corporation.
capital stock of the corporation has been The corporation shall exist for a period not
subscribed, and at least 25% of the total exceeding fifty (50) years from the date of
subscription has been fully paid to him in incorporation unless sooner dissolved or
actual cash and/or in property the fair unless said period is extended.
valuation of which are equal to at least 25%
of the said subscription , such paid up 5. Names, Nationalities and residences of
capital being not less than five-thousand incorporators.
pesos (P5,000). The names, nationalities and residences of
the incorporators must be stated in the
Sec.15. Forms of Articles of Incorporation. articles of the corporation for the purpose
– Unless otherwise prescribed by special of complying with legal requirement that
law, articles of incorporation of all domestic majority of the incorporators must be
corporations shall supply substantially the residents of the Philippines and complying
following requirements in the form as with the statutory requirement on share
provided for by the SEC: ownership and in other instances where
Filipino Citizens are required.
1. The name of the corporation.
6. Number of directors and trustees.
The number of the director and trustees Property as subscription payment –
must not be less than five (5) nor more than Generally, all forms of tangible properties
fifteen (15). are acceptable for purposes of payment to
subscription provided that the three test of
7. Names, nationalities and residences of paid-up capital determination are complied
directors. with, i.e., ownership, existence and
A majority of the directors or trustees of all valuable, subject to certain restrictions as
corporation organized under this Code must may be imposed by law.
be a residents citizens of the Philippines.
SEC adopted the policy that
8. Amount of authorized capital stock. discourages the inclusion of intangible
A stock corporation must state the “amount assets as goodwill, lease-hold rights, or
of its authorized capital stock in lawful timber concession rights, payment of such
money of the Philippines, the number of properties Motor vehicle, real estate
shares into which it is divided, and in case properties and navigable vessels in payment
the shares are par value shares, the par of pre-incorporation subscription, increases
value of each, the names, nationalities, and of capital stock or in exchange for additional
residences of the original subscribers, and issuance of shares are allowed only by the
the amount subscribed and paid by each on SEC provided that:
his subscription, and if some or all the 1. There has been a proof of valid
shares are without par value, such fact must transfer;
be stated”. 2. All taxes due from the properties
has been paid; and
9. Non-stock Corporation. 3. Such properties have been
The Corporation Code requires the articles reasonably valued.
of the non-stock corporation to states: the
amount of its capital, the names, Papers to accompany articles with SEC
nationalities and residences of its The SEC requires the following papers to be
contributors and the amount contributed submitted to it with the articles of
by each. A non-stock corporation may have incorporation:
capital but it has no authorized capital 1. A verification slip executed by the
stock. Chief of the Record Section states
that the proposed name of the
10. Inclusion of other matters. corporation has been verified and
The articles of incorporation “may include found to be distinct/ not similar to
other matters that is not inconsistent with the names of already existing
law and which the incorporators may deem corporation or those pending
necessary and convenient”. registration.
2. Written undertaking to change
Sworn Statement of the Treasurer corporate name in case there is a
The Securities and Exchange Commission person, firm or entity with a prior
shall not accept the articles of incorporation right to the use of said name or one
of any stock corporation unless similar to it.
accompanied by a sworn statement of the 3. Sworn statement of assets and
Treasurer elected by the subscribers liabilities, duly executed under oath
showing that at least: by the corporate treasurer together
with the amount P50.00 to defray
1. 25% of the authorized capital stock has publication expenses.
been subscribed. 4. Bank certificate of deposit, issued
under oath by the bank manager or
2. 25% of the subscription has been fully any authorized bank officer, that
paid in actual cash or property. there is a deposit of the stated
amount representing the paid-up
3. The paid-up capital being not less than capital of the corporation either in
P5,000.00. the name of the treasurer in trust
for the corporation or in the name
SEC Policy of the corporation itself.
5. Written authority to verify bank Law reserves the rights to modify the charter
deposit signed by the corporate The constitution and the Corporation Code
treasurer empowering the SEC and reserved the right to amend the charter of a
/or the Central bank to check and private corporation. The constitution
inspect the existence of the bank provides that “no franchise or right be
deposit of the corporate paid-up granted except under the condition that it
capital. shall be subject to amendment, alteration,
6. Taxpayer account number of the or repeal by the National Assembly when
incorporators pursuant to Executive public interest so requires.
order No. 213.
7. Registration Data Sheet, a Amendment of Articles of Incorporation
statement in statistical data form, The articles of incorporation may be
signed by an authorized amended for legitimate purposes that refer
representative of the corporation to any matter stated in the articles of
regarding important information incorporation. It may refer to:
about the corporate seal, 1. Change of corporate name;
corporate name, principal office, 2. Extension of term of corporation;
capital structure, their subscription 3. Change in classes or series of shares;
and TAN (SEC Bulletin, Oct. 1982). 4. Change in rights, privileges or
restrictions in share ownership;
Sec. 16. Amendment of Articles of 5. Increase or decrease in the number of
Incorporation. – Unless otherwise directors; and
prescribed by this Code or by special law, 6. Change in purpose or purposes and
and for legitimate purposes, any provision other necessary changes.
or matter stated in the articles of
incorporation may be amended by a Vote or recent assent required in amendment of
majority vote of the board of directors or the articles of incorporation shall be as follows:
trustees and the vote or written assent of Stock Corporation – A majority vote of the
the stockholders representing at least two- directors or trustees and the vote or written
thirds (2/3) of the outstanding capital stock, assent of the stockholders representing at
without prejudice to the appraisal rights of least two- thirds (2/3) of the outstanding
dissenting stockholders in accordance with capital stock. Under section 81 of the Code,
the provision of this Code, or the vote or a dissenting stockholder may exercise his
written assent of two-thirds (2/3) of the appraisal right if he is against the
members if it be a non-stock corporation. amendment to be made and demand
payment of the fair value of his shares.
The original and amended articles
altogether shall contain all provision Non-stock Corporation – A majority vote of
required by law to be set out in the articles board of directors and the vote or written
of incorporation. Such articles, as amended assent of 2/3 of the members.
shall be indicated by underscoring the
change or changes made, and the copy The amendments to the articles of
thereof duly certified under oath by the incorporation shall take effect upon its
corporate secretary and the majority of the approval by the Securities and Exchange
directors or trustees stating the fact that Commission or from the filing with the said
said amendments have been duly approved Commission if not acted upon within six
by the required vote of the stockholders or months from the date of filing for a cause
members, shall be submitted to the not attributable to the corporation.
Securities and Exchange Commission.
Sec. 17. Grounds when articles of
The amendment shall take effect upon its incorporation or amendment may be
approval by the Securities and Exchange rejected or disapproved. – The Securities
Commission or from the date of filing with and Exchange Commission may reject the
the said Commission if not acted upon articles of incorporation or disapproved any
within six (6) months from the date of filing amendment thereto if the same is not in
for a cause not attributable to the compliance with the requirements of this
corporation.
Code: Provided, That the Commission shall by which the corporation can be identified
give the incorporators a reasonable time and distinguished from other corporation,
within which to correct or modify the firms or entities.
objectionable portions of the articles or
amendment. The following are grounds for Change of corporate name
such amendment or disapproval: A corporation may change its name by
merely amending its charter in the manner
1. That the articles of incorporation or any prescribed by law. The change of name of
amendment thereto is not substantially the corporation does not result in
in accordance with the form prescribed dissolution. The changing of the name of a
herein. corporation is no more the creation of a
corporation than the changing of the name
2. That the purpose or purposes of the of a natural person.
corporation are patently
unconstitutional, illegal, immoral, or Restriction in use in certain names of words
contrary to government rules and There are special laws prohibiting the use of
regulation. certain names and/or words. Thus, under
the General Banking Act, no person or entity
3. That the Treasurer’s Affidavit not conducting the business of commercial
concerning the amount of capital stock banking shall use the words “bank”,
subscribed and/or paid is false. “banking”, “banker”, “building and loan
association”, “trust corporation”, etc. or
4. That the required percentage of words of similar import. The word
ownership of the capital stock to be “National” under Act 2612 may not be use
owned by citizens of the Philippines has by those doing business as bankers,
not been complied with as required by brokers, or savings institutions. “United
existing laws of the constitution. Nations” both in its full and abbreviated
forms, for commercial and business
No articles of incorporation or amendment purposes. There are other names or words
to articles of incorporation of banks, which pursuant to other special laws may
banking and quasi-banking institutions, not be used.
building and loan association, trust
companies, public utilities, educational Sec. 19. Commencement of Corporate
institution, and other corporations Existence. – A private corporation formed or
governed by special laws shall be accepted organized under this Code commences to
or approved by the Commission unless have corporate existence and juridical
accompanied by a favourable personality and is deemed incorporated
recommendation of the appropriate from the date the Securities and Exchange
government agency to the effect that such Commission issues a certificate of
articles or amendment is in accordance with incorporation under its official seal; and
law. thereupon the incorporators,
stockholders/members, and their
Sec. 18. Corporate name. – No corporate successors shall constitute a body politic
name may be allowed by the Securities and and corporate under the name stated in the
Exchange Commission if the proposed name articles of incorporation for the period of
is identical or deceptively or confusingly time mentioned therein, unless said period
similar to that of any existing corporation or is extended or the corporation is sooner
to any other name already protected by law dissolved in accordance with law.
or its patently deceptive, confusing or
contrary to existing laws. When the change Sec. 20. De Facto corporation. – The due
in a corporate name is approved, the incorporation any corporation claiming in
commission shall issue an amended good faith to be a corporation under this
certificate of incorporation under the Code, and its right to exercise corporate
amended name. powers, shall not be inquired into
collaterally in any private suit to which such
Necessity of Corporate name corporation may be a party. Such inquiry
It is necessary that a corporation should
have a name because that is the only way
may be made by the Solicitor General in a of a contrary tenor. The object of the
quo warranto proceeding. principle of estoppel is to prevent injustice
to an otherwise innocent person.
De facto corporation – generally refer to
organizations exercising corporate power Sec. 22. Effect of non-use of corporate
under colour of a more or less legally charter and continuous in operation of a
constituted corporation. corporation. – If a corporation does not
formally organize and commence the
Elements of De facto corporation transaction of its business or the
1. Existence of a valid law under which a construction of its works within two (2)
corporation can be organized. years from the date of its incorporation, its
2. An attempt in good faith to incorporate. corporate powers cease and the corporation
3. Actual exercise of incorporate powers. 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
addresses of two of the original subscribers to organize, commence the transactions of
were omitted in the articles of its businesses or the construction of its
incorporation. In suit filed by X, a creditor, works, or to continuously operate is due to
against the corporation he alleged that the causes beyond the control of the
corporation has no valid existence and corporation as may be determined by the
sought to hold the seven incorporators (also Securities and Exchange Commission.
directors) liable personally on the
obligation. X’s allegation that the Organization
corporation had no valid existence would The idea of organization in reference to
constitute a collateral (side) attack in a corporations means executive structure,
private suit. Only the Solicitor General as election of officers, providing for
government lawyer may raise the question subscription and payment of capital,
by quo warranto proceeding. (Literally by adoption of by-laws, and other steps
“what right”). necessary to endow the legal entity with
capacity to transact business for which it
Sec. 21. Corporation by estoppel. – All was created.
persons who assume to act as a corporation
knowing it to be without authority to do so The Grant of corporate existence, conferred
shall be liable as general partners for all by the issuance of certificate of
debts, liabilities and damages incurred or incorporation, is subject to two subsequent
arising as a result thereof: Provided, conditions, to wit:
however, That when any such ostensible 1. The corporation must “formally
corporation is sued on any transaction organize”.
entered by it as a corporation or on any tort 2. The corporation must actually begin the
committed by it as such, it shall not be “transaction of its business”.
allowed to use as a defense its lack of
corporate personality. Failure to comply with either or both of
these conditions within two (2) years from
One who assumes an obligation to an the date of its incorporation, its corporate
ostensible corporation as such cannot resist power cease and the corporation must be
performance thereof on the ground that deemed dissolved.
there was in fact no corporation.
Sec. 23. The board of directors or trustees.
Estoppel – It is preclusion, which prevent a – Unless otherwise provided in this Code,
man from denying a fact in consequences of the corporate powers of all corporation
his own previous act, allegations, or denial formed under this Code shall be exercised ,
all business conducted and all property of 3. Domestic air carrier, the directing head
such corporations controlled and held by or 2/3 of the board of directors and
the board of directors or trustees to be other managing officers shall be citizens
elected from among the holders of stock, of the Philippines.
or where there is no stock, from among 4. Registered investments companies, the
the members of the corporation, who shall directors thereof must be Filipino
hold office for one (1) year and until their citizen.
successors are elected and qualified. 5. Private development banks, all the
members of the board of directors shall
Every director must own at least one (1) be citizen of the Philippines.
share of the capital stock of the corporation 6. In case of financing corporation, at least
of which he is a director, which share shall 2/3 of all members of the board of
stand in his name on the books of the directors shall be citizen of the
corporation. Any director who ceases to be Philippines.
the owner of at least one (1) share of the
capital stock of the corporation of which he Sec. 24. Election of directors or trustees. –
is the director shall thereby cease to be a At all elections of directors or trustees,
director. Trustees of non-stock corporations there must be present, either in person or
must be members thereof. A majority of the by representative authorized to act by
directors or trustees of all corporations written proxy, the owners of the majority of
organized under this Code must be the outstanding capital stock, or if there be
residents of the Philippines. no capital stock, a majority of the members
entitled to vote. The election must be by
Qualifications of directors ballot if requested by any voting stockholder
1. He must own at least one (1) share of or member. In stock corporations, every
the capital stock of the corporation in stockholder entitled to vote shall have the
his name. right to vote in person or by proxy the
2. Majority of the directors must be a number of shares of stock standing, at the
resident citizen of the Philippines. time fixed in the by-laws, in his own name
3. A director must not have been on the stock books of the corporation, or
convicted by final judgement of an where the by-laws are silent, at the time of
offense punishable by imprisonment the election; and said shareholder may vote
exceeding six (6) years or a violation of such number of shares for as many persons
the provisions of the Corporation Code as there are directors to be elected or he
committed within five (5) years prior to may cumulate said shares and give one
the date of election or appointment. candidate as many votes as the number of
directors to be elected multiplied by the
The directors, once elected, become the number of his shares shall equal, or he may
representatives of the corporation itself, not distribute them on the same principle
its stockholders. The directors of a non- among as many candidate as he shall see fit;
stock corporation are required to be Provided, That the total number of votes
members thereof and like stock cast by him shall not exceed the numbers of
corporations “majority of the directors and shares owned by him as shown in the
trustees of all corporations organized under books of the corporation multiplied by the
the Corporation Code must be residents whole number of directors to be elected:
citizen of the Philippines”. There are some Provided, however, that no delinquent
special corporation not organized with the stocks shall be voted. Unless otherwise
Corporation Code where directors are provided in the articles of incorporation, or
required to be citizens of the Philippines. in the by- laws, members of corporation
They are as follows: which have no capital stock may cast as
1. Bank and banking institution, at least many votes as there are trustees to be
2/3 of the members of the board of elected but may not cast more than one
directors shall be citizen of the vote for one candidate. Candidates receiving
Philippines. the highest number of votes shall be
2. Rural banks, every member of the board declared elected. Any meeting of the
of directors shall be citizens of the stockholders or members called for an
Philippines. election may adjourn from day to day or
from time to
time but not sine die or definitely if, for any Sec. 25. Corporate officers, quorum. –
reason, no election is held, or if there are Immediately after their election, the
not present or represented by proxy, at the directors of a corporation must formally
meeting, the owners of the majority of the organized by the election of a president,
outstanding capital stock, or if there be no who shall be a director, a treasurer who may
capital stock, a majority of the members or may not be a director, a secretary who
entitled to vote. shall be a resident citizen of the Philippines,
and such other officers as may be provided
Methods of voting for in the by-laws. Any two (2) or more
The voting methods which may be resorted positions may be held concurrently by the
to by a voting stockholder are as follows: same person, except that no one shall act as
1. Straight voting. president and secretary or as president and
2. Cumulative voting for one candidate. treasurer at the same time.
3. Cumulative voting by distribution.
The directors or trustees and officers to be
Example of Straight Voting elected shall perform the duties enjoined
A owns 100 shares of stock in X corporation. on them by law and by the by-laws of the
During the meeting for the purpose of corporation. Unless the articles of
electing five directors, he may cast his vote incorporation or the by-laws provide form a
by giving each of the five candidates 100 greater majority, a majority of the number
votes, hence, he distribute equally his vote of directors or trustees as fixed in the
without preference or discrimination. articles of incorporation shall constitute a
quorum for the transaction of corporate
Example of Cumulative voting for one candidate business, and every decision of at least a
In the preceding illustration, if A owns 100 majority of the directors or trustees present
voting shares and there are five directors to at a meeting at which there is a quorum
be elected, A is entitled to 500 votes which shall be valid as a corporate act , except for
he may “cumulate” by giving it to candidate the election of the officers which shall
Z alone. require the vote of a majority of all the
Example of Cumulative voting by distribution members of the board.
As in the same example above, if A owns Qualification of corporate officer
100 voting shares, and there are five 1. President. He must be a director.
directors to be elected, A is entitled to 500 2. Treasurer. He may or may not be a
votes which he may distribute to candidate director.
Y and Z giving the former 300 and the latter 3. Secretary. He must be a resident and
200 provided that the total number of citizen of the Philippines
votes cast by him does not exceed 500 4. Other officers provided for in the by-
votes. laws.
Sec. 30. Compensation of directors. – In the Sec. 32. Dealings of directors, trustees or
absence of any provision in the by-laws officers with the corporation. – A contract of
fixing their compensation, the directors the corporation with one or more of its
shall not receive any compensation, as such directors or trustees or officers is voidable,
directors, except for reasonable per diems: at the option of such corporation, unless
Provided, however, That any such all the conditions are present:
compensation (other than pier diems) may
be granted to directors by the vote of the 1. That the presence of such director or
stockholders representing at least a trustee in the board meeting in which
the contract was approved was not
necessary to constitute a quorum for with such officers or agents. (Yao Ka Sin
such meeting. Trading vs. Court of Appeals, G.R. No.
53820, June 15, 1992, citing Francisco vs.
2. That the vote of such director or GSIS, 7 SCRA 577)
trustee was not necessary for the
approval of the contract. Corporate president presumed to have
authority
3. That the contract is fair and reasonable As a strict rule, the corporate president has
under the circumstances. no inherent power to act for the
corporation, slowly giving way to realization
4. That in the case of an officer, the that such officer has certain limited powers
contract with the officer has been in the transaction of the usual and ordinary
previously authorized by the Board of business of the corporation. In the absence
Directors. of agreement or by law provision to the
contrary, the president is presumed to have
Where any of the first two conditions set the authority to act within the domain of
forth in the preceding paragraph is absent, the general of his or her usual duties.
in the case of a contract with a director or (People’s Aircargo, and Warehousing Co.,
trustee, such contract may be ratified by Inc. vs. Court of Appeals, G.R. No. 117847,
the vote of the stockholders representing Oct. 7, 1998)
at least two-thirds (2/3) of the outstanding
capital stock or of two-thirds (2/3) of the Sec. 33. Contracts between corporations
members in a meeting called for the with interlocking directors. – Except in
purpose: Provided, That full disclosure of cases of fraud, and provided the contract is
the adverse interest of the directors or fair and reasonable under the
trustees involved is made at such meeting: circumstances, a contract between two or
Provided, however, That the contract is fair more corporations having interlocking
and reasonable under the circumstances. directors shall not be invalidated on that
ground alone; Provided, That if the interest
Director disqualified to vote if he has personal of the interlocking director in one
interest corporation or corporations is merely
A director is disqualified to vote at a nominal, he shall be subject to the
meeting of the board if he has any personal provisions of the preceding section insofar
interest in a matter before the board; in as the latter corporation or corporations are
such case, his vote cannot be counted in concerned.
making up a quorum. Stockholdings exceeding twenty
percent (20%) of the outstanding capital
Disclosure of adverse interest by director stock shall be considered substantial for
It has been held that in dealing with their purposes of interlocking directors.
corporation the directors must make full
disclosure of all relevant facts or the Interlocking directors – Interlocking
transaction is voidable. The failure of a directors are persons who serve as member
director to inform his fellow directors of his of the board of directors of two or more
adverse bargaining position and other competing corporations or corporations
material circumstances should be seriously engaged in practically the same kind of
considered and inspected by the courts as business.
manner on the fairness and good faith of
the transaction and whether it is just and Effect of Corporate contracts with interlocking
reasonable as to the corporation. directors
Interlocking directors of corporations does
Exceptions in Signing contract without authority not make a contract between or among the
of Board of Directors is void corporations void and of no effect provided
If a private corporation intentionally or there in no fraud and reasonable under the
negligently clothed its officers or agents circumstances.
with apparent power to perform acts of it,
the corporation will be estopped to deny Sec. 34. Disloyalty of a director. – Where a
that such apparent authority is real, as to director, by virtue of his office, acquires for
innocent third persons dealing in good faith himself a business opportunity which
should belong to the corporation, thereby majority vote of the board, except with
obtaining profits to the prejudice of such respect to: (1) approval of any action for
corporation, he must account to the latter which shareholders’ approval is also
for all such profits by refunding the same, required; (2) the filling of vacancies in the
unless his act has been ratified by a vote of board; (3) the amendment or repeal of by-
the stockholders owning or representing at laws or the adoption of new by-laws; (4) the
least two-thirds (2/3) of the outstanding amendment or repeal of any resolution of
capital stock. This provision shall be the board which by it express terms is not
applicable notwithstanding the fact that the so amenable or repealable; and (5) a
director risked his own funds in the venture. distribution of cash dividends to the
shareholders.
Duties of directors Sec. 36. Corporate powers and
Directors owe a three-fold duty to the capacity. – Every corporation incorporated
corporation. First, they must be obedient; under this Code has the power and
they owe a duty to keep within the powers capacity:
of the corporation as well as within those of
the board of directors. Second, they must be 1. To sue and be sued in its corporation
diligent; they owe a duty to exercise name.
reasonable care and prudence. The third
duty owing by directors is that of individual 2. Of succession by its corporate name for
loyalty. the period of time stated in the articles
of incorporation and the certificate of
Concept of “corporate or business opportunity.” incorporation.
The doctrine of “corporate opportunity” is
but one phase of the cardinal rule of 3. To adopt and use a corporate seal.
undivided loyalty on the part of the
fiduciaries. If there is a presented to a 4. To amend its articles of incorporation in
corporate officer or director a business accordance with the provisions of this
opportunity which the corporation is code.
financially able to undertake, is from its 5. To adopt by-laws, not contrary to law,
nature, in the line of the corporation’s morals, or public policy, and to amend
business and is of practical advantage to it, or repeal the same in accordance with
is one in which the corporation will be this Code.
brought into conflict with that of his
corporation, the law will not permit him to 6. In case of stock corporations, to issue or
seize the opportunity for himself. sell stocks to subscribers and to sell
treasury stocks in accordance with the
Director is a fiduciary. provisions of this code; and to admit
He who is in such fiduciary position cannot members to the corporation if it be a
serve himself first and his cestuis non-stock corporation.
(beneficiary) second. He cannot manipulate
the affairs of his corporation to their 7. To purchase, receive, take or grant,
disadvantage and in disregard of the hold, convey, sell, lease, pledge,
standards of common decency. He cannot mortgage and otherwise deal with such
by the intervention of a corporate entity real and personal property, including
violate the ancient principle against serving securities and bonds of other
two masters. corporations, as the transaction of the
lawful business of the corporation may
Sec. 35. Executive Committee. – The by- be reasonably and necessarily require,
laws of a corporation may create an subject to the limitations prescribed by
executive committee, composed of not less law and the Constitution.
than three members of the board, to be
appointed by the board. Said committee 8. To enter into with other corporations
may act, by majority vote of all its members, merger or consolidation as provided in
on such specific matters within the this code.
competence of the board, as may be
delegated to it in the by-laws or on a 9. To make reasonable donations,
including those for the public welfare or
for hospital, charitable, cultural, or trustees and ratified at a meeting by the
scientific, civic, or similar purposes: stockholders representing at least two-
Provided, That no corporation, domestic thirds (2/3) of the outstanding capital stock
or foreign, shall give donations in aid of or by at least two-thirds (2/3) of the
any political party or candidate or for members in case of non-stock corporations.
purposes of partisan political activity. Written notice of proposed action and of
the time and place of the meeting shall be
10. To establish pension, retirement, and addressed to each stockholder or member
other plans for the benefit of its at his place of residence as shown on the
directors, trustees, officers and books of the corporation and deposited to
employees. the addressee in the post office with
postage prepaid, or served personally:
11. To exercise such other powers as may Provided, That in case of extension of
be essential or necessary to carry out its corporate term, any dissenting stockholder
purpose or purposes as stated in its may exercise his appraisal right under the
articles of incorporation. conditions provided in this Code.
Sec. 46. by-laws Adoption. – Every Corporation has inherent power to adopt by-
corporation formed under this code, must, laws
within one month after receipt of official One of its legal incidents and is usually
notice of the issuance of its certificate of expressly granted by law of the charter
incorporation by the Securities and subject to such limitations as may be
Exchange Commission, adopt a new code of contained in the statute or the charter,
by-laws for its government not inconsistent subject to such limitations as may be
with this code. For the adoption of by-laws contained in the statute or charter, and the
by the corporation the affirmative vote of general requirements of validity. If a
the stockholders representing at least a corporation fails to file its by-laws within the
majority of the outstanding capital stock, or period required by law its certificate of
of at least a majority of the outstanding incorporation may be suspended or even
capital stock, or of at least a majority of the revoked.
members, in the case of non-stick
corporations, shall be necessary. The by- Section 46 allows the adoption and filing of
laws shall be signed by the stockholders or the by-laws before incorporation provided
members voting for them and shall be kept the same is approved by all the
in the principal office of the corporation, incorporators and submitted to the
subject to the inspection of the Securities and Exchange Commission
stockholders or members during office together with the articles of incorporation.
hours; and a copy thereof, duly certified to
by a majority of the directors or trustees By-laws cannot provide for unreasonable
and countersigned by the secretary of the restriction
corporation, shall be filed with the Restriction upon the traffic in stock must
Securities and Exchange Commission which have their source in legislative enactment,
shall be attached to the original articles of as the corporation itself cannot create such
incorporation. impediments. By-laws are created for
protection and not for restriction.
Notwithstanding the provisions of the
preceding paragraph, by-laws may be Elements of valid by-laws
adopted and filed prior to incorporation; in 1. Must not be inconsistent with the
such case, such by-laws shall be approved general law and the Corporation Code.
and signed by all the incorporators and 2. Must not be inconsistent with public
submitted to the Securities and Exchange policy.
Commission, together with the articles of 3. Must be general in application and not
incorporation. directed against particular individuals.
4. Must not be inconsistent with the
In all cases, by-laws shall be effective only articles of incorporation.
upon the issuance by the Securities and 5. Must not impair obligations and
Exchange Commission of a certification that contracts.
the by-laws are not inconsistent with the 6. Must not be in restraint of trade.
Code. 7. Must not restrict religious freedom.
8. The penalties for violation of the by- Amender or new by-laws shall only be
laws. effective upon the issuance by the SEC of a
certification that the same are not
9. In the case of stick corporations, the inconsistent with this code.
manner of issuing stock certificates.
The authority to make or adopt the original
10. Such other matter as may be necessary by-laws of a corporation cannot be given to
for the proper or convenient the board of directors or trustees. The
stockholders of a stock corporation or the Notice of any meeting may be waived,
members of the non-stick corporation adopt expressly or impliedly, by any stockholder or
or make the original by-laws. member.
An amendment of by-law renders stockholder Whenever, for any cause, there is no person
ineligible as director authorized to call a meeting, the SEC, upon
It is well-settled xxx that corporations have petition of a stockholder or member, and
the power to make by-laws declaring a on the showing of good cause there for, may
person employed in the service of a rival issue an order to the petitioning stockholder
company to be ineligible for the or member directing him to call a meeting
corporation’s Board of Directors. An of the corporation by giving proper notice
amendment which renders ineligible, or if required by this Code or by the by-laws. The
elected, subjects to removal, a director if he petitioning stockholder or member shall
be also a director in a corporation whose preside thereat until at least a majority of
business is in competition with or is the stockholders or members present have
antagonistic to the other corporation is chosen one of their numbers as presiding
valid. This is based upon the principle that officer.
where the director is so employed in the
service of a rival company, he cannot serve Corporate decisions; rationale of meetings
both, but must betray one or the other. As a rule, a majority of the shareholders or
Such an amendment advances the benefit members have no power to vote or act for
of the corporation and is good. the corporation as to matters on which
shareholders have authority, except at a
Meetings Necessity meeting called and conducted according to
A majority of the stockholders or members law. Written or oral consent to a corporate
can bind the corporation only at a meeting act by the shareholders or members
regularly held and conducted. To constitute individually, even though a majority may
a legal meeting, so as to render the acts and agree, is not binding on the corporation.
vote of the majority binding the meeting
must be regularly called by one having When there is no person authorized to call a
authority. In the absence of provision to the meeting
contrary such authority exists in the A stockholder or member may petition the
directors or managing agents. SEC upon showing of good cause, to call a
meeting and directing the petitioner
Sec. 49. Kinds of Meeting. – Meetings of (stockholder or member) to give notice
directors, trustees, stockholders, or required by the Code and the by-laws. The
members may be regular or special. petitioning stockholder or member shall
preside at such meeting until at least a
Sec. 50. Regular and special meetings of majority of the stockholders or members
stock holders or members. – Regular present have chosen one of their numbers
meetings of stockholders or members shall as presiding officer.
be held annually on a date fixed in the by-
laws, or if not so fixed, on any date in April Sec. 51. Place and time of meetings of
of every year as determined by the board of stockholders or members. – Stockholders’
directors or trustees: Provided, that written or members’ meetings, whether regular or
notice of regular meetings shall be sent to special, shall be held in the city or
all stockholders or members of record at municipality where the principal office of
least 2 weeks prior to the meeting, unless a the corporation is located, and if practicable
different period is required by the by-laws. in the principal office of the corporation:
Provided, that Metro Manila shall, for the
Special meetings of stockholders or purposes of his section, be considered a city
members shall be held at any time deemed or municipality
necessary or as provided in the by-laws:
Provided, however, that at least 1 week Notice of meetings shall be in writing, and
written notice shall be sent to all stock the time and place thereof stated therein.
holders or members, unless otherwise All proceedings had and any business
provided in the by-laws. transacted at any meeting of the
stockholders or members, if within the
powers or authority of the corporation, Sec. 54. Who shall preside at meetings. –
shall be valid even of the meeting be The president shall preside at all meeting of
improperly held or called, provided all the the directors or trustees as well as of the
stockholders or members of the corporation stockholders or members, unless the by-
are present or duly represented at the laws provide otherwise.
meeting.
The meetings of directors or trustees may
Place of meetings be held anywhere in the by-laws. Notice of
(Regular or special) meetings shall be held regular or special meetings of directors or
in the city or municipality where the trustees must be sent to them at least 1 day
principal office of the corp. is located. prior to the scheduled meeting, unless the
by-laws provided otherwise.
If the meeting be improperly held or called
(as when there was a defective notice) the Sec. 55. Right to vote of pledgors,
same shall still be valid provided that mortgagors and administrators. – In case
1. The act done was within the powers of of pledged or mortgaged share in stock
the corporation. corporations, the pledgor or mortgagor shall
2. All the stockholders or members were have the right to attend and vote at
present or duly represented. meetings of stockholders, unless the pledge
or mortgagee is expressly given such right in
Sec 52. Quorum in meetings. – Unless writing which is recorded on the appropriate
otherwise provided for in this Code or in the corporate books by the pledgor or
by-laws, a quorum shall consist of the mortgagor.
stockholders representing a majority of the
outstanding capital stock or a majority of Executors, administrators, receivers and
the members in the case of non-stock other legal representatives duly appointed
corporations. by the court may attend and vote in behalf
of the stockholders or members without
Quorum – Signifies the number of persons need of any written proxy.
belonging to a corporation required to
transact business. Within the meaning of The pledgor or mortgagor of shatem in the
section 52 above, a quorum shall consist of absence of agreement to the contrary, if
the stockholders representing a majority of the shate remain in his name on the books
the outstanding capital stock or a majority of the corporation has the right to attend
of the members in the case of non-stock and vote at meetings of stockholders.
corporations.
A person who appears on the books of a
Sec. 53. Regular of special meetings of corporation or otherwise as the absolute
directors or trustees. – The meetings shall owner of stock clearly has the right to
be held monthly, unless the by-laws provide vote, although in face he may hold it as
otherwise. trustee.
Special meetings of the board of directors Executor and administrator has the right, to
or trustees may be held at any time upon vote shares belonging to the estate of his
the call of the president or as provided in decedent, and it can make no difference
the by-laws that the share stand on the books of the
corporation in the name of the decedent.
Meetings of directors or trustees of
corporations may be held anywhere in or Sec. 56. Voting in case of joint ownership
outside of the Philippines, unless the by- of stock. – In case of share of stock owned
laws provide otherwise. Notice of regular or jointly by 2 or more persons, in order to
special meetings stating the date, time and vote the same, the consent of all the co-
place of the meeting must be sent to every owners shall be necessary, unless there is a
director or trustee at least 1 day prior to the written proxy, signed by all the co-owners.
scheduled meeting, unless otherwise Authorizing one or some of them or any
provided in the by-laws. A director or other person to vote such share or shares:
trustee may waive this requirement, either provided, that when the shares are owned
expressly or impliedly.
in an capacity by the holders therof, any one of a voting trust specifically required as a
of the joint owner can vote said shares or condition in a loan agreement, said voting
appoint a proxy therfor. trust may be for a period exceeding 5 years
but shall automatically expire upon full
If share are owned by 2 or more persons payment of the loan. A voting trust
jointly, the right to vote is in them jointly, agreement must be in writing and
and , in order that the shares may be voted, notarized, and shall specify the terms and
they must agree upon the vote. This rule of conditions thereof. A certified copy of such
joint action applies to shares held by several agreement shall be filed with the
executors or trustees, in the absence of corporation and with the SEC: otherwise,
provision for a majority vote if the said agreement is ineffective and
fiduciaries disagree. unenforceable. The certificate or of stock
covered by the voting trust agreement shall
Sec. 57. Voting right for treasury share. – be cancelled and new one shall be issued in
Treasury shares shall have no voting right as the name of the trustee or trustees stating
long as such stock remains in the treasury. that they are issued pursuant to said
agreement. In the books of the corporation,
Treasury shares have no voting rights. it shall be noted that the transfer in the
name of the trustee or trustees is made
Sec. 58. Proxies. – Stockholders and pursuant to said voting trust agreement.
members may vote in person or by proxy in
all meetings of stock holders or members. The Trustee or trustees shall be execute and
Proxies shall be in writing, signed by the deliver to the transferors voting trust
stock holder or member and filed before certificates, which shall be transferable in
the scheduled meeting with the corporate the same manner and with the same effect
secretary. Unless otherwise provided in the as certificates of stock.
proxy, it shall be valid only for the meeting
for which it is intended. No proxy shall be The voting trust agreement filed with the
valid and effective for a period longer than corporation shall be subject to examination
five years at any one time. by any stockholder of the corporation in the
same manner as any other corporate book
Proxy – In corporate law, is a person who or record: Provided, That both the
votes for and this represents the transferor and the trustee or trustees may
stockholders or members. exercise the right of inspection of all
corporate books and records in accordance
Voting by proxy with the provisions of this code.
Ordinarily the right to vote shall be
exercised by the stockholders themselves or Any other stock holder may transfer his
by their duly authorized representatives. shares to the same trustee or trustees upon
Proxy to be valid must be: the terms and conditions stated in the
1. In writing, signed by the stockholder or voting trust agreement, and there upon
member giving it. shall be bound by all the provisions of said
2. Filed with the corporate secretary agreement.
before the scheduled meeting.
3. It is valid only for the meeting for which No voting trust agreement shall be entered
it is intended unless otherwise into for the purpose of circumventing the
stipulated. law against monopolies and illegal
4. Even if the proxy is a continuing one it combinations in restraint of trade or used
shall not be longer than 5 year at any for purposes of fraud.
one time.
Unless expressly renewed, all rights granted
Sec 59. Voting trusts. – One or more in a voting trust agreement shall
stockholders of a stock corporation may be automatically expire at the end of the
create a voting trust for the purpose of agreed period, and the voting trust
conferring upon a trustee or trustees the certificates as well as the certificates of
right to vote and other rights pertaining to stick in the name of the trustee or trustees
the share for a period not exceeding 5 years shall thereby be deemed cancelled and new
at any one time: Provided, that in the case
certificates of stock shall be reissued in the No person can become a stockholder in a
name of the transferors. corporation by virtue of a subscription for
stock unless there is a valid contract
The voting trustee or trustees may vote by between him and the corporation. When a
proxy unless the agreement provides contract of subscription for stock in a
otherswise. corporation is binding it is a contract
between the subscriber or subscribers and
Concept of voting trusts the corporation, and its formation and
A voting trust is an agreement by which validity are governed by the same principles
stockholders surrender their voting power substantially as any other contract except in
and place it irrevocably in the hands of so far as such principles may be rendered
others for a definite period of time. In inapplicable by particular charter or
exchange for the certificates of stock the statutory provisions. No express promise to
trustee delivers to the stockholder voting pay is necessary to make the subscriber
trust certificates. liable.
Different modes by which a corporation may SEC. 63 The capital stock of stock
issue shares of stock corporation shall be divided into shares
1. By subscription before and after Certificate of stock shall be issued for said
incorporation, to original, unissued shares.
stocks.
2. By sale of treasury stock after Nature of a certificate of stock
incorporation for money property, or 1. It is a written instrument signed by the
service. proper officer of a corporation stating or
3. By subscription to new stocks, when all acknowledging that the person named
the original stocks have been issued and therein is the owner of a designated
the amount of the capital stock number of shares of stock.
increased. 2. It indicates the name of the holder, the
4. By making a stock dividend. number, kind and class of shares
represented, and the date of issuance.
Limitations in the issuance of stocks 3. It i merely the evidence of the holder's
1. Shall not be issued for a consideration interest in the corporation, his
less than the par or issued price thereof ownership of the share represented
except treasury shares so long as the thereby.
price is reasonable. 4. It is not essential to make one a
2. Shall not be issued in exchange of stockholder in a corporation.
promissory notes or future services.
3. When the consideration is other than • Every stockholder has a right to
actual cash or consists of intangible have proper certificate issued to
property, the value thereof shall be him as soon as he has complied
initially determined by the with the conditions which entitle
incorporators or the board of directors, him to one.
subject to the approval of the SEC. • A corporation cannot issue shares
4. The issued price of no par value shares in excess of the maximum
must be fixed as provided in Sec. 62. authorized in its AOI.
- issued price may vary from time to time • An over issued stock is absolutely
but value may not be less than P5. void even if possessor is in good
faith.
Sec. 63. Certificate of stock and transfer of • Shares can be transferred
shares. – The capital stock of stock represented by the certificate by its
corporations shall be divided into shares for endorsement by the owner or his
which certificates signed by the president or agent and delivery to the transferee.
vice president, countersigned by the
secretary or assistant secretary, and sealed Restrictions on transfer of stock
with the seal of the corporation shall be 1. A by-law prohibits a transfer of stock
issued in accordance with the by-laws. without the consent or approval of all
Shares of stock so issued are personal stockholders or of the president or
property and may be transferred by board of directors is ILLEGAL.
delivery of the certificate or certificates
endorsed by the owner or his attorney-in-
2. A provision in the certificate that is dividends as against the
transferable only to some person first corporation but the transferor,
approved by the board of directors as the nominal owner of the
unlawfully restricts the right of the share, is the trustee for the
stockholder. benefit of the real owner.
3. The condition “non-transferable” 3. It is invalid as against corporate
appearing on certificates of stock is creditors, and the transferor is still
VOID. liable to the corporation. The
4. corporations which will engage in any transfer of stock by a shareholder
business reserved for Filipino citizens does not relieve him from the
are required to indicate in AOI and all liability to creditors of the
certificates. corporation for unpaid subscription
until the transfer is consummated
Two requirements to effect transfer of stocks by being registered in the books.
Endorsement and delivery of stock 4. It is invalid as against creditors of
certificate the transferor without notice of the
-the usual practice is for the stockholder to transfer.
sign the form on the back of the stock
certificate. Shares of stock against which the
-if the holder of the certificate desires to corporation holds any unpaid claim shall
assume the legal right of the stockholder he not be transferable in the books – no
fills up the blank in the form inserting his unpaid claims against the stock.
name as transferee. • no unpaid subscriptions due and
-then he delivers the certificate to the payable.
secretary of the corporation so that the
transfer may be entered in the books. Sec. 64. Issuance of stock certificates. – No
certificate of stock shall be issued to a
Other modes of transfer subscriber until the full amount of his
1. Assignment thru a separate instrument. subscription together with interest and
2. Judicial or extra-judicial settlement of expenses (in case of delinquent shares), if
the estate. any is due, has been paid.
b) Set up and
register with the SEC stockholder
its stock and transfer • Address
book. • Nationality
• No. of shares
c) File its by-laws with subscribed
the • Amt. subscribed
Commission. by each
Within 15 days from Submit a statement of Shall be made for
end of 3 months from sources and inspection.
registration application of funds Within 5 days before Submit list of
certified by an the date of annual stockholders/memb
independent CPA. meeting ers entitled to vote
a) Within 105 days i) If paid-up capital > as of a date prior to
after the end of its P50,000, file a copy the meeting.
fiscal year of BS and P&L
statement. The SEC must be notified of any:
1. Change or transfer of address.
ii) If paid-up capital 2. Any investment of corporate funds in
< P50,000, same as any of the secondary purposes of the
(i) and certified under corporation by filing a copy of the
oath by the Treasurer resolution approved by 2/3 of the
or any responsible subscribed capital stock entitled to vote
officer. authorizing the BoD to invest in any of
b) Within 45 days Certified under oath the secondary purposes.
by the Treasurer or
any responsible Sec. 76. Plan of merger or consolidation. –
officer. Two or more corporations may merge into a
Within 30 days from Submit: single corporation which shall be one
the date of annual 1) General constituent corporations or may
meeting information sheet consolidate into a new single corporation
for the fiscal year. which shall be consolidated corporation.
Sec. 85. Who bears costs of appraisal. – The important thing to consider in arriving
The costs and expenses of appraisal shall be at the appraisal value is whether the
borne by the corporation, unless the fair valuation arrived at is fair, just and
value ascertained by the appraisers is reasonable to all parties concerned.
approximately the same as the price which
the corporation may have offered to pay the Other instances when appraisal right may be
stockholder, in which case they shall be granted
borne by the latter. In case of an action to 1. Amendment of “any provision or matter
recover such fair value, all costs and stated in the articles of incorporation.”
expenses shall be assessed against the 2. When the corporate term is extended.
corporation, unless the refusal of the 3. Any purpose other than the primary
stockholder to receive payment was purpose.
unjustified. 4. Close corporation – a stockholder may
compel the corporation to purchase FV
Consideration of the costs of appraisal “for any reasons.”
Expenses of appraisal: Exercise of appraisal right provided
• Appraisers’ fees compensatory alternative to investor
• Attorneys’ fees Appraisal statutes extending to corporate
• Expert accountants’ fees purpose or duration amendments would
• Witnesses before the appraisers’ seem to be of limited value.
fees
Thus, clarifies an otherwise delicate aspect Appraisal rights cannot challenge this power
of appraisal proceeding. but they can provide a compensatory
alternative to an investor faced with a loss
Sec. 86. Notation on certificate(s); right of of existing stock rights and should be so
transferee. – Within ten (10) days after employed.
demanding payment for his shares, a
dissenting stockholder shall submit the When right of stockholder to payment ceases
certificate(s) of stock representing his 1. The demand for payment is withdrawn
shares to the corporation for notation with the consent of the corporation.
thereon that such shares are dissenting 2. The proposed corporate action is
shares. His failure to do so shall, at the abandoned or rescinded by the
option of the corporation, terminate his corporation.
rights under this Title. If shares represented 3. Proposed action is disapproved by the
by the certificate(s) bearing such notation SEC where such approval is necessary.
are transferred, and the certificate(s) 4. Such stockholder is not entitled to
consequently cancelled, the rights of the exercise his appraisal right.
transferor as a dissenting stockholder under
this Title shall cease and the transferee shall Sec. 87. Definition. – For the purposes of
have all the rights of a regular stockholder; this Code, a non-stock corporation is one
and all dividend distributions which would where no part of its income is distributable
have accrued on such shares shall be paid to as dividends to its members, trustees, or
the transferee. officers, subject to the provisions of this
Code on dissolution: Provided, That, any
Valuation of shares of dissenting shareholders profit which a non-stock corporation may
Appraisers should consider the elements obtain as an incident to its operation shall,
that tend to affect market quotations: whenever necessary or proper, be used for
the furtherance of the purpose or purposes under such conditions which may be,
for which the corporation was organized, prescribed by, the Securities and Exchange
subject to the provisions of this Title. Commission.
The provisions governing stock Voting by proxy may be denied in articles or by-
corporations, when pertinent, shall be laws
applicable to non-stock corporations, except The law makes voting by proxy merely
as may be covered by specific provisions of directory in the case of non-stock
this Title. corporations and even allows the articles of
incorporation or by-laws thereof to deny
Definition proxy voting.
Non-stock corporation – one where no part
of its income is distributable as dividends to If proxy voting may be denied outrightly in
its members, trustees, or officers. the articles or by-laws of non-stock
corporations, it necessarily follows that the
Sec. 88. Purposes. – Non-stock corporations qualifications or limitations on who should
may be formed or organized for charitable, be appointed proxies may also be made
religious, educational, professional, cultural, therein.
fraternal, literary, scientific, social, civic
service, or similar purposes, like trade, Sec.90. Non-transferability of membership.
industry, agricultural and like chambers, or – Membership in a non-stock corporation
any combination thereof, subject to the and all rights arising therefrom are personal
special provisions of this Title governing and non-transferable, unless the articles of
particular classes of non-stock corporations. incorporation or the by-laws otherwise
provide.
Distinction between a stock corporation and a
non-stock corporation Sec.91. Termination of membership. –
Point of Stock Non-Stock Membership shall be terminated in the
Comparison Corporation Corporation manner and for the causes provided in the
Membership Ownership Consent of articles of incorporation or the by-laws.
of stock the Termination of membership shall have the
associates effect of extinguishing all rights of a
member in the corporation or in its
Solicitation of gifts, donations or property, unless otherwise provided in the
contributions by non-stock corporations articles of incorporation or the by-laws.
A certificate of registration must be secured
from the Insurance Commissioner Sec.92. Election and term of trustees. –
otherwise the articles of incorporation Unless otherwise provided in the articles of
cannot be filed. incorporation or the by-laws, the board of
trustees of non-stock corporations, which
Sec. 89. Right to vote. – The right of the may be more than fifteen (15) in number as
members of any class or classes to vote may may be fixed in their articles of
be limited, broadened or denied to the incorporation or by-laws, shall, as soon as
extent specified in the articles of organized, so classify themselves that the
incorporation or the by-laws. Unless so term of office of one-third (1/3) of their
limited, broadened or denied, each number shall expire every year; and
member, regardless of class, shall be subsequent elections of trustees comprising
entitled to one vote. one-third (1/3) of the board of trustees shall
be held annually and trustees so elected
Unless otherwise provided by the articles of shall have a term of three (3) years.
incorporation or the by-laws, a member Trustees thereafter elected to fill vacancies
may vote by proxy in accordance with the occurring before the expiration of a
provisions of this Code. particular term shall hold office only for the
unexpired period.
Voting by mail or other similar means by
members of non-stock corporations may be No person shall be elected as trustee unless
authorized by the by-laws of non-stock he is a member of the corporation.
corporations with the approval of, and
Unless otherwise provided in the articles of “RESOLVED, that the corporation or
incorporation or the by-laws, officers of a associatin will comply with the S.E.C.
non-stock corporation may be directly REQUIREMENTS FOR NON-STOCK
elected by the members. CORPORATION dated May 24, 1963 , in
the course of its operation.”
Three-year term for trustees in non-stock 4. LIST OF MEMBERS of the association
corporation containing their manual signature and
The term of trustees in non-stock attested by the Acting Secretary, if the
corporation is three (3) years except incorporators are the present members
educational corporations where the term is so far, state such fact in writing and
five (5) years. further state that the list of additional
members who will be admitted in
Elections of directors by regions in non- stock accordance with the by-laws of the
corporations not allowed association shall e submitted to the
The Securities and Exchange Commission in Commission from time to time. (3
an opinion stated that the “Election of Copies)
members of the Board of Directors of a non
stock corporation by zones or regions would Sec. 94. Rules of distribution. – In case
violate the law which requires that at all dissolution of a non-stock corporation in
elections of directors, there must be accordance with the provisions of this Code,
present a majority of the members entitled its assets shall be applied and distributed as
to vote. ” follows:
Sec.93. Place of meetings. – The by-laws 1. All liabilities and obligations of the
may provide that the members of a non- corporation shall be paid, satisfied and
stock corporation may hold their regular or discharged, or adequate provision shall
special meetings at any place even outside be made therefore.
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
meeting: and Provided, further, That the occurs by reason of the dissolution,
place of meeting shall be within the shall be returned, transferred or
Philippines. conveyed in accordance with such
requirements.
Supporting papers required to be submitted to
the Securities and Exchange Commission: 3. Assets received and held by the
1. LETTER OF UNDERTAKING addressed to corporation subject to limitations
the Commission signed by at least a permitting their use only for charitable,
majority of the incorporators or by a religious, benevolent, educational or
duly authorized representative, to the similar purposes, but not held upon a
effect that the association will change condition requiring return, transfer or
its corporate name in the event another conveyance by reason of the
person, firm or entity has acquired a dissolution, shall be transferred or
prior right to use the same name or conveyed to one or more corporations,
similar to it. (3 copies) societies or organizations engaged in
2. MODUS OPERANDI or a detailed activities in the Philippines substantially
explanation as to how the association similar to those of the dissolving
shall carry out its objectives signed by corporation according to a plan of
atleast a majority of the incorporators distribution adopted pursuant to this
or by a duly authorized representative. Chapter.
(3 Copies)
3. RESOLUTION of the Board signed by 4. Assets other than those mentioned in
atleast a majority of the Directors or the preceding paragraphs, if any, shall
certified under oath by the Secretary in be distributed in accordance with the
the following tenor to wit: (3 Copies) provisions of the articles of
incorporation or the by-laws, to the
extent that the articles of incorporation
or the by-laws, determine the shall be held of record by not more
distributive rights of members, or any than 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
organizations or corporations, whether this 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 Code.
vote, adopt a resolution recommending a
plan of distribution and directing the Any corporation may be incorporated as a
submission thereof to a vote at a regular or close corporation, except mining or oil
special meeting of members having voting companies, stock exchanges, banks,
rights. Written notice setting forth the insurance companies, public utilities,
proposed plan of distribution or a summary educational institutions and corporations
thereof and the date, time and place of declared to be vested with public interest in
such meeting shall be given to each accordance with the provisions of this Code.
member entitled to vote, within the time The provisions of this Title shall primarily
and in the manner provided in this Code for govern close corporations: Provided, That
the giving of notice of meetings to the provisions of other Titles of this Code
members. Such plan of distribution shall be shall apply suppletorily except insofar as this
adopted upon approval of at least two- Title otherwise provides.
thirds (2/3) of the members having voting
rights present or represented by proxy at Sec. 97. Articles of incorporation. – The
such meeting. articles of incorporation of a close
corporation may provide:
Distribution of assets of non-stock
corporations to the members on dissolution 1. For a classification of shares or rights
is not forbidden, unless it holds its assets and the qualifications for owning or
upon some trust, public or private, in which holding the same and restrictions on
case the claims of the state, the their transfers as may be stated therein,
beneficiaries, or of the founder and his subject to the provisions of the
successors may have to be considered. following section.
A non-stock (non-profit) corporation may
not ordinarily organize as a stock 2. For a classification of directors into one
corporation, authorized to issue shares of or more classes, each of whom may be
stock, but may issue membership voted for and elected solely by a
certificates which do not entitle to the particular class of stock.
holder to dividends.
3. For a greater quorum or voting
Sec. 96. Definition and applicability of requirements in meetings of
Title. – A close corporation, within the stockholders or directors than those
meaning of this Code, is one whose articles provided in this Code.
of incorporation provide that:
The articles of incorporation of a close
1. All the corporation's issued stock of all corporation may provide that the business
classes, exclusive of treasury shares, of the corporation shall be managed by the
stockholders of the corporation rather than identity and personality of each shareholder
by a board of directors. So long as this are important to his associates, so that
provision continues in effect: although they may consider their business
as corporation in their dealings with third
1. No meeting of stockholders need be persons, among themselves the
called to elect directors. stockholders act and feel as partners.”
2. Unless the context clearly requires Entities which may not be organized as close
otherwise, the stockholders of the corporations
corporation shall be deemed to be • Mining or oil companies
directors for the purpose of applying • Stock exchanges
the provisions of this Code. • Banks
• Insurance companies
3. The stockholders of the corporation • Public utilities
shall be subject to all liabilities of • Educational institutions
directors. • Corporations declared to be vested
with public interest
The articles of incorporation may likewise
provide that all officers or employees or Stockholders authorized to manage close
that specified officers or employees shall be corporations
elected or appointed by the stockholders, As a rule, management of stock corporation
instead of by the board of directors. is normally given to board of directors or
trustees. However, the Corporation Code
Requisites of Close Corporation provides: “The articles of incorporation of a
Within the meaning of a close corporation close corporation may provide that the
under the Corporation Code the following business of the corporation shall be
are its attributes: managed by the stockholders of the
1. Its stockholders are limited not corporation rather than by a board of
exceeding 20 persons. directors.” Also, “The articles of
2. Its shares of stock are subject to one or incorporation may likewise provide that all
more restrictions on transfer. officers or employees or that specified
3. Its shares of stock are not listed in any officers or employees shall be elected or
stock exchange. appointed by the stockholders, instead of by
the board of directors.”
Salient Feature of Close Corporations
1. It has only a few stockholders, who if Sec. 98. Validity of restrictions on transfer
not related by blood or marriage, know of shares. – Restrictions on the right to
each other well and are aware of each transfer shares must appear in the articles
other’s business skills. of incorporation and in the by-laws as well
2. All or more of them are active in the as in the certificate of stock; otherwise, the
corporate business, either as directors, same shall not be binding on any purchaser
officers or as key men in management. thereof in good faith. Said restrictions shall
3. The stocks of the corporation are not not be more onerous than granting the
listed on the exchange nor is there existing stockholders or the corporation the
trading in them outside the stock option to purchase the shares of the
market. transferring stockholder with such
*It would seem that base on these reasonable terms, conditions or period
features many corporations in the stated therein. If upon the expiration of said
Philippines would be close period, the existing stockholders or the
corporations. corporation fails to exercise the option to
purchase, the transferring stockholder may
Reasons for formation of close corporations sell his shares to any third person.
“The existence of close corporations can be
attributed to the desire of intimate groups Sec. 99. Effects of issuance or transfer of stock
of business associates to obtain the in breach of qualifying conditions. –
advantages of a corporate organization, like 1. If stock of a close corporation is issued
that of limited liability. However, the or transferred to any person who is not
entitled under any provision of the
articles of incorporation to be a holder 6. The term "transfer", as used in this
of record of its stock, and if the section, is not limited to a transfer for
certificate for such stock conspicuously value.
shows the qualifications of the persons
entitled to be holders of record thereof, 7. The provisions of this section shall not
such person is conclusively presumed to impair any right which the transferee
have notice of the fact of his ineligibility may have to rescind the transfer or to
to be a stockholder. recover under any applicable warranty,
express or implied.
2. If the articles of incorporation of a close
corporation states the number of Restrictions on transfer of shares of stock
persons, not exceeding twenty (20), The corporation may provide in its articles
who are entitled to be holders of record of incorporation, in its by-laws as well as in
of its stock, and if the certificate for the certificate of stock restrictions on the
such stock conspicuously states such right of stockholders to transfer their shares
number, and if the issuance or transfer of stocks. If not so provided as aforesaid the
of stock to any person would cause the same “shall not be binding on any purchaser
stock to be held by more than such thereof in good faith.” Charter restrictions
number of persons, the person to on the transfer of shares are binding on all
whom such stock is issued or who become shareholders, as they become
transferred is conclusively presumed to parties to the charter contract and take
have notice of this fact. their shares subject to it. Considerable
latitude allowed incorporators and
3. If a stock certificate of any close shareholders in imposing transfer
corporation conspicuously shows a restrictions in the articles of incorporation
restriction on transfer of stock of the and they will not usually be declared
corporation, the transferee of the stock against public policy unless palpably
is conclusively presumed to have notice unreasonable under the circumstances.
of the fact that he has acquired stock in
violation of the restriction, if such “Stock in the corporation is not merely
acquisition violates the restriction. property. It also creates a personal relation
analogous otherwise than technically to a
4. Whenever any person to whom stock of partnership. There seems to be no greater
a close corporation has been issued or objection to retaining the right of choosing
transferred has, or is conclusively one’s associates in a corporation than in a
presumed under this section to have, firm.”
notice either (a) that he is a person not
eligible to be a holder of stock of the Reasons for restriction on shares of stock In
corporation, or (b) that transfer of stock a close corporation, the identity of the other
to him would cause the stock of the stockholders is important to each; the
corporation to be held by more than the incorporators have confidence in one
number of persons permitted by its another which they may not have in an
articles of incorporation to hold stock of outsider. Furthermore, the incorporators
the corporation, or (c) that the transfer may feel that the success of the enterprise
of stock is in violation of a restriction on depends upon the retention of the
transfer of stock, the corporation may, personnel who formed it, or they may be
at its option, refuse to register the manufacturing under secret processes
transfer of stock in the name of the which they do not want outsiders to learn.
transferee. In the family corporation it is often the
desire of he father to pass the corporation
5. The provisions of subsection (4) shall to his son without interference from other
not applicable if the transfer of stock, outside the family. Any one of these factors
though contrary to subsections (1), (2) may induce the incorporators to attempt to
of (3), has been consented to by all the restrict the transfer of stock.
stockholders of the close corporation,
or if the close corporation has amended Effect of the transfer of stock in breach of
its articles of incorporation in qualifying conditions
accordance with this Title.
Unless “consented to by all the operation of the business and affairs of
stockholders or if the close corporation has a close corporation, the stockholders
amended its articles of incorporation,” a shall be held to strict fiduciary duties to
transfer of shares of stock in breach of each other and among themselves. Said
qualifying conditions would justify the stockholders shall be personally liable
corporation through the corporate secretary for corporate torts unless the
to refuse to register the transfer of stock. corporation has obtained reasonably
Such transfer need not be for value, hence it adequate liability insurance.
may be the result of a donation.
Effect of the Stockholders’ agreement
Sec. 100. Agreements by stockholders. – before and after formation of corporation
1. Agreements by and among stockholders Stockholders’ agreements before and after
executed before the formation and formation and organization of the
organization of a close corporation, corporation survive incorporation and shall
signed by all stockholders, shall survive be valid and binding for as long as they are
the incorporation of such corporation not inconsistentwith the articles of
and shall continue to be valid and incorporation. Agreements made prior to
binding between and among such incorporation require fairly literal
stockholders, if such be their intent, to performance. There must be an actual
the extent that such agreements are not contractual relation. Given such relation,
inconsistent with the articles of the pre-incorporators are promoters and
incorporation, irrespective of where the may arrange agreements to form and
provisions of such agreements are manage the corporation.
contained, except those required by this
Title to be embodied in said articles of Sec. 101. When board meeting is
incorporation. unnecessary or improperly held. – Unless
the by-laws provide otherwise, any action
2. An agreement between two or more by the directors of a close corporation
stockholders, if in writing and signed by without a meeting shall nevertheless be
the parties thereto, may provide that in deemed valid if:
exercising any voting rights, the shares
held by them shall be voted as therein 1. Before or after such action is taken,
provided, or as they may agree, or as written consent thereto is signed by all
determined in accordance with a the directors.
procedure agreed upon by them.
3. No provision in any written agreement 2. All the stockholders have actual or
signed by the stockholders, relating to implied knowledge of the action and
any phase of the corporate affairs, shall make no prompt objection thereto in
be invalidated as between the parties writing.
on the ground that its effect is to make
them partners among themselves. 3. The directors are accustomed to take
informal action with the express or
4. A written agreement among some or all implied acquiescence of all the
of the stockholders in a close stockholders.
corporation shall not be invalidated on
the ground that it so relates to the 4. All the directors have express or implied
conduct of the business and affairs of knowledge of the action in question and
the corporation as to restrict or none of them makes prompt objection
interfere with the discretion or powers thereto in writing.
of the board of directors: Provided,
That such agreement shall impose on If a director's meeting is held without
the stockholders who are parties proper call or notice, an action taken
thereto the liabilities for managerial therein within the corporate powers is
acts imposed by this Code on directors. deemed ratified by a director who failed to
attend, unless he promptly files his written
5. To the extent that the stockholders are objection with the secretary of the
actively engaged in the management or corporation after having knowledge thereof.
Sec. 102. Pre-emptive right in close unnecessary or even if improperly held
corporations. - The pre-emptive right of would be valid. The by-laws, however, may
stockholders in close corporations shall provided otherwise or a stockholder may
extend to all stock to be issued, including file his written objection in writing after
reissuance of treasury shares, whether for having knowledge of the action taken by
money, property or personal services, or in the directors.
payment of corporate debts, unless the
articles of incorporation provide otherwise. Pre-emptive right in close corporations;
Issuance of new Stock
Exceptions in Section 39, not applicable A stockholder in a close corporation has a
It is submitted that in a close corporation, right to purchase his pro rata share of the
the exceptions provided in Sec 39 are not new stock. If the pre-emptive right is
applicable. The first exception mentioned violated he can sue the corporation for
therein regarding the shares issued in damages, enjoin the stock issue, obtain an
compliance with laws requiring stock order permitting him to subscribe, or obtain
offerings or minimum stock ownership by cancellation of the issue. But even where
the public cannot by its very nature refer to the stockholder’s pre-emptive right is
a close corporation. The pre-emptive right preserved. The right may be inadequate as
of shareholders in close corporation is thus a protective devise for the stockholder in a
broadened to include all issues without any close corporation because the lack of a
exception, unless of course, restricted by market for his stock leaves him with the
the articles of incorporation and printed in alternatives of investing more capital or
the stock certificates. It may be mentioned having the value of his stock diluted.
however, that any prior waiver of pre-
emptive right must be expressly provided Sec. 104. Deadlocks. - Notwithstanding any
for in the articles of incorporation and not contrary provision in the articles of
in an ordinary agreement executed by the incorporation or by-laws or agreement of
parties. This rule however, would not stockholders of a close corporation, if the
militate against the unanimous agreement directors or stockholders are so divided
of all the stockholders. respecting the management of the
corporation's business and affairs that the
Sec. 103. Amendment of articles of votes required for any corporate action
incorporation. – Any amendment to the cannot be obtained, with the consequence
articles of incorporation which seeks to that the business and affairs of the
delete or remove any provision required by corporation can no longer be conducted to
this Title to be contained in the articles of the advantage of the stockholders generally,
incorporation or to reduce a quorum or the Securities and Exchange Commission,
voting requirement stated in said articles of upon written petition by any stockholder,
incorporation shall not be valid or effective shall have the power to arbitrate the
unless approved by the affirmative vote of dispute. In the exercise of such power, the
at least two-thirds (2/3) of the outstanding Commission shall have authority to make
capital stock, whether with or without such order as it deems appropriate,
voting rights, or of such greater proportion including an order:
of shares as may be specifically provided in
the articles of incorporation for amending, 1. Canceling or altering any provision
deleting or removing any of the aforesaid contained in the articles of
provisions, at a meeting duly called for the incorporation, by-laws, or any
purpose. stockholder's agreement.
Rule and Exceptions when board meeting 2. Canceling, altering or enjoining any
unnecessary resolution or act of the corporation or
General Rule: the directors of a corporation its board of directors, stockholders, or
cannot act individually or separately in officers.
order to bind the corporation. They must
act as a board at a meeting duly called for 3. Directing or prohibiting any act of the
the purpose. corporation or its board of directors,
Exception: Section 101. It enumerates the stockholders, officers, or other persons
instances when a board at a meeting is party to the action.
4. Requiring the purchase at their fair provided either for directorial disputes or
value of shares of any stockholder, for stockholder disputes. Although there
either by the corporation regardless of are some disadvantages of arbitration
the availability of unrestricted retained proceedings, nevertheless, the advantages
earnings in its books, or by the other of arbitration, in saving both money and
stockholders. hard feelings, would seem to outweigh the
disadvantages in most cases.
5. Appointing a provisional director.
Provisional director and SEC supervised
6. Dissolving the corporation. management
In accordance with Section 104, the SEC
7. Granting such other relief as the may in case of deadlocks in the close
circumstances may warrant. corporation appoint a provisional director.
“A provisional director shall be an impartial
A provisional director shall be an impartial person who is neither a stock-holder nor a
person who is neither a stockholder nor a creditor of the corporation and whose other
creditor of the corporation or of any qualifications, may be determined by the
subsidiary or affiliate of the corporation, SEC.”
and whose further qualifications, if any, may
be determined by the Commission. A Under Section 2 (Pres Decree No. 1653), the
provisional director is not a receiver of the SEC has the power “to create and appoint a
corporation and does not have the title and management committee, board, or body to
powers of a custodian or receiver. A undertake the management of corporations,
provisional director shall have all the rights partnership or other associations in
and powers of a duly elected director of the appropriate cases wherein there is
corporation, including the right to notice of imminent danger or dissipation, loss or
and to vote at meetings of directors, until wastage or destruction of assets or other
such time as he shall be removed by order properties or paralization of business
of the Commission or by all the operations of such corporations or entities
stockholders. His compensation shall be prejudicial to the interest of the minority,
determined by agreement between him party-litigants or the general public.”
and the corporation subject to approval of
the Commission, which may fix his Sec. 105. Withdrawal of stockholder or
compensation in the absence of agreement dissolution of corporation. – In addition
or in the event of disagreement between and without prejudice to other rights and
the provisional director and the remedies available to a stockholder under
corporation. this Title, any stockholder of a close
corporation may, for any reason, compel the
Deadlock – Deadlock signifies a standstill in said corporation to purchase his shares at
the management of the corporate affairs their fair value, which shall not be less than
resulting from the evenly divide action of their par or issued value, when the
directors or stockholders in a close corporation has sufficient assets in its books
corporation. to cover its debts and liabilities exclusive of
capital stock: Provided, That any
In the event of deadlocks SEC may arbitrate stockholder of a close corporation may, by
In the event of a deadlock in a close written petition to the Securities and
corporation, the SEC has the power to Exchange Commission, compel the
arbitrate the deadlock “upon written dissolution of such corporation whenever
petition of any stockholder.” In close any of acts of the directors, officers or those
corporations that are subject to a checks in control of the corporation is illegal, or
and balances system because of control fraudulent, or dishonest, or oppressive or
devices there are bound to be deadlocks, unfairly prejudicial to the corporation or
and some steps must be taken to cope with any stockholder, or whenever corporate
them. Many of the problems that arise can assets are being misapplied or wasted.
be settled by arbitration, Arbitration (the
determination of a matter of difference • Appraisal rights in regular corporations
between contending parties) may be can be opted by the dissenting stockholder
only in cases where the fundamental
change in the corporate structure or or other institutions of learning shall, as
operations is involved, whereas a soon as organized, so classify themselves
stockholder of a close corporation may, for that the term of office of one-fifth (1/5) of
any reason, compel the said coporation to their number shall expire every year.
purchase his shares at their par value, when Trustees thereafter elected to fill vacancies,
the corporation has sufficient assets in its occurring before the expiration of a
books to cover his debts and liabilities particular term, shall hold office only for the
exclusive of capital stock. ( In Appraisal unexpired period. Trustees elected
right, fair value of shares is given but in thereafter to fill vacancies caused by
Withdrawal Right, the fair value cannot be expiration of term shall hold office for five
less than the par or issued value of the (5) years. A majority of the trustees shall
shares; In Appraisal right, there must be constitute a quorum for the transaction of
present unrestricted retained earnings in business. The powers and authority of
the books of the corporation) trustees shall be defined in the by-laws.
EDUCATIONAL CORPORATIONS
For Educational corporations, where the
trustees should be divided into multiples of
five. So you should have five, ten or fifteen
trustees if they are organized as non-stock
corporation. And unless otherwise provided
in the articles of incorporation or by-laws,
the terms of the trustees should be five
years, and every year only one fifth (1/5) is
elected, again to provide for continuity in
policies. But you can provide that they will
be all elected instead for a term of one year,
everybody has to be elected.
How formed?
Sec. 111. Articles of incorporation. – In
order to become a corporation sole, the
chief archbishop, bishop, priest, minister,
rabbi or presiding elder of any religious
denomination, sect or church must file with
the Securities and Exchange Commission
articles of incorporation setting forth the
following:
4. The names and addresses of the 4. That the religious society or religious
persons who are to supervise the order, or diocese, synod, or district
winding up of the affairs of the organization desires to incorporate for
corporation. the administration of its affairs,
properties and estate.
Upon approval of such declaration of
dissolution by the Securities and Exchange 5. The place where the principal office of
Commission, the corporation shall cease to the corporation is to be established and
carry on its operations except for the located, which place must be within the
purpose of winding up its affairs. Philippines.
ivil tribunals, then a church member who is expelled from the membership by the church authorities, or a priest or minister who is by the
5, Nov.28, 2004 to Ferrer and Ferrer Law Office re term of existence of religious corporation.
corporation sole or a corporation aggregate. As such, thdeislasw
o lvinetentdhsethajtureidliigciaolus oerngtiatnyi.zatiFoonrs may exist perp
dissolution to be effective “[t]he
requirements mandated by the
Corporation Code should have been
strictly complied with.” Vesagas v. Court
of Appeals, 371 SCRA 509, 516 (2002).
• A corporation cannot extend its life by
amendment of its articles of
incorporation effected during the three-
year statutory period for liquidation
when its original term of existence had
DISSOLUTION already expired, as the same would
Dissolution of a corporation is the constitute new business. Alhambra
extinguishment of the franchise of a Cigar & Cigarette Manufacturing
corporation and termination of its corporate Company, Inc. v. SEC, 24 SCRA 269
existence. (1968).
• When the period of corporate life
Modes of Dissolution: expires, the corporation ceases to be a
1. Voluntary Dissolution body corporate for the purpose of
2. Involuntary Dissolution continuing the business for which it was
3. Shortening of term organized. PNB v. Court of First Instance
4. Expiration of term (JRS at 311) of Rizal, Pasig, Br. XXI, 209 SCRA 294
5. Failure to organize and commence (1992).
business within two years from the date
of issuance of certificate of
incorporation
6. Legislative Dissolution (CLV’s CLR at 936)
Effects of Dissolution:
1. Transfer of Legal title to corporate
property.
2. The corporation ceases as a body
corporate to continue the business for
which it was established.
3. Continuation of a body corporation (the
corporation continues as a body
corporate for 3 years for purposes of
winding up or liquidation).
4. After the expiration of the 3 year
winding up period, the corporation
ceases to exist for all purposes. (JRS at
314).
Republic Act No. 5455. Regulates the entry Presidential Decree No. 151 allows citizens
of foreign investments whenever foreign of the Philippines or corporations which
equity participation exceeds 30 percent of have acquired lands of the public domain or
the capital stock. which or any other law, to enter into service
contracts for financial, technical,
Under Republic Act no. 5455 “doing business management or other forms of assistance
includes”: with any foreign person or entity whenever
a. Soliciting orders, purchases, service and wherever such contracts are vital to
contracts, opening offices whether achieve sound and more expeditious
called liaison offices or branches. exploration, development, exploitation or
b. Appointing representatives or utilization of such lands owned, held or
distributors who are domiciled in the controlled by such citizens or corporations.
Philippines or who in any calendar year
stay in the Philippines for a period or Section 127. Who may be a resident agent.
periods totalling one hundred eighty – A resident agent may be either an
days or more. individual residing in the Philippines or a
c. Participating in the management, domestic corporation lawfully transacting
supervision, or control of any domestic business in the Philippines: Provided, That
business firm, entity, or corporation in in the case of an individual, he must be of
the Philippines. good moral character and of sound financial
d. Any other act or acts that imply a standing.
continuity of commercial dealings or
arrangements, and contemplates to Section 128. Resident agent; service of
that extent the performance of acts or process. – The Securities and Exchange
works, or the exercise of some of the Commission shall require as a condition
function normally incident to, and in precedent to the issuance of the license to
progressive prosecution of, commercial transact business in the Philippines by any
gain or of the purpose and object of the foreign corporation that such corporation
business organization. file with the Securities and Exchange
Commission a written power of attorney
The Board of Investments requires license designating some person who must be a
not only of corporations organized abroad resident of the Philippines, on whom any
but also of domestic corporations, if more summons and other legal processes may be
than 40% of its voting shares are owned served in all actions or other legal
and held by aliens or more than 30% of its proceedings against such corporation, and
total capitalization is in the hands of aliens. consenting that service upon such resident
agent shall be admitted and held as valid as
Guidelines for issuance of certificate of if served upon the duly authorized officers
authority to do business under BOI (Rep. Act of the foreign corporation at its home office.
No.5455) Any such foreign corporation shall
likewise execute and file with the Securities Section 129. Law applicable. – Any foreign
and Exchange Commission an agreement or corporation lawfully doing business in the
stipulation, executed by the proper Philippines shall be bound by all laws, rules
authorities of said corporation, in form and and regulations applicable to domestic
substance as follows: corporations of the same class, except such
only as provide for the creation, formation,
“The (name of foreign corporation) does organization or dissolution of corporations
hereby stipulate and agree, in consideration or those which fix the relations, liabilities,
of its being granted by the Securities and responsibilities, or duties of stockholders,
Exchange Commission a license to transact members, or officers of corporations to
business in the Philippines, that if at any each other or to the corporation.
time said corporation shall cease to transact
business in the Philippines, or shall be Licensed foreign corporations lawfully doing
without any resident agent in the business in the Philippines shall be subject
Philippines on whom any summons or other to our laws just like domestic corporations
legal processes may be served, then in any of the same class.
action or proceeding arising out of any
business or transaction which occurred in Philippine laws will not apply when it refers
the Philippines, service of any summons or to the creation, formation, organization or
other legal process may be made upon the dissolution of corporations or such as fux
Securities and Exchange Commission and the relations, liabilities, responsibilities, or
that such service shall have the same force duties of stockholders, members, or officers
and effect as if made upon the duly- of corporations to each other or to the
authorized officers of the corporation at its corporation.
home office.”
Section 130. Amendments to articles of
Whenever such service of summons or incorporation or by-laws of foreign
other process shall be made upon the corporations. – Whenever the articles of
Securities and Exchange Commission, the incorporation or by-laws of a foreign
Commission shall, within ten (10) days corporation authorized to transact business
thereafter, transmit by mail a copy of such in the Philippines are amended, such
summons or other legal process to the foreign corporation shall, within sixty (60)
corporation at its home or principal office. days after the amendment becomes
The sending of such copy by the effective, file with the Securities and
Commission shall be necessary part of and Exchange Commission, and in the proper
shall complete such service. All expenses cases with the appropriate government
incurred by the Commission for such service agency, a duly authenticated copy of the
shall be paid in advance by the party at articles of incorporation or by-laws, as
whose instance the service is made. amended, indicating clearly in capital letters
In case of a change of address of the or by underscoring the change or changes
resident agent, it shall be his or its duty to made, duly certified by the authorized
immediately notify in writing the Securities official or officials of the country or state of
and Exchange Commission of the new incorporation. The filing thereof shall not of
address. itself enlarge or alter the purpose or
purposes for which such corporation is
The SEC shall require as a condition authorized to transact business in the
precedent to the issuance of the license to Philippines.
transact business in the Philippines by any
foreign corporation that such corporation Section 131. Amended license. – A foreign
file with the SEC, a written power of corporation authorized to transact business
attorney designating some person who in the Philippines shall obtain an amended
must be a resident of the Philippines, on license in the event it changes its corporate
whom any summons and other legal name, or desires to pursue in the
processes may be served in all actions or Philippines other or additional purposes, by
other legal proceedings against such submitting an application therefor to the
corporation. Securities and Exchange Commission,
favorably endorsed by the appropriate
government agency in the proper cases.
Section 132. Merger or consolidation Section 133. Doing business without a
involving a foreign corporation licensed in license. – No foreign corporation transacting
the Philippines. – One or more foreign business in the Philippines without a
corporations authorized to transact license, or its successors or assigns, shall be
business in the Philippines may merge or permitted to maintain or intervene in any
consolidate with any domestic corporation action, suit or proceeding in any court or
or corporations if such is permitted under administrative agency of the Philippines; but
Philippine laws and by the law of its such corporation may be sued or proceeded
incorporation: Provided, That the against before Philippine courts or
requirements on merger or consolidation as administrative tribunals on any valid cause
provided in this Code are followed. of action recognized under Philippine laws.
6. Failure to pay any and all taxes, imposts, 3. The petition for withdrawal of license
assessments or penalties, if any, lawfully has been published once a week for
due to the Philippine Government or three (3) consecutive weeks in a
any of its agencies or political newspaper of general circulation in the
subdivisions. Philippines.