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PARTNERSHIP Principle of Delectus Personae (choice of
Art. 1767. By the contract of partnership two or
more persons bind themselves to contribute
money, property, or industry to a common fund
with the intention of dividing the profits among
themselves.
Definition
Partnership is a contract whereby two or more
persons bind themselves to contribute money,
property or industry to a common fund with the
intention of dividing profits among themselves.
Elements
1. Intention to form a contract
of partnership
2. Participation in both profits and losses
3. Community of interests
Basic Features
1. Voluntary agreement
2. Association for profit
3. Mutual contribution to a common fund
4. Lawful purpose or object
5. Mutual agency of partners
6. Articles must not be kept secret
7. Separate juridical personality
Characteristics
1. Consensual – perfected by
mere consent.
2. Bilateral – formed by two or more persons
creating reciprocal rights and obligations.
3. Preparatory - entered into as a means to an
end.
4. Nominate – has a special name or
designation.
5. Onerous – contributions in the form of either
money, property and/or industry must be
made.
6. Commutative – the undertaking of each
partner is considered as the equivalent of
that of the others.
7. Principal – its existence or validity does not
depend on some other contract.
persons) – a person has the right to select
persons with whom he wants to be associated
with in partnership.
Art. 1768. The partnership has a juridical
personality separate and distinct from that of
each of the partners even in case of failure to
comply with the requirements of Article 1772,
first paragraph.
Partnership, a juridical person
As an independent juridical person, a partnership
may enter into contracts, acquire and possess
property of all kinds in its name, as well as incur
obligations and bring civil or criminal actions.
Thus, a partnership may be declared insolvent
even if the partners are not. It may enter into
contracts and may sue and be sued in its firm
name or by its duly authorized representative. It
is sufficient that service of summons be served on
any partner.
Partners cannot be held liable for the obligations
of the partnership unless it is shown that the legal
fiction of a different juridical personality is being
used for a fraudulent, unfair or illegal purpose.
Effect of failure to comply with statutory
requirements Under Art
1772
Partnership still acquires personality despite
failure to comply with the requirements of
execution of public instrument and registration
of name in SEC.
Under Arts 1773 and 1775
Partnership with immovable property
contributed, if without requisite inventory,
signed and attached to public instrument, shall
not acquire any juridical personality because the
contract itself is void. This is also true for secret
associations or societies.
To organize a partnership not an absolute right
It is but a privilege which may be enjoyed only
under such terms as the State may deem
necessary to impose.
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Art. 1769. In determining whether a partnership
exists, these rules shall apply:
1. Except as provided by Article 1825, persons
who are not partners as to each other are not
partners as to third persons.
2. Co-ownership or co-possession does not of
itself establish a partnership, whether such
co-ownership or copossessors do or do not
share any profits made by the use of the
property.
3. The sharing of gross returns does not of itself
establish a partnership, whether or not the
persons sharing them have a joint or common
right or interest in any property from which
the returns are derived.
4. The receipt by a person of a share of the
profits of a business is prima facie evidence
that he is a partner in the business, but no
such inference shall be drawn if such profits
were received in payment:
a. As a debt by
installments or otherwise.
b. As wages of an employee or rent to
a landlord.
c. As an annuity to a widow or
representative of a deceased partner.
d. As interest on a loan, though the amount
of payment vary with the profits of the
business.
e. As the consideration for the sale of a
goodwill of a business or other property
by installments or otherwise.
In general, to establish the existence of a
partnership, all of its essential features or
characteristics must be shown as being present.
In case of doubt, art.1769 shall apply. This article
seeks to exclude from the category of partnership
certain features enumerated herein which, by
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themselves, are not indicative of the existence of
a partnership.
Persons not partners as to each other Persons
who are partners as between themselves are
partners as to third persons. Generally, the
converse is true: if they are not partners between
themselves, they cannot be partners as to third
persons. Partnership is a matter of intention,
each partner giving his consent to become a
partner. However, whether a partnership exists
between the parties is a factual matter. Where
parties declare they are not partners, this, as a
rule, settles the question between them. But
where a person misleads third persons into
believing that they are partners in a non-existent
partnership, they become subject to liabilities of
partners (doctrine of estoppel).Whether or not
the parties call their relationship or believe it to
be a partnership is immaterial. Thus, with the
exception of partnership by estoppel, a
partnership cannot exist as to third persons if no
contract of partnership has been entered into
between the parties themselves.
Co-ownership or co-possession
There is co-ownership whenever the ownership
of an undivided thing or right belongs to different
persons.
Clear intent to derive profits from operation of
business
Co-ownership does not of itself establish the
existence of a partnership, although it is one of its
essential elements. This is true even if profits are
derived from the joint ownership. The profits
must be derived from the operation of business
by the members of the association and not
merely from property ownership. The law does
not imply a partnership between co-owners
because of the fact that they develop or operate
a common property, since they may rightfully do
this by virtue of their respective titles. There must
be a clear intent to form a partnership.
Existence of fiduciary relationship
Partners have a well-defined fiduciary
relationship between them. Co-owners do not.
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Should there be dispute; the remedy of partners
is an action for dissolution, termination and
accounting. For co-owners it would be one, for
instance, for nonperformance of contract. People
can become co-owners without a contract but
they cannot become partners without one.
Persons living together without benefit of
marriage
Property acquired governed by rules on
coownership.
Sharing of gross returns not even presumptive
evidence of partnership The mere sharing of
gross returns alone does not even constitute
prima facie evidence of partnership, since in a
partnership, the partners share profits after
satisfying all of the partnership’s liabilities.
Reason for the rule
Partner interested in both failures and successes;
it is the chance of loss or gain that characterizes
a business. Where the contract requires a given
portion of gross returns to be paid over, the
portion is paid over as commission, wages, rent,
etc.
Where there is evidence of mutual
management
Where there is further evidence of mutual
management and control, partnership may
result.
Receipt of share in the profits strong
presumptive evidence of partnership An
agreement to share both profits and losses tends
strongly to establish the existence of a
partnership. It is not conclusive, however, just
prima facie and may be rebutted by other
circumstances.
When no such inference will be drawn
Under par. 4 of art. 1769, sharing of profits is not
prima facie evidence of partnership in the cases
enumerated under subsections (a) – (e). In these
cases, the profits are not shared as partner but in
some other respects or purpose. The basic test of
partnership is whether the business is carried on
in behalf of the person sought to be held liable.
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Sharing of profits as owner It is not merely the
sharing of profits, but the sharing of them as co-
owner of the business or undertaking that makes
one partner. Test: Does the recipient have an
equal voice as proprietor in the conduct and
control of the business? Does he own a share of
the profits as proprietor of the business
producing them? One must have an interest with
another in the profits of a business as profits.
Burden of proof and presumption The burden of
proving the existence of a partnership rests on
the party having the affirmative of that issue. The
existence of a partnership must be proved and
will not be presumed. The law presumes that
those acting as partners have entered into a
contract of partnership. Where the law presumes
the existence of partnership, the burden of proof
is on the party denying its existence. When a
partnership is shown to exist, the presumption is
that it continues and the burden of proof is on the
person asserting its termination. One who alleges
partnership cannot prove it merely by evidence
of an agreement using the term “partner”. Non-
use of the term, however, is entitled to weight.
The question of whether a partnership exists is
not always dependent upon the personal
arrangement or understanding of the parties.
Parties intending to do a thing which in law
constitutes partnership are partners.
Legal intention is the crux of partnership. Parties
may call themselves partners but their contract
may be adjudged something quite different.
Conversely, parties may expressly state that
theirs in not a partnership yet the law may
determine otherwise on the basis of legal intent.
However, courts will be influenced to some
extent by what the parties call their contract.
Tests and incidents of partnership
In determining whether a partnership exists, it is
important to distinguish between tests or indicia
and incidents of partnership. Only those terms of
a contract upon which the parties have reached
an actual understanding, either expressly or
impliedly, may afford a test by which to ascertain
the legal nature of the contract. Some of the
typical incidents of a partnership are:
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1. The partners share in profits and losses.
2. They have equal rights in the mgt and
conduct of the partnership business.
3. Every partner is an agent of the partnership,
and entitled to bind the others by his acts. He
may also be liable for the entire partnership
obligations.
4. All partners are personally liable for the debts
of the partnership with their separate
property except that limited partners are not
bound beyond the amount of their
investment.
5. A fiduciary relation exists between the
partners.
6. On dissolution, the partnership is not
terminated, but continues until the winding
up of partnership is completed. Such
incidents may be modified by stipulation of
the partners.
Similarities between a partnership and a
corporation
1. Both have juridical personality separate and
distinct from that of the individuals
composing it;
2. Both can only act through its agents;
3. Both are organizations composed of an
aggregate of individuals;
4. Both distribute profits to those who
contribute capital to the business;
5. Both can only be organized where there is a
law authorizing is organization;
6. Partnerships are taxable as corporations.
Art. 1770. A partnership must have a lawful
object or purpose, and must be established for
the common benefit or interest of the partners.
When an unlawful partnership is dissolved by a
judicial decree, the profits shall be confiscated in
favor of the State, without prejudice to the
provisions of the Penal Code governing the
confiscation of the instruments and effects of a
crime. Object or purpose of partnership
The provision of the 1st paragraph reiterates 2
essential elements of a contract of partnership:
1. Legality of the object; and
2. Community of benefit or interest of the
partners. The parties possess absolute
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freedom to choose the transaction or
transactions they must engage in. The only
limitation is that the object must be lawful
and for the common benefit of the members.
The illegality of the object will not be
presumed; it must appear to be of the
essence of the relationship.
Effects of an unlawful partnership
1. The contract is void and the partnership
never existed in the eyes of the law;
2. The profits shall be confiscated in favor of the
government;
3. The instruments or tools and proceeds of the
crime shall also be forfeited in favor of the
government;
4. The contributions of the partners shall not be
confiscated unless they fall under #3.
A partnership is dissolved by operation of law
upon the happening of an event which makes it
unlawful. A judicial decree is not necessary to
dissolve an unlawful partnership. However,
advisable that judicial decree be secured. 3rd
persons who deal w/ partnership w/o knowledge
of illegal purpose are protected.
Right to return of contribution where
partnership is unlawful
Partners must be reimbursed the amount of their
respective contributions. The partner who limits
himself to demanding only the amount
contributed by him need not resort to the
partnership contract on which to base his claim
or action. Since the purpose for which the
contribution was made has not come into
existence, the manager or administrator must
return it, and he who has paid his share is entitled
to recover it.
Right to receive profits where partnership is
unlawful
Law does not permit action for obtaining earnings
from an unlawful partnership because for that
purpose, the partner will have to base his action
upon the partnership contract, which is null and
without legal existence by reason of its unlawful
object; and it is self-evident that what does not
exist cannot be a cause of action. Profits earned
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do not constitute or represent the partner’s
contribution. He must base his claim on the
contract which is void. It would be immoral and
unjust for the law to permit a profit from an
industry prohibited by it. T he courts will refuse
to recognize its existence, and will not lend their
aid to assist either of the parties thereto in an
action against each other. Therefore, there
cannot be no accounting demanded of a partner
for the profits which may be in his hands, nor can
recovery be had.
Effect of partial illegality of partnership business
Where a part of the business is legal and part
illegal, a n account of that which is legal may be
had. Where, w/o the knowledge or participation
of the partners, the firm’s profits in a lawful
business has been increased by wrongful acts,
the innocent partners are not precluded as
against the guilty partners from recovering their
share of the profits.
Effect of subsequent illegality
of partnership business
Contract will not be nullified. Where the business
for which the partnership is formed is legal when
the partnership is entered into, but afterward
becomes illegal, an accounting may be had as to
the business transacted prior to such time.
Community of interest
between the partners for
business purposes
The salient features of an ordinary partnership
are a community of interest in profits and losses,
a community of interest in the capital employed,
and a community of power in administration. This
community of interest is the basis of the
partnership relation. However, although every
partnership is founded on a community of
interest, e very community of interest does not
necessarily constitute a partnership. Property
used in the business may belong to one or more
partners, so that there is no joint property, other
than joint earnings. To state that partners are co-
owners of a business is to state that they have the
power if ultimate control. But partners may agree
upon concentration of management, leaving
some of their members entirely inactive or
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dormant. Only one of these features, profit-
sharing, seems to be absolutely essential. But a
mere sharing of profits of itself does not of
necessity constitute a partnership. The court
must consider all the essential elements in light
of the facts of the particular case before deciding
whether a partnership exists.
Art. 1771. A partnership may be constituted in
any form, except where immovable property or
real rights are contributed thereto, in which case
a public instrument shall be necessary .Form of
partnership
contract
General rule
No special form required for validity or existence
of the contract of partnership. Contract maybe
made orally or in writing regardless of the value
of the contributions.
Where immovable property or real rights are
contributed
Execution of public instrument necessary for
validity of contract of partnership. To affect 3rd
persons, the transfer of real property to the
partnership must be duly registered in the
Registry of Property.
When partnership agreement covered by the
Statute of Frauds
An agreement to enter in a partnership at a
future time, which by its terms is not to be
performed w/in a year from the making thereof
is covered by the Statute of Frauds. Such
agreement is unenforceable unless it is in writing
or at least evidenced by some note or
memorandum.
Partnership implied from conduct
Binding effect
Existence of partnership may be implied from the
acts or conduct of the parties, as well as from
other declarations, and such implied contract
would be as binding as a written and express
contract.
Ascertainment of intention of parties In
determining whether a particular transaction
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constitutes a partnership, as between the parties,
the intention as disclosed by the entire
transaction, and as gathered from the facts and
from the language employed by the parties as
well as their conduct, should be ascertained.
Conflict between intention and terms of
contract
If the parties intend a general partnership, they
are general partners although their purpose is to
avoid the creation of such a relation.
Art. 1772. Every contract of partnership having a
capital of three thousand pesos or more, in
money or property, shall appear in a public
instrument, which must be recorded in the Office
of the Securities and Exchange Commission.
Failure to comply with the requirements of the
preceding paragraph shall not affect the liability
of the partnership and the members thereof to
third persons. Registration of partnership
Partnership with capital of P3, 000 or more
Requirements:
1. The contract must appear in a public
instrument;
2. It must be recorded or registered w/ the SEC.
However, failure to comply w/ the above
requirements does not prevent the
formation of the partnership or affect its
liability and that of the partners to 3rd
persons. But any partner is granted the right
bylaw to compel each other to execute the
contract in a public instrument.
Purpose of registration Registration is necessary
as a condition for the issuance of licenses to
engage in business and trade. In this way, the tax
liabilities of big partnerships cannot be evaded
and the public can determine more accurately
their membership and capital before dealing with
them.
When partnership considered registered The
objective of the law is to make the recorded
instrument open to all and to give notice thereof
to interested parties. This objective is achieved
from the date the partnership papers are
presented to and left for record in the
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Commission. This is the effective date of
registration. If the certificate of recording is
issued on a subsequent date, its effectively
retroacts to date of presentation.
Art. 1773. A contract of partnership is void,
whenever immovable property is contributed
thereto, if an inventory of said property is not
made, signed by the parties, and attached to the
public instrument. Partnership with contribution
of immovable property
Where immovable property contributed, failure
to comply w/ the following requisites will render
the partnership contract void:
1. The contract must be in a public instrument;
2. An inventory of the property contributed
must be made, signed by the parties, and
attached to the public instrument. Art. 1773
is intended primarily to protect 3rd persons.
W/ regard to 3rdpersons, a de facto
partnership or partnership by estoppel may
exist. There is nothing to prevent the court
from considering the partnership agreement
an ordinary contract from which the parties’
rights and obligations to each other may be
inferred and enforced.
When inventory is not required
An inventory is required only whenever
immovable property is contributed. If not
contributed or if personal property, no inventory
required.
Importance of making inventory of real property
in a p a r t n e r s h i p An inventory is very
important in a partnership to how much is due
from each partner to complete his share in the
common fund and how much is due to each of
them in case of liquidation. The execution of a
public instrument of partnership would be
useless if there is no inventory of immovable
property contributed because w/o its description
and designation, the instrument cannot be
subject to inscription in the Registry of Property,
and the contribution cannot prejudice 3rd
persons.
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Art. 1774. Any immovable property or an interest
therein may be acquired in the partnership name.
Title so acquired can be conveyed only in the
partnership name. Acquisition or conveyance of
property by partnership
Since partnership has juridical personality of its
own, it may acquire immovable property in its
own name. Title so acquired can be conveyed
only in the partnership name.
Art. 1775. Associations and societies, whose
articles are kept secret among the members, and
wherein any one of the members may contract in
his own name with third persons, shall have no
juridical personality, and shall be governed by the
provisions relating to co-ownership. Secret
partnerships without juridical personality
Partnership relation is created only by the
voluntary agreement of the partners. It is
essential that the partners are fully informed not
only of the agreement but of all matters affecting
the partnership. Secret partnerships are not by
nature partnerships. Secret partnerships shall be
governed by the provisions relating to
coownership.
Importance of giving publicity to articles of
partnership
It is essential that the arts of partnership be given
publicity for the protection not only of the
members themselves but also 3rd persons from
fraud and deceit. A member who transacts
business for the secret partnership in his own
name becomes personally bound to 3rd persons
unaware of the existence of such association.
Partnership liability may still result, however, in
cases of estoppel.
Art. 1776. As to its object, a partnership is either
universal or particular. As regards the liability of
the partners, a partnership may be general or
limited. Classifications of partnership
As to extent of its subject matter
1. Universal partnership. (Art. 1777)
a. Universal partnership of all present
property. (Art. 1778)
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b. Universal partnership of profits.
(Art. 1780)
2. Particular partnership. (Art. 1783)
As to liability of the partners
General partnership: one consisting of general
partners who are liable pro rata and subsidiary
and sometimes solidarily w/ their separate
property for partnership debts.
Limited partnership: one formed by two or more
persons having as members one or more general
partners and one or more limited partners, the
latter not being personally liable for the
obligations of the partnership.
As to duration
Partnership at will: one in w/c no time is specified
and is not formed for a particular undertaking or
venture and w/c may be terminated at any time
by mutual agreement of the partners, or by the
will of any one partner alone; or one for a fixed
term or particular undertaking w/c is continued
after the end of the term or undertaking w/o
express agreement.
Partnership with a fixed term: one w/c the term
for w/c the partnership is to exist is fixed or
agreed upon or one formed for a particular
undertaking.
As to the legality of its existence De jure
partnership: one w/c has complied w/ all the
legal requirements for its establishment.
De facto partnership: one w/c has failed to
comply w/ all the legal requirements for its
establishment.
As to representation to others Ordinary or real
partnership: one w/c actually exists among the
partners and also as to 3rd persons.
Ostensible partnership or partnership or
partnership by estoppel: one w/c in reality is not
a partnership, but is considered a partnership
only in relation to those who, by their conduct or
admission, are precluded to deny or disprove its
existence.
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As to publicity
Secret partnership: one wherein the existence of
certain persons as partners is not avowed or
made known to the public by any of the partners.
Open or notorious partnership: one whose
existence is avowed or made known to the public
by the members of the firm.
As to purpose
Commercial or trading partnership: one formed
or the transaction of business.
Professional or non-trading partnership: one
formed for the exercise of a profession.
Kinds of partners
Under the Civil Code
1. Capitalist partner: one who contributes
money or property to the common fund.
2. Industrial partner: one who contributes only
his industry or personal service.
3. General partner: one whose liability to 3rd
persons extends to his separate property.
4. Limited partner: one whose liability to 3rd
persons is limited to his capital contribution.
5. Managing partner: one who manages the
entity.
6. Liquidating partner: one who takes charge of
the winding up of partnership affairs upon
dissolution.
7. Partner by estoppel: one who is not really a
partner but is liable as a partner for the
protection of innocent 3rd persons. He is one
represented as being a partner but who is not
so between the partners themselves.
8. Continuing partner: one who continues the
business of a partnership after it has been
dissolved by reason of the admission of a new
partner, or the retirement, death or
expulsion of one or more partners.
9. Surviving partner: one who remains after a
partnership has been dissolved by the death
of any partner.
10. Subpartner: one who, not being a member of
the partnership, contracts w/ a partner
w/reference to the latter’s share in the
partnership.
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Other classifications
1. Ostensible partner: one who takes active part
and known to the public as a partner.
2. Secret partner: one who takes active part in
the business but is not known to be a partner
by outside parties nor held
out as a partner by the other partners. He is
an actual partner.
3. Silent partner: one who does not take any
active part in the business although he may
be known to be a partner.
4. Dormant partner: one who does not take
active part in the business and is not known
or held out as a partner. He would be both a
silent and a secret partner.
5. Original partner: one who is a member of the
partnership from the time of its organization.
6. Incoming partner: a person lately, or about to
be, taken into an existing partnership as a
member.
7. Retiring partner: one withdrawn from the
partnership; a withdrawing partner. Art.
1777. A universal partnership may refer to all
the present property or to all the profits.
Art. 1778. A partnership of all present property is
that in which the partners contribute all the
property which actually belongs to them to a
common fund, with the intention of dividing the
same among themselves, as well as all the profits
they may acquire therewith.
Art. 1779. In a universal partnership of all present
property, the property which belongs to each of
the partners at the time of the constitution of the
partnership becomes the common property of all
the partners, as well as all the profits which they
may acquire there with. A stipulation for the
common enjoyment of any other profits may also
be made; but the property which the partners
may acquire subsequently by inheritance, legacy
or donation cannot be included in such
stipulation, except the fruits thereof.
Universal partnership of all present property
explained
A universal partnership of profits is one w/c
comprises all that the partners may acquire by
their industry or work during the existence of the
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partnership and the usufruct of movable or
immovable property w/c each of the partners
may possess at the time of the celebration of the
contract. In this kind of partnership, the following
become the common property of all the partners:
Property w/c belonged to each of them at the
time of the constitution of the partnership;
Profits w/c they may acquire from the property
contributed.
Contribution of future property
General rule: future properties cannot be
contributed. The very essence of the contract of
partnership that the properties contributed be
included in the partnership requires the
contribution of things determinate. The position
of a partner is like that of a donor, and donations
cannot comprehend future property. Thus,
property subsequently acquired by 1.inheritance;
2. Legacy; or 3. Donation cannot be included by
stipulation except the fruits thereof. Hence, any
stipulation including property so acquired is void.
Profits from other sources (not from properties
contributed) will become common property only
is there’s a stipulation.
Art. 1780. A universal partnership of profits
comprises all that the partners may acquire by
their industry or work during the existence of the
partnership. Movable or immovable property
which each of the partners may possess at the
time of the celebration of the contract shall
continue to pertain exclusively to each, only the
usufruct passing to the partnership.
Universal partnership of profits explained A
universal partnership of profits is one w/c
comprises all that the partners may acquire by
their industry or work during the existence of the
partnership and the usufruct of movable or
immovable property w/c each of the partners
may possess at the time of the celebration of the
contract.
Ownership of present and future property The
partners retain their ownership over their
present and future property. What passes to the
partnership are the profits or income and the use
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or usufruct of the same. Consequently, upon
dissolution, such property is returned to the
partners who own it.
Profits acquired through chance
Since the law only speaks of profits w/c the
partners may acquire by their industry or work,
profits acquired purely by chance are not
included.
Fruits of property subsequently acquired Fruits
of property subsequently acquired by the
partners do not belong to the partnership. Such
profits, however, may be included by express
stipulation.
Art. 1781. Articles of universal partnership,
entered into without specification of its nature,
only constitute a universal partnership of profits.
Presumption in favor of
universal partnership of profits
Reason for presumption: universal partnership of
profits imposes less obligations on the partners,
since they preserve the ownership of their
separate property.
Art. 1782. Persons who are prohibited from
giving each other any donation or advantage
cannot enter into a universal partnership.
Limitations upon the right to form a partnership
Persons who are prohibited by law to give
donations cannot enter into a universal
partnership for the reason that each of the
partners virtually makes a donation. To allow it
would be permitting them to do indirectly what
the law expressly prohibits. A partnership formed
in violation of this article is null and void.
Consequently, no legal personality is acquired. A
husband and wife, however, may enter into a
particular partnership or be members thereof.
Relevant provisions:
Art. 87: Donations between spouses during
marriage void, except moderate gifts on occasion
of family rejoicing. Also applies to those living
together as husband and wife w/o valid marriage.
Art. 739: The following donations are void: Those
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made between persons who are guilty of adultery
or concubinage at the time of the donation (no
need for conviction; preponderance of evidence
only required);
Those made between persons found guilty of the
same criminal offense,
inconsideration thereof;
c.)Those made to a public officer or his wife,
descendants and ascendants, by reason of his
office.
Art. 1783. A particular partnership has for its
object determinate things, their use or fruits, or a
specific undertaking, or the exercise of a
profession or vocation.
Particular partnership explained A particular
partnership is one w/c is neither a universal
partnership of present property nor a universal
partnership of profits. The fundamental
difference between a universal partnership and
a particular partnership lies in the scope of their
subject matter or object. In the former, the
object is vague and indefinite,
contemplating a general business w/ some
degree of continuity, while in the latter, it is
limited and well-defined, being confined
to an undertaking of a single,
temporary, or ad hoc nature.
Business of partnership need not be continuing
in nature
The carrying on of a business of a continuing
nature is not essential to constitute a
partnership. An agreement to undertake a
particular piece of work or a single transaction or
a limited number of transactions and
immediately divide the resulting profits would
seemt o fall w/in the meaning of the term
“partnership” as used in the law.
Rule under American law
The above is not true under the Uniform
Partnership Act w/c does not include joint
ventures w/c exists for a single transaction or a
limited number of transactions.
Law on Business Organizations Reviewer
Joint venture
While a joint venture is not a formal partnership
in the legal or technical sense, both are
governed, subject to certain qualifications,
practically by the same rules or principles of
partnership. This is logical since in a
joint venture, like in a partnership,
there is a community of interest in the business
and a mutual right of control and an agreement
to share jointly in profits and losses.
Corporation as a partner
While under the Philippine Civil Code, a joint
venture is a form of partnership w/ a legal
personality separate and distinct from the parties
composing it, and should thus 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
corporation cannot enter into a partnership
contract, it may, however, engage in a joint
venture if the nature of the venture is authorized
by its charter.
Art. 1784. A partnership begins from the moment
of the execution of the contract,
unless it is otherwise stipulated. (1679)
Art. 1785. When a contract for a fixed term or
particular undertaking is continued after the
termination of such term or particular
undertaking without any express agreement, the
rights and duties of the partners remains the
same as they were at such termination, so far as
is consistent with a partnership at will.
A continuation of the business by the partners or
such of them as habitually acted therein during
the term, without any settlement or liquidation
of the partnership affairs, is prima facie evidence
of a continuation of the partnership.
Partnership at will is one in which no term of
existence has been fixed and which may be
terminated at the will of any partners.
Art. 1786. Every partner is a debtor of the
partnership for whatever he may have promised
to contribute thereto.
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He shall also be bound for warranty in case of
eviction with regard to specific and determinate
things which he may have contributed to the
partnership, in the same cases and in the same
manner as the vendor is bound with respect to
the vendee. He shall also be liable for the fruits
thereof from the time they should have been
delivered, without the need of any demand.
Obligations of partners to contribute:
1. Shall deliver at the beginning of the
partnership or, if a different date has been
agreed upon, at the stipulated time the
properties he agreed to
contribute;
2. Shall answer for eviction, in case the
partnership is deprived of the ownership of
any specific property he contributed;
3. Shall answer to the partnership for the fruits
of the properties whose delivery he delayed
from the date he should have contributed it
up to actual delivery without necessity of any
demand;
4. Shall preserve said properties with the
diligence of a good father of a family pending
their delivery to the
partnership;
5. And shall indemnify the partnership for any
damage caused it by the retention of said
properties or by the delay in their
contribution.
Art. 1787. When the capital or part thereof which
a partner is bound to contribute consists of
goods, their appraisal must be made in the
manner prescribed in the contract of partnership,
and in the absence of stipulation, it shall be made
by experts chosen by the partners, and according
to current prices, the subsequent changes
thereof being for the account of the partnership.
Art. 1788. A partner who has undertaken to
contribute a sum of money and fails to do so
becomes a debtor for the interest and damages
from the time he should have complied with his
obligation.
Law on Business Organizations Reviewer
The same rule applies to any amount he may have
taken from the partnership coffers, and his
liability shall begin from the time he converted
the amount to is own use.
Liability of partner for estafa
Failure to return the money taken, there is the
element of fraudulent appropriation of the
money delivered to a partner with specific
instructions for the use of the partnership, then
estafa is committed under the Revised Penal
Code.
Art. 1789. An industrial partner cannot engage in
any business for himself, UNLESS the partnership
expressly permits him to do so; and if he should
do so, the capitalist partners may either exclude
him from the firm or avail themselves of the
benefits which he may have obtained in violation
of this provision, with a right to damages in either
case.
Industrial partner is one who contributes his
industry or labor in the partnership.
Industrial partner barred from engaging in
business
To prevent any conflict of interest between the
industrial and the partnership, and to insure
faithful compliance by said partner with his
prestation.
Art. 1790. Unless there is a stipulation to the
contrary, the partners shall contribute equal
shares to the capital of the partnership.
Art. 1791. If there is no agreement to the
contrary, in case of an imminent loss of the
business of the partnership, any partner who
refuses to contribute an additional share to the
capital, except an industrial partner, to save the
venture, shall be obliged to sell his interest to the
other partners.
Art. 1792. If a partner authorized to manage
collects a demandable sum, which was owed to
him in his own name, from a person who owned
the partnership another sum also demandable,
the sum thus collected shall be applied to the two
11

credits in proportion to their amounts, even
though he may have given a receipt for his own
credit only; but should he have given it for the
account of the partnership credit, the amount
shall be fully applied to the latter.
The provisions of this article are understood to be
without prejudice to the right granted to the
debtor by Art. 1252, but only if the personal
credit of the partner should be more onerous to
him.
Requisites:
1. Two existing debts
2. Both debts must be demandable
3. The one who collected the debt is a partner
who is authorized to manage and is actually
managing the partnership
Art. 1793. A partner who has received, in whole
or in part, his share of a partnership credit, when
the other partners have not collected theirs, shall
be obliged, if the debtor should thereafter
become insolvent, to bring to the partnership
capital what he received even though he may
have given receipt for his share only.
Art. 1794. Every partner is responsible to the
partnership for damages suffered by it through
his fault, and he cannot compensate them with
the profits and benefits which he may have
earned for the partnership by his industry.
However, the courts may equitably lessen this
responsibility if through the partner’s
extraordinary efforts in other activities of the
partnership, unusual profits have been realized.
Partner liable for damages caused the
partnership
Art. 1794 follows the general rule of contracts
that where a person is at fault in the fulfillment
of his obligations he shall be liable for the
payment of damages. The partner’s fault,
however, must be determined in accordance
with the circumstances of person, time and place.
Law on Business Organizations Reviewer
Liquidation necessary to
ascertain damages
It is first necessary that a liquidation of the
business thereof be made to the end that the
profits and losses may be known and the causes
of the latter and the responsibility of the
defendant as well as the damages which each
partner may have suffered, may be determined.
Art. 1795. The risk of specific and determinate
things, which are not fungible, contributed to the
partnership so that only their use and fruits may
be for the common benefit, shall be borne by the
partner who owns them.
If the things contributed are fungible, or cannot
be kept without deteriorating, or if they were
contributed to be sold, the risk shall be borne by
the partnership. In the absence of stipulation, the
risk of things brought and appraised in the
inventory, shall also be borne by the partnership,
and in such case the claim shall be limited to the
value at which they were appraised.
Risk of Specific and determinate things
The risk of specific and determinate things which
are not fungible, like a boat, only the use of which
is contributed, shall be borne by the partner as
the ownership thereof is not transferred to the
partnership. This follows the general rule that the
thing perished with the owner.
Things fungible or perishable
If the things contributed are fungible or cannot be
kept without deteriorating (perishable) like wine,
oil, etc., even if they are contributed only for the
use of the partnership, the risk of loss shall be for
the account of the partnership for the latter
cannot make use of them without their getting
consumed or presumed.
Things contributed to be sold
If the things contributed are to be sold, the
partnership bears the risk of loss, for obviously
the partnership is the intended owner;
otherwise, the firm cannot make the sale.
Things brought and appraised in inventory The
partnership bears the risk of loss of things
12

brought and appraised in the inventory as this has
the effect of an implied sale thus making the
partnership the owner of said things.
Art. 1796. The partnership shall be responsible
to every partner for the amounts he may have
disbursed on behalf of the partnership and for
the corresponding interest, from the time the
expenses are made; it shall also answer to each
partner for the obligations he may have
contracted in good faith in the interest of the
partnership business, and for the risk
inconsequence of its management.
Responsibility of the partnership to a partner
If a partner has advanced funds for the
partnership, he is entitled to recover the
amounts advanced by him with interest. This
must be so for the reason that a partner is a mere
agent of the partnership and under the rules of
agency, an agent who advances funds for his
principal may recover the same interest.
Art. 1797. The profits and losses shall be
distributed in conformity with the agreement. If
only the share of each partner in the profits has
been agreed upon, the share of each in the losses
shall be in the same proportion.
In the absence of stipulation, the share of each
partner in the profits and losses shall be in
proportion to what he may have contributed, but
the industrial partner shall not be liable for the
losses. As for the profits, the industrial partner
shall receive such share as may be just and
equitable under the circumstances. If besides his
services he has contributed capital, he shall also
receive a share in the profits in proportion to his
capital.
Rules in profit sharing:
1. The partners share the profits in accordance
with the ratio established by their contract.
2. If there is no such stipulation in the
partnership contract, then:
1. If all are capitalist partners they have the
profits in proportion to their capital
contributions;
2. If there are capitalist as well as industrial
partners, the industrial partner get a
Law on Business Organizations Reviewer
share each that is just and equitable
while the capitalist partners divide the
remainder in proportion to their capital
contributions; and
3. If there is a capitalist-industrial partner,
he gets a share in the profits as an
industrial partner and an additional share
in proportion to his capital contribution
to be determined as in (b), above.
Rules in loss sharing:
1. The stipulation in the partnership agreement
regarding loss sharing must be followed.
2. If there is no such agreement, but the
contract provides for a profit sharing ration,
the profit sharing ratio shall also be the loss
sharing ration.
3. In the absence of loss sharing and profit
sharing stipulations in the contract, then the
loss shall be borne by the partners in
proportion to their capital contributions; but
a purely industrial partner is exempted from
participation in the loss.
Share of industrial partner in profits and losses
Unless agreed upon, the industrial partner shall
receive such share in the profits as may be just
and equitable under the circumstances. As for
the losses, the industrial partner is not liable.
However, under Art. 1816, if the partnership has
a contractual debt and it cannot pay, the
industrial partner equally with the capitalist
partners, can be compelled by the creditor to pay
his pro rata share out of his own property or
assets.
Art. 1798. If the partners have agreed to entrust
to a third person the designation of the share of
each one in the profits and losses, such
designation may be impugned only when it is
manifestly inequitable. In no case may a partner
who has begun to execute the decision of the
third person, or who has not impugned the same
within a period of three months from the time he
had knowledge thereof, complain of such
decision.
The designation of profits and losses cannot be
entrusted to one of the partners.
13

Reason for the provision
Admittedly, the designation of profits and losses
cannot be entrusted to one of the partners as the
fulfillment of a contract cannot be left to one of
the contracting parties. It may, however, be
entrusted to a third person by common interest.
Art. 1799. A stipulation which excludes one or
more partners from any share in the profits or
losses is void.
Stipulation to exclude a partner from profits and
losses is void
The law does not allow a provision in the contract
of partnership excluding one or more partners
from sharing in the profits and losses. The reason
is that a partnership is organized for the common
benefit or interest of the partners.
Reason for exclusion of industrial partner An
industrial partner is not liable for losses because
if the partnership fails to realize any profits, the
industrial partner would have contributed his
labor in vain. Furthermore, the industrial partner
cannot withdraw the work already done by him
for the partnership.
Art. 1800. The partner who has been appointed
manager in the articles of the partnership may
execute all acts of the administration despite the
opposition of his partners, unless he should act in
Bad faith., and his powers is irrevocable without
the just or lawful cause. The vote of the partners
representing the controlling interest shall be
necessary for such revocation of power. A power
granted after the partnership has constituted
may revoked at any time. Each partner has a right
to an equal voice in the conduct of the
partnership business. This right is not dependent
on the amount or size of the partner’s capital
contribution.
Appointed as manager after
the constitution of the partnership
Partner appointed in arts of partnership may
execute all acts of administration
notwithstanding the opposition of the other
partners, unless he should act in bad faith. His
Law on Business Organizations Reviewer
power is revocable only upon just and lawful
cause and upon the vote of the partners
representing the controlling interest.
Reason: revocation represents change in terms of
contract.
In case of mismanagement: Usual remedies
allowed by law including dissolution.
Appointment as manager after the constitution
of the partnership Appointment may be revoked
at any time for any cause what so ever.
Reason: revocation not founded on a change of
will on the part of the partners. Appointment not
condition of contract. It is merely a simple
contract of agency, which may be revoking at any
time. It is believe that the vote for revocation
must also represent the controlling interest.
Scope of the power of the managing partner
General rule: partner appointed as manager has
all the powers of a general agent as well as all the
incidental powers necessary to carry out the
object of the partnership in the transaction of its
business.
Exception: When powers of manager is
specifically restricted. A managing partner may
not bind the partnership by contract foreign to its
business.
Compensation for service rendered Partner
Generally not entitle to compensation, In the
absence of an agreement to the contrary, each
member of the partnership assumes the duty to
give his time, attention, and skill to the
management of its affairs, as may be reasonably
necessary to the success of the common
enterprise; and for this service a share of the
profits is his only compensation. In managing
partnership affairs, a partner is practically taking
care of his own interest or managing his own
business. In the absence of any prohibition in the
arts. Of partnership for the payment of salaries to
general partners, there is nothing to prevent the
partners to enter into a collateral verbal
agreement to that effect.
EXCEPTIONS: In proper cases, the law may imply
a contract for compensation;
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1. A partner engaged by his co-partners to
perform services not required of him in
fulfilment of the duties and in capacity other
than that of a partner.
2. When there is extraordinary neglect on the
part of one partner to perform his duties,
imposing entire burden on remaining
partner.
3. One partner may employ the other to do
work for him outside of and independent of
the co-partnership.
4. Partners exempted by terms of partnership
from rendering services may demand pay for
services rendered.
5. Where one partner is entrusted with
management and devotes his whole time and
devotion at the instance of the other partners
who are attending to their individual business
and giving no time or attention to the
partnership business.
Art. 1801. If two or more partners have been
intrusted with the management of the
partnership without the specification of their
respective duties or without the stipulation that
one of them shall not act without the consent of
all others, each one separately execute all acts of
administration, but if anyone of them should
oppose the act of each other, the decision of the
majority shall prevail. In the case of tie the
partners owning the controlling interest shall
decide the matter. Where respective duties of
two or more managing partners not specifies.
Each one may separately perform acts of
administration
1. If one or more of the managing partners shall
oppose the acts of the others, then
the decision of the majority of the
managing
partners shall prevail. Right to oppose can be
exercise only by those entrusted with mgt.
2. In case of tie, matter shall be decided by the
vote of the partners owning the controlling
interest.
Law on Business Organizations Reviewer
REQUISITES FOR APPLICATION OF RULE
1. Two or more partners have been appointed
as managers;
2. There is no specification
of their respective duties;
3. There is no stipulation that one of them shall
not act without the consent of all the others.
ART. 1802 In case it should have been stipulated
that none of the managing partner shall act
without the consent of the others, the
concurrence of all shall be necessary for validity
of the acts, and the absence or disability of any
one of them cannot alleged, unless there is
imminent danger of grave or irreparable injury to
the partnership.
When unanimity of action stipulated
concurrence necessary for validity of acts The
partners may stipulate that none of the managing
partners shall act without the consent of the
others. In such a case, the unanimous consent of
all the managing partners shall be necessary for
the validity of their acts. This consent is so
indispensable that neither absence nor disability
of any one of them may allege as excuse to
dispense with requirement. Exception: When
there is imminent danger of grave or irreparable
injury to the partnership then a partner may act
alone without consent of partner who is absent
or under disability.
Consent of managing partners not necessary in
routine transactions
The requirement of written authority refers
evidently to formal and unusual written
contracts.
Art. 1803. When the manner of management has
not agreed upon, the following rules shall
observed:
1. All partners shall be considered agents and
whatever any one of them may do alone shall
bind the partnership without prejudice to the
provision of article 1801
2. None of the partners may, without the
consent of others, make any important
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 Law on Business Organizations Reviewer

alteration in the immovable property of the

partnership, even if it may be useful to the Right of the person associated with the
partnership, but if there ids refusal of the
partnership’s share
consent by the other partners is manifestly
Subpartnership agreements do not affect the
prejudicial to the interest of the partnership,
composition, existence, or operations of the firm.
the court’s intervention may be sought.
The subpartners are
partners interest,
Rules when manner of the management that has
not agreed upon all partners considered as
However, in the absence of the mutual assent of
managers and agents All partners shall have
all the parties, a subpartner does not become a
equal rights in the mgmt. and conduct of
member of the partnership, even if the other
partnership affairs. All of them shall considered
partners know about the agreement. Not being a
mgrs. and agents and whatever any one of them
member of the partnership, he does not acquire
may do alone shall bind the partnership. If there
the rights of a partner nor is he liable for its
is timely opposition, however, the matter shall
debts.
decided by majority vote. In case of tie, vote of
partners representing controlling interest.
Reason for the rule
Partnership is based on mutual trust and
Unanimous consent required for alteration of
confidence among the partners. Inclusion of new
immovable property
partner would be a modification of the original
The consent need not be express. It may presume
contract of partnership requiring unanimous
from the fact of knowledge of the alteration
consent of all the partners. Prohibition applies
without interposing any objection. Prohibition
even if person associated is already a partner.
only applies to immovable property because of
the greater importance of this kind of property,
Art. 1805. The partnership books shall be kept,
and the alteration thereof must be important.
subject to any agreement between the partners,
This would be an act of strict dominion. If refusal
at the principal place of the business of the
to give consent is manifestly prejudicial to the
partnership, and every partner shall at any
interest of the partnership, court intervention
reasonable hour have access to and may inspect
maybe sought. Consent may presume from
and copy any of them.
silence (lack of opposition despite knowledge).If
alteration is necessary for preservation of the
Keeping of partnership books Partner with duty
property, consent of the other partners not
required. to keep partnership books
The duty to keep true and correct books showing
the firm’s accounts, such books being at all times
Art. 1804. Every partner may associate another
person with him in his share, but the associates open to inspection of all members of the firm,
shall not admitted into the partnership without primarily rests on the managing or active partner.
It is presume that the partners have knowledge
the consent of all other partners, even of the
partner having an associate should be a manager of the contents of the partnership books and that
of subpartnership nature said books state accurately the state of accounts,
but errors can corrected.
The partnership formed between a member of a
partnership and a third Person for a division of Rights with the respect to partnership books
the profits coming to him from the partnership Books should kept at the principal place of
enterprise is termed subpartnership. business as each partner has the right to free
It is a partnership within a partnership and is access to them and to inspect or copy any of
distinct and separate from the main or principal them at any reasonable time, even after
partnership. dissolution. Inspection rights not absolute can

16

restrained from using info for other than
partnership purpose.
Access to partnership books
Rights can exercise at any reasonable hour. This
means reasonable hours on business days
throughout the year and not merely during some
arbitrary period of a few days chosen by the
managing partners.
Art. 1806. Partners shall render on demand true
and full information of all things affecting the
partnership to any partner or the legal
representative of any deceased partner or of any
partner under legal disability. Duty to render
information, there must be no concealment
between partners in all matters affecting the
partnership. Information must use only for
partnership purpose. Not just on demand but
partner also has duty of voluntary disclosure.
However, duty to render info does notarise with
respect to matters appearing in partnership
books since each partner has the right to inspect
those. Good faith not only requires that a partner
should not make a false statement but also that
he should abstain from any false concealment.
Art. 1807. Every partner must account the
partnership for any benefit, and hold as trustee
for it any profits derived from him without the
consent of the partners from any transaction
connected with the formation, conduct, or
liquidation of the partnership or from any use by
him of his property.
The relation between the partners is essentially
fiduciary involving trust and confidence, each
partner considered in law, as he is, in fact, the
confidential agent of the others. The duties of a
partner are analogous to those of a trustee.
Duty to act for common benefit
Cannot use and apply exclusively to own
individual benefit partnership assets or results of
knowledge and info gained in character of
partner. Managing partners particularly owe a
fiduciary duty to inactive partners.
Law on Business Organizations Reviewer
Duty begins during the formation of partnership
Principle of good faith applies not only during
partnership but during the negotiations leading
to the formation of the partnership. Also, a
person who agreed w/ another to form a
partnership has the obligation to account for
commissions and discounts received in acquiring
property for the future partnership.
Duty continues even after the dissolution of the
partnership
Duty of partner to act w/ utmost good faith
towards his co-partners continues throughout
the entire life of the partnership even after
dissolution for whatever reason or whatever
means, until the relationship is terminated,
i.e. the winding up of partnership affairs is
completed.
Duty to account for secret and similar profits
The duty of a partner to account as a fiduciary
operates to prevent from making a secret profit
out of the operation of the partnership and from
carrying on the business for his private advantage
or a business in competition w/ the firm w/o
consent of other partners. Violation may be
ground for dissolution.
Duty to account for earnings accruing even after
termination of partnership If a partner uses info
obtained by him from the partnership for his own
account w/o the consent of the other partners,
he is liable to account for any benefit he might
obtain.
Duty to make full disclosure of information
belonging to partnership
A partner is also subject to the fiduciary duty of
undivided loyalty and complete disclosure of info
of all things affecting the partnership. By
Information is meant information, which can be
used for the purposes of the partnership. Info
cannot use for a partner’s private gain – even if
after termination.
17

Duty not to acquire interest or right adverse to
partnership
If partner does, he holds it in trust for the benefit
of the partnership and must account to the firm
for the profits of the transaction,
unless it appears that the others consented
Art. 1808. The Capitalist partners cannot engage
for their own account in any operation, which is
of the kind of business in which the partnership is
engaged, unless there is a stipulation to the
contrary. Any capitalist partner violating this
prohibition shall bring to the common funds any
profit accruing to him from his transactions, and
shall personally bear all the losses.
Prohibition against partner engaging the
business
Prohibition relative – Prohibition against
capitalist partner to engage in business is relative,
unlike the industrial partner who is absolutely
prohibited from engaging in any business for
himself. Capitalist partner is only prohibited from
engaging for his own account in any operation
which is the same as or similar to the business in
which the partnership is engaged and which is
competitive w/ said business
VIOLATION – Obligation to bring to common fund
any profits derived and in case of losses, he shall
bear them alone. Partners, however, by
stipulation may permit it. The law permits him to
carry on a business not connected or competing
with that of the partnership. Law is silent on
whether he can engage in same line of business
for the account of another.
Prohibition still applies because of fiduciary
position imposing duties of utmost good faith. He
may not carry on any other business in rivalry w/
the partnership.
Reason for prohibition
Fiduciary nature of relationship imposes
obligation of utmost good faith. Rule prevents
use of info obtained in course of transaction of
partnership business or because of connection
w/ firm regarding business secrets and clientele
of firm to its prejudice.
Law on Business Organizations Reviewer
Art. 1809. Any partner shall have the right to a
formal account as partnership affairs:
1. If he is wrongfully excluded from the
partnership business or possession of
its property by his co-partner;
2. If the right exists under the terms of any
agreement;
3. Provided by article 1807;
4. Whenever other circumstances render it just
and reasonable, Right of the partner to a
formal account.
General rule: During existence of partnership, a
partner is not entitled to a formal account of
partnership affairs. Reason: rights of partner
amply protected in arts1805 and 1806. In
addition, it would cause much inconvenience and
unnecessary waste of time.
Exception: In the special and unusual situations
enumerated under art. 1809. Right of partner to
demand an accounting w/o bringing about
dissolution is a necessary corollary to right to
share in profits. A formal account is a necessary
incident to the dissolution of the partnership.
Art. 1810. The property rights of a partner are:
1. His rights in specific partnership
property;
2. His interest in the partnership;
3. His right to participate in the management,
extent of property rights of a partner.
Principal Rights
1. Rights in specific partner property;
2. Interest in partnership; 3. Right to
participate in management.
RELATED RIGHTS
1. Right to reimbursement for amounts
advanced to partnership and to
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 Law on Business Organizations Reviewer

indemnification for risks inconsequence of Assets Includes not The

management (art. 1796). Included only the aggregate of
2. Right of access and inspection of partnership original the
books (art. 1805). capital individual
3. Right to true and full information of all things contributions, contributions
affecting partnership (art. 1806). but also all
made by the
4. Right to formal account of partnership affairs property
partners in
under certain circumstances (art. 1809). subsequently
acquired establishing
5. Right to have partnership dissolved also or continuing
because of
under certain conditions (arts. 18301831). the
the
partnership partnership.
Partnership property and partnership capital
or w/
distinguished
partnership
Partnership Partnership funds,
property capital including
Changes Variable: its Constant: it partnership
value value may remains name and
vary from day unchanged goodwill.
today w/ as the
changes in amount is fix Ownership of certain property
market value by agreement Property use by the partnership – Where there is
of the no express agreement that property used by a
partners, partnership constitutes partnership property,
and is not such use does not make it partnership property,
affected by and whether it is so depends on the intention of
fluctuations the parties, w/c may be shown by proving an
in the value of express agreement or acts of particular conduct.
the The intent of the parties is the controlling factor.
partnership Property acquired by a partner with partnership
property, funds – Unless a contrary intention appears,
although property acquired by a partner in his own name
it w/ partnership funds is partnership property.
may be However, if the property was acquired after
increased dissolution but before the winding up of the
and partnership affairs, it would be his separate
decreased by property but he would be liable to account to the
unanimous partnership for the funds used in its acquisition.
consent of
the partners. Art. 1811. A partner is co-owner with his
partners of specific partnership property. The
incidents of this co-ownership are such
that;

1. A partner, subject to the provision of this

title and any agreement between the partner,
has an equal right with his partners to possess
specific partnership property for partnership
purposes; but he has no right to possess such

19

property for any other purpose without the
consent of his partners;
2. A partner’s right in specific partnership
property is not assignable except in connection
with the assignment of rights of all the partners
in the same property;
3. A partner’s right in specific partnership
property is not subject to attachment or
execution, except on a claim against the
partnership;
4. A partner’s right in specific partnership
property is not subject to legal support under art.
291 nature of a partner’s right in
specific partnership property
Art. 1811 contemplates tangible property but not
intangible things. A partner is a coowner w/ his
partners of specific partnership property, but the
rules on coownership do not necessarily apply.
The legal incidents of this tenancy in partnership
are distinctively characteristic of the partnership
relation. They are as follows:
Equal rights of possession - Ordinarily, a partner
has an equal right to possess specific partnership
property for partnership purposes. None of the
partner scan possesses and uses the specific
partnership property other than for partnership
purposes w/o the consent of the other partners.
Should any of them use the property for his own
benefit, he must account, like a stranger, to the
others for the profits derived there from or the
value of his wrongful possession or occupation. A
partner wrongfully excluded from possession of
partnership property by a co-partner has a right
to formal account and may even apply for a
judicial decree of dissolution. On the death of a
partner, his right in specific partnership property
vests in the surviving partners. By agreement, the
right to possess specific partnership property
may surrender. In the absence of special
agreement, however, neither partner separately
owns, or has the exclusive right of possession of
any partnership property or any proportional
part thereof. Each has dominion over the entire
partnership property. The possession of
Law on Business Organizations Reviewer
partnership property by one partner is the
possession of all until his possession becomes
adverse. A partner cannot initiate title by adverse
possession until and unless he makes an adverse
claim.
Right not assignable - A partner cannot
separately assign his right to specific partnership
property but all of them can assign their rights in
the same property.
Reasons for non-assignability:
1. It prevents interference by outsiders in
partnership affairs;
2. It protects the right of other partners and
partnership creditors to have partnership
assets applied to firm debts;
3. It is often impossible to determine the extent
of a partner’s beneficial interest in a
particular partnership asset. Reason for
impossibility: Each partner, having a
beneficial interest in the partnership
property considered as a whole, has a
beneficial interest in each part. Where,
however, none of the above reasons apply,
an authorized assignment by a partner of his
right in specific partnership property is void,
but it may be regarded as a valid assignment
of the partner’s interest in the partnership.
The law allows a retiring partner to assign his
rights in partnership property to the
partner(s) continuing the business.
Right limited to share of what remains after
partnership debts has been paid
Strictly speaking, no particular partnership
property or any specific or an aliquot part thereof
can be considered the separate or individual
property of any partner. The whole of
partnership property belongs to the partnership
considered as a juridical person, and a partner
has no interest in it but his share of what remains
after all partnership debts are paid.
Consequently, specific partnership property is
not subject to attachment, execution,
garnishment, or injunction, w/o the consent of all
the partners except on a claim against the
partnership. For the same reason that the
property belongs to the partnership, the partners
20

cannot claim any right under the homestead or
exemption laws when it is attached for
partnership debts. However, a judgment creditor
may levy upon a partner’s interest in the
partnership itself because it is actually his
property, by means of a “charging order.” The
right of the partners to specific partnership
property is not subject to legal support since the
property belongs to the partnership and not to
the partners. However, their interest in the
partnership is. The method of reaching a
judgment debtor’s interest in partnership
property is specifically set forth in art.1814.
Art. 1812. A partner’s interest in the partnership
is his share of the profits and surplus.
Share of profits and surplus – The partner’s
interest in the partnership consists of his share in
the undistributed profits during the life of the
partnership as a going concern and his share in
the undistributed surplus after its dissolution.
Profits: the excess of returns over expenditure in
a transaction or series of transactions; or the net
income of the partnership for a given period.
Surplus: the assets of the partnership after
partnership debts and liabilities are paid and
settled and the rights of the partners among
themselves are adjusted. It is the excess of assets
over liabilities. If the liabilities are more than the
assets, the difference represents the extent of
the loss.
Art.1813. A conveyance by a partner by his whole
interest in the partnership does not of itself
dissolve the partnership, or, against the other
partners in the absence of agreement, entitle the
assignee, during the continuance of the
partnership, to interfere in the management or
administration of the partnership business or
affairs, or to require any information or account
of the partnership transactions, or to inspect the
partnership books; however it merely entitles the
assignee to receive the accordance with his
contract, the profits to which the assigning
partner would otherwise be entitled.
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In case of fraud in the management of the
partnership, the assignee may avail himself of the
usual remedies. In case of dissolution of the
partnership, the assignee is entitle to receive his
assignor’s interest and may require an account
from the date only of the last account agreed to
by all partners. Effect of assignment of partner’s
whole interest in partnership.
A partner’s right in specific partnership property
is not assignable but he may assign his interest in
the partnership to any of his co-partners or to a
third Person irrespective of the consent of the
other partners, in the absence of agreement to
the contrary.
Rights withheld from assignee
1. To interfere in the management.
2. To require any information or account.
3. To inspect any of the partnership books.
No one can be compelled to be partners w/
someone else. The assignment does not divest
the assignor of his status and rights as a partner
nor operate as dissolution. The law, however,
provides the nonassigning collaborates w/ a
ground for dissolving the partnership if they so
desire.
Remedy of other partners
Dissolution of partnership not intended – Many
partnership agreements are made merely as
security for loans, the assigning partner never
intending to destroy the partnership relation. If
the assigning partner neglects his duties after
assignment, the other partners may dissolve the
partnership under art. 1830.
Dissolution of partnership intended – A partner’s
conveyance of his interest in the partnership
operates as dissolution of the partnership only
when it is clear that the parties contemplated and
intended the entire withdrawal from the
partnership of such partner and the termination
of the partnership as between the partners.
Rights of assignee of partner’s interest
1. To receive in accordance w/ his contract the
profits accruing to the assigning partner;
21

2. To avail himself of the usual remedies
provided by law in the event of fraud in the
management;
3. To receive the assignor’s interest in case of
dissolution;
4. To require an account of partnership affairs,
but only in case the partnership is dissolved,
and such account shall cover the period from
the date only of the last account agreed to by
all partners. The purchaser of a partner’s
interest may apply to the court for dissolution
after the termination of the specified term or
undertaking or at any time if the partnership
is one at will.
Art. 1814. Without prejudice to the preferred
rights of the partnership creditors on due
application to a competent court by any
judgement creditor of the partner, the court
which entered the interest of the debtor partner
with payment of the unsatisfied amount of such
judgement debt with the interest thereon; and
may then or later appoint a receiver of his share
of the profits, and of any other money due or to
fall due to him in respect of the partnership, and
make all other orders, directions and accounts
and inquiries which the debtor partner might
have made, or which circumstances of the case
may require. The interest charged may redeem at
any time before foreclosure, or in any case of a
sale being directed by the court, may be purchase
without thereby causing dissolution:
1. With separate property, by any one or more
of the partners;
2. With partnership property, by any one or
more of the partners with the consent of all
the partners a whose interest are not so
charged or sold, nothing in this title shall be
held to deprive a partner of his right, if any,
under the exemption laws, as regards his
interest in the partnership.
Application for a charging order after securing
judgement on his credit While a separate
creditor of a partner cannot attach or levy upon
specific partnership property for the satisfaction
of his credit because partnership assets are
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reserved for partnership creditors, he can secure
a judgment on his credit and then apply to the
proper court for a “charging order”, subjecting
the interest of the debtor partner in the
partnership w/ the payment of the unsatisfied
amount of such judgment w/ interest thereon w/
the least interference w/ the partnership
business and the rights of the other partners. By
virtue of the charging order, any amount or
portion thereof w/c the partnership would
otherwise pay to the debtor-partner should
instead be given to the judgment creditor. This
remedy, however, is w/o prejudice to the
preferred rights of partnership creditors whose
claims should be satisfied first.
Availability of other remedies
Art. 1814 have made this an exclusive remedy so
that a writ of execution will not be proper.
However, if the judgment debt remains
unsatisfied, the court may resort to other courses
of action notwithstanding the issuance of the
charging order.
Redemption or purchase of
interest charged
Redemptioner – The interest of the
debtorpartner so charged may be redeemed or
purchased w/ the separate property of any one
or more of the partners, or w/ partnership
property but w/ the consent of all the partners
whose interests are not so charged or sold.
Redemption Price – The value of the partner’s
interest in the partnership has no bearing on the
redemption price w/c is likely to be lower since it
will be dependent on the amount of the
unsatisfied judgment debt.
Right of redeeming non-debtor partner – There
deeming non-debtor partner does not acquire
absolute ownership over the debtor-partner’s
interest but holds it in trust for him consistent w/
principles of fiduciary relationship.
Rights of partner under exemption laws A
partner cannot claim any right under the
homestead laws or exemption laws when specific
partnership property is attached for partnership
22

debt. W/ respect, however, to the partner’s
interest in the partnership as distinguished from
his interest in specific partnership property, the
partner may avail himself of the exemption laws
after partnership debts have been paid. A
partner’s interest or share in the partnership
property is really his property.
Art. 1815. Every partnership shall operate under
a firm name, which may or may not include the
name of one or more of the partners, those who,
not being members of the partnership, include
their names in the firm name, shall be subject to
liability of a partner
Requirement of the firm name
Meaning of word “firm” – The name, title, or
style under which a company transacts business;
a partnership of two or more persons; a
commercial house. In its common acceptation,
the term implies a partnership. The term is also
used as synonymous with “company,” “house,”
and
“concern.”
Importance of having a firm name A partnership
must have a firm name under which it will
operate. A firm name is necessary to distinguish
the partnership, which has a distinct and
separate juridical personality from the individuals
composing the partnership and from other
partnerships and entities.
Right of the partners to choose firm name The
partners enjoy the utmost freedom in the
selection of the partnership name. As a general
rule, they may adopt any firm name desired.
Use of misleading name – The partners cannot
use a name that is identical or deceptively
confusingly similar to that of any existing
partnership or corporation or to any other name
already protected by law or is patently deceptive,
confusing or contrary to existing laws, as to
mislead the public by passing itself off as another
partnership or corporation, or its goods or
services as those of such other company.
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Liability inclusion of name in the firm name –
Persons who, not being partners, include their
names in the firm name do not acquire the rights
of a partner but shall be subject to the liability of
a partner insofar as 3rd Persons without notice
are concerned. Such persons become partners by
estoppel. Art. 1815 does not cover the case of a
limited partner who allows his name to be
included in the firm name, orof a person
continuing the business of a partnership after
dissolution, who uses the name of the dissolved
partnership or the name of a deceased partner as
part thereof.
Art. 1816. All partners, including industrial ones,
shall be liable pro rata with all their property and
after all the partnership assets have been
exhausted, for the contracts which may be
entered into in the name and for the account of
the partnership, under its signature and by a
person authorized to act for the partnership.
However, any partner may enter into a separate
obligation to perform a partnership contract.
Article 1816 distinguished from article
1787
Article 1816 applies in cases where third party
creditors are concerned as it falls under the
heading of section 3. “Obligations of the Partners
with Regard to Third Persons.” Article 1797
applies only where the issue is among the
partners as it falls under the heading of Section 1,
Chapter 2, which states: “Obligations of the
Partners Among Themselves.” The pro rata
liability of partners to third persons under Article
1816 being a clear mandate of the law, any
stipulation changing or modifying such liability is
void except as among the partners.
Refers to partnership obligations Article 1816
which refers to the payment of partnership
obligations arising from contracts clearly imposes
subsidiary and joint (pro rata) liability for
contractual debts owing to third persons upon all
the partners, including industrial partners who
ordinarily are not liable for losses. The liability is
subsidiary because the partners cannot be made
answerable with their separate property unless
23

the partnership property has first been
exhausted.
Pro rata liability – Literally, pro rata liability
means proportionate distribution of liability. In
the law of obligations, the concurrence of two or
more debtors in one and the same obligation
makes it prima facie a joint (pro rata) obligation,
and the debts is presumed divided into as many
equal shares as there are debtors and each one
of them is bound to pay only his share.
Art. 1817. Any stipulation against the liability laid
down in the preceding article shall be void,
except as among the partners.
Industrial partner cannot exempt himself from
liability to third persons
Each one of the industrial partners is liable to
third persons for the debts of the firm and if he
has paid such debts out of his private property
during the life of the partnership, when its affairs
are settled he is entitled to credit for the amount
so paid, and if its results that there is not enough
property in the partnership to pay him, then the
capitalist partners must pay him. Our conclusion
is that neither on principle nor on authority can
the industrial partner be relieved from liability to
third persons for the debts of the partnership.
Art. 1818. Every partner is an agent of the
partnership for the purpose of its business, and
the act of every partner, including the execution
in the partnership name of any instrument, for
apparently carrying on in the usual way the
business of the partnership of which he is a
member binds the partnership, unless the
partner so acting has in fact no authority to act
for the partnership in the particular matter, and
the person with whom he is dealing has
knowledge of the fact that he has no such
liability.
An act of a partner which is not apparently for the
carrying on of business of the partnership in the
usual way does not bind the partnership unless
authorized by the other partners.
Except when authorized by the other partners or
unless they have abandoned the business, one or
Law on Business Organizations Reviewer
more but less than all the partners have no
authority to:
1. Assign the partnership property in trust for
creditors or on the assignee’s promise to pay
the debts of the partnership.
2. Dispose of the goodwill of the business.
3. Do any other act which would make it
impossible to carry on the ordinary business
of a partnership.
4. Confess a judgment.
5. Enter into a compromise concerning a
partnership claim or liability.
6. Submit a partnership claim or liability to
arbitration.
7. Renounce a claim of the partnership.
No act of a partner in contravention of a
restriction on authority shall bind the
partnership to persons having knowledge of
the restriction.
first paragraph of article 1818, or unless
such property has been conveyed by the
grantee or a person claiming through such
grantee to a holder for value without
knowledge that the partner, in making the
conveyance, has exceeded his authority.
Art. 1819. Where title to real property is in
the partnership name, any partner may
convey title to such property by a
conveyance executed in the partnership
name; but the partnership may recover
such property unless the partner's act binds
the partnership under the provisions of the
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Where title to real property is in the name
of the partnership, a conveyance executed
by a partner, in his own name, passes the
equitable interest of the partnership,
provided the act is one within the authority
of the partner under the provisions of the
first paragraph of Article 1818.
Where title to real property is in the name of one
or more but not all the partners, and the record
does not disclose the right of the partnership, the
partners in whose name the title stands may
convey title to such property, but the partnership
may recover such property if the partners’ act
does not bind the partnership under the
provisions of the first paragraph of Article 1818,
unless the purchaser or his assignee, is a holder
for value, without knowledge.
Where the title to real property is in the
name of one or more or all the partners, or
in a third person in trust for the
partnership, a conveyance executed by a
partner in the partnership name, or in his
own name, passes the equitable interest of
the partnership, provided the act is one
within the authority of the partner under
the provisions of the first paragraph of
Article 1818.
Where the title to real property is in the
name of all the partners a conveyance
executed by all the partners passes all their
rights in such property.
Art. 1820. An admission or representation made
by any partner concerning partnership affairs
within the scope of his authority in accordance
with this Title is evidence against the partnership.
Art. 1821. Notice to any partner of any matter
relating to partnership affairs, and the knowledge
of the partner acting in the particular matter,
acquired while a partner or then present to his
Law on Business Organizations Reviewer
mind, and the knowledge of any other partner
who reasonably could and should have
communicated it to the acting partner, operate
as notice to or knowledge of the partnership,
except in the case of fraud on the partnership,
committed by or with the consent of that
partner.
Notice to partner is notice to partnership Clearly
a third person desiring to give notice to a
partnership of some matter pertaining to the
partnership business need not communicate with
all of the partners. If notice is delivered to a
partner, that is an effective communication to
the partnership.
Knowledge before becoming partner Where the
knowledge or notice had been received by the
partner before he became a partner, and his
partners are ignorant of this, and he is not the
partner acting in the particular matter, there is no
doubt that there has been neither knowledge of
nor notice to the partnership.
Art. 1822. Where, by any wrongful act or
omission of any partner acting in the ordinary
course of the business of the partnership or with
the authority of copartners, loss or injury is
caused to any person, not being a partner in the
partnership, or any penalty is incurred, the
partnership is liable therefor to the same extent
as the partner so acting or omitting to act.
Partner liable for wrongful act of a partner The
partners are liable for the negligent operation of
a vehicle by a partner, acting in the course of
business, which results in a traffic accident.
If he is driving a partnership-owned vehicle for
purposes of his own, the acting partner alone is
liable it is not a partnership tort.
Partnership may proceed against negligent
partner
Where a partnership is liable to a third person,
there is a right of indemnity against the partner
whose negligence caused the injuries.
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Art. 1823. The partnership is bound to make good
the loss:
Where one partner acting within the 1.
scope of his apparent authority receives
money or property of a third person
and misapplies it.
Where the partnership in the course of 2.
its business receives money or property
of a third person and the money or
property so received is misapplied by
any partner while it is in the custody of
the partnership.
Partnership bound by partner’s breach of
trust
The partnership is liable for the conversion
(misappropriation) of money or property
entrusted to the partnership by a third
person. The effect under Article 1824 is the
same whether by the partnership and
subsequently misappropriated by a partner.
Art. 1824. All partners are liable solidarily
with the partnership for everything
chargeable to the partnership under
Articles 1822 and 1823.
Law imposes solidary liability
The law imposes solidary liability upon the
partners and the partnership in cases of torts and
acts of conversion by a partner as provided in Art.
1824. It may be stated that the liability of a
partner for a debt of the partnership depends
upon whether the debts is contractual or it arises
from tort or conversion. If it arises from contract,
the liability is subsidiary and pro rata; if it arises
from tort or conversion, the liability is solidary.
Business partners solidarily liable Arts. 1711 and
1712 of the New Civil Code and Sec. 2 of the
Workmen’s Compensation Act reasonably
indicate that in compensation cases, the liability
of business partners should be merely joint and
not solidary, and one of them happens to be
insolvent, the amount awarded to the
Law on Business Organizations Reviewer
dependents of the deceased employee would
only be partially satisfied, which is evidently
contrary to the intent and purpose of the law to
give full protection to the employee.
Art. 1825. When a person, by words spoken
or written or by conduct, represents
himself, or consents to another
representing him to anyone, as a partner in
an existing partnership or with one or more
persons not actual partners, he is liable to
any such persons to whom such
representation has been made, who has, on
the faith of such representation, given
credit to the actual or apparent partnership,
and if he has made such representation or
consented to its being made in a public
manner he is liable to such person, whether
the representation has or has not been
made or communicated to such person so
giving credit by or with the knowledge of
the apparent partner making the
representation or consenting to its being
made:
When a partnership liability results, he 1.
is liable as though he were an actual
member of the partnership.
When no partnership liability results, he 2.
is liable pro rata with the other persons,
if any, so consenting to the contract or
representation as to incur liability,
otherwise separately.
When a person has been thus represented
to be a partner in an existing partnership, or
with one or more persons not actual
partners, he is an agent of the persons
consenting to such representation to bind
them to the same extent and in the same
manner as though he were a partner in fact,
with respect to persons who rely upon the
representation. When all the members of
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the existing partnership consent to the may ask the attachment and public sale of the
representation, a partnership act or share of the latter in the partnership assets.
obligation results; but in all other cases it is
Art. 1828. The dissolution of a partnership
the joint act or obligation of the person
is the change in the relation of the partners
acting and the persons consenting to the
caused by any partner ceasing to be
representation.
associated in the carrying on as
Estoppel – A preclusion, in law, which prevents a distinguished from the winding up of the
man from alleging or denying a fact, in business.
consequence of his own previous act, allegation,
or denial of a contrary tenor. Art. 1829. On dissolution the partnership is
not terminated, but continues until the
Person bound by his representation A person
winding up of partnership affairs is
who hold himself out as a partner in a business,
or consents to his being so held out, is liable on completed.
contracts made with third persons who deal with
the persons carrying on the business on the faith “Dissolution,” “Winding up,” and
of the representation. He is stopped to deny the “Termination” explained
apparent agency.
Dissolution, winding up, and termination
should not be confused because they are
Art. 1826. A person admitted as a partner into an
existing partnership is liable for all the obligations distinct terms in law. Dissolution
of the partnership arising before his admission as “designates the point in time when the
though he had been a partner when such partners cease to carry on the business
obligations were incurred, except that this together: termination is the point in time
liability shall be satisfied only out of partnership
when all partnership affairs are wound up;
property, unless there is a stipulation to the
contrary. winding up is the process of settling
Incoming partner liable for partnership affairs after dissolution.”
existing obligations
A newly admitted partner is liable for obligations Art. 1830. Dissolution is caused:
of the partnership at the time of his admission.
The obligation of the incoming partner shall be Without violation of the agreement 1.
satisfied only out of partnership property. This is between the partners:
not a harsh rule because the incoming partner
“partakes of the benefit of the partnership a. By the termination of the definite
property, and an established business. He has term or particular undertaking
every means of obtaining full knowledge of
specified in the agreement.
protecting himself, because he may insist on the
liquidation or settlement of existing partnership b. By the express will of any partner,
debts. On the other hand, the creditors have no who must act in good faith, when
means of protecting themselves.
no definite term or particular is
specified.
Art. 1827. The creditors of the partnership shall
be preferred to those of each partner as regards
the partnership property. Without prejudice to
this right, the private creditors of each partner

27

c. By the express will of all the
partners who have not assigned
their interests or suffered them to
be charged for their separate debts,
either before or after the
termination of any specified term or
particular undertaking.
d.
By the expulsion of any partner
from the business bona fide in
accordance with such a power
conferred by the agreement
between the partners
2.
In contravention of the agreement
between the partners, where the
circumstances do not permit a
dissolution under any other provision of
this article, by the express will of any
partner at any time.
By any event which makes it unlawful
for the business of the partnership to
be carried on or for the members to
carry it on in partnership.
Law on Business Organizations Reviewer
When a specific thing which a partner 4.
had promised to contribute to the
partnership, perishes before the
delivery; in any case by the loss of the
thing, when the partner who
contributed it having reserved the
ownership thereof, has only transferred
to the partnership the use or enjoyment
of the same; but the partnership shall
not be dissolved by the loss of the thing
when it occurs after the partnership has
acquired the ownership thereof. 5.
By
the death of any partner.
By the insolvency of any partner or of 6.
the partnership.
3. 7. By the civil interdiction of any partner.
By decree of court under the following 8.
article.
Causes of dissolution in general
Generally, a partnership may be dissolved
by causes: (1) without violation of the
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 Law on Business Organizations Reviewer

agreement between the partners; or (2) in agreement, or otherwise so conducts

contravention of the agreement. Other 5. himself in matters relating to the
specific causes are; (3) an event which partnership business that it is not
makes the business of the partnership 6. Other reasonably practicable to carry on the
unlawful; (4) loss of a specific thing which a business in partnership with him.
partner had promised to contribute to the The business of the partnership can
partnership; (5) the death of a partner; (6) only be carried on at a loss.
the insolvency of any partner or of the circumstances render a dissolution equitable.
partnership itself; (7) civil interdiction of
Partnership ceased upon expiration of
any partner; and lastly (8) by judicial
term; no more juridical personality
decree.
A partnership having ceased to exist since
On the application of the purchaser of a
1959, the partnership has no more juridical 1.
partner's interest under Article 1813 or
personality nor capacity to sue and be sued.
1814:
(Reynolds Philippine Corporation vs. Court
2. After the termination of the specified of appeals, G.R. No. 36187, Jan. 17, 1989)
term or particular undertaking.
At any time if the partnership was a
Effect of Withdrawal before expiration of
partnership at will when the interest
the term
was assigned or when the charging
Under Article 1830, even if there is a
Who may order was issued.
specified term, one partners cause its petition
dissolution by expressly withdrawing eve n for dissolution
before the expiration of the period, with or Dissolution of a partnership may be decreed by the
without justifiable cause. Of course, if the court on application either (1) by a partner or, in
case he has assigned his interest, (2) by his assignee.
cause is not justified or no cause was given,
the withdrawing partner is liable for
Art. 1832. Except so far as may be necessary to wind
damages but in no case can he be up partnership affairs or to complete transactions
compelled to remain in the firm. With his begun but not then finished, dissolution terminates
withdrawal, the number of members is all authority of any partner to act for the
decreased, hence, the dissolution. And in partnership:
whatever way we view the situation, the
1. With respect to the partners
conclusion is inevitable that the partners
were to be guided in the liquidation of the
partnership by the provisions of its duly Art. 1831. On application by or for a partner
registered articles of partnership. (Roxas vs. the court shall decree a dissolution
Maglana, G.R. L-30616, Dec. 10, 1990) whenever:
a. When the dissolution is not by the
act, insolvency or death of a partner.

b. When the dissolution is by such act,

A partner has been declared insane in 1. insolvency or death of a partner, in
any judicial proceeding or is shown to cases where article 1833 so requires.
be of unsound mind.
A partner becomes in any other way 2. 2. With
incapable of performing his part of the respect to
partnership contract. persons
not
partners,
as declared in article 1834.

29

A partner has been guilty of such
conduct as tends to affect prejudicially death, or insolvency of a partner, the authority
the carrying on of the business.
A partner willfully or persistently 4. For the purposes of winding-up partnership
commits a breach of the partnership
Art. 1833. Where the dissolution is caused by
the act, death or insolvency of a partner,
each partner is liable to his co-partners for
his share of any liability created by any
partner acting for the partnership as if the
partnership had not been dissolved unless:
1. The dissolution being by act of any
partner, the partner acting for the
partnership had knowledge of the
dissolution.
2. The dissolution being by the death or
insolvency of a partner, the partner
acting for the partnership had
knowledge or notice of the death or
insolvency.
General Rule
If the cause of dissolution is the death, act,
or insolvency of a partner, authority of a
partner to bind ceases upon the knowledge
of the dissolution.
If dissolution is caused by act of one of
parties, co-partners are also liable to
contribute towards a liability as if no
dissolution has happened, provided that
there is no notice or the partner does not
have knowledge of the dissolution.
Art. 1834. After dissolution, a partner can
bind the partnership, except as provided in
the third paragraph of this article:
1. By any act appropriate for winding up
partnership affairs or completing
transactions unfinished at dissolution.
2. By any transaction which would bind the
partnership if dissolution had not taken
place, provided the other party to the
transaction:
a. Had extended credit to the
partnership prior to dissolution and
Law on Business Organizations Reviewer
General Rule
3. If the cause of dissolution is not by act,
ceases immediately.
Exception
affairs.
had no knowledge or notice of the
dissolution.
b. Though he had not so extended
credit, had nevertheless known of
the partnership prior to dissolution,
and, having no knowledge or notice
of dissolution, the fact of dissolution
had not been advertised in a
newspaper of general circulation in
the place (or in each place if more
than one) at which the partnership
business was regularly carried on.
The liability of a partner under the first
paragraph, No. 2, shall be satisfied out of
partnership assets alone when such partner
had been prior to dissolution:
1. Unknown as a partner to the person with
whom the contract is made.
2. So far unknown and inactive in
partnership affairs that the business
reputation of the partnership could not
be said to have been in any degree due
to his connection with it.
The partnership is in no case bound by any
act of a partner after dissolution:
1. Where the partnership is dissolved
because it is unlawful to carry on the
business, unless the act is appropriate
for winding up partnership affairs.
2. Where the partner has
become insolvent.
3. Where the partner has no authority to
wind up partnership affairs; except by a
transaction with one who —
a. Had extended credit to the
partnership prior to dissolution and
had no knowledge or notice of his
want of authority.
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b. Had not extended credit to the
partnership prior to dissolution, and,
having no knowledge or notice of his
want of authority, the fact of his
want of authority has not been
advertised in the manner provided
for advertising the fact of dissolution
in the first paragraph, No. 2 (b).
Nothing in this article shall affect the liability
under article 1825 of any person who after
dissolution represents himself or consents to
another representing him as a partner in a
partnership engaged in carrying on business.
General Rule
Dissolution terminates the authority of the
partners to bind partnership.
Exceptions
Any act appropriate for winding-up
partnership affairs or completing
transactions unfinished at dissolution
If third persons that transacted had no actual
knowledge of the dissolution. *Persons
extending credit prior to dissolution are
entitled to notice of dissolution. If they had
no notice or knowledge of dissolution, they
may hold the retired partner for obligations
made by continuing partners after
dissolution.
Art. 1835. The dissolution of the partnership
does not of itself discharge the existing
liability of any partner.
A partner is discharged from any existing
liability upon dissolution of the partnership
by an agreement to that effect between
himself, the partnership creditor and the
person or partnership continuing the
business; and such agreement may be
inferred from the course of dealing between
the creditor having knowledge of the
dissolution and the person or partnership
continuing the business.
The individual property of a deceased
partner shall be liable for all obligations of
the partnership incurred while he was a
partner, but subject to the prior payment of
his separate debts.
Law on Business Organizations Reviewer
General Rule
Dissolution of a partnership does not itself
discharge the existing liability of any partner.
Exception
A partner can be discharged from any
existing liability upon dissolution of the
partnership provided that there is an
agreement between the partnership
creditor and the person or partners
continuing the business. *Individual
properties of the deceased partner shall be
liable to all obligations of the partnership
made while he was a partner.
Art. 1836. Unless otherwise agreed, the
partners who have not wrongfully dissolved
the partnership or the legal representative
of the last surviving partner, not insolvent,
has the right to wind up the partnership
affairs, provided, however, that any partner,
his legal representative or his assignee, upon
cause shown, may obtain winding up by the
court.
Who may wind up Partnership Affairs?
Partner designated in the agreement. In
absence of agreement, the part that did no
wrongfully dissolved the partnership.
If all partners died, the legal representative
of the last surviving partner provided that
the partner is not insolvent.
Winding up of a dissolved partnership may
be done
Extrajudicially by the partners themselves.
Judicially under the control of a competent
court.
*Managing partner or winding-up partner
has the right to sell firm property even after
the life of the partnership has expired.
Art. 1837. When dissolution is caused in any
way, except in contravention of the
partnership agreement, each partner, as
against his co-partners and all persons
claiming through them in respect of their
interests in the partnership, unless
otherwise agreed, may have the partnership
property applied to discharge its liabilities,
and the surplus applied to pay in cash the net
amount owing to the respective partners.
But if dissolution is caused by expulsion of a
partner, bona fide under the partnership
agreement and if the expelled partner is
31

discharged from all partnership liabilities,
either by payment or agreement under the
second paragraph of article 1835, he shall
receive in cash only the net amount due him
from the partnership.
When dissolution is caused in contravention
of the partnership agreement the rights of
the partners shall be as follows:
1. Each partner who has not caused
dissolution wrongfully shall have:
a. All the rights specified in the first
paragraph of this article.
b. The right, as against each partner
who has caused the dissolution
wrongfully, to damages breach of
the agreement.
2. The partners who have not caused the
dissolution wrongfully, if they all desire
to continue the business in the same
name either by themselves or jointly
with others, may do so, during the
agreed term for the partnership and for
that purpose may possess the
partnership property, provided they
secure the payment by bond approved
by the court, or pay any partner who has
caused the dissolution wrongfully, the
value of his interest in the partnership at
the dissolution, less any damages
recoverable under the second
paragraph, No. 1 (b) of this article, and in
like manner indemnify him against all
present or future partnership liabilities.
3. A partner who has caused the
dissolution wrongfully shall have:
a. If the business is not continued
under the provisions of the second
paragraph, No. 2, all the rights of a
partner under the first paragraph,
subject to liability for damages in the
second paragraph, No. 1 (b), of this
article.
b. If the business is continued under
the second paragraph, No. 2, of this
article, the right as against his
copartners and all claiming through
them in respect of their interests in
Law on Business Organizations Reviewer
the partnership, to have the value of
his interest in the partnership, less
any damage caused to his
copartners by the dissolution,
ascertained and paid to him in cash,
or the payment secured by a bond
approved by the court, and to be
released from all existing liabilities of
the partnership; but in ascertaining
the value of the partner's interest
the value of the good-will of the
business shall not be considered.
Rights of partners upon dissolution
1. Dissolution is caused without violation of
the agreement.
2. In contravention of the agreement.
If partnership is dissolved without violation
of the agreement
1. All partners may have the property sold
for payment of partnership liabilities.
2. If there is surplus, after paying the
liabilities of the firm, it shall be given in
cash to the partners.
If the partnership was dissolved in
contravention of the agreement
1. The remaining partners have the right to
sell partnership property to pay the
partnership’s liabilities and the surplus is
distributed to the remaining partners as
well.
2. As against the guilty partner for the
dissolution of the partnership, the
remaining partners have the right to
recover damages for breach.
3. The remaining partners may also
continue the business up to end of the
stipulated term of the partnership.
Art. 1838. Where a partnership contract is
rescinded on the ground of the fraud or
misrepresentation of one of the parties
thereto, the party entitled to rescind is,
without prejudice to any other right,
entitled:
1. To a lien on, or right of retention of, the
surplus of the partnership property after
satisfying the partnership liabilities to
third persons for any sum of money paid
by him for the purchase of an interest in
the partnership and for any capital or
advances contributed by him.
32

2. To stand, after all liabilities to third
persons have been satisfied, in the place
of the creditors of the partnership for
any payments made by him in respect of
the partnership liabilities.
3. To be indemnified by the person guilty of
the fraud or making the representation
against all debts and liabilities of the
partnership.
Right of partner to rescind contract of
partnership
If one is induced by fraud or
misrepresentation to become a partner, the
contract is voidable. If the contract is
annulled, the injured party is entitled to
restitution. Here, the fraud or
misrepresentation vitiates consent.
However, until the partnership contract is
annulled by a proper action in court, the
partnership relations exist and the
defrauded partner is liable for all obligations
to third persons.
1. Right of injured partner where
partnership contract rescinded
2. Right of retention of
partnership property
3. Right to be subrogated in place of
creditors of partnership
4. Right to be indemnified by the guilty
partner against all liabilities of the
partnership.
Art. 1839. In settling accounts between the
partners after dissolution, the following
rules shall be observed, subject to any
agreement to the contrary:
1. The assets of the partnership are:
a. The partnership property.
b. The contributions of the partners
necessary for the payment of all the
liabilities specified in No. 2.
2. The liabilities of the partnership shall
rank in order of payment, as follows:
a. Those owing to creditors other than
partners.
Law on Business Organizations Reviewer
b. Those owing to partners other than
for capital and profits.
c. Those owing to partners in respect
of capital.
d. Those owing to partners in respect
of profits.
3. The assets shall be applied in the order
of their declaration in No. 1 of this article
to the satisfaction of the liabilities.
4. The partners shall contribute, as
provided by article 1797, the amount
necessary to satisfy the liabilities.
5. An assignee for the benefit of creditors
or any person appointed by the court
shall have the right to enforce the
contributions specified in the preceding
number.
6. Any partner or his legal representative
shall have the right to enforce the
contributions specified in No. 4, to the
extent of the amount which he has paid
in excess of his share of the liability.
7. The individual property of a deceased
partner shall be liable for the
contributions specified in No. 4.
8. When partnership property and the
individual properties of the partners are
in possession of a court for distribution,
partnership creditors shall have priority
on partnership property and separate
creditors on individual property, saving
the rights of lien or secured creditors.
9. Where a partner has become insolvent
or his estate is insolvent, the claims
against his separate property shall rank
in the following order:
a. Those owing to separate creditors.
b. Those owing to partnership
creditors.
c. Those owing to partners by way of
contribution.
33

Rules for settling accounts between the
partners
1. The assets of the partnership
2. Liabilities of the partnership
3. Application of assets
4. Contribution by the partners
Assets of the partnership
1. Partnership property
2. The contributions of the partners
necessary for the payment of all
liabilities
Order of application of the assets
1. Those owing to partnership creditors
2. Those owing to partners other than for
capital and profits such as loans given by
the partners or advances for business
expenses
3. Those owing for the return of the capital
contributed by the partners
4. The share of the profits, if any, due to
each partner
Order of application of partner who become
insolvent or his estate his insolvent, the
claims against his separate property
1. Those owing to separate creditors
2. Those owing to partnership creditors
3. Those owing to partners by way of
contribution
Liability of deceased
partner’s individual property
The individual property of a deceased
partner shall be liable for his share of the
contributions necessary to satisfy the
liabilities of the partnership incurred while
he was a partner.
Art. 1840. In the following cases creditors of
the dissolved partnership are also creditors
of the person or partnership continuing the
business:
1. When any new partner is admitted into
an existing partnership, or when any
partner retires and assigns (or the
representative of the deceased partner
assigns) his rights in partnership
property to two or more of the partners,
or to one or more of the partners and
one or more third persons, if the
business is continued without
liquidation of the partnership affairs.
Law on Business Organizations Reviewer
2. When all but one partner retire and
assign (or the representative of a
deceased partner assigns) their rights in
partnership property to the remaining
partner, who continues the business
without liquidation of partnership
affairs, either alone or with others.
3. When any partner retires or dies and the
business of the dissolved partnership is
continued as set forth in Nos. 1 and 2 of
this article, with the consent of the
retired partners or the representative of
the deceased partner, but without any
assignment of his right in partnership
property.
4. When all the partners or their
representatives assign their rights in
partnership property to one or more
third persons who promise to pay the
debts and who continue the business of
the dissolved partnership.
5. When any partner wrongfully causes a
dissolution and the remaining partners
continue the business under the
provisions of article 1837, second
paragraph, No. 2, either alone or with
others, and without liquidation of the
partnership affairs.
6. When a partner is expelled and the
remaining partners continue the
business either alone or with others
without liquidation of the partnership
affairs.
The liability of a third person becoming a
partner in the partnership continuing the
business, under this article, to the creditors
of the dissolved partnership shall be satisfied
out of the partnership property only, unless
there is a stipulation to the contrary.
When the business of a partnership after
dissolution is continued under any
conditions set forth in this article the
creditors of the dissolved partnership, as
against the separate creditors of the retiring
or deceased partner or the representative of
the deceased partner, have a prior right to
any claim of the retired partner or the
representative of the deceased partner
34

against the person or partnership continuing
the business, on account of the retired or
deceased partner's interest in the dissolved
partnership or on account of any
consideration promised for such interest or
for his right in partnership property.
Nothing in this article shall be held to modify
any right of creditors to set aside any
assignment on the ground of fraud.
The use by the person or partnership
continuing the business of the partnership
name, or the name of a deceased partner as
part thereof, shall not of itself make the
individual property of the deceased partner
liable for any debts contracted by such
person or partnership.
Dissolution of a partnership by change of
members
Causes
1. New partner is admitted
2. Partner retires
3. Partner dies
4. Partner withdraws
5. Partner is expelled from partnership
6. Other partners assign their rights to sole
remaining partner
7. All the partners assign their rights in
partnership property to third persons.
*Any change in membership dissolves a
partnership and creates a new one
*When a business of a dissolved partnership
is continued by former or without new
partners, the old creditors are creditors of
the person or partnership that is continuing
the business.
Art. 1841. When any partner retires or dies,
and the business is continued under any of
the conditions set forth in the preceding
article, or in article 1837, second paragraph,
No. 2, without any settlement of accounts as
between him or his estate and the person or
partnership continuing the business, unless
otherwise agreed, he or his legal
representative as against such person or
partnership may have the value of his
interest at the date of dissolution
ascertained, and shall receive as an ordinary
creditor an amount equal to the value of his
interest in the dissolved partnership with
interest, or, at his option or at the option of
his legal representative, in lieu of interest,
Law on Business Organizations Reviewer
the profits attributable to the use of his right
in the property of the dissolved partnership;
Provided, That the creditors of the dissolved
partnership as against the separate
creditors, or the representative of the
retired or deceased partner, shall have
priority on any claim arising under this
article, as provided article 1840, third
paragraph.
Rights of retiring of properties of deceased,
partner when business continued
To have the value of the interest of the
retiring partner or deceased partner in the
partnership determined as of the date of
dissolution.
To receive thereafter, as an ordinary
creditor, an amount equal to the value of his
share in the dissolved partnership with
interest, or, at his option, in place of interest,
the profits attributable to the use of his right.
General Rule
When partner retires from the partnership,
he is entitled to the payment of what may be
due to him after liquidation.
Exception
No liquidation needed when there is
settlement as to what retiring partner shall
receive.
Art. 1842. The right to an account of his
interest shall accrue to any partner, or his
legal representative as against the winding
up partners or the surviving partners or the
person or partnership continuing the
business, at the date of dissolution, in the
absence of any agreement to the contrary.
Right to demand an accounting of
partnership affairs must be directed against
1. Winding-up partners
2. Surviving partners
3. The person the partnership continuing
the business
Art. 1843. A limited partnership is one
formed by two or more persons under the
provisions of the following article, having as
members one or more general partners and
one or more limited partners. The limited
partners as such shall not be bound by the
obligations of the partnership.
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 Law on Business Organizations Reviewer

General partner Limited partner a. The name of the partnership, adding

thereto the word "Limited".
Personally liable for Liability
partnership extends only
b. The character of the business.
obligations to his capital
contribution.
c. The location of the principal place
Have equal right in No share in of business.
management of management of
partnership partnership. d. The name and place of residence of
May contribute May contribute each member, general and limited
money, property or money and property partners being respectively
industry designated.
Proper party to Not proper party to
proceedings proceedings e. The term for which the partnership
is to exist.
Interest cannot be Interest is assignable
assigned to with assignee f. The amount of cash and a
description of and the agreed value
make new acquiring all rights of
of the other property contributed by
partner the limited partner
each limited partner.
His name may Name not included in
appear in the firm firm name g. The additional contributions, if any,
name to be made by each limited partner
Prohibited from No prohibition and the times at which or events on
engaging in a the happening of which they shall be
business like made.
partnership’s
His retirement, His retirement, h. The time, if agreed upon, when the
insolvency and insolvency and death contribution of each limited partner
death dissolves the does not dissolve the is to be returned.
partnership partnership
i. The share of the profits or the other
compensation by way of income
Characteristics of limited partnership which each limited partner shall
1. Must be formed in accordance with the receive by reason of his
requirements of the law. contribution.
2. There must be one or more general
partners who control the management j. The right, if given, of a limited
of the business. partner to substitute an assignee as
3. There must be one or more limited contributor in his place, and the
partners contributing to the capital and terms and conditions of the
sharing in the profits but have nothing to substitution.
do with the management.
4. Obligations of the partnership must be k. The right, if given, of the partners to
paid out of common fund and in the admit additional limited partners.
separate properties of the general
partners. l. The right, if given, of one or more of
the limited partners to priority over
Art. 1844. Two or more persons desiring to other limited partners, as to
form a limited partnership shall: contributions or as to compensation
by way of income, and the nature of
1. Sign and swear to a certificate, which such priority.
shall state —
m. The right, if given, of the remaining
general partner or partners to

36

continue the business on the death,
retirement, civil interdiction,
insanity or insolvency of a general
partner.
n. The right, if given, of a limited
partner to demand and receive
property other than cash in return
for his contribution.
2. File for record the certificate in the
Office of the Securities and Exchange
Commission.
A limited partnership is formed if there has
been substantial compliance in good faith
with the foregoing requirements.
Qualifications of limited partnership
1. The partners must sign and swear to a
certificate of limited partnership
2. Must file for record the certificate in the
office of the Securities and
Exchange Commission
Art. 1845. The contributions of a limited
partner may be cash or property, but not
services.
Limited partners can only contribute money
and property and cannot contribute services
to the partnership to protect persons dealing
with the firms with frauds.
Art. 1846. The surname of a limited partner
shall not appear in the partnership name
unless:
1. It is also the surname of a general
partner.
2. Prior to the time when the limited
partner became such, the business has
been carried on under a name in which
his surname appeared.
A limited partner whose surname appears in
a partnership name contrary to the
provisions of the first paragraph is liable as a
general partner to partnership creditors who
extend credit to the partnership without
actual knowledge that he is not a general
partner.
Law on Business Organizations Reviewer
Limited partner’s surname is not included in
the firm name provided these
circumstances
1. If the surname of general partner is the
same with limited partner’s
2. If the limited partner’s surname was
included and was carried on the new
partnership
*If the limited partner’s surname was
included in the firm name, he is liable as a
general partner.
Art. 1847. If the certificate contains a false
statement, one who suffers loss by reliance
on such statement may hold liable any party
to the certificate who knew the statement to
be false:
1. At the time he signed the certificate.
2. Subsequently, but within a sufficient
time before the statement was relied
upon to enable him to cancel or amend
the certificate, or to file a petition for its
cancellation or amendment as provided
in article 1865.
Liability for false statement in certificate
Under this provision, any partner to the
certificate containing a false statement is
liable provided the following requisites are
present:
1. He knew the statement to be false at the
time he signed the certificate, or
subsequently, but having sufficient time
to cancel or amend it or file a petition for
its cancellation or amendment, he failed
to do so.
2. The person seeking to enforce liability
has relied upon the false statement in
transacting business with the
partnership.
3. The person suffered loss as a result of
reliance upon such false statement.
ART. 1848. A limited partner shall become
liable as a general partner unless, in addition
to the exercise of his rights and powers as a
limited partner, he takes part in the control
of the business. Limited partner has no
control in business
A limited partner is excluded from any active
voice in the control of the affairs of the firm.
37

Limited partner cannot perform acts of
administration
Limited partners may not perform any act of
administration with respect to the interests
of the partnership, not even in the capacity
of agents of the managing partners.
ART. 1849. After the formation of a limited
partnership, additional limited partners may
be admitted upon filling an amendment to
the original certificate in accordance with
the requirements of Article 1865.
The writing to amend a certificate
1. Shall conform to the requirements of
Article 1844 as far as necessary to set
forth clearly the change in the certificate
which it is desired to make.
2. Be signed and sworn to by all members,
and an amendment substituting a
limited partner.
ART. 1850. A general partner shall all have
the rights and powers and be subject to all
the restrictions and liabilities of a partner in
a partnership without limited partners.
However, without the written consent or
ratification of the specific act by all the
limited partners, a general partner or all of
the general partners have no authority to:
1. Do any act in contravention of the
certificate.
2. Do any act which would make it
impossible to carry on the ordinary
business of the partnership.
3. Confess a judgement
against the partnership.
4. Possess partnership property, or assign
their rights in specific partnership
property, for other than a partnership
purpose.
5. Admit a person as a general partner.
6. Admit a person as a limited partner,
unless the right so to do is given in the
certificate.
7. Continue the business with partnership
property on the death, retirement,
insanity, civil interdiction or insolvency
of a general partner, unless the right so
to do is given in the certificate.
Law on Business Organizations Reviewer
Powers of general partner in limited
partnership
The general partner shall have all the right
and powers and be subject to all the
restrictions and liabilities of a partner in a
partnership without limited partners.
ART. 1851. A limited partner shall have the
same rights as a general partner to:
1. Have the partnership books kept at the
principal place of business of the
partnership, and at a reasonable hour to
inspect and copy any of them.
2. Have on demand true and full
information of all things affecting the
partnership, and a formal account of
partnership affairs whenever
circumstances render it just and
reasonable.
3. Have dissolution and winding up by
decree of court.
A limited partner shall have the right to
receive a share of the profit or other
compensation by way of income and to the
return of his contribution as provided in
Articles 1856 and 1857.
Rights of limited partner
It has lesser rights than a general partner. It
may exercise rights similar to a general
partner.
ART. 1852. Without prejudice to the
provisions of Article 1848, a person who has
contributed to the capital of a business
conducted by a person or partnership
erroneously believing that he has become a
limited partner in a limited partnership, is
not, by reason of his exercise of the rights of
a limited partner, a general partner with the
person or in the partnership carrying on the
business, or bound by the obligations of such
person or partnership; provided that on
ascertaining the mistake he promptly
renounces his interest in the profits of the
business, or other compensation by way of
income.
Conditions for exemption from liability
1. Prompt renunciation of interest and/ or
income upon ascertaining the mistake.
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 Law on Business Organizations Reviewer

2. Non-inclusion of limited partner’s name Limited partner not allowed to hold

in the firm name. collateral security
3. Non-participation in the management of A limited partner may not receive
the business. partnership property as collateral security.

ART. 1853. A person may be a general

partner and a limited partner in the same
partnership at the same time, provided that
this fact shall be stated in the certificate
provided for in Article 1844.

A person who is a general, and also at the

same time a limited partner, shall have all
the rights and powers and be subject to all
restrictions of a general partner; except
that, in respect to his contribution, shall
have the rights against the other members
which he would have had if he were not also
a general partner.

ART. 1854. A limited partner also may loan

money to and transact other business with
the partnership and unless he is also a
general partner, receive on account of
resulting claims against the partnership, with
general creditors, a pro rata share of the
assets. No limited partner shall in respect to
any such claim:

1. Receive or hold as collateral security any

partnership property.

2. Receive from a general partner or the

partnership any payment, conveyance,
or release from liability, if at the time the
assets of the partnership are not
sufficient to discharge partnership
liabilities to persons not claiming as
general or limited partners.

The receiving of collateral security, or a

payment, conveyance, or release in violation
of the foregoing provisions is a fraud on the
creditors of the partnership.

Loans and business transactions with

limited partners
A limited partner is allowed to loan money to
the firm; transact other business with the
partnership, and receive a pro rata share in
the assets with general creditors.

39

ART. 1855. Where there are several limited
partners the members may agree that one or
more of the limited partners shall have a
priority over other limited partners as to the
return of their contributions, as to their
compensation by way of income, or as to any
other matter. If such an agreement is made
it shall be states in the certificate, and in the
absence of such a statement all the limited
partners shall stand upon equal footing.
ART. 1856. A limited partner may receive
from the partnership the share of the profits
or the compensation by way of income
stipulated for in the certificate; provided,
that after such payment is made, whether
from the property of the partnership or that
of a general partner, the partnership assets
are in excess of all liabilities of the
partnership except liabilities to limited
partners on account of their contributions
and to general partners.
ART. 1857. A limited partner shall not
receive from a general partner or out of
partnership property any part of his
contributions until:
1. All liabilities of the partnership, except
liabilities to general partners and to
limited partners on account of their
contributions, have been paid or there
remains property of the partnership
sufficient to pay them.
2. The consent of all members is had,
unless the return of the contribution
may be rightfully demanded under the
provisions of the second paragraph.
3. The certificate is cancelled or so
amended as to set forth the withdrawal
or reduction.
Subject to the provisions of the first
paragraph, a limited partner may rightfully
demand the return of his contribution:
1. On the dissolution of a partnership.
2. When the date specified in the
certificate for its return has arrived.
Law on Business Organizations Reviewer
3. After he has given six months’ notice in
writing to all other members, if no time
is specified in the certificate, either for
the return of the contribution or for the
dissolution of the partnership.
In the absence of any statement in the
certificate to the contrary or the consent of
all members, a limited partner, irrespective
of the nature of his contribution, has only
the right to demand and receive cash in
return for his contribution.
A limited partner may have the partnership
dissolved and its affairs wound up when:
1. He rightfully but unsuccessfully demands
the return of his contribution.
2. The other liabilities of the partnership
have not been paid, or the partnership
property is insufficient for their payment
as required by the first paragraph, No. 1,
and the limited partner would otherwise
be entitled to the return of his
contribution.
Conditions of a limited partner entitled to
return of his contribution
1. All liabilities of the partnership have
been paid or there are assets sufficient
to pay partnership liabilities.
2. The consent of all the partners is
obtained.
3. The certificate is cancelled or so
amended as to set forth the withdrawal
or reduction of the contribution.
When limited partner may demand return
1. The partnership is dissolved
2. The date specified for its return has
arrived
3. If no term is specified, after six months’
notice in writing to all other partners.
Limited partner to receive cash
It will be noted that the limited partner has a
right to demand and receive cash only in
return for his contribution even when he
contributed property.
2.
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ART. 1858. A limited partner is liable to the
partnership:
1. For the difference between his
contribution as actually made and that
stated in the certificate as having been
made.
For any unpaid contribution which he
agreed in the certificate to make in the
future at the time and on the conditions
stated in the certificate.
A limited partner holds a trustee for the
partnership:
1. Specific property stated in the certificate
as contributed by him, but which was not
contributed or which has been
wrongfully returned.
2. Money or other property wrongfully
paid or conveyed to him on account of
his contribution.
The liabilities of a limited partners as set
forth in this article can be waived or
compromised only by the consent of all
members; but a waiver or compromise shall
not affect the right of a creditor of a
partnership who extended credit or whose
claim arose after the filling and before a
cancellation or amendment of the
certificate, to enforce such liabilities.
When a contributor has rightfully received
the return in whole or in part of the capital
of his contribution, he is nevertheless liable
to the partnership for any sum, not in excess
of such return with interest, necessary to
discharge its liabilities to all creditors who
extended credit or whose claims arose
before such return.
Limited partner liable to partnership for
sum returned
A limited partner whose contribution has
been rightfully returned is still liable to the
partnership for an amount not in excess of
the sum returned plus interest as may be
necessary to pay the claims of persons who
extended credit or whose claims arose
before the return.
ART. 1859. A limited partner’s interest is
assignable.
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A substitute limited partner is a person
admitted to all the rights of a limited partner
who has died or has assigned his interest in
a partnership.
An assignee, who does not become a
substituted limited partner, has no right to
require any information or account of the
partnership transactions or to inspect the
partnership books; he is only entitled to
receive the share of the profits or other
compensation by way of income, or the
return of his contribution, to which his
assignor would otherwise be entitled.
An assignee shall have the right to become a
substituted partner if all the members
consent thereto or if the assignor, being
thereunto empowered by the certificate,
gives the assignee that right.
An assignee becomes a substituted limited
partner when the certificate is appropriately
amended in accordance with Article 1865.
The substituted limited partner has all the
rights and powers, and is subject to all the
restrictions and liabilities of his assignor,
except those liabilities of which he was
ignorant at the time he became a limited
partner and which could not be ascertained
for the certificate.
The substitution of the assignee as a limited
partner does not release the assignor from
liability to the partnership, under article
1847 and 1858.
Limited partner’s interest assignable A
limited partner’s interest in the partnership
is assignable. The assignee, however, of a
limited partner’s interest does not
necessarily become a substituted limited
partner.
ART. 1860. The retirement, death,
insolvency, insanity or civil interdiction of a
general partner dissolves the partnership,
unless the business is continued by the
remaining general partners:
1. Under a right so to do stated in the
certificate.
41

2. With the consent of all members.
It must be observed that the death, etc., of a
general partner dissolves the partnership
while the death of a limited partner does not
cause the dissolution of the firm, unless
there is only one limited partner.
ART. 1861. On the death of a limited partner
his executor or administrator shall have all
the rights of a limited partner for the
purpose of settling his estate, and such
power as the deceased had to constitute his
assignee a substituted limited partner.
The estate of a deceased limited partner
shall be liable for all his liabilities as a limited
partner.
ART. 1862. On due application to a court of
competent jurisdiction by any creditor of a
limited partner, the court may charge the
interest of the indebted limited partner with
payment of the unsatisfied amount of such
claim, and may appoint a receiver, and make
all other orders, directions, and inquiries
which the circumstances of the case may
require.
The interest may be redeemed with the
separate property of any general partner,
but may not be redeemed with partnership
property.
The remedies conferred by the first
paragraph shall not be deemed exclusive of
others which may exist.
ART. 1863. In settling accounts after
dissolution the liabilities of the partnership
shall be entitled to payment in the following
order:
1. Those to creditors, in the order of
priority as provided by law, except those
to limited partners on account of their
contributions, and to general partners.
2. Those to limited partners in respect to
their share of the profits and other
compensation by way of income on their
contributions.
Law on Business Organizations Reviewer
3. Those to limited partners in respect to
the capital of their contributions.
4. Those to general partners other than for
capital and profits.
5. Those to general partners in respect to
profits.
6. Those to general partners in respect to
capital.
Subject to any statement in the certificate or
to subsequent agreement, limited partners
share in the partnership assets in respect to
their claims for capital, and in respect to
their claims for profit or for compensation by
way of income on their contribution
respectively, in proportion to the respective
amounts of such claims.
Art. 1864. The certificate shall be cancelled
when the partnership is dissolved or all
limited partners cease to be such. A
certificate shall be amended when:
1. There is a change in the name of the
partnership or in the amount or
character of the contribution of any
limited partner.
2. A person is substituted as a limited
partner.
3. An additional limited partner
is admitted.
4. A person is admitted as a general
partner.
5. A general partner retires, dies, becomes
insolvent or insane, or is sentenced to
civil interdiction and the business is
continued under article 1860.
6. There is a change in the character of the
business of the partnership.
7. There is a false or erroneous statement
in the certificate.
2.
42

8. There is a change in the time as stated in
the certificate for the dissolution of the
partnership or for the return of a
contribution.
9. A time is fixed for the dissolution of the
partnership, or the return of a
contribution, no time having been
specified in the certificate.
10. The members desire to make a change in
any other statement in the certificate in
order that it shall accurately represent
the agreement among them.
Art. 1865. The writing to amend a certificate
shall:
1. Conform to the requirements of article
1844 as far as necessary to set forth
clearly the change in the certificate
which it is desired to make.
Be signed and sworn to by all members,
and an amendment substituting a
limited partner or adding a limited or
general partner shall be signed also by
the member to be substituted or added,
and when a limited partner is to be
substituted, the amendment shall also
be signed by the assigning limited
partner.
The writing to cancel a certificate shall be
signed by all members.
A person desiring the cancellation or
amendment of a certificate, if any person
designated in the first and second
paragraphs as a person who must execute
the writing refuses to do so, may petition the
court to order a cancellation or amendment
thereof.
If the court finds that the petitioner has a
right to have the writing executed by a
person who refuses to do so, it shall order
the Office of the Securities and Exchange
Commission where the certificate is
recorded, to record the cancellation or
amendment of the certificate; and when the
certificate is to be amended, the court shall
also cause to be filed for record in said office
a certified copy of its decree setting forth the
amendment.
Law on Business Organizations Reviewer
A certificate is amended or cancelled when
there is filed for record in the Office of the
Securities and Exchange Commission, where
the certificate is recorded:
1. A writing in accordance with the
provisions of the first or second
paragraph.
2. A certified copy of the order of the court
in accordance with the provisions of the
fourth paragraph.
3. After the certificate is duly amended in
accordance with this article, the
amended certified shall thereafter be for
all purposes the certificate provided for
in this Chapter.
A certificate is considered cancelled or
amended when there is filed for record
1. A writing to amend the certificate; or
2. A certified copy of the order of the court
in the event of an unjustified refusal of a
partner to sign the writing.
Art. 1866. A contributor, unless he is a
general partner, is not a proper party to
proceedings by or against a partnership,
except where the object is to enforce a
limited partner's right against or liability to
the partnership.
Art. 1867. A limited partnership formed
under the law prior to the effectivity of this
Code, may become a limited partnership
under this Chapter by complying with the
provisions of article 1844, provided the
certificate sets forth:
1. The amount of the original contribution
of each limited partner, and the time
when the contribution was made.
2. That the property of the partnership
exceeds the amount sufficient to
discharge its liabilities to persons not
claiming as general or limited partners
by an amount greater than the sum of
the contributions of its limited partners.
A limited partnership formed under the
law prior to the effectivity of this Code,
until or unless it becomes a limited
partnership under this Chapter, shall
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 Law on Business Organizations Reviewer

continue to be governed by the

provisions of the old law.

CORPORATIONS
TITLE I - GENERAL
PROVISIONS DEFINITIONS AND
CLASSIFICATIONS

Sec. 1. Title of the Code. – This Code shall be

known as “The Corporation Coder of the
Philippines”.

Sec. 2. Corporation defined. - A corporation

is an artificial being created by operation of
law having the right of succession and the
powers, attributes and properties expressly
authorized by law or incident to its
existence.

Definition
A corporation is an artificial being created by
operation of law having the right of
succession and the powers, attributes and
properties expressly authorized by law or
incident to its existence.

Attributes
1. It is an artificial being.
2. It is created by operation of law.
3. It has the right of succession.

2.

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 Law on Business Organizations Reviewer

4. It has only the powers, attributes and partnership.

properties expressly authorized by law
or incident to its existence. Right of No right of Possesses
Succession succession right of
Similarities between a partnership and a succession
corporation Extent of Partners Stockholders
1. Juridical personality separate and Liability to (except are liable only
distinct from the individuals composing Third Persons limited to the extent
partners) are of their
it. liabl investments
2. Act only through its agents. e personally as
3. Composed of an aggregate and represented
of individuals. subsidiarily by the shares
4. Distribute profits to those who for subscribed by
partnership them.
contribute to capital.
debts to
5. May be organized only when there is a third persons.
law authorizing it.
6. Subject to income tax. Transferability A A stockholder
of interest partn has the right
er cannot to transfer his
transfer shares
Point of interest so as without the
Partnership Corporation to make a prior consent
Comparison
partner of the other
Manner of By mere By law or
without the stockholders.
Creation agreement operation of
consent of all
of the law other
parties existing
Number of By a Requires at partners.
Parties minimum of least five (5) Term of May be May not be
two (2) incorporators existence established formed for a
persons
for any period term in excess
Commence- Generally From the date of of 50 years
ment of from the of the time extendible to
Juridical moment of issuance stipulated not more
Personality execution of of the by the than 50 years.
the contract certificate of partners.
incorporation
Firm name A limited A corporation
of the
partnership is may adopt a
Securities and
required to firm name
Exchange
add the word provided it is
Commission
‘Ltd.’ to its not identical
(SEC)
name. or deceptively
Powers May Can
similar to any
exercise exerci
registered
powers se only the
firm name or
authorized powers
contrary to
by partners expressly
provided the existing laws.
granted by
same are law or Dissolution May be May only be
not contrary incident to its dissolved at dissolved
to law, existence. any time by with the
morals, the will of any consent of
good or all the state.
customs, partners.
public policy
Governing Civil Code Corporation
or
Laws Code
publ
Distinctions between a partnership and a
ic order.
corporation
Management When it is It is vested in
not agreed the board of
upon, each directors 45
partner is an or
agent of the trustees.

3. Continuity of existence in spite of death
or changes of members.
4. Transferability of shares.
5. Centralized management under a board
of directors.
6. Standardized methods of organization,
management and finance for the
protection of shareholders and creditors
under statutory regulations.
Disadvantages of a corporate form of
business organizations
1. The limited liability of the stockholders
serves to limit the credit available to the
corporation.
2. The transferability of shares permits the
uniting of incompatible and conflicting
interests in one enterprise.
3. The minority stockholders are usually
subservient to the wishes of the
majority.
4. In big corporations, the stockholders’
voting rights have become largely
theoretical because of widespread
ownership, lukewarmness and
disinterest in management, inertia, and
inaccessible meeting places.
5. In large corporations, management and
control has been separated from
ownership.
6. By and large corporations are subject to
governmental restrictions, controls, and
report requirements not imposed on
other forms of business organizations.
7. Corporate sphere of activity is limited in
the transaction of its business to the
state of the organization.
8. The corporate form involves “double
taxation” on corporation income.
Sec. 3. Classes of corporations. –
Corporations formed or organized under this
Code may be stock or non-stock
Law on Business Organizations Reviewer
Advantages of a corporate form of business
organizations
1. The capacity to hold property, to contract,
to sue and be sued as a legal unit or
distinct entity.
Exemption of shareholders from
individual liability.
corporations. Corporations which have
capital stock divided into shares and are
authorized to distribute to the holders of
such shares dividends or allotments of the
surplus profits on the basis of shares held are
stock corporations. All other corporations
are non-stock corporations.
Other kinds of corporations
1. Quasi-corporations – from the word
“quasi”, meaning “as if”, are entities that
are not absolutely corporations but are
considered as if they were. Eg. Public
boards created by law
2. Quasi-public – are entities engaged in
rendering basic services of such public
importance as to entitle them to certain
privileges like eminent domain or use of
public property. Eg. Electric, gas, water
and telephone companies.
3. Government-owned or controlled – are
entities organized by the government or
corporations of which the government is
a majority stockholder. Eg. Philippine Air
Lines
4. Domestic – one incorporated under
Philippine laws.
5. Foreign – one formed, organized, or
existing under any laws other than those
of the Philippines.
6. Corporation aggregate – one composed
of more than one member or corporator.
7. Corporation sole – consists of one
member or corporator and his
successors.
8. Religious corporations, sole or aggregate
– organized, either as sole or aggregate,
to administer properties of the church.
9. Ecclesiastical – organized for religious
purposes.
10. Lay – organized for a purpose other than
religious
2.
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 Law on Business Organizations Reviewer

11. Eleemosynary – organized for charitable

purposes.
12. Civil – are those than ecclesiastical and
eleemosynary, whether public or
private.
13. Close – one wherein all the outstanding
stock is owned by the persons who are
active in management and conduct of
the business.
14. Open – one in which all the members or
corporations have a vote in the election
of the directors and other officers.
15. Multi-national – one having been
created or organized in one state
conducts business or activities across
national boundaries and but subject to
the legal sanctions of the countries in
which they operate.
16. Non-profit – organized without
contemplation of gains, profits or
dividends to their members on invested
capital.
17. De Jure – one created in strict or
substantial conformity with the
statutory requirements for
incorporation and whose right to exist as
a corporation cannot be successfully

47

attacked even in a direct proceeding for
that purpose by the State.
Sec. 4. Corporations created by special laws
or charters. – Corporations created by
special laws or charters shall be governed
primarily by the provisions of the special law
or charter creating them or applicable to
them, supplemented by the provisions of
this Code, insofar as they are applicable.
Sec. 5. Corporators and incorporators,
stockholders, and members. – Corporators
are those who compose a corporation,
whether as stockholders or members.
Incorporators are those stockholders or
members mentioned in the articles of
incorporation as originally forming and
composing the corporation and who are
signatories thereof.
Corporators in a stock corporation are called
stock-holders or shareholders. Corporators
in a non-stock corporation are called
members.
Components of a Corporation
1. Corporators – are those who composed
a corporation, whether as stockholders
of members. The term includes
incorporators, stockholders or
members.
2. Incorporators – are those stockholders
or members mentioned in the articles of
incorporation as originally forming and
composing the corporation and who are
signatories thereof.
3. Stockholders or shareholders – are those
corporators in a stock corporation.
4. Members – are those corporators in a
non-stock corporation.
5. Promoters – is a self-constituted
organizer who finds an enterprise or
venture and helps to attract investors,
form a corporation and launch it in
business, all with a view to promotion
profits.
Promotion – is the act of procuring the initial
finances and the making of all preparations
necessary to launch a corporation.
Activities of a promoter
1. The discovery and investigation of a
promising business opportunity.
Law on Business Organizations Reviewer
2. The formulation of business and
financial plans.
3. Assembling the enterprise by
negotiations and obtaining some control
over the subject matter by option or
contracts made on behalf of the
proposed corporation or on his own
credit.
4. The making of arrangements for
financing the enterprise and the
floatation of securities.
5. Arrange tactful and painless methods for
getting his own reward for the task of
promotion out of the prospective
investors and for reimbursement for his
expenses, contracts, and services
without frightening away those who are
expected to provide the funds.
General rule: A corporation is not bound by
any agreement made by a promoter.
Exception to the rule: Unless and until the
corporation approves the agreement.
Sec. 6. Classification of shares. – The shares
of stock of stock corporations may be
divided into classes or series of shares, or
both, any of which classes or series of shares
may have such rights, privileges or
restrictions as may be stated in the articles
of incorporation: Provided, That no share
may be deprived of voting rights except
those classified and issued as “preferred” or
“redeemable” shares, unless otherwise
provided in this Code: Provided, further, That
there shall always be a class or series of
shares which have complete voting rights.
Any or all of the shares or series of shares
may have a par value or have no par value as
may be provided for in the articles of
incorporation: Provided, however, That
banks, trust companies, insurance
companies, public utilities, and building and
loan associations shall not be permitted to
issue no-par value shares of stock.
Preferred shares of stock issued by any
corporation may be given preference in the
distribution of the assets of the corporation
in case of liquidation and in the distribution
of dividends, or such other preferences as
may be stated in the articles of incorporation
which are not violative of the provisions of
this Code: Provided, That preferred shares of
stock may be issued only with a stated par
value. The board of directors, where
48

authorized in the articles of incorporation,
may fix the terms and conditions of
preferred shares of stock or any series
thereof: Provided, That such terms and
conditions shall be effective upon the filing
of a certificate thereof with the Securities
and Exchange Commission.
Shares of capital stock issued without par
value shall be deemed fully paid and
nonassessable and the holder of such shares
shall not be liable to the corporation or to its
creditors in respect thereto: Provided; That
shares without par value may not be issued
for a consideration less than the value of five
(P5.00) pesos per share: Provided, further,
That the entire consideration received by the
corporation for its no-par value shares shall
be treated as capital and shall not be
available for distribution as dividends.
A corporation may, furthermore, classify its
shares for the purpose of insuring
compliance with constitutional or legal
requirements.
Except as otherwise provided in the articles
of incorporation and stated in the certificate
of stock, each share shall be equal in all
respects to every other share. Where the
articles of incorporation provide for non-
voting shares in the cases allowed by this
Code, the holders of such shares shall
nevertheless be entitled to vote on the
following matters:
1. Amendment of the
articles of incorporation.
2. Adoption and amendment of by-laws.
3. Sale, lease, exchange, mortgage, pledge
or other disposition of all or substantially
all of the corporate property.
4. Incurring, creating or increasing bonded
indebtedness.
5. Increase or decrease of capital stock.
6. Merger or consolidation of the
corporation with another corporation or
other corporations.
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7. Investment of corporate funds in
another corporation or business in
accordance with this Code.
8. Dissolution of the corporation.
Except as provided in the immediately
preceding paragraph, the vote necessary to
approve a particular corporate act as
provided in this Code shall be deemed to
refer only to stocks with voting rights.
Definition
A “stock” or share of stock is one of the units
into which the capital stock has been
divided. It represents the interest or right
that the holder of the stock or stockholder
has in the corporation.
A stock certificate certifies that one is a
holder or owner of a certain number of
shares of stock in the corporation. It is a
mere documentary evidence of the holder’s
ownership of shares and a convenient
instrument for the transfer of title.
Classes or series of shares of stock subject to
restrictions
1. Shares shall not be deprived of voting
rights except preferred or redeemable
shares but non-voting shares must still
be entitles to vote on matters specified
in the last paragraph of Section 6 like
matters relating to amendment of the
articles of incorporation and dissolution
of the corporation.
2. Where non-voting shares are provided
for there must always be a class or series
of shares with complete voting rights.
3. Banks, trust companies, insurance
companies, public utilities, and building
and loan associations shall not be
permitted to issue no-par value shares of
stock.
4. Preferred shares of stock which may be
given preference in the distribution of
assets in case of liquidation and
distribution of dividends or other
preferences may be issued only with
stated par value.
5. The terms and conditions of preferred
shares or series thereof may be fixed by
the board of directors only when
authorized by the articles of
incorporation the effectivity thereof
49

shall be reckoned from the filing of
certificate with the SEC.
6. Shares without par value may not be
issued for a consideration less than the
value of five (P5.00) pesos per share.
7. Unless otherwise provided by law the
rights, privileges or restrictions on
classes or series of shares must be stated
in the articles of incorporation and in the
stock certificates.
Classes or series of shares
1. Voting and Non-Voting Shares; General
rule: Every member of a nonstock
corporation and every legal owner of
shares in a stock corporation, has a right
to be present and vote at all corporate
meetings. Exception to the rule: Unless
there is a stipulation in contrary.
2. Par Value and No-Par Value Shares Par
value is the given fixed or definite value
of a share in the articles of incorporation.
3. Common and Preferred
Shares.
Preferred shares of stock may be: (a)
preferred as to assets; (b) preferred as to
dividends. Preferred as to dividends may
either be cumulative or noncumulative,
or participating or nonparticipating
4. Promotion Shares – are such stocks
issued to those who may originally own
the mining ground or valuable rights
connected therewith, in consideration of
their deeding the same to the mining
company when the company is
incorporated, or it may mean such stock
as is issued to promoters.
5. Shares of Escrow – are shares subject to
an escrow agreement, that is, an
agreement under which the shares are
deposited by the grantor or his agent
with a third person, to be delivered by
the depositary to the vendee or
subscriber only upon the happening of
certain conditions.
6. Founder’s Shares;
7. Redeemable “Callable” Shares;
8. Treasury Shares;
9. Other shares classified to comply with
constitutional or legal requirements.
Instances when non-voting shares may vote
1. Amendment of the
articles of incorporation;
2. Adoption and amendment of by-laws;
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3. Sale, lease, exchange, mortgage, pledge
or other disposition of all or substantially
all of the corporate property;
4. Incurring, creating or increasing bonded
indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the
corporation with another corporation or
other corporations;
7. Investment of corporate funds in
another corporation of business in
accordance with the Corporation Code;
and
8. Dissolution of the corporation.
Sec. 7. Founders’ shares. – Founders' shares
classified as such in the articles of
incorporation may be given certain rights
and privileges not enjoyed by the owners of
other stocks, provided that where the
exclusive right to vote and be voted for in the
election of directors is granted, it must be for
a limited period not to exceed five (5) years
subject to the approval of the Securities and
Exchange Commission. The five-year period
shall commence from the date of the
aforesaid approval by the Securities and
Exchange Commission.
Definition
Founders’ shares, generally common stock,
are given to the founders or promoters of a
corporation in payment of money expended
or services rendered in the promotion of it.
Sec. 8. Redeemable shares. – Redeemable
shares may be issued by the corporation
when expressly so provided in the articles of
incorporation. They may be purchased or
taken up by the corporation upon the
expiration of a fixed period, regardless of the
existence of unrestricted retained earnings
in the books of the corporation, and upon
such other terms and conditions as may be
stated in the articles of incorporation, which
terms and conditions must also be stated in
the certificate of stock representing said
shares.
Definition
Redeemable (“Callable”) shares of stock
which are usually preferred are frequently
issued subject to redemption at the option
of either the corporation, the stockholder, or
both, at a definite price representing
premium above the amount originally paid.
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Sinking fund refers to a fund set-up by the
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
future.
Sec. 9. Treasury shares. - Treasury shares are
shares of stock which have been issued and
fully paid for, but subsequently reacquired
by the issuing corporation by purchase,
redemption, donation or through some
other lawful means. Such shares may again
be disposed of for a reasonable price
fixed by the board of directors. (n)
Definition
Treasury shares are owned by the
corporation having been reacquired by the
issuing corporation by “purchase,
redemption, donation or through some
other lawful means.” It has no voting rights
or rights as to dividends or distributions.
TITLE II - INCORPORATION AND
ORGANIZATION OF PRIVATE
CORPORATIONS Definition
Incorporation is the act of creating a
corporation.
Sec. 10. Number and qualifications of
incorporators. – Any number of natural
persons not less than five (5) but not more
than fifteen (15), all of legal age and a
majority of whom are residents of the
Philippines, may form a private corporation
for any lawful purpose or purposes. Each of
the incorporators of s stock corporation
must own or be a subscriber to at least one
(1) share of the capital stock of the
corporation.
Qualifications of incorporators 1.
Must be a natural person.
2. Must be of legal age.
Sec. 11. Corporate term. – A corporation
shall exist for a period not exceeding fifty
(50) years from the date of incorporation
unless sooner dissolved or unless said period
is extended. The corporate term as originally
stated in the articles of incorporation may be
extended for periods not exceeding fifty (50)
years in any single instance by an
amendment of the articles of incorporation,
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in accordance with this Code; Provided, That
no extension can be made earlier than five
(5) years prior to the original or subsequent
expiry date(s) unless there are justifiable
reasons for an earlier extension as may be
determined by the Securities and Exchange
Commission.
Sec. 12. Minimum capital stock required of
stock corporations. – Stock corporations
incorporated under this Code shall not be
required to have any minimum authorized
capital stock except as otherwise specifically
provided for by special law, and subject to
the provisions of the following section.
Sec.13. Amount of capital stock to be
subscribed and paid for purpose of
incorporation. – At least twenty-five percent
(25%) of the authorized capital stock as
stated in the articles of incorporation must
be subscribed at the time of incorporation,
and at least twentyfive percent (25%) of the
total subscription must be paid upon
subscription, the balance to be payable on a
date or dates fixed in the contract of
subscription without need of call, or in the
absence of fixed date or dates, upon call for
payment by the board of directors: Provided,
however, that in no case shall the paid-up
capital be less than five thousand (P5,0000)
pesos.
Amount to be subscribed and paid
Illustration:
If X, Inc. has authorized capital stock
of P100, 000 divided into 1,000 shares with
par value of P100.00 per share, it must be
shown that at least P25, 000 or 250 shares of
the authorized capital stock must be
subscribed. Of the total subscription of P25,
000, at least P6, 250.00 or 25% of total
subscription must be paid. It is not necessary
that each subscriber pay Twentyfive percent
(25%) on his subscription. On the other hand,
where the authorized capital stock is stated
at 2,000 no par value shares , it must be
shown that at least 500- no par value share
have been subscribed. The basis of
computation is on the number of shares.
Securities and Exchange
Commission (SEC) may conduct compliance
with paid-up capital requirements because it
has come to the knowledge of the
Commission that some corporation have
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been organized merely as fronts for some
hidden objectives with no real intention of
carrying out the purported purposes in their
articles of incorporation. If a bigger capital
stock is required, the abuse of the privileges
of a corporation would be minimized.
Capital stock requirements under the
special laws
1. In case of mining and agricultural
incorporation, or corporation organized
for the purpose of the disposition ,
exploitation, development or utilization
of natural resources of the Philippines,
as well as corporation organized for the
operations of public utilities, the
Constitution provides that at least 60 %
of the capital stock of such corporation
must be owned by citizens of the
Philippines.
2. The Insurance Code provide that “no
domestic insurance company shall, if a
stock corporation, engage in business in
the Philippines unless posses of a paid
up capital stock equal to at least two
million pesos”. Where the insurance
company is to engage in insurance
business it must have a “paid-up capital
stock of at least five million pesos” to be
invested in securities specified by law,
which securities are to be deposited
with the Insurance
Commissioner.
3. The Financing Company Act requires
that “at least sixty per centum of the
capital of financing companies must be
owned by citizens of the Philippines and
shall have a paid-up capital of not less
than five hundred thousand pesos”.
4. Commercial banks are required to have
a paid-up capital of 100 million pesos.
When a commercial bank having licence
to operate an expanded foreign
currency deposit system it must have a
paid-up capital of at least 150 million
pesos and when a commercial bank is
authorized to engage in universal
banking it must have a paid up capital of
at least 500 million pesos.
5. The New Constitution provides that:
“The ownership and management of
mass media shall be limited to citizens
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of the Philippines or to corporations or
association wholly-owned and manage
by such citizen”.
6. Under the Retail Trade Nationalization
law “no person who is not a citizen of
the Philippines, and no association,
partnership, or corporation the capital
of which is not wholly owned by citizens
of the Philippines, shall engage directly
or indirectly in the retail trade business.
7. Only vessels of domestic ownership are
authorized to engage in coastwise
shipping in the Philippines. Vessels are
considered of domestic ownership
when such ownership is vested in some
one or more of the following: (1)
Citizens of the Philippines; (2) any
corporation or any company composed
wholly of the citizens of the Philippines;
(3) any corporation or company created
under the laws of the Philippines,
provided at least 75% of the capital
stock thereof or of any interested in
said capital is wholly owned by the
citizens of the Philippines.
Sec.14. Contents of articles of the
incorporations. – All corporation organized
under this Code shall file with the Securities
and Exchange Commission articles of
incorporation in any of the official languages,
duly signed and acknowledged by all of the
incorporators containing substantially the
following matters, except as otherwise
prescribed by this Code or by special laws:
1. The name of the corporation.
2. The specific purpose or purposes for
which the corporation is being
incorporated. Where the corporation
have more than one stated purpose, the
article of incorporation shall state which
the primary is and which is/are the
secondary purpose or purposes:
Provided, That a non-stock corporation
may not include a purpose which would
change or contradict its nature as such.
3. The place where the principal office of
the corporation is to be located, which
must be within the Philippines.
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4. The term for which the corporation is to
exist.
5. The names, nationalities and residences
of the incorporators.
6. The number of directors or trustees
which shall not be less than five (5) nor
more than fifteen (15).
7. The names, nationalities and residences
of the person who shall act as directors
or trustees until the first regular
directors or trustees are duly elected
and qualified accordance with this Code.
8. If it be a stock corporation, the amount
of its authorized capital stock in lawful
money of the Philippines, the number of
shares which it is divided, and in case the
shares are par value shares, the par
value of each, the names, nationalities
and residences of the original subscriber,
and the amount subscribed and paid by
each on his subscription, and if some or
all of the shares are without par value,
such fact must be stated.
9. If it be a non-stock corporation, the
amount of its capital, the names,
nationalities and residences of the
contributors and the amount,
contributed by each.
10. Such other matters are not inconsistent
with law and which the incorporators
may deem necessary and convenient.
The Securities and Exchange Commission
shall not accept the articles of incorporation
of any stock corporation unless
accompanied by a sworn statement of the
Treasurer elected by the subscriber showing
that at least 25% of the authorized capital
stock of the corporation has been
subscribed, and at least 25% of the total
subscription has been fully paid to him in
actual cash and/or in property the fair
valuation of which are equal to at least 25%
of the said subscription , such paid up capital
being not less than five-thousand pesos
(P5,000).
Sec.15. Forms of Articles of Incorporation. –
Unless otherwise prescribed by special law,
articles of incorporation of all domestic
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corporations shall supply substantially the
following requirements in the form as
provided for by the SEC:
1. The name of the corporation.
Incorporators may choose any name they
see fit , however strange, uneuphonious, or
unrhetorical it may be , provided it is one not
identical with or prejudicially similar to a
name which has previously been adopted by
and is being use by another corporation as
its corporate name
Change of Corporate name
The change of the corporate name
doesn’t mean a new corporation, nor the
successor of the original corporation. It is the
same corporation with a different name
having its character with no respect change.
The corporation continues, as before,
responsible in its new name for all debts or
other liabilities it had previously contracted
or incurred.
2. Specific purpose or purposes.
The statement of the purpose has its
principal function the affirmative
authorization of the management to enter
into those contracts and business
transactions which may be considered as
incidental to its attainment of the purposes.
It also imposes implied limitations of their
authority by the exclusion of lines of activity
which are not covered.
3. Principal office of the Corporation. The
principal office of the corporation must
be within the Philippines. It is where the
books of the corporation are kept and
its officers usually and ordinarily meet
for the purpose of managing the affairs
and transactions of the business of the
corporation.
4. Terms of Existence of the Corporation.
The corporation shall exist for a period
not exceeding fifty (50) years from the
date of incorporation unless sooner
dissolved or unless said period is
extended.
5. Names, Nationalities and residences of
incorporators.
The names, nationalities and residences of
the incorporators must be stated in the
articles of the corporation for the purpose of
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complying with legal requirement that
majority of the incorporators must be
residents of the Philippines and complying
with the statutory requirement on share
ownership and in other instances where
Filipino Citizens are required.
6. Number of directors and trustees.
The number of the director and trustees
must not be less than five (5) nor more than
fifteen (15).
7. Names, nationalities and residences of
directors.
A majority of the directors or trustees of all
corporation organized under this Code
must be a residents citizens of the
Philippines.
8. Amount of authorized capital
stock. A stock corporation must state the
“amount of its authorized capital stock in
lawful money of the Philippines, the
number of shares into which it is divided,
and in case the shares are par value shares,
the par value of each, the names,
nationalities, and residences of the original
subscribers, and the amount subscribed
and paid by each on his subscription, and if
some or all the shares are without par
value, such fact must be stated”.
9. Non-stock Corporation. The
Corporation Code requires the articles of
the non-stock corporation to states: the
amount of its capital, the names,
nationalities and residences of its
contributors and the amount contributed
by each. A non-stock corporation may have
capital but it has no authorized capital
stock.
10. Inclusion of other matters. The
articles of incorporation “may include
other matters that is not inconsistent with
law and which the incorporators may deem
necessary and convenient”.
Sworn Statement of the Treasurer The
Securities and Exchange Commission shall
not accept the articles of incorporation of
any stock corporation unless accompanied
by a sworn statement of the Treasurer
elected by the subscribers showing that at
least:
Law on Business Organizations Reviewer
1. 25% of the authorized capital stock has
been subscribed.
2. 25% of the subscription has been fully
paid in actual cash or property.
3. The paid-up capital being not less than
P5,000.00.
SEC Policy
Property as subscription payment –
Generally, all forms of tangible properties
are acceptable for purposes of payment to
subscription provided that the three test of
paid-up capital determination are complied
with, i.e., ownership, existence and valuable,
subject to certain restrictions as may be
imposed by law.
SEC adopted the policy that
discourages the inclusion of intangible assets
as goodwill, lease-hold rights, or timber
concession rights, payment of such
properties Motor vehicle, real estate
properties and navigable vessels in payment
of pre-incorporation subscription, increases
of capital stock or in exchange for additional
issuance of shares are allowed only by the
SEC provided that:
1. There has been a proof of valid
transfer;
2. All taxes due from the properties has
been paid; and
3. Such properties have been
reasonably valued.
Papers to accompany articles with SEC
The SEC requires the following papers to be
submitted to it with the articles of
incorporation:
1. A verification slip executed by the
Chief of the Record Section states
that the proposed name of the
corporation has been verified and
found to be distinct/ not similar to
the names of already existing
corporation or those pending
registration.
2. Written undertaking to change
corporate name in case there is a
person, firm or entity with a prior
right to the use of said name or one
similar to it.
3. Sworn statement of assets and
liabilities, duly executed under oath
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by the corporate treasurer together
with the amount P50.00 to defray
publication expenses.
4. Bank certificate of deposit, issued
under oath by the bank manager or
any authorized bank officer, that
there is a deposit of the stated
amount representing the paid-up
capital of the corporation either in
the name of the treasurer in trust for
the corporation or in the name of
the corporation itself.
5. Written authority to verify bank
deposit signed by the corporate
treasurer empowering the SEC and
/or the Central bank to check and
inspect the existence of the bank
deposit of the corporate paid-up
capital.
6. Taxpayer account number of the
incorporators pursuant to Executive
order No. 213.
7. Registration Data Sheet, a shall be subject to amendment, alteration,
statement in statistical data form,
signed by an authorized
representative of the corporation
regarding important information
about the corporate seal,
corporate name, principal office,
capital structure, their subscription
and TAN (SEC Bulletin, Oct. 1982).
Sec. 16. Amendment of Articles of
Incorporation. – Unless otherwise
prescribed by this Code or by special law,
and for legitimate purposes, any provision
or matter stated in the articles of
incorporation may be amended by a
majority vote of the board of directors or
trustees and the vote or written assent of
the stockholders representing at least
twothirds (2/3) of the outstanding capital
stock, without prejudice to the appraisal
rights of dissenting stockholders in
accordance with the provision of this Code,
or the vote or written assent of two-thirds
(2/3) of the members if it be a non-stock
corporation.
The original and amended articles
altogether shall contain all provision
required by law to be set out in the articles
of incorporation. Such articles, as amended
shall be indicated by underscoring the
change or changes made, and the copy
thereof duly certified under oath by the
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corporate secretary and the majority of the
directors or trustees stating the fact that
said amendments have been duly approved
by the required vote of the stockholders or
members, shall be submitted to the
Securities and Exchange Commission.
The amendment shall take effect upon its
approval by the Securities and Exchange
Commission or from the date of filing with
the said Commission if not acted upon
within six (6) months from the date of filing
for a cause not attributable to the
corporation.
Law reserves the rights to modify the
charter
The constitution and the Corporation Code
reserved the right to amend the charter of a
private corporation. The constitution
provides that “no franchise or right be
granted except under the condition that it
or repeal by the National Assembly when
public interest so requires.
Amendment of Articles of Incorporation
The articles of incorporation may be
amended for legitimate purposes that refer
to any matter stated in the articles of
incorporation. It may refer to: 1. Change of
corporate name;
2. Extension of term of corporation;
3. Change in classes or series of shares;
4. Change in rights, privileges or
restrictions in share ownership;
5. Increase or decrease in the number of
directors; and
6. Change in purpose or purposes and
other necessary changes.
Vote or recent assent required in
amendment of the articles of incorporation
shall be as follows:
Stock Corporation – A majority vote of the
directors or trustees and the vote or written
assent of the stockholders representing at
least two- thirds (2/3) of the outstanding
capital stock. Under section 81 of the Code,
a dissenting stockholder may exercise his
appraisal right if he is against the
amendment to be made and demand
payment of the fair value of his shares.
55

Non-stock Corporation – A majority vote of
board of directors and the vote or written
assent of 2/3 of the members.
The amendments to the articles of
incorporation shall take effect upon its
approval by the Securities and Exchange
Commission or from the filing with the said
Commission if not acted upon within six
months from the date of filing for a cause not
attributable to the corporation.
Sec. 17. Grounds when articles of
incorporation or amendment may be
rejected or disapproved. – The Securities
and Exchange Commission may reject the
articles of incorporation or disapproved any
amendment thereto if the same is not in
compliance with the requirements of this
Code: Provided, That the Commission shall
give the incorporators a reasonable time
within which to correct or modify the
objectionable portions of the articles or
amendment. The following are grounds for
such amendment or disapproval:
1. That the articles of incorporation or any
amendment thereto is not substantially
in accordance with the form prescribed
herein.
2. That the purpose or purposes of the
corporation are patently
unconstitutional, illegal, immoral, or
contrary to government rules and
regulation.
3. That the Treasurer’s Affidavit concerning
the amount of capital stock subscribed
and/or paid is false.
4. That the required percentage of
ownership of the capital stock to be
owned by citizens of the Philippines has
not been complied with as required by
existing laws of the constitution.
No articles of incorporation or amendment
to articles of incorporation of banks, banking
and quasi-banking institutions, building and
loan association, trust companies, public
utilities, educational institution, and other
corporations governed by special laws shall
be accepted or approved by the Commission
unless accompanied by a favourable
recommendation of the appropriate
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government agency to the effect that such
articles or amendment is in accordance with
law.
Sec. 18. Corporate name. – No corporate
name may be allowed by the Securities and
Exchange Commission if the proposed name
is identical or deceptively or confusingly
similar to that of any existing corporation or
to any other name already protected by law
or its patently deceptive, confusing or
contrary to existing laws. When the change
in a corporate name is approved, the
commission shall issue an amended
certificate of incorporation under the
amended name.
Necessity of Corporate name It is necessary
that a corporation should have a name
because that is the only way by which the
corporation can be identified and
distinguished from other corporation, firms
or entities.
Change of corporate name
A corporation may change its name by
merely amending its charter in the manner
prescribed by law. The change of name of
the corporation does not result in
dissolution. The changing of the name of a
corporation is no more the creation of a
corporation than the changing of the name
of a natural person.
Restriction in use in certain names of words
There are special laws prohibiting the use of
certain names and/or words. Thus, under
the General Banking Act, no person or entity
not conducting the business of commercial
banking shall use the words “bank”,
“banking”, “banker”, “building and loan
association”, “trust corporation”, etc. or
words of similar import. The word “National”
under Act 2612 may not be use by those
doing business as bankers, brokers, or
savings institutions. “United Nations” both in
its full and abbreviated forms, for
commercial and business purposes. There
are other names or words which pursuant to
other special laws may not be used.
Sec. 19. Commencement of Corporate
Existence. – A private corporation formed
or organized under this Code commences to
have corporate existence and juridical
personality and is deemed incorporated
56

from the date the Securities and Exchange
Commission issues a certificate of
incorporation under its official seal; and
thereupon the incorporators,
stockholders/members, and their successors
shall constitute a body politic and corporate
under the name stated in the articles of
incorporation for the period of time
mentioned therein, unless said period is
extended or the corporation is sooner
dissolved in accordance with law.
Sec. 20. De Facto corporation. – The due
incorporation any corporation claiming in
good faith to be a corporation under this
Code, and its right to exercise corporate
powers, shall not be inquired into collaterally
in any private suit to which such corporation
may be a party. Such inquiry may be made
by the Solicitor General in a quo warranto
proceeding.
De facto corporation – generally refer to
organizations exercising corporate power
under colour of a more or less legally
constituted corporation.
Elements of De facto corporation
1. Existence of a valid law under which a
corporation can be organized.
2. An attempt in good faith to incorporate.
3. Actual exercise of incorporate powers.
Quo warranto – an inquiry made into the
right of a corporation to conduct business.
Illustration
Seven competent individual organized a
corporation by filing the articles of
incorporation and securing a certificate of
incorporation with the SEC. However, the
addresses of two of the original subscribers
were omitted in the articles of incorporation.
In suit filed by X, a creditor, against the
corporation he alleged that the corporation
has no valid existence and sought to hold the
seven incorporators (also directors) liable
personally on the obligation. X’s allegation
that the corporation had no valid existence
would constitute a collateral (side) attack in
a private suit. Only the Solicitor General as
government lawyer may raise the question
by quo warranto proceeding. (Literally by
“what right”).
Law on Business Organizations Reviewer
Sec. 21. Corporation by estoppel. – All
persons who assume to act as a corporation
knowing it to be without authority to do so
shall be liable as general partners for all
debts, liabilities and damages incurred or
arising as a result thereof: Provided,
however, That when any such ostensible
corporation is sued on any transaction
entered by it as a corporation or on any tort
committed by it as such, it shall not be
allowed to use as a defense its lack of
corporate personality.
One who assumes an obligation to an
ostensible corporation as such cannot resist
performance thereof on the ground that
there was in fact no corporation.
Estoppel – It is preclusion, which prevent a
man from denying a fact in consequences of
his own previous act, allegations, or denial of
a contrary tenor. The object of the principle
of estoppel is to prevent injustice to an
otherwise innocent person.
Sec. 22. Effect of non-use of corporate
charter and continuous in operation of a
corporation. – If a corporation does not
formally organize and commence the
transaction of its business or the
construction of its works within two (2) years
from the date of its incorporation, its
corporate powers cease and the corporation
shall be deemed dissolved. However, if a
corporation has commenced the transaction
of its business but subsequently becomes
continuously inoperative for a period of at
least five (5) years, the same shall be ground
for the suspension or revocation of its
corporate franchise or certificate of
incorporation.
This provision shall not apply if the failure to
organize, commence the transactions of its
businesses or the construction of its works,
or to continuously operate is due to causes
beyond the control of the corporation as
may be determined by the Securities and
Exchange Commission.
Organization
The idea of organization in reference to
corporations means executive structure,
election of officers, providing for
subscription and payment of capital,
adoption of by-laws, and other steps
57

necessary to endow the legal entity with
capacity to transact business for which it was
created.
The Grant of corporate existence, conferred
by the issuance of certificate of
incorporation, is subject to two subsequent
conditions, to wit:
1. The corporation must
“formally organize”.
2. The corporation must actually begin the
“transaction of its business”.
Failure to comply with either or both of these
conditions within two (2) years from the date
of its incorporation, its corporate power
cease and the corporation must be deemed
dissolved.
Sec. 23. The board of directors or trustees. –
Unless otherwise provided in this Code, the
corporate powers of all corporation formed
under this Code shall be exercised , all
business conducted and all property of such
corporations controlled and held by the
board of directors or trustees to be elected
from among the holders of stock, or where
there is no stock, from among the members
of the corporation, who shall hold office for
one (1) year and until their successors are
elected and qualified.
Every director must own at least one (1)
share of the capital stock of the corporation
of which he is a director, which share shall
stand in his name on the books of the
corporation. Any director who ceases to be
the owner of at least one (1) share of the
capital stock of the corporation of which he
is the director shall thereby cease to be a
director. Trustees of non-stock
corporations must be members thereof. A
majority of the directors or trustees of all
corporations organized under this Code
must be residents of the Philippines.
Qualifications of directors
1. He must own at least one (1) share of
the capital stock of the corporation in
his name.
2. Majority of the directors must be a
resident citizen of the Philippines.
3. A director must not have been
convicted by final judgement of an
offense punishable by imprisonment
exceeding six (6) years or a violation of
Law on Business Organizations Reviewer
the provisions of the Corporation Code
committed within five (5) years prior to
the date of election or appointment.
The directors, once elected, become the
representatives of the corporation itself,
not its stockholders. The directors of a
nonstock corporation are required to be
members thereof and like stock
corporations “majority of the directors and
trustees of all corporations organized under
the Corporation Code must be residents
citizen of the Philippines”. There are some
special corporation not organized with the
Corporation Code where directors are
required to be citizens of the Philippines.
They are as follows:
1. Bank and banking institution, at least 2/3
of the members of the board of directors
shall be citizen of the
Philippines.
2. Rural banks, every member of the board
of directors shall be citizens of the
Philippines.
3. Domestic air carrier, the directing head
or 2/3 of the board of directors and
other managing officers shall be citizens
of the Philippines.
4. Registered investments companies, the
directors thereof must be Filipino citizen.
5. Private development banks, all the
members of the board of directors shall
be citizen of the Philippines.
6. In case of financing corporation, at least
2/3 of all members of the board of
directors shall be citizen of the
Philippines.
Sec. 24. Election of directors or trustees. – At
all elections of directors or trustees, there
must be present, either in person or by
representative authorized to act by written
proxy, the owners of the majority of the
outstanding capital stock, or if there be no
capital stock, a majority of the members
entitled to vote. The election must be by
ballot if requested by any voting stockholder
or member. In stock corporations, every
stockholder entitled to vote shall have the
right to vote in person or by proxy the
number of shares of stock standing, at the
time fixed in the by-laws, in his own name on
the stock books of the corporation, or where
the by-laws are silent, at the time of the
election; and said shareholder may vote such
number of shares for as many persons as
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there are directors to be elected or he may
cumulate said shares and give one candidate
as many votes as the number of directors to
be elected multiplied by the number of his
shares shall equal, or he may distribute them
on the same principle among as many
candidate as he shall see fit; Provided, That
the total number of votes cast by him shall
not exceed the numbers of shares owned by
him as shown in the books of the corporation
multiplied by the whole number of directors
to be elected: Provided, however, that no
delinquent stocks shall be voted. Unless
otherwise provided in the articles of
incorporation, or in the by- laws, members of
corporation which have no capital stock may
cast as many votes as there are trustees to
be elected but may not cast more than one
vote for one candidate. Candidates receiving
the highest number of votes shall be
declared elected. Any meeting of the
stockholders or members called for an
election may adjourn from day to day or
from time to time but not sine die or
definitely if, for any reason, no election is
held, or if there are not present or
represented by proxy, at the meeting, the
owners of the majority of the outstanding
capital stock, or if there be no capital stock,
a majority of the members entitled to vote.
Methods of voting
The voting methods which may be resorted
to by a voting stockholder are as follows:
1. Straight voting.
2. Cumulative voting for one candidate.
3. Cumulative voting by distribution.
Example of Straight Voting
A owns 100 shares of stock in X corporation.
During the meeting for the purpose of
electing five directors, he may cast his vote
by giving each of the five candidates 100
votes, hence, he distribute equally his vote
without preference or discrimination.
Example of Cumulative voting for one
candidate
In the preceding illustration, if A owns 100
voting shares and there are five directors to
be elected, A is entitled to 500 votes which
he may “cumulate” by giving it to candidate
Z alone.
Law on Business Organizations Reviewer
Example of Cumulative
voting by distribution
As in the same example above, if A owns 100
voting shares, and there are five directors to
be elected, A is entitled to 500 votes which
he may distribute to candidate Y and Z giving
the former 300 and the latter 200 provided
that the total number of votes cast by him
does not exceed 500 votes.
Voting of sequestered shares of stock
It has been held that the “Presidential
Commission on Good Government may
properly exercise the prerogative to vote
sequestered stock of corporation, granted to
it by the President of the Philippines xxx
pending the outcome of proceeding to
determine the ownership of sequestered
shares of stock. xxx Substitution of directors
is not be done without reason or rhyme, and
undertaken only when essential to prevent
disappearance or wastage of corporate
property, and always under such
circumstance as assure that replacements
are truly processed of competence,
experience and probity.
Sec. 25. Corporate officers, quorum. –
Immediately after their election, the
directors of a corporation must formally
organized by the election of a president, who
shall be a director, a treasurer who may or
may not be a director, a secretary who shall
be a resident citizen of the Philippines, and
such other officers as may be provided for in
the by-laws. Any two (2) or more positions
may be held concurrently by the same
person, except that no one shall act as
president and secretary or as president and
treasurer at the same time.
The directors or trustees and officers to be
elected shall perform the duties enjoined on
them by law and by the by-laws of the
corporation. Unless the articles of
incorporation or the by-laws provide form a
greater majority, a majority of the number of
directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for
the transaction of corporate business, and
every decision of at least a majority of the
directors or trustees present at a meeting at
which there is a quorum shall be valid as a
corporate act , except for the election of the
officers which shall require the vote of a
majority of all the members of the board.
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Qualification of corporate officer 1.
President. He must be a director.
2. Treasurer. He may or may not be a
director.
3. Secretary. He must be a resident and
citizen of the Philippines
4. Other officers provided for in the bylaws.
Three levels of corporate control
1. The board of director which is
responsible for the corporate policies
and the general management of the
business affairs of the corporation.
2. The officers, who in theory execute the
policies lay down by the board , but in
practice often have wide latitude in
determining the course of business
operations.
3. Stockholders who like amendments of
the articles of incorporation.
Teleconferencing of Board Members In the
Philippines, teleconferencing and
videoconferencing of members of board of
directors of private corporation is a reality, in
light of the Republic Act No. 8792.The
Securities and Exchange Commission issued
SEC Memorandum Circular No. 15, on
November 30, 2001, providing the guidelines
to be complied with related to such
conferences. Thus, the court agrees with the
RTC that persons in the Philippines may have
a teleconference with a group of persons in
South Korea relating to business
transactions or corporate governance.
Directors and officers distinguished The
officers of a corporation, unlike the
directors, are true agent of the corporation.
Each officer may bind the corporation by his
individual acts within the actual or apparent
scope of authority. On the other hand, a
director has no authority to act for the
corporation.
Authority of corporate officers
The corporation transact its business
through its officers or agents. An officer’s
power as an agent of the corporation must
be sought from the statute, charter, and the
by-laws or in a delegation of authority to
such officers, from the acts of board of
directors, formally expressed or implied
from a habit or custom of doing business.
Law on Business Organizations Reviewer
Chairman of the Board A chairman of the
board of directors must himself director be a
director of the corporation. His duty as
presiding officer is not an executive one. It
has been suggested that he well be given
advisory duties in determining executive
salaries, bonus plans and pensions,
determining dividend policy, selecting
auditors, and dealing questions with labor
and company policy.
President
The president must be a director of the
corporation. The powers of the president of
a corporation are vested in him by law or the
by-laws; otherwise, he has no power over
the corporate property and business than
has any other director. However, he may be
given actual authority to make particular
contracts, or to execute conveyances,
borrow money, execute mortgages, and do
other acts, by the charter, the by-laws,
resolutions of directors or their informal
acquiescence.
Vice- President
In the absence of the president, or if the
office of the president becomes vacant, as a
rule, the vice president elected and
appointed by the shareholders or directors
has authority to act in his stead, and to
perform the duties of the office.
Secretary
A secretary must be a resident citizen of the
Philippines. It is generally its duty to make
and keep corporate records; to make proper
entries of the votes, resolution and
proceedings of the shareholders and
directors in the management of the
corporation, and of all other matters
required to be entered in the records. The
secretary is the ministerial officer who
cannot bind the corporation unless he is
authorized to do so.
Treasurer
The treasurer of the corporation “may or
may not be a director”. He is the proper
officer and the only proper officer in the
absence of express provision to the contrary,
to receive and keep the money of the
corporation and to disburse them as he may
be authorized.
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Other officers
The by-laws of the corporation may provide
for such other officers and agent as may be
necessary and convenient considering the
nature and needs of the business. Their
compensation is provided for by the by-laws
and the board of directors in a suitable
manner.
Quorum – signifies the number of persons
belonging to a corporation required to
transact business.
Section 25 of the Corporation Code requires
more people than a simple majority to form
a quorum. If no such defining number is
determined, a quorum is a simple majority.
Directors cannot vote by proxy
The directors cannot vote by proxy but must
personally present, and act by themselves.
Sec. 26. Report of election of directors,
trustees and officers. – Within thirty (30)
days after the election of the officers,
trustees and directors of the corporation,
the secretary, or any other officer of the
corporation shall submit to the Securities
and Exchange Commission, the names,
nationalities and residences of the directors,
trustees and officers elected.
Should a director, trustee or officer die,
resign or in any manner cease to hold office,
his heirs in case of his death, the secretary or
any other officer of the corporation, or the
director, trustee or officer himself, shall
immediately report such fact to the
Securities and Exchange Commission.
Sec. 27. Disqualification of directors,
trustees or officers. – No person convicted
by final judgement of an offense punishable
by imprisonment for a period exceeding six
(6) years, or a violation of this Code,
committed within five (5) years prior to the
date of his election or appointment, shall
qualify as a director, trustee or officer of any
corporation.
Sec. 27 of the Corporation Code is an
additional safeguard that only upright and
honest individuals be entrusted with
management of the corporate affairs.
A director of a cooperative who is
subsequently elected as member of the
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Sangguniang Panglungsod (City Council)
becomes automatically disqualified from
continuing as such director by virtue of the
clear mandate of PD No. 269 providing that
except for “barrio captains and councillors”
elective officials are ineligible to become
officers and/or directors of any cooperative.
The SEC ruled that firms engage in wholly or
partially nationalized activities, aliens are
banned from being appointed to
management position such as president,
vice-president, treasurer, auditor, secretary,
etc. of said companies. However, they can be
elected directors in preparation to their
allowable participation or share in the
capital of such activities, in accordance with
the Commonwealth Act No. 108, as
amended by PD 715, otherwise known as the
Anti- Dummy Law.
Sec. 28. Removal of director or trustees. –
Any director or trustee of the corporation
may be removed from office by a vote of the
stockholders holding or representing at least
two- thirds (2/3) of the outstanding capital
stock, or if the corporation be a nonstock
corporation , by a vote of at least two- thirds
(2/3) of the members entitled to vote:
Provided, That such removal shall take place
either at a regular meeting of the
corporation or at the special meeting called
for the purpose, and in either case, after
previous notice to stockholders or members
of the corporation of the intention to
propose such removal at the meeting. A
special meeting of the stockholders or
members of the corporation for the purpose
of removal of directors or trustees, or any of
them, must be called by the secretary on
order of the president or on the written
demand of the stockholders representing or
holding at least a majority of the outstanding
capital stock, or, if it be a non-stock
corporation, on the written demand of a
majority of the members entitled to vote.
Should the secretary failed to refuse to call
the special meeting upon such demand, or
fail or refuse to give the notice, or if there is
no secretary, the call for the meeting may be
addressed directly to the stockholders or
members of any by any stockholder or
member of the corporation signing the
demand. Notice of the time and place of
such meeting, as well as the intention to
propose such removal, must be given by
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publication or by written notice as
prescribed in this Code. The vacancy
resulting from removal pursuant to this
section may be filled by election at the same
meeting without further notice, or at any
regular or at any special meeting called for
the purpose after giving notice as prescribed
in this Code. Removal may be with or
without cause: Provided, That removal
without cause may not be used to deprived
minority stockholders or members of the
right of representation to which they may be
entitled under Section 24 of this Code.
Directors or trustee may be removed even
without cause
The legislative policy is that the shareholders
shall be the ultimate masters, not the
directors. The shareholders should be
clothed with the power of judging the
competency and fitness of the directors and
of choosing a board that will carry out of
their business policy.
Directors representing minority may not be
removed without cause. The power to
removed director or trustee even without
cause given to shareholders or members
may not be used to deprived minority
shareholders or members of the right of
representation to which they may be
entitled under Section 24 of the Corporation
Code. Cumulative voting of directors in a
stock corporation is mandatory and cannot
be dispensed with in the by-laws. Being a
statutory right, the stockholders cannot be
deprived of the use of cumulative voting.
May the result of the duly held election of
directors be altered by mere agreement of
the directors?
The Securities and Exchange Commission
ruled that: “An agreement by which director
is reposed in any body except majority of
stockholders is in violation of ‘public policy’
and ‘enforceable’ ”.
The Securities and Exchange Commission has
jurisdiction or authority to “hear and decide
cases” involving controversies in the election
or appointments of directors, trustees,
officers or managers of such corporations,
partnerships or associations. Controversy
concerning removal of directors or trustees
may also be heard by the SEC.
Law on Business Organizations Reviewer
Sec. 29. Vacancies in the office of director or
trustee. – Any vacancy occurring in the
board of directors or trustees other than by
removal by the stockholders or members or
by expiration of term, may be filled by the
vote of at least a majority of the remaining
directors or trustees, if still constituting a
quorum; otherwise, said vacancies must be
filled by the stockholders in a regular or
special meeting called for that purpose. A
director or trustee so elected to fill the
vacancy shall be elected only for the
unexpired term of his predecessor in office.
Any directorship or trusteeship to be filled by
reason of an increase in the number of
directors or trustees shall be filled only by an
election at a regular or at a special meeting
of stockholders or members duly called for
the purpose, or in the same meeting
authorizing the increase of directors or
trustees if so stated in the notice of the
meeting.
Sec. 30. Compensation of directors. – In the
absence of any provision in the by-laws fixing
their compensation, the directors shall not
receive any compensation, as such directors,
except for reasonable per diems:
Provided, however, That any such
compensation (other than pier diems) may
be granted to directors by the vote of the
stockholders representing at least a majority
of the outstanding capital stock at a regular
or special stockholders’ meeting. In no case
shall the total yearly compensation of
directors, as such directors, exceed ten
percent (10%) of the net income before
income tax of the corporation during the
preceding year.
Sec. 31. Liability of directors, trustees or
officers. – Directors or trustees who willfully
and knowingly vote for or assent to patently
unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in
directing the affairs of the corporation or
acquire any personal or pecuniary interest in
conflict with their duty as such directors, or
trustees shall be liable jointly and severally
for all damages resulting therefrom suffered
by the corporation, its stockholders or
members and other persons.
When a director, trustee or officer attempts
to acquire or acquires, in violation of his
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duty, any interest adverse to the corporation
in respect of any matter which has been
reposed in him in confidence, as to which
equity imposes a disability upon him to deal
in his own behalf, he shall be liable as a
trustee for the corporation and must
account for the profits which otherwise
would have accrued to the corporation.
Directors are trustees
It is well-stated rule in corporate law that
directors of corporations are trustees and
are required to act in the utmost good faith.
Liability of corporate directors and officers
for illegal dismissal of employees In cases of
illegal dismissal, corporate directors and
officers are solidarily liable with the
corporation, where terminations of
employment are done with malice or in bad
faith. (Acesite Corp. vs. NLRC, G.R. No.
152308, January 26, 2005, 449 SCRA 360)
Sec. 32. Dealings of directors, trustees or
officers with the corporation. – A contract of
the corporation with one or more of its
directors or trustees or officers is voidable,
at the option of such corporation, unless all
the conditions are present:
1. That the presence of such director or
trustee in the board meeting in which
the contract was approved was not
necessary to constitute a quorum for
such meeting.
2. That the vote of such director or trustee
was not necessary for the approval of
the contract.
3. That the contract is fair and reasonable
under the circumstances.
4. That in the case of an officer, the
contract with the officer has been
previously authorized by the Board of
Directors.
Where any of the first two conditions set
forth in the preceding paragraph is absent,
in the case of a contract with a director or
trustee, such contract may be ratified by the
vote of the stockholders representing at
least two-thirds (2/3) of the outstanding
capital stock or of two-thirds (2/3) of the
Law on Business Organizations Reviewer
members in a meeting called for the
purpose: Provided, That full disclosure of
the adverse interest of the directors or
trustees involved is made at such meeting:
Provided, however, That the contract is fair
and reasonable under the circumstances.
Director disqualified to vote if he has
personal interest
A director is disqualified to vote at a meeting
of the board if he has any personal interest
in a matter before the board; in such case,
his vote cannot be counted in making up a
quorum.
Disclosure of adverse interest by director It
has been held that in dealing with their
corporation the directors must make full
disclosure of all relevant facts or the
transaction is voidable. The failure of a
director to inform his fellow directors of his
adverse bargaining position and other
material circumstances should be seriously
considered and inspected by the courts as
manner on the fairness and good faith of the
transaction and whether it is just and
reasonable as to the corporation.
Exceptions in Signing contract without
authority of Board of Directors is void If a
private corporation intentionally or
negligently clothed its officers or agents with
apparent power to perform acts of it, the
corporation will be estopped to deny that
such apparent authority is real, as to
innocent third persons dealing in good faith
with such officers or agents. (Yao Ka Sin
Trading vs. Court of Appeals, G.R. No. 53820,
June 15, 1992, citing Francisco vs.
GSIS, 7 SCRA 577)
Corporate president presumed to have
authority
As a strict rule, the corporate president has
no inherent power to act for the corporation,
slowly giving way to realization that such
officer has certain limited powers in the
transaction of the usual and ordinary
business of the corporation. In the absence
of agreement or by law provision to the
contrary, the president is presumed to have
the authority to act within the domain of the
general of his or her usual duties. (People’s
Aircargo, and Warehousing Co., Inc. vs. Court
of Appeals, G.R. No. 117847,
Oct. 7, 1998)
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Sec. 33. Contracts between corporations
with interlocking directors. – Except in cases
of fraud, and provided the contract is fair
and reasonable under the circumstances, a
contract between two or more corporations
having interlocking directors shall not be
invalidated on that ground alone; Provided,
That if the interest of the interlocking
director in one corporation or corporations
is merely nominal, he shall be subject to the
provisions of the preceding section insofar as
the latter corporation or corporations are
concerned.
Stockholdings exceeding
twenty percent (20%) of the outstanding
capital stock shall be considered substantial
for purposes of interlocking directors.
Interlocking directors – Interlocking directors
are persons who serve as member of the
board of directors of two or more competing
corporations or corporations engaged in
practically the same kind of business.
Effect of Corporate contracts with
interlocking directors
Interlocking directors of corporations does
not make a contract between or among the
corporations void and of no effect provided
there in no fraud and reasonable under the
circumstances.
Sec. 34. Disloyalty of a director. – Where a
director, by virtue of his office, acquires for
himself a business opportunity which should
belong to the corporation, thereby obtaining
profits to the prejudice of such corporation,
he must account to the latter for all such
profits by refunding the same, unless his act
has been ratified by a vote of the
stockholders owning or representing at least
two-thirds (2/3) of the outstanding capital
stock. This provision shall be applicable
notwithstanding the fact that the director
risked his own funds in the venture.
Duties of directors
Directors owe a three-fold duty to the
corporation. First, they must be obedient;
they owe a duty to keep within the powers
of the corporation as well as within those of
the board of directors. Second, they must be
diligent; they owe a duty to exercise
reasonable care and prudence. The third
Law on Business Organizations Reviewer
duty owing by directors is that of individual
loyalty.
Concept of “corporate or
business opportunity.”
The doctrine of “corporate opportunity” is
but one phase of the cardinal rule of
undivided loyalty on the part of the
fiduciaries. If there is a presented to a
corporate officer or director a business
opportunity which the corporation is
financially able to undertake, is from its
nature, in the line of the corporation’s
business and is of practical advantage to it, is
one in which the corporation will be brought
into conflict with that of his corporation, the
law will not permit him to seize the
opportunity for himself.
Director is a fiduciary.
He who is in such fiduciary position cannot
serve himself first and his cestuis
(beneficiary) second. He cannot manipulate
the affairs of his corporation to their
disadvantage and in disregard of the
standards of common decency. He cannot by
the intervention of a corporate entity violate
the ancient principle against serving two
masters.
Sec. 35. Executive Committee. – The bylaws
of a corporation may create an executive
committee, composed of not less than three
members of the board, to be appointed by
the board. Said committee may act, by
majority vote of all its members, on such
specific matters within the competence of
the board, as may be delegated to it in the
by-laws or on a majority vote of the board,
except with respect to: (1) approval of any
action for which shareholders’ approval is
also required; (2) the filling of vacancies in
the board; (3) the amendment or repeal of
bylaws or the adoption of new by-laws; (4)
the amendment or repeal of any resolution
of the board which by it express terms is not
so amenable or repealable; and (5) a
distribution of cash dividends to the
shareholders.
Sec. 36. Corporate powers and capacity. –
Every corporation incorporated under this
Code has the power and capacity:
1. To sue and be sued in its corporation
name.
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2. Of succession by its corporate name for
the period of time stated in the articles
of incorporation and the certificate of
incorporation.
3. To adopt and use a corporate seal.
4. To amend its articles of incorporation in
accordance with the provisions of this
code.
5. To adopt by-laws, not contrary to law,
morals, or public policy, and to amend or
repeal the same in accordance with this
Code.
6. In case of stock corporations, to issue or
sell stocks to subscribers and to sell
treasury stocks in accordance with the
provisions of this code; and to admit
members to the corporation if it be a
non-stock corporation.
7. To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
otherwise deal with such real and
personal property, including securities
and bonds of other corporations, as the
transaction of the lawful business of the
corporation may be reasonably and
necessarily require, subject to the
limitations prescribed by law and the
Constitution.
8. To enter into with other corporations
merger or consolidation as provided in
this code.
9. To make reasonable donations, including
those for the public welfare or
for hospital, charitable,
cultural, scientific, civic, or similar
purposes: Provided, That no corporation,
domestic or foreign, shall give donations
in aid of any political party or candidate or
for purposes of partisan political activity.
10. To establish pension, retirement, and
other plans for the benefit of its
directors, trustees, officers and
employees.
11. To exercise such other powers as may be
essential or necessary to carry out its
purpose or purposes as stated in its
articles of incorporation.
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Powers of a corporation
A corporation has such powers, and such
powers only, as are conferred upon it by law
or by its agreement. Powers may be
conferred upon a corporation:
1. Expressly.
2. Impliedly, because they are incidental to
corporate existence.
3. Impliedly, because they are necessary or
proper in order to exercise the powers
expressly conferred.
General express powers
Section 36 of the Corporation Code
enumerates the general and express powers
of corporations.
Other corporate powers The Corporation
Code enumerates other express powers of
corporations as follows:
1. Power to extend or shorten corporate
term (Sec. 37).
2. Power to increase or decrease capital
stock; incur, create or increase bonded
indebtedness (Sec. 38).
3. Power to deny pre-emptive right (Sec.
39).
4. Power to sell or dispose assets (Sec. 40).
5. Power to acquire own shares (Sec. 41).
6. Power to invest corporate funds in
another corporation or business or for
any other purpose (Sec. 42).
7. Power to declare dividends (Sec. 43).
8. Power to enter into management
contracts (Sec. 44).
Sec. 37. Power to extend or shorten
corporate term. – A private corporation may
extend or shorten its terms as stated in the
articles of incorporation when improved by
a majority vote of the board of directors or
trustees and ratified at a meeting by the
stockholders representing at least twothirds
(2/3) of the outstanding capital stock or by at
least two-thirds (2/3) of the members in case
of non-stock corporations. Written notice of
proposed action and of the time and place of
the meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally: Provided, That in case of
extension of corporate term, any dissenting
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stockholder may exercise his appraisal right
under the conditions provided in this Code.
Extension of corporate term limited to 50
years
The corporate term may be extended for
periods not exceeding 50 years in any single
instance as provided by section 11 of the
Corporation Code. No extension can be
made earlier than 5 years prior to the
original or subsequent expiry date(s) unless
there are justifiable reasons for an earlier
extension as determined by the SEC.
Corporation cannot extend expired term. 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 already expired.
Sec. 38. Power to increase or decrease
capital stock; incur, create or increase
bonded indebtedness. – No corporation
shall increase or decrease its capital stock or
incur, create or increase any bonded
indebtedness unless approved by a majority
vote of the board of directors and, at a
stockholders’ meeting duly called for the
purpose, two-thirds (2/3) of the outstanding
capital stock shall favor the increase or
diminution of the capital stock, or the
incurring, creating or increasing of and
bonded indebtedness. Written notice of the
proposed increase or diminution of the
capital stock or of the incurring, creating, or
increasing of any bonded indebtedness and
of the time and place of the stockholders’
meeting at which the proposed increase or
diminution of the capital stock or the
incurring or increasing of any bonded
indebtedness is to be considered, must be
addressed to each stockholder at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally.
A certificate in duplicate must be signed by a
majority of the directors of the corporation
and countersigned by the chairman and
secretary of the stockholders’ meeting,
setting forth:
1. That the requirements of this section
have been complied with.
Law on Business Organizations Reviewer
2. The amount of the increase or
diminution of the capital stock.
3. If an increase of the capital stock, the
amount of capital stock or number of
shares of no-par stock thereof actually
subscribed, the names, nationalities and
residences of the persons subscribing,
the amount of capital stock or number of
shares of no-par stock subscribed by
each, and the amount paid by each on
his subscription in cash or property, or
the amount of capital stock or number of
shares of no-par stock allotted to each
stockholder if such increase is for the
purpose of making effective stock
dividend therefor authorized.
4. Any bonded indebtedness to be
incurred, created, or increased.
5. The actual indebtedness of the
corporation on the day of the meeting.
6. The amount of the stock represented at
the meeting.
7. The vote authorizing the increase or
diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness.
Any increase or decrease in the capital stock
or the incurring, creating or increasing of any
bonded indebtedness shall require prior
approval of the Securities and Exchange
Commission.
One of the duplicate certificate shall be kept
on file in the office of the corporation and
the other shall be filed with the Securities
and Exchange Commission and attached to
the original articles of incorporation. From
and after approval by the Securities and
Exchange Commission and the issuance by
the Commission of its certificate of filing, the
capital stock shall stand increased or
decreased and the incurring, creating or
increasing of any bonded indebtedness
authorized, as the certificate of filing may
declare: Provided,
That the Securities and Exchange
Commission shall not accept for filing any
certificate of increase of capital stock unless
accompanied by the sworn statement of the
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Treasurer of the corporation lawfully
holding office at the time of the filing of the
certificate, showing that at least twenty-five
percent (25%) of such increased capital
stock has been subscribed and that at least
twenty-five percent (25%) of the amount
subscribed has been paid either in actual
cash to the corporation or that there has
been transferred to the
corporation property the valuation of which
is equal to twenty-five percent
(25%) of the subscription: Provided,
further, That no decrease of the capital
stock shall be approved by the Commission,
if its effect shall prejudice the
rise of corporate creditors.
Non-stock corporations may incur or create
bonded indebtedness, or increase the same,
with the approval by a majority vote of the
board of trustees and of at least twothirds
(2/3) of the members in a meeting duly
called for the purpose.
Bonds issued by a corporation shall be
registered with the Securities and Exchange
Commission, which shall have the authority
to determine the sufficiency of the terms
thereof.
Bonds – Bonds are in form and effect similar
to promissory notes, secured by mortgage or
trust deed upon specified property of the
debtor corporation.
Properties to a bond
Every bond issue usually involve three
parties: (1) the debtor – corporation; (2) the
creditor – bondholder; and (3) the trustee.
Bonds classified
Bonds are classified into:
coupon or registered bonds,
mortgage bonds, debentures,
convertible bonds, participating bonds,
collateral trust bands, and guaranteed
bonds.
Coupon or registered bonds
Coupon bonds are payable to bearer or to
the order of a person, and have attached to
them coupon notes for each instalment of
interest as it falls due.
Mortgage bond
A mortgage bond is one secured by a
mortgage on corporate property.
Law on Business Organizations Reviewer
Debenture bonds
Debenture bonds are not secured by specific
corporate property but rather solely on the
issuer’s ability to pay the indebtedness.
Convertible bonds
Convertible bonds are those which includes
a provision which permits the holder of the
bond to convert the bond into a specified
number of shares of stock of the corporation
at his option within a period fixed therein.
Participating bonds
The owners or holders of participating bonds
entitle them to participate in earnings of the
corporation above the specified rates of
interest fixed.
Collateral trust bonds
Collateral trust bonds are secured by a lien
on securities deposited with a named
trustee constituting the collateral.
Guaranteed bonds
Guaranteed bonds are guaranteed or
secured by another corporation other than
the issuing corporation.
Sec. 39. Power to deny pre-emptive right. –
All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all
issues or disposition of shares of any class, in
proportion to their respective shareholdings,
unless such right is denied by the articles of
incorporation or an amendment thereto:
Provided, That such pre-emptive right shall
not extend to shares to be issued in
compliance with laws requiring stock
offerings or minimum stock ownership by
the public; or to shares to be issued in good
faith with the approval of the stockholders
representing two-thirds (2/3) of the
outstanding capital stock, in exchange for
property needed for corporate purposes or
in payment of a previously contracted debt.
Pre-emptive right – It means literally to
establish a prior right. A stockholder’s
preemptive right is his right to subscribe to
new shares of stock in proportion to his
existing stockholdings, before the new
shares are issued to others.
Sec. 40. Sale or other disposition of assets. –
Subject to the provisions of existing laws on
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illegal combinations and monopolies, a
corporation may, by a majority vote of its
board of directors or trustees, sell, lease,
exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its
property and assets, including its goodwill,
upon such terms and conditions and for such
consideration, which may be money, stocks,
bonds or other instruments for the payment
of money or other property or consideration,
as its board of directors or trustees may
deem expedient, when authorized by the
vote of the stockholders representing at
least two-thirds (2/3) of the outstanding
capital stock; or in case of nonstock
corporation, by the vote of at least two-
thirds (2/3) of the members, in a
stockholders’ or members’ meeting duly
called for the purpose. Written notice of the
proposed action and of the time and place of
the meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with the postage prepaid,
or served personally: Provided, That any
dissenting stockholder may exercise his
appraisal right under the conditions
provided in this Code.
A sale or other disposition shall be
deemed to cover substantially all the
corporate property and assets if thereby the
corporation would be rendered
incapable of continuing the business or
accomplishing the purpose for which it was
incorporated.
After such authorization or approval by the
stockholders or members, the board of
directors or trustees may, nevertheless, in its
discretion, abandon such sale, lease,
exchange, mortgage, pledge or other
disposition of property and assets, subject to
the rights of third parties under any contract
relating thereto, without further action or
approval by the stockholders or members.
Nothing in this section is intended to restrict
the power of any corporation, without the
authorization by the stockholders or
members, to sell, lease, exchange,
mortgage, pledge or otherwise dispose of
any of its property and assets if the same is
necessary in the usual and regular course of
business of said corporation or if the
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proceeds of the sale or other disposition of
such property and assets be appropriated for
the conduct of its remaining business.
In non-stock corporations, where there are
no members with voting rights, the vote of
at least a majority of the trustees in office
will be sufficient authorization for the
corporation to enter into any transaction
authorized by this section.
Sec. 41. Power to acquire own shares. – A
stock corporation shall have the power to
purchase or acquire its own shares for a
legitimate corporate purpose or purposes,
including but not limited to the following
cases: Provided, That the corporation has
unrestricted retained earnings in its books to
cover the shares to be purchased or
acquired:
1. To eliminate fractional shares arising out
of stock dividends.
2. To collect or compromise an
indebtedness to the corporation, arising
out of unpaid subscription, in a
delinquency sale, and to purchase
delinquent shares sold during said sale.
3. To pay dissenting or withdrawing
stockholders entitled to payment for
their shares under the provisions of this
Code.
Sec. 42. Power to invest corporate funds in
another corporation or business or for any
other purpose. – Subject to the provisions of
this code, a private corporation may invest
its funds in any other corporation or business
or for any purpose other than the primary
purpose for which it was organized when
approved by a majority of the board of
directors or trustees and ratified by the
stockholders representing at least twothirds
(2/3) of the outstanding capital stock, or by
at least two-thirds (2/3) of the members in
the case of non-stock corporations, at a
stockholders’ or members’ meeting duly
called for the purpose. Written notice of the
proposed investment and the time and place
of the meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
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served personally; Provided, That any
dissenting stockholder shall have appraisal
right as provided in this Code: Provided,
however, That were the investment by the
corporation is reasonably necessary to
accomplish its primary purpose as stated in
the articles of incorporation, the approval of
the stockholders or members shall not be
necessary.
Sec. 43. Power to declare dividends. – The
board of directors of a stock corporation may
declare dividends out of the unrestricted
retained earnings which shall be payable in
cash, in property, or in stock to all
stockholders on the basis of outstanding
stock held by them: Provided, That any cash
dividends due on delinquent stock shall first
be applied to the unpaid balance on the
subscription plus costs and expenses, while
stock dividends shall be withheld from the
delinquent stockholder until his unpaid
subscription is fully paid: Provided, further,
That no stock dividend shall be issued
without the approval of stockholders
representing not less than two-thirds (2/3)
of the outstanding capital stock at a regular
or special meeting duly called for the
purposes.
Stock corporation are prohibited from
retaining surplus profits in excess of one
hundred percent (100%) of their paid-in
capital stock, except: (1) when justified
approved by the Board of Directors; or (2)
when the corporation is prohibited under
any loan agreement with any financial
institution or creditor, whether local or
foreign, from declaring dividends without
its/his consent, and such consent has not yet
been secured; or (3) when it can be clearly
shown that such retention is necessary
under special circumstance obtaining in the
corporation, such as when there is a need for
special reserve for probable contingencies.
Concept of dividends
A dividend is a corporate profit set aside,
declared and ordered by the directors to be
paid to the stockholders on demand or at a
fixed time.
Dividends distinguished from profits
“Dividends” means the profits or that
portion of the profits of the corporation
which its board of directors, by proper
Law on Business Organizations Reviewer
resolution, sets apart for rotable distribution
among the stockholders. It is distinguished
from “profits” for the profits in the hands of
a corporation do not become dividends until
they have been set apart, or at least
declared, as dividends and transferred to the
separate property of the individual
stockholders.
Surplus profits – Surplus or net profits of a
corporation is the difference between the
total present value of its assets, after
deducting losses and liabilities, and the
amount of its capital stock. (11 Fletcher,
Sec. 5335)
Basis of dividend declaration
The board of directors of a stock corporation
may declare dividends on the basis of
outstanding stock held by the stockholders.
The basis therefore is the stockholder’s total
subscription and not on the amount paid by
him on the subscription. This is for the
reason that his entire subscription
represents his holding in the corporation for
which he pays interests on any unpaid
portion. (SEC Opinion, Dec.
17, 1973)
Classes of dividends
Dividends which a corporation may declare
and distribute to its stockholders may be
classified into: cash dividend, stock dividend,
property dividend, scrip dividend, and
liquidating dividend.
Cash dividend
Cash dividend is one payable in money.
Stock dividend
Stock dividend is a dividend payable in stock
instead of cash or property.
Property dividend
The directors in their discretion may
authorize distributions in bonds or in
property, such as warehouse receipts for
whiskey or shares of stock of a subsidiary
corporation.
Scrip dividend
Scrip dividend is a writing or a certificate
issued to a stockholder entitling him to the
payment of money or the like at some future
time inasmuch as the company, at the time
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the scrip dividends are declared, has profits
not in cash.
Liquidating dividend
Liquidating dividend involves the
distribution of assets by a corporation to its
stockholders upon dissolution.
Sec. 44. Power to enter into a management
contract. – No corporation shall conclude a
management contract with another
corporation unless such contract shall have
been approved by the Board of Directors and
by stockholders owning at least the majority
of the outstanding capital stock, or by at
least majority of the members in the case of
a non-stock corporation, of both the
managing and the managed corporation, at
a meeting duly called for the purpose:
Provided, That (a) where a stockholder or
stockholders representing the same interest
of both the managing and the managed
corporations own and control more than
one-third (1/3) of the total outstanding
capital stock entitled to vote of the
managing corporation; or (b) where the
majority of the members of the Board of
Directors of the managing corporation also
constitute a majority of the members of the
Board of Directors of the managed
corporation, then the management contract
must be approved by the stockholders of the
managed corporation owning of at least
two-thirds (2/3) of the total outstanding
capital stock entitled to vote, or by at least
two-thirds (2/3) of the members in case of a
non-stock corporation. No management
contract shall be entered into for a period
longer than five years for any one term.
The provisions of the next preceding
paragraph shall apply to any contract
whereby a corporation undertakes to
manage or operate all or substantially all of
the business of the other corporation,
whether such contracts are called service
contracts, operating agreements or
otherwise: Provided, however, That such
service contracts or operating agreements
which relate to the exploration,
development, exploitation or utilization of
natural resources may be entered into for
such periods as may be provided by the
pertinent laws or regulations.
Law on Business Organizations Reviewer
Concept of management contract A
management contract is an agreement
under which the board of directors of a
corporation delegates the powers of
management to another person or
corporation for a period of time provided for
in the agreement.
Effects of Management contracts Contracts
by which the board of directors delegates
the power of supervision and management
to another person or corporation for a
specified period are invalid if they involve a
surrender by the board of its power and duty
of supervision and control.
Management prerogatives
An owner of a business enterprise is given
considerable margin in managing his
business because it is deemed important to
society as a whole that he should succeed.
Sec. 45. Ultra vires acts of corporations. –
No corporation under this Code shall possess
or exercise any corporate powers except
those conferred by this Code or by its articles
of incorporation and except such as are
necessary or incidental to the exercise of the
powers so conferred.
Intra vires – The acts of a corporation within
its express or implied powers. Ultra vires –
The acts of a corporation outside its express
or implied powers.
It denotes some act or transaction on the
part of a corporation which, although not
unlawful or contrary to public policy of
executed by an individual, is yet beyond the
legitimate powers of the corporation as they
are defined by the statute under which it is
formed, or which are applicable to it, or by
its charter or incorporation papers.
Admittedly, if the contract is executed on
both sides neither party can maintain an
action to set aside the transaction or to
recover what has been parted with. The
courts will not interfere in such a case to
deprive either the corporation or the other
part of money or property acquired under
the contract. On the other hand, the great
weight of authority is to consider executor
contracts as unenforceable.
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Ultra vires contracts accepted doctrines
1. If the contract is fully executed on both
sides, the contract is effective and the
courts will not interfere to deprive either
part of what has been acquired under it.
2. If the contract is executor on both sides,
as a rule either party can maintain an
action for its non-performance.
3. Where the contract is executor on side
only, and has been fully performed on
the other, the courts differ as whether
an action will lie on the contract against
the party who has received benefits of
performance under it. Majority of the
courts hold that the party who has
received benefits from the performance
is stopped” to set up that the contract us
ultra vires to defeat an action on the
contract. There is, however, a rule which
is widely recognized by the courts that
ultra vires. “Should not be allowed to
prevail, when involved for or against the
corporation, where it will defeat the
ends of justice or work a legal wrong.
Acts which are ultra vires are voidable but
may be ratified. In order that such ultra vires
may be ratified it must be shown that 1. The
act was consummated or executed.
2. No creditors are prejudiced or they have
given their consent thereto.
3. The right of the public or the state are
not involved.
4. All of the stockholders consent thereto.
A corporation, like an individual, may ratify
and thereby render binding upon it the
originally authorized acts of its officers or
other agents. This is true because the
questioned investment is neither contrary to
law, morals, public order or public policy. It
is a corporate transaction or contract which
is within the corporate powers but which is
defective from a purported failure to
observe in its execution the requirement of
the law that the investment must be
authorized by the affirmative vote of the
stockholders holding 2/3 of the voting
power.
Sec. 46. by-laws Adoption. – Every
corporation formed under this code, must,
within one month after receipt of official
notice of the issuance of its certificate of
Law on Business Organizations Reviewer
incorporation by the Securities and
Exchange Commission, adopt a new code of
by-laws for its government not inconsistent
with this code. For the adoption of by-laws
by the corporation the affirmative vote of
the stockholders representing at least a
majority of the outstanding capital stock, or
of at least a majority of the outstanding
capital stock, or of at least a majority of the
members, in the case of non-stick
corporations, shall be necessary. The bylaws
shall be signed by the stockholders or
members voting for them and shall be kept
in the principal office of the corporation,
subject to the inspection of the stockholders
or members during office hours; and a copy
thereof, duly certified to by a majority of the
directors or trustees and countersigned by
the secretary of the corporation, shall be
filed with the Securities and Exchange
Commission which shall be attached to the
original articles of incorporation.
Notwithstanding the provisions of the
preceding paragraph, by-laws may be
adopted and filed prior to incorporation; in
such case, such by-laws shall be approved
and signed by all the incorporators and
submitted to the Securities and Exchange
Commission, together with the articles of
incorporation.
In all cases, by-laws shall be effective only
upon the issuance by the Securities and
Exchange Commission of a certification that
the by-laws are not inconsistent with the
Code.
The Securities and Exchange Commission
shall not accept for filing the by-laws or any
amendment thereto of any bank, banking
institution, building and loan association,
trust company, insurance company, public
utility, educational institution or other
special corporations governed by special
laws, unless accompanied by a certificate of
the appropriate government agency to the
effect that such by-laws or amendments are
in accordance with law.
Necessity of by-laws The corporation must
adopt the code of bylaws for its internal
government.
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Corporation has inherent power to adopt
by-laws
One of its legal incidents and is usually
expressly granted by law of the charter
subject to such limitations as may be
contained in the statute or the charter,
subject to such limitations as may be
contained in the statute or charter, and the
general requirements of validity. If a
corporation fails to file its by-laws within the
period required by law its certificate of
incorporation may be suspended or even
revoked.
Section 46 allows the adoption and filing of
the by-laws before incorporation provided
the same is approved by all the incorporators
and submitted to the Securities and
Exchange Commission together with the
articles of incorporation.
By-laws cannot provide for unreasonable
restriction
Restriction upon the traffic in stock must
have their source in legislative enactment, as
the corporation itself cannot create such
impediments. By-laws are created for
protection and not for restriction.
Elements of valid by-laws
1. Must not be inconsistent with the
general law and the Corporation Code.
2. Must not be inconsistent with public
policy.
3. Must be general in application and not
directed against particular individuals.
4. Must not be inconsistent with the
articles of incorporation.
5. Must not impair obligations
and contracts.
6. Must not be in restraint of trade.
7. Must not restrict religious freedom.
By-laws validity
As a rule, the by-laws of a corporation are
valid if they are reasonable and calculated to
carry into effect the objects of the
corporation, and are not contradictory to the
general policy of the laws of the land.
Binding effect of by-laws
By-laws when valid, substantially the same
force and effect as laws of the corporation as
have the provisions of its charter in so far as
the corporation, the persons within it is
Law on Business Organizations Reviewer
concerned. They are in effect written into
the charter and in this sense; they become
part of the fundamental law of the
corporation. And the corporation, and its
directors and officers are bound by and must
comply with them. Strangers, however, are
not bound to know by-laws which are merely
provisions for the government of a
corporation and notice of them will not be
presumed.
Sec 47. Contents of by-laws. – Subject to the
provisions of the Constitution, this Code,
other special laws, and the articles of
incorporation, a private corporation may
provide in its by-laws for:
1. The time, place and manner of calling
and conducting regular or special
meetings of the directors or trustees.
2. The time and manner of calling and
conducting regular or special meetings
of the stockholders or members.
3. The required quorum in meetings of
stockholders or members and the
manner of voting therein.
4. The form for proxies of stockholders and
members and the manner of voting
them.
5. The qualifications, duties and
compensation of directors or trustees,
officer and employees.
6. The time for holding the annual election
of directors or trustees and the mode or
manner of giving notice thereof.
7. The manner of election or appointment
and the term of office of all offices other
than directors or trustees.
8. The penalties for violation of the bylaws.
9. In the case of stick corporations, the
manner of issuing stock certificates.
10. Such other matter as may be necessary
for the proper or convenient transaction
of its corporate business and affairs.
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The enumerations of contents of by-laws are
not exclusive and neither does the provision
require all the matters mentioned to appear
in the by-laws.
The By-laws must not violate the
Constitution, the Corporation Code, other
special laws and the articles of
incorporation.
A corporation which has failed to file its
bylaws within the prescribed period does
not ipso facto lost its powers as such.
Sec. 48. Amendments to by-laws. – The
board of directors or trustees, by a majority
vote thereof, and the owners of at least a
majority of the outstanding capital stock, or
at least a majority of the members of a
nonstock corporation, at a regular or special
meeting duly called for the purpose, may
amend or repeal any by-laws or adopt new
by-laws. The owners of 2/3 of the
outstanding capital stock or 2/3 of the
members in a non-stick corporation may
delegate to the repeal any by-laws or adopt
new by-laws: provided, that any power
delegated to the board of directors or
trustees shall be considered as revoked
whenever stockholders owning or
representing a majority of the outstanding
capital stock or a majority of the members in
non-stock corporations, shall so vote at a
regular or special meeting.
Whenever any amendment or new by-laws
are adopted, such amendment or new
bylaws shall be attached to the original
bylaws in the office of the corporation, and a
copy thereof, duly certified under oath by
the corporate secretary and a majority of the
directors or trustees, shall be filed with the
Securities and Exchange Commission, the
same to be attached to the original articles
of incorporation and original bylaws.
Amender or new by-laws shall only be
effective upon the issuance by the SEC of a
certification that the same are not
inconsistent with this code.
The authority to make or adopt the original
by-laws of a corporation cannot be given to
the board of directors or trustees. The
stockholders of a stock corporation or the
Law on Business Organizations Reviewer
members of the non-stick corporation adopt
or make the original by-laws.
An amendment of by-law renders
stockholder ineligible as director It is well-
settled xxx that corporations have the power
to make by-laws declaring a person
employed in the service of a rival company
to be ineligible for the corporation’s Board
of Directors. An amendment which renders
ineligible, or if elected, subjects to removal,
a director if he be also a director in a
corporation whose business is in
competition with or is antagonistic to the
other corporation is valid. This is based upon
the principle that where the director is so
employed in the service of a rival company,
he cannot serve both, but must betray one
or the other. Such an amendment advances
the benefit of the corporation and is good.
Meetings Necessity
A majority of the stockholders or members
can bind the corporation only at a meeting
regularly held and conducted. To constitute
a legal meeting, so as to render the acts and
vote of the majority binding the meeting
must be regularly called by one having
authority. In the absence of provision to the
contrary such authority exists in the
directors or managing agents.
Sec. 49. Kinds of Meeting. – Meetings of
directors, trustees, stockholders, or
members may be regular or special.
Sec. 50. Regular and special meetings of
stock holders or members. – Regular
meetings of stockholders or members shall
be held annually on a date fixed in the
bylaws, or if not so fixed, on any date in April
of every year as determined by the board of
directors or trustees: Provided, that written
notice of regular meetings shall be sent to all
stockholders or members of record at least 2
weeks prior to the meeting, unless a
different period is required by the by-laws.
Special meetings of stockholders or
members shall be held at any time deemed
necessary or as provided in the by-laws:
Provided, however, that at least 1 week
written notice shall be sent to all stock
holders or members, unless otherwise
provided in the by-laws.
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Notice of any meeting may be waived,
expressly or impliedly, by any stockholder or
member.
Whenever, for any cause, there is no person
authorized to call a meeting, the SEC, upon
petition of a stockholder or member, and on
the showing of good cause there for, may
issue an order to the petitioning stockholder
or member directing him to call a meeting of
the corporation by giving proper notice
required by this Code or by the by-laws. The
petitioning stockholder or member shall
preside thereat until at least a majority of
the stockholders or members present have
chosen one of their numbers as presiding
officer.
Corporate decisions; rationale of meetings
As a rule, a majority of the shareholders or
members have no power to vote or act for
the corporation as to matters on which
shareholders have authority, except at a
meeting called and conducted according to
law. Written or oral consent to a corporate
act by the shareholders or members
individually, even though a majority may
agree, is not binding on the corporation.
When there is no person authorized to call a
meeting
A stockholder or member may petition the
SEC upon showing of good cause, to call a
meeting and directing the petitioner
(stockholder or member) to give notice
required by the Code and the by-laws. The
petitioning stockholder or member shall
preside at such meeting until at least a
majority of the stockholders or members
present have chosen one of their numbers as
presiding officer.
Sec. 51. Place and time of meetings of
stockholders or members. – Stockholders’ or
members’ meetings, whether regular or
special, shall be held in the city or
municipality where the principal office of the
corporation is located, and if practicable in
the principal office of the corporation:
Provided, that Metro Manila shall, for the
purposes of his section, be considered a city
or municipality
Notice of meetings shall be in writing, and
the time and place thereof stated therein. All
proceedings had and any business
Law on Business Organizations Reviewer
transacted at any meeting of the
stockholders or members, if within the
powers or authority of the corporation, shall
be valid even of the meeting be improperly
held or called, provided all the stockholders
or members of the corporation are present
or duly represented at the meeting.
Place of meetings
(Regular or special) meetings shall be held in
the city or municipality where the principal
office of the corp. is located.
If the meeting be improperly held or called
(as when there was a defective notice) the
same shall still be valid provided that
1. The act done was within the powers of
the corporation.
2. All the stockholders or members were
present or duly represented.
Sec 52. Quorum in meetings. – Unless
otherwise provided for in this Code or in the
by-laws, a quorum shall consist of the
stockholders representing a majority of the
outstanding capital stock or a majority of the
members in the case of non-stock
corporations.
Quorum – Signifies the number of persons
belonging to a corporation required to
transact business. Within the meaning of
section 52 above, a quorum shall consist of
the stockholders representing a majority of
the outstanding capital stock or a majority of
the members in the case of non-stock
corporations.
Sec. 53. Regular of special meetings of
directors or trustees. – The meetings shall be
held monthly, unless the by-laws provide
otherwise.
Special meetings of the board of directors or
trustees may be held at any time upon the
call of the president or as provided in the by-
laws
Meetings of directors or trustees of
corporations may be held anywhere in or
outside of the Philippines, unless the bylaws
provide otherwise. Notice of regular or
special meetings stating the date, time and
place of the meeting must be sent to every
director or trustee at least 1 day prior to the
scheduled meeting, unless otherwise
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provided in the by-laws. A director or trustee
may waive this requirement, either expressly
or impliedly.
Sec. 54. Who shall preside at meetings. –
The president shall preside at all meeting of
the directors or trustees as well as of the
stockholders or members, unless the bylaws
provide otherwise.
The meetings of directors or trustees may be
held anywhere in the by-laws. Notice of
regular or special meetings of directors or
trustees must be sent to them at least 1 day
prior to the scheduled meeting, unless the
by-laws provided otherwise.
Sec. 55. Right to vote of pledgors,
mortgagors and administrators. – In case of
pledged or mortgaged share in stock
corporations, the pledgor or mortgagor shall
have the right to attend and vote at
meetings of stockholders, unless the pledge
or mortgagee is expressly given such right in
writing which is recorded on the appropriate
corporate books by the pledgor or
mortgagor.
Executors, administrators, receivers and
other legal representatives duly appointed
by the court may attend and vote in behalf
of the stockholders or members without
need of any written proxy.
The pledgor or mortgagor of shatem in the
absence of agreement to the contrary, if the
shate remain in his name on the books of the
corporation has the right to attend and vote
at meetings of stockholders.
A person who appears on the books of a
corporation or otherwise as the absolute
owner of stock clearly has the right to vote,
although in face he may hold it as trustee.
Executor and administrator has the right, to
vote shares belonging to the estate of his
decedent, and it can make no difference that
the share stand on the books of the
corporation in the name of the decedent.
Sec. 56. Voting in case of joint ownership of
stock. – In case of share of stock owned
jointly by 2 or more persons, in order to vote
the same, the consent of all the coowners
shall be necessary, unless there is a written
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proxy, signed by all the co-owners.
Authorizing one or some of them or any
other person to vote such share or shares:
provided, that when the shares are owned in
an capacity by the holders therof, any one of
the joint owner can vote said shares or
appoint a proxy therfor.
If share are owned by 2 or more persons
jointly, the right to vote is in them jointly,
and , in order that the shares may be voted,
they must agree upon the vote. This rule of
joint action applies to shares held by several
executors or trustees, in the absence of
provision for a majority vote if the fiduciaries
disagree.
Sec. 57. Voting right for treasury share. –
Treasury shares shall have no voting right as
long as such stock remains in the treasury.
Treasury shares have no voting rights.
Sec. 58. Proxies. – Stockholders and
members may vote in person or by proxy in
all meetings of stock holders or members.
Proxies shall be in writing, signed by the
stock holder or member and filed before the
scheduled meeting with the corporate
secretary. Unless otherwise provided in the
proxy, it shall be valid only for the meeting
for which it is intended. No proxy shall be
valid and effective for a period longer than
five years at any one time.
Proxy – In corporate law, is a person who
votes for and this represents the
stockholders or members.
Voting by proxy
Ordinarily the right to vote shall be exercised
by the stockholders themselves or by their
duly authorized representatives.
Proxy to be valid must be:
1. In writing, signed by the stockholder or
member giving it.
2. Filed with the corporate secretary
before the scheduled meeting.
3. It is valid only for the meeting for which
it is intended unless otherwise
stipulated.
4. Even if the proxy is a continuing one it
shall not be longer than 5 year at any
one time.
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Sec 59. Voting trusts. – One or more
stockholders of a stock corporation may be
create a voting trust for the purpose of
conferring upon a trustee or trustees the
right to vote and other rights pertaining to
the share for a period not exceeding 5 years
at any one time: Provided, that in the case of
a voting trust specifically required as a
condition in a loan agreement, said voting
trust may be for a period exceeding 5 years
but shall automatically expire upon full
payment of the loan. A voting trust
agreement must be in writing and notarized,
and shall specify the terms and conditions
thereof. A certified copy of such agreement
shall be filed with the corporation and with
the SEC: otherwise, said agreement is
ineffective and unenforceable. The
certificate or of stock covered by the voting
trust agreement shall be cancelled and new
one shall be issued in the name of the
trustee or trustees stating that they are
issued pursuant to said agreement. In the
books of the corporation, it shall be noted
that the transfer in the name of the trustee
or trustees is made pursuant to said voting
trust agreement.
The Trustee or trustees shall be execute and
deliver to the transferors voting trust
certificates, which shall be transferable in
the same manner and with the same effect
as certificates of stock.
The voting trust agreement filed with the
corporation shall be subject to examination
by any stockholder of the corporation in the
same manner as any other corporate book or
record: Provided, That both the transferor
and the trustee or trustees may exercise the
right of inspection of all corporate books and
records in accordance with the provisions of
this code.
Any other stock holder may transfer his
shares to the same trustee or trustees upon
the terms and conditions stated in the voting
trust agreement, and there upon shall be
bound by all the provisions of said
agreement.
No voting trust agreement shall be entered
into for the purpose of circumventing the
law against monopolies and illegal
combinations in restraint of trade or used for
purposes of fraud.
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Unless expressly renewed, all rights granted
in a voting trust agreement shall
automatically expire at the end of the agreed
period, and the voting trust certificates as
well as the certificates of stick in the name of
the trustee or trustees shall thereby be
deemed cancelled and new certificates of
stock shall be reissued in the name of the
transferors.
The voting trustee or trustees may vote by
proxy unless the agreement provides
otherswise.
Concept of voting trusts
A voting trust is an agreement by which
stockholders surrender their voting power
and place it irrevocably in the hands of
others for a definite period of time. In
exchange for the certificates of stock the
trustee delivers to the stockholder voting
trust certificates.
Limitations on voting trust agreement
1. It shall be for a period not exceeding 5
years but if required under a loan
agreement, the period may be for more
than 5 years but shall automatically
cease upon full payment of the loan.
2. It must be in writing and notarized.
3. It shall not be entered into to circumvent
laws on monopolies and restraint of
trade, nor shall it be entered into
purposes of fraud.
4. It shall be filed with the corporation and
with SEC otherwise it shall be ineffective
and unenforceable.
5. It shall be subject to examinations by any
stockholder in the same manner as any
other corporate book or record.
6. Parties to the voting trust agreement
shall be bound by all the provisions of
said agreement.
Sec. 60. Subscription contract. – Any
contract for the acquisition of unissued stock
in an existing corporation or a corporation
still to be formed shall be deemed a
subscription within the meaning of this Title,
notwithstanding the fact that the parties
refer to it as a purchase or some other
contract.
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How can a person become a shareholder in
a stock corporation?
1. By subscription contract with an existing
corporation for the acquisition of
unissued shares.
2. By purchase from the corporation of
treasury shares.
3. By transfer from a previous stockholder
of the outstanding shares or existing
subscription to shares.
Binding effect of subscription
No person can become a stockholder in a
corporation by virtue of a subscription for
stock unless there is a valid contract
between him and the corporation. When a
contract of subscription for stock in a
corporation is binding it is a contract
between the subscriber or subscribers and
the corporation, and its formation and
validity are governed by the same principles
substantially as any other contract except in
so far as such principles may be rendered
inapplicable by particular charter or
statutory provisions. No express promise to
pay is necessary to make the subscriber
liable.
No form required of subscription contracts
Unless otherwise required by law. Thus, a
person who accepts a certificate of stock
from a corporation, or who acts as a
stockholder by participating in stockholders’
meeting, making payments, or otherwise,
thereby becomes a stockholder and liable as
such, not only to creditors, but also to the
corporation, although there may have no
express contract of subscription.
Sale of Shares of Stock Needs SEC Approval
The Securities Act requires that before a
corporation, except a public utility, bank,
corporation association and a few others,
sells, or offers for sale in the Philippines any
of its securities, like shares of stocks or
bonds, it must register the same and/or
secure a permit from the SEC for the
purpose. The authorization is in the form of
an exemption from the requirements of
registration and licensing, and is issued by
the way of resolution of the SEC.
Power to issue shares is lodged in the board
of directors and no stockholders’ meeting is
necessary to consider it because additional
issuance of shares of stock does not need
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approval of the stockholders. The “Board of
Trustees shall, in of stock of the corporation
and shall prescribe the form of
the certificate of stock of corporation.”
Kinds of Subscription:
1.1. Pre-incorporation – is one agreed upon
before the incorporation of the
proposed corporation.
1.2. Post-incorporation Subscription –
entered into after the incorporation or
formation of the corporation.
2. Absolute Subscription – one not subject
to any condition or happening of certain
unknown events.
3. Conditional Subscription – its fulfillment
depends upon the happening of
uncertain events of contingencies. It does
not make the subscriber a stockholder or
render him liable to pay the amount of
the subscription, until performance or
fulfillment of the condition.
4. Subscription upon special terms – where
“the corporation agreed, as an
independent element, to do a certain
thing or things, but not as condition to
the accrual of liability of the subscriber
or the acquisition of the rights of a
stockholder.
Sec. 61. Pre-incorporation subscription. – A
subscription for shares of stock of a
corporation still to be formed shall be
irrevocable for a period of at least six (6)
months from the date of subscription, unless
all of the other subscribers consent to the
revocation, or unless the incorporation of
said corporation fails to materialize within
said period or within a longer period as may
be stipulated in the contract of subscription:
Provided, That no pre-incorporation
subscription may be revoked after the
submission of the articles of incorporation to
the Securities and Exchange Commission.
SEC. 61 Pre-incorporation subscription is
mandatory (Sec. 13 & 14) at least 25% of the
authorized capital stock has been subscribed
and at least 25% of the total subscription has
been fully paid.
Subscription for shares of stock of a
corporation still to be formed shall be
irrevocable for a period of at least 6 months
from the date of subscription, unless:
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1. All subscribers consent to
its revocation.
2. The incorporation fails to materialize
within 6 months or a longer period as
agreed upon.
The irrevocability of pre-incorporation
prevents a subscriber from speculating on
the stocks of the proposed corporation and
protects the corporation from financially
irresponsible subscribers.
Sec. 62. Considering for stocks. – Stocks shall
not be issued for a consideration less than
the par or issued price thereof.
Consideration for the issuance of stock may
be any or a combination of any two or more
of the following:
1. Actual cash paid to the corporation.
2. Property, tangible or intangible, actually
received by the corporation and
necessary or convenient for its use and
lawful purposes at a fair valuation equal
to the par or issued value of the stock
issued.
3. Labor performed for or services actually
rendered to the corporation.
4. Previously incurred indebtedness of the
corporation.
5. Amounts transferred from unrestricted
retained earnings to stated capital.
6. Outstanding shares exchanged for stocks
in the event of reclassification or
conversion.
Where the consideration is other than actual
cash, or consists of intangible property such
as patents of copyrights, the valuation
thereof shall initially be determined by the
incorporators or the board of directors,
subject to approval by the Securities and
Exchange Commission.
Shares of stock shall not be issued in
exchange for promissory notes or future
service. The same considerations provided
for in this section, insofar as they may be
applicable, may be used for the issuance of
bonds by the corporation. The issued price of
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no-par value shares may be fixed in the
articles of incorporation or by the board of
directors pursuant to authority conferred
upon it by the articles of incorporation or the
by-laws, or in the absence thereof, by the
stockholders representing at least a majority
of the outstanding capital stock at a meeting
duly called for the purpose.
Consideration for issuance of stock may be
any or any combination of any two or more
of the ff:
1. Cash
2. Property – tangible or intangible
3. Labor performed or services actually
rendered
4. Previously incurred indebtedness by the
corporation
5. Amounts transferred from unrestricted
retained earnings to stated capital
6. Outstanding shares exchanged for stock
in the event of reclassification or
conversion
Sources of corporate capital
1. Funds furnished by shareholders
2. Borrowings
3. Profits and stock dividends
Different modes by which a corporation
may issue shares of stock
1. By subscription before and after
incorporation, to original, unissued
stocks.
2. By sale of treasury stock after
incorporation for money property, or
service.
3. By subscription to new stocks, when all
the original stocks have been issued and
the amount of the capital stock
increased.
4. By making a stock dividend.
Limitations in the issuance of stocks
1. Shall not be issued for a consideration
less than the par or issued price thereof
except treasury shares so long as the
price is reasonable.
2. Shall not be issued in exchange of
promissory notes or future services.
3. When the consideration is other than
actual cash or consists of intangible
property, the value thereof shall be
initially determined by the incorporators
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or the board of directors, subject to the
approval of the SEC.
4. The issued price of no par value shares
must be fixed as provided in Sec. 62.
issued price may vary from time to time but
value may not be less than P5.
Sec. 63. Certificate of stock and transfer of
shares. – The capital stock of stock
corporations shall be divided into shares for
which certificates signed by the president or
vice president, countersigned by the
secretary or assistant secretary, and sealed
with the seal of the corporation shall be
issued in accordance with the by-laws.
Shares of stock so issued are personal
property and may be transferred by delivery
of the certificate or certificates endorsed by
the owner or his attorney-infact or other
person legally authorized to make the
transfer. No transfer, however, shall be valid,
except as between the parties, until the
transfer is recorded in the books of the
corporation showing the names of the
parties to the transaction, the date of the
transfer, the number of the certificate or
certificates and the number of shares
transferred.
No shares of stock against which the
corporation holds any unpaid claim shall be
transferable in the books of the corporation.
SEC. 63 The capital stock of stock corporation
shall be divided into shares Certificate of
stock shall be issued for said shares.
Nature of a certificate of stock
1. It is a written instrument signed by the
proper officer of a corporation stating or
acknowledging that the person named
therein is the owner of a designated
number of shares of stock.
2. It indicates the name of the holder, the
number, kind and class of shares
represented, and the date of issuance.
3. It i merely the evidence of the holder's
interest in the corporation, his
ownership of the share represented
thereby.
4. It is not essential to make one a
stockholder in a corporation.
• Every stockholder has a right to have
proper certificate issued to him as
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soon as he has complied with the
conditions which entitle him to one.
• A corporation cannot issue shares in
excess of the maximum authorized
in its AOI.
• An over issued stock is absolutely
void even if possessor is in good
faith.
• Shares can be transferred
represented by the certificate by its
endorsement by the owner or his
agent and delivery to the transferee.
Restrictions on transfer of stock
1. A by-law prohibits a transfer of stock
without the consent or approval of all
stockholders or of the president or board
of directors is ILLEGAL.
2. A provision in the certificate that is
transferable only to some person first
approved by the board of directors
unlawfully restricts the right of the
stockholder.
3. The condition “non-transferable”
appearing on certificates of stock is
VOID.
4. corporations which will engage in any
business reserved for Filipino citizens are
required to indicate in AOI and all
certificates.
Two requirements to effect transfer of
stocks
Endorsement and delivery of stock
certificate
-the usual practice is for the stockholder to
sign the form on the back of the stock
certificate.
-if the holder of the certificate desires to
assume the legal right of the stockholder he
fills up the blank in the form inserting his
name as transferee.
-then he delivers the certificate to the
secretary of the corporation so that the
transfer may be entered in the books.
Other modes of transfer
1. Assignment thru a separate instrument.
2. Judicial or extra-judicial settlement of
the estate.
Validity of stock transfer
1. As between parties -merely the delivery of
the certificate indorsed by the owner or his
attorneyin-fact or other person legally
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authorized to make the transfer. 2. As
against third persons -the transfer of shares
must be entered and noted upon the books
of the
corporation
-only absolute transfer are recorded
Effects of unregistered shares
1. It is valid and binding as between the
transferor and transferee.
2. It is invalid insofar as the corporation
is concerned except when notice is
given to the corporation for
purposes of registration.
a) the transferor has the right to vote
and to be voted for, and has the
right to participate in any meeting
b) the transferor has the right to
dividends as against the
corporation but the transferor, as
the nominal owner of the share, is
the trustee for the benefit of the
real owner.
3. It is invalid as against corporate
creditors, and the transferor is still
liable to the corporation. The
transfer of stock by a shareholder
does not relieve him from the
liability to creditors of the
corporation for unpaid subscription
until the transfer is consummated by
being registered in the books.
4. It is invalid as against creditors of the
transferor without notice of the
transfer.
Shares of stock against which the
corporation holds any unpaid claim shall not
be transferable in the books – no unpaid
claims against the stock.
no unpaid subscriptions due and
payable.
Sec. 64. Issuance of stock certificates. – No
certificate of stock shall be issued to a
subscriber until the full amount of his
subscription together with interest and
expenses (in case of delinquent shares), if
any is due, has been paid.
SEC. 64 It is prohibited to issue certificates of
stock to a subscriber who has not paid the
full amount of his subscription together with
interest and expenses.
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Derivative suit – one brought by one or more
stockholders or members in the name and in
behalf of the corporation to redress wrongs
committed against it or to protect or
vindicate corporate rights.
Individual suit – one brought by a
stockholder in his own name against the
corporation for direct violation of his
contractual rights such as right to vote, to
dividends etc.
Representative suit – a group of stockholders
may bring a direct suit against the
corporation. This is when a wrong is
committed against a group of stockholders.
Certificate of Stock – a written instrument
signed by the proper corporate officers, and
evidencing the fact that the person therein
named is the registered owner of the share
or shares therein described.
Nature and Functions of Certificates It
represents the number of shares which the
corporation acknowledges that the holder of
the certificate is entitled to and is a solemn
and continuing affirmation by the
corporation that the person to whom it was
issued is entitled to all the rights and subject
to all the liabilities of a stockholder in the
company in respect of the number of shares
named, and that the company will respect
his rights and the rights of anyone to whim
he may transfer such shares, by refusing to
admit any new transferee to the rights of a
stockholder except upon the surrender of
the certificate.
Issuance of Stock Certificate. It requires:
1. sign by the president or vice-president,
countersigned by the secretary or
assistant secretary, and sealed with the
seal of the corporation, and issued in
accordance with the law.
2. The certificate must be delivered or
mailed to the subscriber, with the
documentary stamps required by law
affirmed thereon.
3. The par value with respect to shares with
par value, or the full subscriptions, as to
no-par value shares must be fully paid.
4. Where it involves transfer of outstanding
shares, the original certificate must be
retained.
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Purpose of Registration of Transfer
1. To enable the corporation to know at all
times who its actual shareholders are,
because mutual rights and obligations
exist between the corporation and its
stockholders.
2. To afford to the corporation an
opportunity to object or refuse its
consent to the transfer in case it has any
claim against the stock sought to be
transferred or for any other valid reason.
3. To avoid fraudulent or
fictitious transfer.
4. It is intended also for the benefit and
protection of persons who may deal with
the corporation and become creditors,
so that they know who are the
stockholders, and as such liable to its
creditors.
Right to Transfer shares of stock
1. By delivering the certificate, duly
indorsed on the back.
2. By delivering the certificate
accompanied by a separate assignment.
3. Where stock is levied on in execution of
judgment, by delivering the certificate
coupled with an assignment by the
sheriff who conducted the levy.
4. Transfer by sale of delinquent shares.
Liabilities of a stockholders
1. Liability to the corporation for unpaid
subscription
2. Liability to the corporation for interest
on unpaid subscription
3. Liability to creditors of the corporation
on unpaid subscription
4. Liability for watered stock
5. Liability for dividends unlawfully paid
6. Liability for failure to
create a corporation
Sec. 65. Liability of directors for watered
stocks. – Any director or officer of a
corporation consenting to the issuance of
stocks for a consideration less than its par or
issued value or for a consideration in any
form other than cash, valued in excess of its
fair value, or who, having knowledge
thereof, does not forthwith express his
objection in writing and file the same with
the corporate secretary, shall be solidarily,
liable with the stockholder concerned to the
corporation and its creditors for the
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difference between the fair value received at
the time of issuance of the stock and the par
or issued value of the same.
SEC. 65 watered stocks – stock issued for no
value at all or for a value less than its
equivalent either in cash, property, shares,
stock dividends, or services the law prohibits
the issuance of watered stocks (only refers
to original issue)
1. To protect persons who may acquire
stock and those who may become the
creditors of the corporation on the faith
of its outstanding capital stock being
fully paid.
2. To secure equality among subscribers
and prevents discrimination against
those who have paid in full the par or
issued value.
Who are liable for watered stocks? Both
consenting director or officer and the
stockholder concerned for the whole
amount of difference.
Trust Fund Theory – involves an implied
promise to the corporation to pay the par
value of the shares in money or its
equivalent, supplementing it by a legal
restriction against release or fictitious
payment of this obligation to the prejudice
of creditors.
Sec. 66. Interest on unpaid subscriptions. –
Subscribers for stock shall pay to the
corporation interest on all unpaid
subscriptions from the date of subscription,
if so required by, and at the rate of interest
fixed in the by-laws. If no rate of interest is
fixed in the by-laws, such rate shall be
deemed to be the legal rate.
Sec. 67. Payment of balance of subscription.
– Subject to the provisions of the contract of
subscription, the board of directors of any
stock corporation may at any time declare
due and payable to the corporation unpaid
subscriptions to the capital stock and may
collect the same or such percentage thereof,
in either case with accrued interest, if any, as
it may deem necessary.
Payment of any unpaid subscription or any
percentage thereof, together with the
interest accrued, if any, shall be made on the
date specified in the contract of subscription
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or on the date stated in the call made by the
board. Failure to pay on such date shall
render the entire balance due and payable
and shall make the stockholder liable for
interest at the legal rate on such balance,
unless a different rate of interest is provided
in the by-laws, computed from such date
until full payment. If within thirty (30) days
from the said date no payment is made, all
stocks covered by said subscription shall
thereupon become delinquent and shall be
subject to sale as hereinafter provided,
unless the board of directors orders
otherwise.
Remedies to enforce payment of stock
subscription
1. Extra-judicial sale at public auction –
Permits the corporation to put up unpaid
stock for sale and dispose of it for the
account of the delinquent subscribers
(governed by sections 67-69 of the
Corporation Code of the
Philippines).
2. Judicial action by court action (provided
under Section 70)
3. Denying a stockholder delinquent for
unpaid subscription the right to vote
(under section 71)
4. Collection from cash dividends and
withholding stock dividends (under
Section 43)
Sanctions on stock delinquent
1. Rights denied to stockholder shall not be
voted or be entitled to vote or
representation at any stockholders'
meeting, nor entitled the holder thereof
to any of the rights of a stockholder
except the right to dividends.
2. Right given to the corporation.
3. The corporation has the right to apply
cash dividends due on delinquent stock
to the unpaid balance on the
subscription plus cost and expenses.
While stock dividends, corporation to
withhold the same from the delinquent
stockholder until his unpaid subscription is
fully paid.
When is the balance of subscription
payable?
1. On the date specified in the contract of
subscription.
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2. In the absence of any specified date in
the contract of subscription, on the date
stated in the call made by the board of
directors.
When does the stock become delinquent? A
stock becomes delinquent upon failure of
the holder to pay the unpaid subscription or
balance thereof within 30 days from the date
specified in the contract of subscription or
on the date stated in the call.
Call – a declaration officially made by a
corporation usually expressed in the form of
a resolution of the board of directors
requiring payment of all or a certain
prescribed portion of a subscriber's stock
subscription.
Requisites for a valid call
1. It must be made in the manner
prescribed by law.
2. It must be made by the board of
directors.
3. It must operate uniformly upon all
shares.
Sec. 68. Delinquency sale. – The board of
directors may, by resolution, order the sale
of delinquent stock and shall specifically
state the amount due on each subscription
plus all accrued interest, and the date, time
and place of the sale which shall not be less
than thirty (30) days nor more than sixty
(60) days from the date the stocks become
delinquent.
Notice of said sale, with a copy of the
resolution, shall be sent to every delinquent
stockholder either personally or by
registered mail. The same shall furthermore
be published once a week for two (2)
consecutive weeks in a newspaper of
general circulation in the province or city
where the principal office of the
corporation is located.
Unless the delinquent stockholder pays to
the corporation, on or before the date
specified for the sale of the delinquent
stock, the balance due on his subscription,
plus accrued interest, costs of
advertisement and expenses of sale, or
unless the board of directors otherwise
orders, said delinquent stock shall be sold at
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public auction to such bidder who shall offer
to pay the full amount of the balance on the
subscription together with accrued interest,
costs of advertisement and expenses of
sale, for the smallest number of shares or
fraction of a share. The stock so purchased
shall be transferred to such purchaser in the
books of the corporation and a certificate
for such stock shall be issued in his favor.
The remaining shares, if any, shall be
credited in favor of the delinquent
stockholder who shall likewise be entitled
to the issuance of a certificate of stock
covering such shares.
Should there be no bidder at the public
auction who offers to pay the full amount of
the balance on the subscription together
with accrued interest, costs of
advertisement and expenses of sale, for the
smallest number of shares or fraction of a
share, the corporation may, subject to the
provisions of this Code, bid for the same,
and the total amount due shall be credited
as paid in full in the books of the
corporation. Title to all the shares of stock
covered by the subscription shall be vested
in the corporation as treasury shares and
may be disposed of by said corporation in
accordance with the provisions of this Code.
Procedure:
1. The board of directors passes a
resolution declaring payable the whole
or certain percentage of the unpaid
subscription stating the date fixed for
payment. If the date of payment is
specified in the contract of subscription,
no call is necessary.
2. The stockholders are given notice of the
resolution by the secretary of the
corporation. If the stockholders fails to
pay within 30 days from date specified,
the stocks becomes delinquent.
3. the board of directors, by resolution,
orders the sale of delinquent stocks,
stating the amount due and the date,
time, and place of sale with notice to the
delinquent stockholders which notice
shall be published.
4. On the date of sale, will be sold at public
auction to higher bidder for cash.
Highest bidder – the person offering at the
sale to pay the full amount of the balance on
the subscription together with accrued
Law on Business Organizations Reviewer
interest, cost of advertisement and expenses
of sale, for the smallest number of shares.
In the absence of bidders or highest bidder,
the corporation may purchase for itself the
delinquent stock.
Sec. 69. When sale may be questioned. – No
action to recover delinquent stock sold can
be sustained upon the ground of irregularity
or defect in the notice of sale, or in the sale
itself of the delinquent stock, unless the
party seeking to maintain such action first
pays or tenders to the party holding the
stock the sum for which the same was sold,
with interest from the date of sale at the
legal rate; and no such action shall be
maintained unless it is commenced by the
filing of a complaint within six (6) months
from the date of sale.
Grounds for the recovery of stock unlawfully
sold for delinquency are:
1. Irregularity or defect in the notice of sale
2. Irregularity or defect in the sale itself of
the delinquent stock
Sec. 70. Court action to recover unpaid
subscription. – Nothing in this Code shall
prevent the corporation from collecting by
action in a court of proper jurisdiction the
amount due on any unpaid subscription,
with accrued interest, costs and expenses.
As a general rule, a corporation may not
maintain a suit for the enforcement of
unpaid subscription without first making a
call.
Judicial remedy is limited to the amount due
on any unpaid subscription with accrued
interest, costs and expenses
Sec. 71. Effect of delinquency. – No
delinquent stock shall be voted for be
entitled to vote or to representation at any
stockholder's meeting, nor shall the holder
thereof be entitled to any of the rights of a
stockholder except the right to dividends in
accordance with the provisions of this Code,
until and unless he pays the amount due on
his subscription with accrued interest, and
the costs and expenses of advertisement, if
any.
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SEC. 71 Stock delinquency does not deprive
the holder of all his rights as a stockholder
except the right to be voted for or be entitled
to representation at any stockholders'
meeting. He shall still receive dividends. But
delinquent stocks shall be subject to
delinquency sale.
Effects of Stocks declared delinquent:
1. Cannot be voted for or be entitled to
vote in corporate meetings or be
represented by proxy at any
stockholders’ meeting.
2. The holder of delinquent stock is not
entitled to exercise the rights of a
stockholder (i.e. to inspect books and
records, etc.).
3. The holder of delinquent stocks is
entitled to dividends. Section 43
provides however, that “ any cash
dividends due on delinquent stock shall
first be applied to the unpaid balance on
the subscription plus costs and expense,
while stock dividends shall be withheld
from the delinquent stockholder until his
unpaid subscription is fully paid”.
Sec. 72. Rights of unpaid shares. – Holders
of subscribed shares not fully paid which are
not delinquent shall have all the rights of a
stockholder.
SEC. 72 Before unpaid shares become
delinquent, the holder thereof is not
considered to have violated any contract
with the corporation, and, therefore, he has
all the rights of a stockholder which rights
include the right to vote.
Sec. 73. Lost or destroyed certificates. – The
following procedure shall be followed for the
issuance by a corporation of new certificates
of stock in lieu of those which have been lost,
stolen or destroyed:
1. The registered owner of a certificate of
stock in a corporation or his legal
representative shall file with the
corporation an affidavit in triplicate
setting forth, if possible, the
circumstances as to how the certificate
was lost, stolen or destroyed, the
number of shares represented by such
certificate, the serial number of the
certificate and the name of the
corporation which issued the same. He
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shall also submit such other information
and evidence which he may deem
necessary.
2. After verifying the affidavit and other
information and evidence with the
books of the corporation, said
corporation shall publish a notice in a
newspaper of general circulation
published in the place where the
corporation has its principal office, once
a week for three (3) consecutive weeks
at the expense of the registered owner
of the certificate of stock which has been
lost, stolen or destroyed. The notice shall
state the name of said corporation, the
name of the registered owner and the
serial number of said certificate, and the
number of shares represented by such
certificate, and that after the expiration
of one (1) year from the date of the last
publication, if no contest has been
presented to said corporation regarding
said certificate of stock, the right to
make such contest shall be barred and
said corporation shall cancel in its books
the certificate of stock which has been
lost, stolen or destroyed and issue in lieu
thereof new certificate of stock, unless
the registered owner files a bond or
other security in lieu thereof as may be
required, effective for a period of one
(1) year, for such amount and in such form
and with such sureties as may be
satisfactory to the board of directors, in
which case a new certificate may be
issued even before the expiration of the
one (1) year period provided herein:
Provided, That if a contest has been
presented to said corporation or if an
action is pending in court regarding the
ownership of said certificate of stock
which has been lost, stolen or destroyed,
the issuance of the new certificate of
stock in lieu thereof shall be suspended
until the final decision by the court
regarding the ownership of said certificate
of stock which has been lost, stolen or
destroyed.
Except in case of fraud, bad faith, or
negligence on the part of the corporation
and its officers, no action may be brought
against any corporation which shall have
issued certificate of stock in lieu of those
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lost, stolen or destroyed pursuant to the
procedure above-described.
SEC. 73 The registered owner of certificates
of stock in a corporation or his legal
representative shall file with the corporation
an affidavit setting forth how certificate
were lost, stolen or destroyed, the number
of shares represented by each certificate,
the serial numbers of the certificate and
name of the corporation which issued the
same.
The affidavit shall be verified Corporation
shall publish a notice in a newspaper in
general circulation published in the place
where the corporation has its principal office
for 3 consecutive weeks.
After 1 year from the date of the last
publication, if no contest presented to the
corporation, corporation shall cancel in the
books the lost certificates and issue new
certificates.
Sec. 74. Books to be kept; stock transfer
agent. – Every corporation shall keep and
carefully preserve at its principal office a
record of all business transactions and
minutes of all meetings of stockholders or
members, or of the board of directors or
trustees, in which shall be set forth in detail
the time and place of holding the meeting,
how authorized, the notice given, whether
the meeting was regular or special, if special
its object, those present and absent, and
every act done or ordered done at the
meeting. Upon the demand of any director,
trustee, stockholder or member, the time
when any director, trustee, stockholder or
member entered or left the meeting must be
noted in the minutes; and on a similar
demand, the yeas and nays must be taken on
any motion or proposition, and a record
thereof carefully made. The protest of any
director, trustee, stockholder or member on
any action or proposed action must be
recorded in full on his demand. The records
of all business transactions of the
corporation and the minutes of any
meetings shall be open to inspection by any
director, trustee, stockholder or member of
the corporation at reasonable hours on
business days and he may demand, writing,
for a copy of excerpts from said records or
minutes, at his expense.
Law on Business Organizations Reviewer
Any officer or agent of the corporation who
shall refuse to allow any director, trustees,
stockholder or member of the corporation to
examine and copy excerpts from its records
or minutes, in accordance with the
provisions of this Code, shall be liable to such
director, trustee, stockholder or member for
damages, and in addition, shall be guilty of
an offense which shall be punishable under
Section 144 of this Code: Provided, That if
such refusal is made pursuant to a resolution
or order of the board of directors or trustees,
the liability under this section for such action
shall be imposed upon the directors or
trustees who voted for such refusal: and
Provided, further, That it shall be a defense
to any action under this section that the
person demanding to examine and copy
excerpts from the corporation's records and
minutes has improperly used any
information secured through any prior
examination of the records or minutes of
such corporation or of any other
corporation, or was not acting in good faith
or for a legitimate purpose in making his
demand.
Stock corporations must also keep a book to
be known as the "stock and transfer book",
in which must be kept a record of all stocks
in the names of the stockholders
alphabetically arranged; the installments
paid and unpaid on all stock for which
subscription has been made, and the date of
payment of any installment; a statement of
every alienation, sale or transfer of stock
made, the date thereof, and by and to whom
made; and such other entries as the by-laws
may prescribe. The stock and transfer book
shall be kept in the principal office of the
corporation or in the office of its stock
transfer agent and shall be open for
inspection by any director or stockholder of
the corporation at reasonable hours on
business days.
No stock transfer agent or one engaged
principally in the business of registering
transfers of stocks in behalf of a stock
corporation shall be allowed to operate in
the Philippines unless he secures a license
from the Securities and Exchange
Commission and pays a fee as may be fixed
by the Commission, which shall be
renewable annually: Provided, That a stock
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 Law on Business Organizations Reviewer

corporation is not precluded from the last taxable year and a profit or loss
performing or making transfer of its own statement for said taxable year, showing in
stocks, in which case all the rules and reasonable detail its assets and liabilities and
regulations imposed on stock transfer the result of its operations.
agents, except the payment of a license fee
herein provided, shall be applicable. At the regular meeting of stockholders or
members, the board of directors or trustees
Books and records to be shall present to such stockholders or
kept by Corporation members a financial report of the operations
1. Record of all business transactions of the corporation for the preceding year,
2. Minutes of all meetings of stockholders which shall include financial statements,
or members, or of board of directors or duly signed and certified by an independent
trustees certified public accountant.
3. Stock and transfer books
4. Optional records and supplementary However, if the paid-up capital of the
books as many be necessary or required corporation is less than P50,000.00, the
by special laws financial statements may be certified under
oath by the treasurer or any responsible
SEC Rules requiring filing of documents. The officer of the corporation.
SEC requires all corporations whose
securities are listed in any stock exchange or Stockholder’s rights to financial statements
with permits to sell shares to the public or and reports
with twenty or more stockholders shall 1. Balance sheet as of the end of the last
hereafter submit to this Commission within taxable year.
thirty (30) days after approval of the 2. A profit and loss statement for said
corporate action, certified true copies of the taxable year.
following documents evidencing the same, 3. The board of directors or trustees shall
to wit: present “a financial report” to
a. Minute of meetings stockholders or members.
1. Calling for payment of unpaid
subscriptions SEC REPORTORIAL REQUIREMENTS Period
2. Increasing or decreasing the capital Requirements
stock
3. Changing the nomenclature of Within 30 days from a) Set up books
shares of stock or certificates of registration of of accounts duly
indebtedness articles onaf registered with the
4. Authorizing the borrowing of incorporation BIR wherein receipts
material sums of money and disbursements
b. Other documents, such as: made are
1. Certificated changing the immediately
composition of the board of recorded.
directors and officers
2. Certificates changing the ownership b) Set up
of the controlling interest in the and
corporation register with the SEC
its stock and transfer
Management contracts duly approved by the book.
stockholders.
c) File its by-laws
Sec. 75. Right to financial statements. – with the
Within ten (10) days from receipt of a Commission.
written request of any stockholder or
member, the corporation shall furnish to him
its most recent financial statement, which
shall include a balance sheet as of the end of

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 Law on Business Organizations Reviewer

Within 15 days from Submit a statement • No. of

end of 3 months of sources and shares
from registration application of funds subscribed
certified by an • Amt. subscribed
independent CPA. by each
a) Within 105 days i) If paid-up Shall be made for
after the end of its capital > P50,000, inspection.
fiscal year file a copy of BS and Within 5 Submit list of
P&L statement. days before stockholders/memb
the date of annual ers entitled to vote
ii) If paid-up meeting as of a date prior to
capital < P50,000, the meeting.
same as (i) and
certified under oath The SEC must be notified of any:
by the Treasurer or 1. Change or transfer of address.
any responsible 2. Any investment of corporate funds in
officer. any of the secondary purposes of the
b) Within 45 days Certified under oath corporation by filing a copy of the
by the Treasurer or resolution approved by 2/3 of the
any responsible subscribed capital stock entitled to vote
officer. authorizing the BoD to invest in any of
Within 30 days from Submit: the secondary purposes.
the date of annual 1) General
meeting information sheet Sec. 76. Plan of merger or consolidation. –
for the fiscal year. Two or more corporations may merge into a
single corporation which shall be one
2) Minutes of constituent corporations or may consolidate
meeting of into a new single corporation which shall be
stockholders/memb consolidated corporation.
ers electing the BoD
certified by the The board of directors or trustees of each
Secretary and corporation, party to the merger or
subscribed and consolidation, shall approve a plan of merger
sworn to before a or consolidation setting forth the following:
notary public.
1. The names of the corporations
3) Minutes of proposing to merge or consolidate,
meeting of BoD hereinafter referred to as the
electing the officers, constituent corporations.
certified by the
secretary and 2. The terms of the merger or consolidation
subscribed and and the mode of carrying the same into
sworn to before a effect.
notary public
Within 5 days from Submit list of 3. A statement of the changes. If any, in the
stockholders/memb stockholders/memb articles of incorporation of the surviving
ers meeting ers as of the date of annual corporation in case of merger; and, with
or special stockholders/memb ers’ respect to the consolidated corporation
meeting, showing: Name of the in case of consolidation, all the
statements required to be set forth in
stockholder the articles of incorporation for
• Address corporations organized under this Code.
• Nationality

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4. Such other provisions with respect to the
proposed merger or consolidation as are
deemed necessary or desirable.
Sec. 77. Stockholders’ or members’
approval. – Upon approval by majority vote
of each of the board of directors or trustees
of the constituent corporations of the plan of
merger or consolidation, the same shall be
submitted for approval by the stockholders
or members of each of such corporations at
separate corporate meetings duly called for
stockholders or members of the respective
corporations, at least two (2) weeks prior to
the date of meeting, either personally or by
registered mail. Said notice shall state the
purpose of the meeting and shall include a
copy or a summary of the plan of merger or
consolidation as the case may be. The
affirmative vote of stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock of each
corporations in case of stock corporations or
at least two-thirds of the members in case of
non-stock corporations, shall be necessary
for the approval of such plan. Any dissenting
stockholder in stock corporations may
exercise his appraisal right in accordance
with this Code; Provided, That if after the
approval by the stockholders of such plan,
the board of directors should decide to
abandon the plan, the appraisal right shall be
extinguished.
Any amendment to the plan of merger or
consolidation may be made, provided such
amendment is approved by majority vote of
the respective boards of directors or
trustees of all the constituent corporations
and ratified by the affirmative vote of
stockholders representing at least twothirds
(2/3) of the members of each of the
constituent corporations. Such plan,
together with any amendment, shall be
considered as the agreement of merger or
consolidation.
Definition
Consolidation – the uniting or amalgamation
of two or more existing corporations to form
a new corporation. The united concern
resulting from the union is called the
consolidated corporation.
Merger – a union effected by the absorbing
of one or more existing corporations by
another which survives and continues the
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combined business. The parties to a
combination by consolidation or merger are
called the “constituent” corporations.
Sec. 78. Articles of merger or consolidation.
– After the approval by the stockholders or
members as required by the preceding
section, articles of merger or articles of
consolidation shall be executed by each of
the constituent corporations, to be signed by
the president or vice-president and certified
by the secretary or assistant secretary of
each corporation setting forth:
1. The plan of the merger or the plan of the
consolidation.
2. As to stock corporations, the number of
shares outstanding, or in case of
nonstock corporations, the number of
members.
3. As to each corporation, the number of
shares or members voting for and
against such plan, respectively.
Sec. 79. Securities and Exchange
Commission’s approval and effictivity of
merger or consolidation. – The articles of
merger or of consolidation signed and
certified as hereinabove required, shall be
submitted to the Securities and Exchange
Commission in quadruplicate for its
approval: Provided, That in the case of
merger or consolidation of banks or banking
institutions, building and loan associations,
trust companies, insurance companies,
public utilities, educational institutions and
other special corporations governed by
special laws, the favorable recommendation
of the appropriate government agency shall
first be obtained. Where the Commission is
satisfied that the merger or consolidation of
the corporations concerned is not
inconsistent with the provisions of this Code
and existing laws, it shall issue a certificate of
merger or consolidation, as the case may be,
at which time the merger or consolidation
shall be effective.
If, upon investigation, the Securities and
Exchange Commission has reason to believe
that the proposed merger or consolidation is
contrary to or inconsistent with the
provisions of this Code or existing laws, it
shall set a hearing to give the corporations
88

concerned the opportunity to be heard.
Written notice of the date, time and place of
said hearing shall be given to each
constituent corporation at least two (2)
weeks before said hearing. The Commission
shall thereafter proceed as provided in this
Code.
Sec. 80. Effects of merger or consolidation.
– The merger or consolidation, as provided
in the preceding sections shall have the
following effects:
1. The constituent corporations shall
become a single corporation which, in
case of merger, shall be the surviving
corporation designated in the plan of
merger; and, in case of consolidation,
shall be the consolidated corporation
designated in the plan of consolidation.
2. The separate existence of the
constituent corporations shall cease,
except that of the surviving or the
consolidated corporation.
3. The surviving or the consolidated
corporation shall possess all the rights,
privileges, immunities and powers and
shall be subject to all the duties and
liabilities of a corporation organized
under this Code.
4. The surviving or the consolidated
corporation shall thereupon and
thereafter possess all the rights,
privileges, immunities and franchises of
each of the constituent corporations;
and all property, real or personal, and all
receivables due on whatever account,
including subscriptions to shares and
other chooses in action, and all and
every other interest of, or belonging to,
or due to each constituent corporation,
shall be taken and deemed to be
transferred to and vested in such
surviving or consolidated corporation
without further act or dead.
5. The surviving or consolidated
corporation shall be responsible and
liable for all the liabilities and obligations
of each of the constituent corporations
in the same manner as if such surviving
or consolidated corporation had itself
incurred such liabilities or obligations;
Law on Business Organizations Reviewer
and any claim, action or proceeding
pending by or against any of such
constituent corporations may be
prosecuted by or against the surviving or
consolidated corporation, as the case
may be. Neither the rights of creditors
nor any lien upon the property of any of
such constituent corporations shall be
impaired by such merger or
consolidation.
Steps to achieve merger or consolidation
1. The BoD of each corporation must draw
up a plan of merger or consolidation.
2. A plan must be submitted to the S/M of
each corporation for approval. The vote
or two-thirds (members) or two-thirds of
the outstanding capital stock
(stockholders) would be required.
3. There has to be a formal agreement
known as the articles of M/C by the
officers of each of the constituent
corporations.
4. The articles of M/C must be submitted to
the SEC for approval.
5. The SEC shall if it deems necessary set a
hearing giving notice to all corporations
concerned.
6. The SEC issues the certificate of M/C.
The M/C becomes effective upon the
issuance of the corresponding
certificate.
Remedy of creditors of
constituent corporations
The only remedy is either against the united
corporation, or to pursue the assets of the
constituents into its hands on the ground of
fraudulent conveyance.
Sec. 81. Instances of appraisal right. – Any
stockholder of a corporation shall have the
right to dissent and demand payment of the
fair value of his shares in the following
instances:
1. In case any amendment to the articles of
incorporation has the effect of changing
or restricting the rights of any
stockholders or class of shares, or of
authorizing preferences in any respect
superior to those of outstanding shares
of any class, or of extending or
shortening the term of corporate
existence.
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2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of
all or substantially all of the corporate
property and assets as provided in this
Code.
3. In case of merger or consolidation.
Sec. 81, not exclusive.
Such appraisal right may also be exercised
when a stockholder dissents when a
corporation or business or for a purpose
other than its main purpose. (Sec. 42)
When a stockholder of a close corporation
may for any reason compel the corporation
to purchase his shares from the par or issued
value, when the corporation has sufficient
assets in its books to cover its debts and
liabilities, exclusive of capital
stock. (Sec. 105)
Sec. 82. How right is exercised. – The
appraisal right may be exercised by any
stockholder who shall have voted against the
proposed corporate action, by making a
written demand on the corporation within
thirty (30) days after the date on which the
vote was taken for payment of the fair value
of his shares: Provided, That failure to make
the demand within such period shall be
deemed a waiver of the appraisal right. If the
proposed corporate action is implemented
or effected, the corporation shall pay to such
stockholder, upon surrender of the
certificate(s) of stock representing his
shares, the fair value thereof as of the day
prior to the date on which the vote was
taken, excluding any appreciation or
depreciation in anticipation of such
corporate action.
If within a period of sixty (60) days from the
date the corporate action was approved by
the stockholders, the withdrawing
stockholder and the corporation cannot
agree on the fair value of the shares, it shall
be determined and appraised by three (3)
disinterested persons, one of whom shall be
named by the stockholder, another by the
corporate and the third by the two (2) thus
chosen. The findings of the majority of the
appraisers shall be final, and their award
shall be paid by the corporation within thirty
(30) days after such award is made:
Law on Business Organizations Reviewer
Provided, That no payment shall be made to
any dissenting stockholder unless the
corporation has unrestricted retain earnings
in its books to cover such payment: and
Provided, further, That upon payment by the
corporation of the agreed or awarded price,
the stockholder shall forthwith transfer his
shares to the corporation.
Exercising the appraisal right
By one who has voted against the proposed
corporate action, by making a written
demand on the corporation within thirty (30)
days after the date on which the vote was
taken for payment of the fair value of his
shares. Those who are absent and present
abstained their vote cannot exercise the
appraisal right.
Sec. 83. Effect of demand and termination
of right. – From the time of demand for
payment of the fair value of a stockholder’s
shares until either the abandonment of the
corporate action involved or the purchase of
the said shares by the corporation, all rights
accruing to such shares, including voting and
dividend rights, shall be suspended in
accordance with the provisions of this Code,
except the right of such stockholder to
receive payment of the fair value thereof:
Provided, That if the dissenting stockholder
is not paid the value of his shares within 30
days after the award, his voting and dividend
rights shall be immediately be restored.
Sec. 84. When right to payment ceases. – No
demand for payment under this Title may be
withdrawn unless the corporation consents
thereto. If, however, such demand for
payment is withdrawn with the consent of
the corporation, or if the proposed
corporate action is abandoned or rescinded
by the corporation or disapproved by the
Securities and Exchange Commission where
such approval is necessary, or if the
Securities and Exchange Commission
determines that such stockholder is not
entitled to the appraisal right, then the right
of said stockholder to be paid the fair value
of his shares shall cease, his status as a
stockholder shall thereupon be restored,
and all dividend distributions which would
have accrued on his shares shall be paid to
him.
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Effect of refusal of corporation to pay
If... Then...
FV of the shares Restore all his rights
within thirty (30) automatically.
days from the award
Insufficiency of the Restore by
unrestricted RE reacquiring his
former status as a
stockholder.
Abandoned;
Rescinded; effects as
Unsecured approval
of the SEC;
Stockholder is not
Same
entitled; Withdrawal above.
(dissenting
stockholder with
consent of the corp)
Sec. 85. Who bears costs of appraisal. – The
costs and expenses of appraisal shall be
borne by the corporation, unless the fair
value ascertained by the appraisers is
approximately the same as the price which
the corporation may have offered to pay the
stockholder, in which case they shall be
borne by the latter. In case of an action to
recover such fair value, all costs and
expenses shall be assessed against the
corporation, unless the refusal of the
stockholder to receive payment was
unjustified.
Consideration of the costs of appraisal
Expenses of appraisal:
• Appraisers’ fees
• Attorneys’ fees
• Expert accountants’ fees
• Witnesses before the appraisers’
fees
Thus, clarifies an otherwise delicate aspect
of appraisal proceeding.
Sec. 86. Notation on certificate(s); right of
transferee. – Within ten (10) days after
demanding payment for his shares, a
dissenting stockholder shall submit the
certificate(s) of stock representing his shares
to the corporation for notation thereon that
such shares are dissenting shares. His failure
to do so shall, at the option of the
corporation, terminate his rights under this
Title. If shares represented by the
certificate(s) bearing such notation are
Law on Business Organizations Reviewer
transferred, and the certificate(s)
consequently cancelled, the rights of the
transferor as a dissenting stockholder under
this Title shall cease and the transferee shall
have all the rights of a regular stockholder;
and all dividend distributions which would
have accrued on such shares shall be paid to
the transferee.
Valuation of shares of
dissenting shareholders
Appraisers should consider the elements
that tend to affect market quotations:
• The rate of dividends
• The regularity with which they have
been paid
• The management and reputation of
the company
• Its prospects for the future
• All other circumstances which will
aid them in estimating the future
course of the stock in the market
The important thing to consider in arriving at
the appraisal value is whether the valuation
arrived at is fair, just and reasonable to all
parties concerned.
Other instances when appraisal right may
be granted
1. Amendment of “any provision or matter
stated in the articles of incorporation.”
2. When the corporate term is extended.
3. Any purpose other than the primary
purpose.
4. Close corporation – a stockholder may
compel the corporation to purchase FV
“for any reasons.”
Exercise of appraisal right provided
compensatory alternative to investor
Appraisal statutes extending to corporate
purpose or duration amendments would
seem to be of limited value.
Appraisal rights cannot challenge this power
but they can provide a compensatory
alternative to an investor faced with a loss of
existing stock rights and should be so
employed.
When right of stockholder to payment
ceases
1. The demand for payment is withdrawn
with the consent of the corporation.
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2. The proposed corporate action is
abandoned or rescinded by the
corporation.
3. Proposed action is disapproved by the
SEC where such approval is necessary.
4. Such stockholder is not entitled to
exercise his appraisal right.
Sec. 87. Definition. – For the purposes of this
Code, a non-stock corporation is one where
no part of its income is distributable as
dividends to its members, trustees, or
officers, subject to the provisions of this
Code on dissolution: Provided, That, any
profit which a non-stock corporation may
obtain as an incident to its operation shall,
whenever necessary or proper, be used for
the furtherance of the purpose or purposes
for which the corporation was organized,
subject to the provisions of this Title.
The provisions governing
stock corporations, when pertinent, shall be
applicable to non-stock
corporations, except as may be covered by
specific provisions of this Title.
Definition
Non-stock corporation – one where no part
of its income is distributable as dividends to
its members, trustees, or officers.
Sec. 88. Purposes. – Non-stock corporations
may be formed or organized for charitable,
religious, educational, professional, cultural,
fraternal, literary, scientific, social, civic
service, or similar purposes, like trade,
industry, agricultural and like chambers, or
any combination thereof, subject to the
special provisions of this Title governing
particular classes of non-stock corporations.
Distinction between a stock corporation
and a non-stock corporation
Point of Stock Non-Stock
Comparison Corporation Corporation
Membership Ownership of Consent of
stock the
associates
Solicitation of gifts, donations
or contributions by non-stock corporations
A certificate of registration must be secured
from the Insurance
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Commissioner otherwise the articles of
incorporation cannot be filed.
Sec. 89. Right to vote. – The right of the
members of any class or classes to vote may
be limited, broadened or denied to the
extent specified in the
articles of incorporation or the by-laws.
Unless so limited, broadened or
denied, each member, regardless of
class, shall be entitled to one vote.
Unless otherwise provided by the articles of
incorporation or the by-laws, a member may
vote by proxy in accordance with the
provisions of this Code.
Voting by mail or other similar means by
members of non-stock corporations may be
authorized by the by-laws of non-stock
corporations with the approval of, and under
such conditions which may be, prescribed
by, the Securities and Exchange Commission.
Voting by proxy may be denied in articles or
by-laws
The law makes voting by proxy merely
directory in the case of non-stock
corporations and even allows the articles of
incorporation or by-laws thereof to deny
proxy voting.
If proxy voting may be denied outrightly in
the articles or by-laws of non-stock
corporations, it necessarily follows that the
qualifications or limitations on who should
be appointed proxies may also be made
therein.
Sec.90. Non-transferability of membership.
– Membership in a non-stock corporation
and all rights arising therefrom are personal
and non-transferable, unless the articles of
incorporation or the by-laws otherwise
provide.
Sec.91. Termination of membership. –
Membership shall be terminated in the
manner and for the causes provided in the
articles of incorporation or the by-laws.
Termination of membership shall have the
effect of extinguishing all rights of a member
in the corporation or in its property, unless
otherwise provided in the articles of
incorporation or the by-laws.
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Sec.92. Election and term of trustees. –
Unless otherwise provided in the articles of
incorporation or the by-laws, the board of
trustees of non-stock corporations, which
may be more than fifteen (15) in number as
may be fixed in their articles of incorporation
or by-laws, shall, as soon as organized, so
classify themselves that the term of office of
one-third (1/3) of their number shall expire
every year; and subsequent elections of
trustees comprising one-third (1/3) of the
board of trustees shall be held annually and
trustees so elected shall have a term of three
(3) years. Trustees thereafter elected to fill
vacancies occurring before the expiration of
a particular term shall hold office only for the
unexpired period.
No person shall be elected as trustee unless
he is a member of the corporation.
Unless otherwise provided in the articles of
incorporation or the by-laws, officers of a
non-stock corporation may be directly
elected by the members.
Three-year term for trustees in non-stock
corporation
The term of trustees in non-stock
corporation is three (3) years except
educational corporations where the term is
five (5) years.
Elections of directors by regions in nonstock
corporations not allowed
The Securities and Exchange Commission in
an opinion stated that the “Election of
members of the Board of Directors of a non
stock corporation by zones or regions would
violate the law which requires that at all
elections of directors, there must be present
a majority of the members entitled
to vote. ”
Sec.93. Place of meetings. – The by-laws
may provide that the members of a nonstock
corporation may hold their regular or special
meetings at any place even outside the place
where the principal office of the corporation
is located: Provided, That proper notice is
sent to all members indicating the date, time
and place of the meeting: and Provided,
further, That the place of meeting shall be
within the
Philippines.
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Supporting papers required to be submitted
to the Securities and Exchange Commission:
1. LETTER OF UNDERTAKING addressed to
the Commission signed by at least a
majority of the incorporators or by a duly
authorized representative, to the effect
that the association will change its
corporate name in the event another
person, firm or entity has acquired a
prior right to use the same name or
similar to it. (3 copies)
2. MODUS OPERANDI or a detailed
explanation as to how the association
shall carry out its objectives signed by
atleast a majority of the incorporators or
by a duly authorized representative. (3
Copies)
3. RESOLUTION of the Board signed by
atleast a majority of the Directors or
certified under oath by the Secretary in
the following tenor to wit: (3 Copies)
“RESOLVED, that the corporation or
associatin will comply with the S.E.C.
REQUIREMENTS FOR NON-STOCK
CORPORATION dated May 24, 1963 , in
the course of its operation.”
4. LIST OF MEMBERS of the association
containing their manual signature and
attested by the Acting Secretary, if the
incorporators are the present members
so far, state such fact in writing and
further state that the list of additional
members who will be admitted in
accordance with the by-laws of the
association shall e submitted to the
Commission from time to time. (3
Copies)
Sec. 94. Rules of distribution. – In case
dissolution of a non-stock corporation in
accordance with the provisions of this Code,
its assets shall be applied and distributed as
follows:
1. All liabilities and obligations of the
corporation shall be paid, satisfied and
discharged, or adequate provision shall
be made therefore.
2. Assets held by the corporation upon a
condition requiring return, transfer or
conveyance, and which condition occurs
by reason of the dissolution, shall be
returned, transferred or conveyed in
accordance with such requirements.
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3. Assets received and held by the
corporation subject to limitations
permitting their use only for charitable,
religious, benevolent, educational or
similar purposes, but not held upon a
condition requiring return, transfer or
conveyance by reason of the dissolution,
shall be transferred or conveyed to one
or more corporations, societies or
organizations engaged in activities in the
Philippines substantially similar to those
of the dissolving corporation according
to a plan of distribution adopted
pursuant to this Chapter.
4. Assets other than those mentioned in
the preceding paragraphs, if any, shall be
distributed in accordance with the
provisions of the articles of
incorporation or the by-laws, to the
extent that the articles of incorporation
or the by-laws, determine the
distributive rights of members, or any
class or classes of members, or provide
for distribution.
5. In any other case, assets may be
distributed to such persons, societies,
organizations or corporations, whether
or not organized for profit, as may be
specified in a plan of distribution
adopted pursuant to this Chapter.
Sec. 95. Plan of distribution of assets. – A
plan providing for the distribution of assets,
not inconsistent with the provisions of this
Title, may be adopted by a non-stock
corporation in the process of dissolution in
the following manner:
The board of trustees shall, by majority vote,
adopt a resolution recommending a plan of
distribution and directing the submission
thereof to a vote at a regular or special
meeting of members having voting rights.
Written notice setting forth the proposed
plan of distribution or a summary thereof
and the date, time and place of such meeting
shall be given to each member entitled to
vote, within the time and in the manner
provided in this Code for the giving of notice
of meetings to members. Such plan of
distribution shall be adopted upon approval
of at least twothirds (2/3) of the members
having voting rights present or represented
by proxy at such meeting.
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Distribution of assets of non-stock
corporations to the members on dissolution
is not forbidden, unless it holds its assets
upon some trust, public or private, in which
case the claims of the state, the
beneficiaries, or of the founder and his
successors may have to be considered. A
non-stock (non-profit) corporation may not
ordinarily organize as a stock corporation,
authorized to issue shares of stock, but may
issue membership certificates which do not
entitle to the holder to dividends.
Sec. 96. Definition and applicability of Title.
– A close corporation, within the meaning of
this Code, is one whose articles of
incorporation provide that:
1. All the corporation's issued stock of all
classes, exclusive of treasury shares,
shall be held of record by not more than
a specified number of persons, not
exceeding twenty (20).
2. All the issued stock of all classes shall be
subject to one or more specified
restrictions on transfer permitted by this
Title.
3. The corporation shall not list in any stock
exchange or make any public offering of
any of its stock of any class.
Notwithstanding the foregoing, a
corporation shall not be deemed a close
corporation when at least two-thirds
(2/3) of its voting stock or voting rights is
owned or controlled by another
corporation which is not a close
corporation within the meaning of this
Code.
Any corporation may be incorporated as a
close corporation, except mining or oil
companies, stock exchanges, banks,
insurance companies, public utilities,
educational institutions and corporations
declared to be vested with public interest in
accordance with the provisions of this Code.
The provisions of this Title shall primarily
govern close corporations: Provided, That
the provisions of other Titles of this Code
shall apply suppletorily except insofar as this
Title otherwise provides.
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Sec. 97. Articles of incorporation. – The
articles of incorporation of a close
corporation may provide:
1. For a classification of shares or rights and
the qualifications for owning or holding
the same and restrictions on their
transfers as may be stated therein,
subject to the provisions of the following
section.
2. For a classification of directors into one
or more classes, each of whom may be
voted for and elected solely by a
particular class of stock.
3. For a greater quorum or voting
requirements in meetings of
stockholders or directors than those
provided in this Code.
The articles of incorporation of a close
corporation may provide that the business of
the corporation shall be managed by the
stockholders of the corporation rather than
by a board of directors. So long as this
provision continues in effect:
1. No meeting of stockholders need be
called to elect directors.
2. Unless the context clearly requires
otherwise, the stockholders of the
corporation shall be deemed to be
directors for the purpose of applying the
provisions of this Code.
3. The stockholders of the corporation shall
be subject to all liabilities of directors.
The articles of incorporation may likewise
provide that all officers or employees or that
specified officers or employees shall be
elected or appointed by the stockholders,
instead of by the board of directors.
Requisites of Close Corporation
Within the meaning of a close corporation
under the Corporation Code the following
are its attributes:
1. Its stockholders are limited not
exceeding 20 persons.
2. Its shares of stock are subject to one or
more restrictions on transfer.
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3. Its shares of stock are not listed in any
stock exchange.
Salient Feature of Close Corporations
1. It has only a few stockholders, who if not
related by blood or marriage, know each
other well and are aware of each other’s
business skills.
2. All or more of them are active in the
corporate business, either as directors,
officers or as key men in management.
3. The stocks of the corporation are not
listed on the exchange nor is there
trading in them outside the stock
market.
*It would seem that base on these
features many corporations in the
Philippines would be close corporations.
Reasons for formation of
close corporations
“The existence of close corporations can be
attributed to the desire of intimate groups of
business associates to obtain the advantages
of a corporate organization, like that of
limited liability. However, the identity and
personality of each shareholder are
important to his associates, so that although
they may consider their business as
corporation in their dealings with third
persons, among themselves the
stockholders act and feel as partners.”
Entities which may not be organized as close
corporations
• Mining or oil companies
• Stock exchanges
• Banks
• Insurance companies
• Public utilities
• Educational institutions
• Corporations declared to be vested
with public interest
Stockholders authorized to manage close
corporations
As a rule, management of stock corporation
is normally given to board of directors or
trustees. However, the Corporation Code
provides: “The articles of incorporation of a
close corporation may provide that the
business of the corporation shall be managed
by the stockholders of the corporation rather
than by a board of directors.” Also, “The
articles of incorporation may likewise provide
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that all officers or employees or that specified
officers or employees shall be elected or
appointed by the stockholders, instead of by
the board of directors.”
Sec. 98. Validity of restrictions on transfer of
shares. – Restrictions on the right to transfer
shares must appear in the articles of
incorporation and in the by-laws as well as in
the certificate of stock; otherwise, the same
shall not be binding on any purchaser
thereof in good faith. Said restrictions shall
not be more onerous than granting the
existing stockholders or the corporation the
option to purchase the shares of the
transferring stockholder with such
reasonable terms, conditions or period
stated therein. If upon the expiration of said
period, the existing stockholders or the
corporation fails to exercise the option to
purchase, the transferring stockholder may
sell his shares to any third person.
Sec. 99. Effects of issuance or transfer of
stock in breach of qualifying conditions. –
1. If stock of a close corporation is issued or
transferred to any person who is not
entitled under any provision of the
articles of incorporation to be a holder of
record of its stock, and if the certificate
for such stock conspicuously shows the
qualifications of the persons entitled to
be holders of record thereof, such
person is conclusively presumed to have
notice of the fact of his ineligibility to be
a stockholder.
2. If the articles of incorporation of a close
corporation states the number of
persons, not exceeding twenty (20), who
are entitled to be holders of record of its
stock, and if the certificate for such stock
conspicuously states such number, and if
the issuance or transfer of stock to any
person would cause the stock to be held
by more than such number of persons,
the person to whom such stock is issued
or transferred is conclusively presumed
to have notice of this fact.
3. If a stock certificate of any close
corporation conspicuously shows a
restriction on transfer of stock of the
corporation, the transferee of the stock
is conclusively presumed to have notice
of the fact that he has acquired stock in
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violation of the restriction, if such
acquisition violates the restriction.
4. Whenever any person to whom stock of
a close corporation has been issued or
transferred has, or is conclusively
presumed under this section to have,
notice either (a) that he is a person not
eligible to be a holder of stock of the
corporation, or (b) that transfer of stock
to him would cause the stock of the
corporation to be held by more than the
number of persons permitted by its
articles of incorporation to hold stock of
the corporation, or (c) that the transfer
of stock is in violation of a restriction on
transfer of stock, the corporation may, at
its option, refuse to register the transfer
of stock in the name of the transferee.
5. The provisions of subsection (4) shall not
applicable if the transfer of stock, though
contrary to subsections (1), (2) of (3), has
been consented to by all the
stockholders of the close corporation, or
if the close corporation has amended its
articles of incorporation in accordance
with this Title.
6. The term "transfer", as used in this
section, is not limited to a transfer for
value.
7. The provisions of this section shall not
impair any right which the transferee
may have to rescind the transfer or to
recover under any applicable warranty,
express or implied.
Restrictions on transfer of shares of stock
The corporation may provide in its articles of
incorporation, in its by-laws as well as in the
certificate of stock restrictions on the right of
stockholders to transfer their shares of
stocks. If not so provided as aforesaid the
same “shall not be binding on any purchaser
thereof in good faith.” Charter restrictions
on the transfer of shares are binding on all
who become shareholders, as they become
parties to the charter contract and take their
shares subject to it. Considerable latitude
allowed incorporators and shareholders in
imposing transfer restrictions in the articles
of incorporation and they will not usually be
declared against public policy unless
palpably unreasonable under the
circumstances.
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“Stock in the corporation is not merely
property. It also creates a personal relation
analogous otherwise than technically to a
partnership. There seems to be no greater
objection to retaining the right of choosing
one’s associates in a corporation than in a
firm.”
Reasons for restriction on shares of stock In
a close corporation, the identity of the other
stockholders is important to each; the
incorporators have confidence in one
another which they may not have in an
outsider. Furthermore, the incorporators
may feel that the success of the enterprise
depends upon the retention of the
personnel who formed it, or they may be
manufacturing under secret processes which
they do not want outsiders to learn. In the
family corporation it is often the desire of he
father to pass the corporation to his son
without interference from other outside the
family. Any one of these factors may induce
the incorporators to attempt to restrict the
transfer of stock.
Effect of the transfer of stock in breach of
qualifying conditions
Unless “consented to by all the stockholders
or if the close corporation has amended its
articles of incorporation,” a transfer of
shares of stock in breach of qualifying
conditions would justify the corporation
through the corporate secretary to refuse to
register the transfer of stock. Such transfer
need not be for value, hence it may be the
result of a donation.
Sec. 100. Agreements by stockholders. –
1. Agreements by and among stockholders
executed before the formation and
organization of a close corporation,
signed by all stockholders, shall survive
the incorporation of such corporation
and shall continue to be valid and
binding between and among such
stockholders, if such be their intent, to
the extent that such agreements are not
inconsistent with the articles of
incorporation, irrespective of where the
provisions of such agreements are
contained, except those required by this
Title to be embodied in said articles of
incorporation.
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2. An agreement between two or more
stockholders, if in writing and signed by
the parties thereto, may provide that in
exercising any voting rights, the shares
held by them shall be voted as therein
provided, or as they may agree, or as
determined in accordance with a
procedure agreed upon by them.
3. No provision in any written agreement
signed by the stockholders, relating to
any phase of the corporate affairs, shall
be invalidated as between the parties on
the ground that its effect is to make
them partners among themselves.
4. A written agreement among some or all
of the stockholders in a close
corporation shall not be invalidated on
the ground that it so relates to the
conduct of the business and affairs of the
corporation as to restrict or interfere
with the discretion or powers of the
board of directors: Provided, That such
agreement shall impose on the
stockholders who are parties thereto the
liabilities for managerial acts imposed by
this Code on directors.
5. To the extent that the stockholders are
actively engaged in the management or
operation of the business and affairs of a
close corporation, the stockholders shall
be held to strict fiduciary duties to each
other and among themselves. Said
stockholders shall be personally liable
for corporate torts unless the
corporation has obtained reasonably
adequate liability insurance.
Effect of the Stockholders’ agreement
before and after formation of corporation
Stockholders’ agreements before and after
formation and organization of the
corporation survive incorporation and shall
be valid and binding for as long as they are
not inconsistent with the articles of
incorporation. Agreements made prior to
incorporation require fairly literal
performance. There must be an actual
contractual relation. Given such relation, the
pre-incorporators are promoters and may
arrange agreements to form and manage the
corporation.
Sec. 101. When board meeting is
unnecessary or improperly held. – Unless
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the by-laws provide otherwise, any action by
the directors of a close corporation without
a meeting shall nevertheless be deemed
valid if:
1. Before or after such action is taken,
written consent thereto is signed by all
the directors.
2. All the stockholders have actual or
implied knowledge of the action and
make no prompt objection thereto in
writing.
3. The directors are accustomed to take
informal action with the express or
implied acquiescence of all the
stockholders.
4. All the directors have express or implied
knowledge of the action in question and
none of them makes prompt objection
thereto in writing.
If a director's meeting is held without proper
call or notice, an action taken therein within
the corporate powers is deemed ratified by
a director who failed to attend, unless he
promptly files his written objection with the
secretary of the corporation after having
knowledge thereof.
Sec. 102. Pre-emptive right in close
corporations. - The pre-emptive right of
stockholders in close corporations shall
extend to all stock to be issued, including
reissuance of treasury shares, whether for
money, property or personal services, or in
payment of corporate debts, unless the
articles of incorporation provide otherwise.
Exceptions in Section 39, not applicable It is
submitted that in a close corporation, the
exceptions provided in Sec 39 are not
applicable. The first exception mentioned
therein regarding the shares issued in
compliance with laws requiring stock
offerings or minimum stock ownership by
the public cannot by its very nature refer to
a close corporation. The pre-emptive right of
shareholders in close corporation is thus
broadened to include all issues without any
exception, unless of course, restricted by the
articles of incorporation and printed in the
stock certificates. It may be mentioned
however, that any prior waiver of
preemptive right must be expressly provided
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for in the articles of incorporation and not in
an ordinary agreement executed by the
parties. This rule however, would not
militate against the unanimous agreement
of all the stockholders.
Sec. 103. Amendment of articles of
incorporation. – Any amendment to the
articles of incorporation which seeks to
delete or remove any provision required by
this Title to be contained in the articles of
incorporation or to reduce a quorum or
voting requirement stated in said articles of
incorporation shall not be valid or effective
unless approved by the affirmative vote of at
least two-thirds (2/3) of the outstanding
capital stock, whether with or without voting
rights, or of such greater proportion of
shares as may be specifically provided in the
articles of incorporation for amending,
deleting or removing any of the aforesaid
provisions, at a meeting duly called for the
purpose.
Rule and Exceptions when board meeting
unnecessary
General Rule: the directors of a corporation
cannot act individually or separately in order
to bind the corporation. They must act as a
board at a meeting duly called for the
purpose.
Exception: Section 101. It enumerates the
instances when a board at a meeting is
unnecessary or even if improperly held
would be valid. The by-laws, however, may
provided otherwise or a stockholder may file
his written objection in writing after having
knowledge of the action taken by the
directors.
Pre-emptive right in close corporations;
Issuance of new Stock A stockholder in a
close corporation has a right to purchase his
pro rata share of the new stock. If the pre-
emptive right is violated he can sue the
corporation for damages, enjoin the stock
issue, obtain an order permitting him to
subscribe, or obtain cancellation of the issue.
But even where the stockholder’s pre-
emptive right is preserved. The right may be
inadequate as a protective devise for the
stockholder in a close corporation because
the lack of a market for his stock leaves him
with the alternatives of investing more
capital or having the value of his stock
diluted.
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Sec. 104. Deadlocks. - Notwithstanding any
contrary provision in the articles of
incorporation or by-laws or agreement of
stockholders of a close corporation, if the
directors or stockholders are so divided
respecting the management of the
corporation's business and affairs that the
votes required for any corporate action
cannot be obtained, with the consequence
that the business and affairs of the
corporation can no longer be conducted to
the advantage of the stockholders generally,
the Securities and Exchange Commission,
upon written petition by any stockholder,
shall have the power to arbitrate the
dispute. In the exercise of such power, the
Commission shall have authority to make
such order as it deems appropriate, including
an order:
1. Canceling or altering any provision
contained in the articles of
incorporation, by-laws, or any
stockholder's agreement.
2. Canceling, altering or enjoining any
resolution or act of the corporation or its
board of directors, stockholders, or
officers.
3. Directing or prohibiting any act of the
corporation or its board of directors,
stockholders, officers, or other persons
party to the action.
4. Requiring the purchase at their fair value
of shares of any stockholder, either by
the corporation regardless of the
availability of unrestricted retained
earnings in its books, or by the other
stockholders.
5. Appointing a provisional director.
6. Dissolving the corporation.
7. Granting such other relief as the
circumstances may warrant.
A provisional director shall be an impartial
person who is neither a stockholder nor a
creditor of the corporation or of any
subsidiary or affiliate of the corporation, and
whose further qualifications, if any, may be
determined by the Commission. A
provisional director is not a receiver of the
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corporation and does not have the title and
powers of a custodian or receiver. A
provisional director shall have all the rights
and powers of a duly elected director of the
corporation, including the right to notice of
and to vote at meetings of directors, until
such time as he shall be removed by order of
the Commission or by all the stockholders.
His compensation shall be determined by
agreement between him and the
corporation subject to approval of the
Commission, which may fix his
compensation in the absence of agreement
or in the event of disagreement between the
provisional director and the corporation.
Deadlock – Deadlock signifies a standstill in
the management of the corporate affairs
resulting from the evenly divide action of
directors or stockholders in a close
corporation.
In the event of deadlocks SEC may arbitrate
In the event of a deadlock in a close
corporation, the SEC has the power to
arbitrate the deadlock “upon written
petition of any stockholder.” In close
corporations that are subject to a checks and
balances system because of control devices
there are bound to be deadlocks, and some
steps must be taken to cope with them.
Many of the problems that arise can be
settled by arbitration, Arbitration (the
determination of a matter of difference
between contending parties) may be
provided either for directorial disputes or for
stockholder disputes. Although there are
some disadvantages of arbitration
proceedings, nevertheless, the advantages
of arbitration, in saving both money and
hard feelings, would seem to outweigh the
disadvantages in most cases.
Provisional director and SEC supervised
management
In accordance with Section 104, the SEC may
in case of deadlocks in the close corporation
appoint a provisional director. “A
provisional director shall be an impartial
person who is neither a stock-holder nor a
creditor of the corporation and whose other
qualifications, may be determined by the
SEC.”
Under Section 2 (Pres Decree No. 1653), the
SEC has the power “to create and appoint a
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management committee, board, or body to
undertake the management of corporations,
partnership or other associations in
appropriate cases wherein there is imminent
danger or dissipation, loss or wastage or
destruction of assets or other properties or
paralization of business operations of such
corporations or entities prejudicial to the
interest of the minority,
party-litigants or the general public.”
Sec. 105. Withdrawal of stockholder or
dissolution of corporation. – In addition and
without prejudice to other rights and
remedies available to a stockholder under
this Title, any stockholder of a close
corporation may, for any reason, compel the
said corporation to purchase his shares at
their fair value, which shall not be less than
their par or issued value, when the
corporation has sufficient assets in its books
to cover its debts and liabilities exclusive of
capital stock: Provided, That any stockholder
of a close corporation may, by written
petition to the Securities and Exchange
Commission, compel the dissolution of such
corporation whenever any of acts of the
directors, officers or those in control of the
corporation is illegal, or fraudulent, or
dishonest, or oppressive or unfairly
prejudicial to the corporation or any
stockholder, or whenever corporate assets
are being misapplied or wasted.
• Appraisal rights in regular
corporations can be opted by the dissenting
stockholder only in cases where the
fundamental change in the corporate
structure or operations is involved, whereas
a stockholder of a close corporation may, for
any reason, compel the said coporation to
purchase his shares at their par value, when
the corporation has sufficient assets in its
books to cover his debts and liabilities
exclusive of capital stock. ( In Appraisal right,
fair value of shares is given but in
Withdrawal Right, the fair value cannot be
less than the par or issued value of the
shares; In Appraisal right, there must be
present unrestricted retained earnings in
the books of the corporation)
• The corporation is not a close
corporation even if the shares belong to less
than twenty if not all the requisites are
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present. San Juan Structural and Steel
Fabricators v.
CA (1998)
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.
Sec. 106. Incorporation. – Educational
corporations shall be governed by special
laws and by the general provisions of this
Code.
Sec. 107. Pre-requisites to incorporation. –
Except upon favourable recommendation of
the Ministry of Education and Culture, the
Securities and Exchange Commission shall
not accept or approve the articles of
incorporation and by-laws of any
educational institution.
Sec. 108. Board of trustees. – Trustees of
educational institutions organized as
nonstock corporations shall not be less than
five (5) nor more than fifteen (15): Provided,
however, That the number of trustees shall
be in multiples of five (5).
Unless otherwise provided in the articles of
incorporation on the by-laws, the board of
trustees of incorporated schools, colleges, or
other institutions of learning shall, as soon as
organized, so classify themselves that the
term of office of one-fifth (1/5) of their
number shall expire every year. Trustees
thereafter elected to fill vacancies, occurring
before the expiration of a particular term,
shall hold office only for the unexpired
period. Trustees elected thereafter to fill
vacancies caused by expiration of term shall
hold office for five (5) years. A majority of the
trustees shall constitute a quorum for the
transaction of business. The powers and
authority of trustees shall be defined in the
by-laws.
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For institutions organized as stock
corporations, the number and term of
directors shall be governed by the provisions
on stock corporations.
**
There are three (3) ways by which a religious
organization can provide for the
administration of its properties: 1. by
forming a non-stock corporation
2. by corporation sole
3. by religious aggregate or society
Corporation sole may constitute of one
person only so the head of a religious sect
would incorporate himself for the purpose of
administering the properties of a religious
sect. To incorporate what you will file with
the SEC is an affidavit. The affidavit will state
that the affiant is the head of a religious
denomination or sect and would want to
become a corporation sole. and the rules of
his religion allow him to incorporate as a
corporation sole and that he is charged with
the administration of its properties and in
fact he will be required to submit an
inventory and the manner in which the
successor will be chosen and the place where
he will hold his office.
The Roman Catholic Archbishop of Manila is
a corporation sole so if Cardinal Sin dies the
new archbishop will simply submit his
appointment and he need not incorporate
again because the corporation is different
from the occupant of the position. The Iglesia
ni Kristo is incorporated as a corporation
sole.
The court has held in Roman Catholic
Apostolic Adm. of Davao, Inc. v. Land
Registration Commission that although the
Bishop was a foreigner, he could register a
parcel of land in his name because he is a
mere administrator the property really
belongs to the faithful and since they are
Filipinos they could register the land in the
administrator’s name.
Under the law if a corporation sole wants to
dispose of or mortgage real property, he has
to get authorization from the Regional Trial
Court unless the rules of the religious sect
allow him to dispose of or mortgage real
property and that is usually the case. The last
is the religious aggregate or religious society.
It can incorporate for the purpose of
managing its properties and the articles
would indicate that the members constitute
Law on Business Organizations Reviewer
a religious order or society and that at least
2/3 of the members have agreed to
incorporate, that the rules allow them to
incorporate they desire to incorporate to
manage their properties in the place where
located. The recollects are incorporated to
manage their properties, they are the single
biggest bloc of stockholder of San Miguel
Corporation.
RELIGIOUS CORPORATIONS
Sec. 109. Classes of religious corporations.
– Religious corporations may be
incorporated by one or more persons. Such
corporations may be classified into
corporations sole and religious societies.
Religious corporations shall be governed by
this Chapter and by the general provisions
on non-stock corporations insofar as they
may be applicable.
a) Corporation Sole
• Corporation sole is a special form of
corporation usually associated with the
clergy and consists of one person only
and his successors, who are
incorporated by law to give some legal
capacities and advantages.
• Nationality. A corporation sole does not
have any nationality but for purposes of
applying our nationalization laws,
nationality is determined not by the
nationality of its head but by the
nationality of the members constituting
the sect in the Philippines even if it is
headed by the Pope. (Roman Catholic
Apostolic Church v. LRC, 1957)
• Effect of Separation of Members.
Members of the sect who left and who
formed a separate religious group are
not entitled to any right to vote over the
properties of their former sect. (Canete
v. CA, 1989)
• Dissolution. By filing a verified
declaration of dissolution. (JRS at 323)
Who may form and for what purpose?
Sec. 110. Corporation sole. – For the
purpose of administering and managing, as
trustee, the affairs, property and
temporalities of any religious denomination,
sect or church, a corporation sole may be
formed by the chief archbishop, bishop,
priest, minister, rabbi or other presiding
elder of such religious
101

denomination, sect or church. (154a)
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:
1. That he is the chief archbishop, bishop,
priest, minister, rabbi or presiding elder
of his religious denomination, sect or
church and that he desires to become a
corporation sole.
2. That the rules, regulations and discipline
of his religious denomination, sect or
church are not inconsistent with his
becoming a corporation sole and do not
forbid it.
3. That as such chief archbishop, bishop,
priest, minister, rabbi or presiding elder,
he is charged with the administration of
the temporalities and the management
of the affairs, estate and properties of
his religious denomination, sect or
church within his territorial jurisdiction,
describing such territorial jurisdiction.
4. The manner in which any vacancy
occurring in the office of chief
archbishop, bishop, priest, minister,
rabbi of presiding elder is required to be
filled, according to the rules, regulations
or discipline of the religious
denomination, sect or church to which
he belongs.
5. The place where the principal office of
the corporation sole is to be established
and located, which place must be within
the Philippines.
The articles of incorporation may include any
other provision not contrary to law for the
regulation of the affairs of the corporation.
Sec. 112. Submission of the articles of
incorporation. – The articles of
incorporation must be verified, before filing,
by affidavit or affirmation of the chief
archbishop, bishop, priest, minister, rabbi or
Law on Business Organizations Reviewer
presiding elder, as the case may be, and
accompanied by a copy of the commission,
certificate of election or letter of
appointment of such chief archbishop,
bishop, priest, minister, rabbi or presiding
elder, duly certified to be correct by any
notary public.
From and after the filing with the Securities
and Exchange Commission of the said
articles of incorporation, verified by affidavit
or affirmation, and accompanied by the
documents mentioned in the preceding
paragraph, such chief archbishop, bishop,
priest, minister, rabbi or presiding elder shall
become a corporation sole and all
temporalities, estate and properties of the
religious denomination, sect or church
theretofore administered or managed by
him as such chief archbishop, bishop, priest,
minister, rabbi or presiding elder shall be
held in trust by him as a corporation sole, for
the use, purpose, behalf and sole benefit of
his religious denomination, sect or church,
including hospitals, schools, colleges, orphan
asylums, parsonages and cemeteries
thereof.
Need for by-laws
No need for by-laws since the business is
conducted by only one man.
Power to acquire and alienate property Sec.
113. Acquisition and alienation of property.
– Any corporation sole may purchase and
hold real estate and personal property for its
church, charitable, benevolent or
educational purposes, and may receive
bequests or gifts for such purposes. Such
corporation may sell or mortgage real
property held by it by obtaining an order for
that purpose from the Court of First Instance
of the province where the property is
situated upon proof made to the satisfaction
of the court that notice of the application for
leave to sell or mortgage has been given by
publication or otherwise in such manner and
for such time as said court may have
directed, and that it is to the interest of the
corporation that leave to sell or mortgage
should be granted. The application for leave
to sell or mortgage must be made by
petition, duly verified, by the chief
archbishop, bishop, priest, minister, rabbi or
presiding elder acting as corporation sole,
and may be opposed by any member of the
102

religious denomination, sect or church
represented by the corporation sole:
Provided, That in cases where the rules,
regulations and discipline of the religious
denomination, sect or church, religious
society or order concerned represented by
such corporation sole regulate the method
of acquiring, holding, selling and mortgaging
real estate and personal property, such
rules, regulations and discipline shall control,
and the intervention of the courts shall not
be necessary.
Filling of vacancies
Sec. 114. Filling of vacancies. – The
successors in office of any chief archbishop,
bishop, priest, minister, rabbi or presiding
elder in a corporation sole shall become the
corporation sole on their accession to office
and shall be permitted to transact business
as such on the filing with the Securities and
Exchange Commission of a copy of their
commission, certificate of election, or letters
of appointment, duly certified by any notary
public.
During any vacancy in the office of chief
archbishop, bishop, priest, minister, rabbi or
presiding elder of any religious
denomination, sect or church incorporated
as a corporation sole, the person or persons
authorized and empowered by the rules,
regulations or discipline of the religious
denomination, sect or church represented
by the corporation sole to administer the
temporalities and manage the affairs, estate
and properties of the corporation sole
during the vacancy shall exercise all the
powers and authority of the corporation sole
during such vacancy.
Dissolution
Sec. 115. Dissolution. – A corporation sole
may be dissolved and its affairs settled
voluntarily by submitting to the Securities
and Exchange Commission a verified
declaration of dissolution.
The declaration of dissolution shall set forth:
1. The name of the corporation.
2. The reason for dissolution and winding
up.
Law on Business Organizations Reviewer
3. The authorization for the dissolution of
the corporation by the particular
religious denomination, sect or church.
4. The names and addresses of the persons
who are to supervise the winding up of
the affairs of the corporation.
Upon approval of such declaration of
dissolution by the Securities and Exchange
Commission, the corporation shall cease to
carry on its operations except for the
purpose of winding up its affairs.
Religious societies or
corporations aggregate
Sec. 116. Religious societies. – Any religious
society or religious order, or any diocese,
synod, or district organization of any
religious denomination, sect or church,
unless forbidden by the constitution, rules,
regulations, or discipline of the religious
denomination, sect or church of which it is a
part, or by competent authority, may, upon
written consent and/or by an affirmative
vote at a meeting called for the purpose of
at least two-thirds (2/3) of its membership,
incorporate for the administration of its
temporalities or for the management of its
affairs, properties and estate by filing with
the Securities and Exchange Commission,
articles of incorporation verified by the
affidavit of the presiding elder, secretary, or
clerk or other member of such religious
society or religious order, or diocese, synod,
or district organization of the religious
denomination, sect or church, setting forth
the following:
1. That the religious society or religious
order, or diocese, synod, or district
organization is a religious organization of
a religious denomination, sect or church.
2. That at least two-thirds (2/3) of its
membership have given their written
consent or have voted to incorporate,
at a duly convened meeting of the body.
3. That the incorporation of the religious
society or religious order, or diocese,
synod, or district organization desiring to
incorporate is not forbidden by
competent authority or by the
constitution, rules, regulations or
103

discipline of the religious denomination,
sect, or church of which it forms a part.
4. That the religious society or religious
order, or diocese, synod, or district
organization desires to incorporate for
the administration of its affairs,
properties and estate.
5. The place where the principal office of
the corporation is to be established and
located, which place must be within the
Philippines.
6. The names, nationalities, and residences
of the trustees elected by the religious
society or religious order, or the diocese,
synod, or district organization to serve
for the first year or such other period as
may be prescribed by the laws of the
religious society or religious order, or of
the diocese, synod, or district
organization, the board of trustees to be
not less than five (5) nor more than
fifteen (15).
Case
Long v. Basa (2001)
• Since in matters purely ecclesiastical the
decisions of the proper church tribunals are
conclusive upon the civil tribunals, then a
church member who is expelled from the
membership by the church authorities, or a
priest or minister who is by them deprived of
his sacred office, is without remedy in the
civil courts. Long v. Basa, 366 SCRA 113
(2001).
Additional Material: SEC Opinion No. 04-45,
Nov.28, 2004 to Ferrer and Ferrer Law Office
re term of existence of religious corporation.
SEC Opinion No. 04-45, (Nov. 28, 2004)
Re: Term of Existence of
Religious Corporations
Section 116 (as well as Sec. 160 of the former
Corporation Law) does not provide for a term
of existence of religious corporations,
whether classified as a corporation sole or a
corporation aggregate. As such, the law
intends that religious organizations may exist
perpetually (SEC Opinion dated Dec. 10,
1981). Moreover, where the Articles of
Incorporation does not provide for a term of
existence, it shall be understood that the
intention is for the corporation to exist for an
indefinite period (SEC Opinion dated Oct.
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23, 1995)
DISSOLUTION
Dissolution of a corporation is the
extinguishment of the franchise of a
corporation and termination of its corporate
existence.
Modes of Dissolution:
1. Voluntary Dissolution
2. Involuntary Dissolution
3. Shortening of term
4. Expiration of term (JRS at 311)
5. Failure to organize and commence
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).
• The termination of the life of a juridical
entity does not by itself cause the
extinction or diminution of the rights and
liability of such entity, since it is allowed
to continue as a juridical entity for 3
years for the purpose of prosecuting and
defending suits by or against it and
enabling it to settle and close its affairs,
to dispose of and convey its property,
and to distribute its assets. Republic v.
Tancinco, 394 SCRA 386 (2002).
• A board resolution to dissolve the
corporation does not operate to so
dissolve the juridical entity. For
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).
104
 Law on Business Organizations Reviewer

• A corporation cannot extend its life by

amendment of its articles of
incorporation effected during the
threeyear statutory period for
liquidation when its original term of
existence had already expired, as the
same would constitute new business.
Alhambra Cigar & Cigarette
Manufacturing Company, Inc. v. SEC, 24
SCRA 269
(1968).
• When the period of corporate life
expires, the corporation ceases to be a
body corporate for the purpose of
continuing the business for which it was
organized. PNB v. Court of First Instance
of Rizal, Pasig, Br. XXI, 209 SCRA 294
(1992).

DISSOLUTION **
There are different ways to dissolve a
corporation one is voluntarily and the other
involuntarily, under the law there are three
provisions governing voluntary dissolution.
The first one is if no creditors are affected. In
all the methods of voluntary dissolution, you
need a resolution approved by a majority of
directors and a resolution approved by at
least 2/3 of the stockholders In Section 118,
where no creditors are affected the directors
and the stockholders pass the resolution
dissolving the corporation and that will be
filed in the SEC for approval. In a case where
a suit was filed and the corporation said, we
have already been dissolved and they
submitted a board resolution, the SC held
that it is not enough to dissolve a
corporation.
The Second one, is under Section 119 where
creditors are affected. Here the board and
the stockholders will approve the dissolution
but a petition will be filed signed by the
majority of the directors and verified by the
president, secretary or one of the directors
which will indicate the claims of creditors.
That will be set for hearing and not less than
thirty (30) days nor more than sixty (60) days
after the entry of the issuance of the order
and a copy of the order will be published
once a week for three consecutive weeks in
a newspaper of general circulation and that
will also be posted for three weeks in three
public

105

places like the bulletin board of a municipal
hall, post office, the plaza and then the SEC
will set that for hearing and determine w/n
the corporation should be dissolved. The
third one you will just shorten the corporate
life and this is the simplest and fastest way
of dissolving the corporation voluntarily like
when Ford Philippines decided to close its
subsidiary they simply amended the articles
of corporation that the corporation will
exist until December 31, 1978.
The SEC will require getting a tax clearance
from the BIR and the stockholders will be
required to sign an undertaking that they
will answer for the claim of the creditors to
the extent of the liquidating dividends they
will receive.
Then you can have an involuntary
dissolution. This could be done by filing a
quo warranto case under rule 66 of the ROC
on the ground mentioned there or a
corporation can be dissolved for certain
violation of the corporation code as
mentioned in the Corporation Code or PD
902-A and also a minority stockholder may
file a petition to dissolve the corporation
where the majority is mismanaging the
assets of the corporation, dissipating its
assets, and fraudulently disposing of its
properties and a receiver may be appointed
in an action for involuntary dissolution. The
SC held in the leading case of El Hogar
Filipino, 50 Phil. 399(1927) the first
corporation organized under the
Corporation Act, the government filed a
case to dissolve that corporation and
invoked 17 grounds, the SC denied the
petition.
Building and loans association like banks are
required to dispose of within 5 years of any
properties they foreclosed they disposed of
the properties after 6 years but they exerted
their best efforts, they hired real estate
brokers, they advertised in newspapers but
they just could not find buyers, they
acquired this land and building, the SC held
that it is not illegal, that they leased the
space that they did not need for their office,
that is not illegal they are maximizing their
property, that they provide a provision in
the by-laws that stockholders can be
compelled to surrender their shares, to be
bought out well the court said that that is
void but that is not sufficient ground to
dissolve the corporation. In other words the
court is saying that you do not dissolve a
Law on Business Organizations Reviewer
corporation for every infraction, the
infraction must be serious, because
dissolution is imposing the death penalty
upon the corporation.
The Court said the employees of a railroad
are required to wear uniform indicating their
positions in their nameplate, now tell me if
one employee did not have such a
nameplate you are going to dissolve a
corporation because that is a legal
requirement?
It has to be a serious violation! But in one
case, the SC dissolved a corporation which
was engaging in banking without
authorization from the monetary board, it
was accepting deposits from the public, the
court considered that as a serious violation.
When a minority stockholder files a case and
asks to dissolve the corporation, the court
said that that is a harsh remedy unless the
situation is really beyond redemption you
should not impose that remedy.
The corporation has three years after it
should have been dissolved for the purpose
of winding up its affairs. The SEC has said the
three year period should be counted from
the time the dissolution was approved by the
SEC even if the directors and stockholders
pass a resolution dissolving the corporation
that is not effective until it has been
approved by the SEC.
For three years, the corporation will
continue to exist it will no longer be a going
concern but only for the purpose of winding
up that is why the SC has said that the
corporation cannot for example renew its
contract of lease because it is no longer a
going concern.
During the three year period, it should
devote its time prosecuting and defending
law suits, winding up its affairs disposing its
properties so they can be used to pay off its
creditors and to distribute balance to the
stockholders.
There are two ways of providing for the
winding up of its affairs under the law. This
is voluntary either the directors themselves
may take care of winding up the affairs of the
corporation or they may appoint a trustee
like when Ford Philippines decided to close
its subsidiary here one of the last acts of the
BOD was to pass a resolution appointing
Ricardo Romulo as trustee vesting upon him
legal title to all the assets of Ford Philippines
to be used to pay off its creditors and to
dispose of its properties of Ford Philippines.
to distribute the balance as liquidating
dividends. 106

Supposed to be, this was the rule before if
any case is not finished within the three
year period, the case will be abated whether
the corporation is plaintiff or whether it
is defendant but recent
jurisprudence has rendered that obsolete.
That rule is applicable if it is the directors
winding up the
corporation. if the corporation is
under receivership, it is the receiver who
may wind up the affair of the corporation.
But if it is the trustee that will not apply, the
trust will subsist until the affairs of the
corporation are wound up and until any
creditor can sue the trustee provided that
the applicable prescriptive period has not
yet lapsed. So if his cause of action is based
on a written contract he has ten (10) years
to sue the trustee.
The Court has said that the remedy there if
the three years will end and there are still
pending cases, is for the board to appoint a
trustee but more recent jurisprudence has
fashioned a practicable solution to that the
lawyer handling the cases may
be considered as trustee of the corporation
and therefore the cases will not be abated
but should continue.
In one case, the SC held that the directors
may be considered as trustees after three
years so that they can continue to wind up
the affairs of the corporation and in effect
the three year period has
become ineffectual.
What are the various methods
of dissolving corporations? Sec. 117.
Methods of dissolution. – A corporation
formed or organized under the provisions of
this Code may be dissolved voluntarily or
involuntarily.
Voluntary
Requirements where no creditors
are affected.
Sec. 118. Voluntary dissolution where no
creditors are affected. – If dissolution of a
corporation does not prejudice the rights of
any creditor having a claim against it, the
dissolution may be effected by majority vote
of the board of directors or trustees, and by
a resolution duly adopted by the affirmative
vote of the stockholders owning at least two-
thirds (2/3) of the outstanding capital stock
Law on Business Organizations Reviewer
or of at least two-thirds (2/3) of the
members of a meeting to be held upon call
of the directors or trustees after publication
of the notice of time, place and object of the
meeting for three (3) consecutive weeks in a
newspaper published in the place where the
principal office of said corporation is located;
and if no newspaper is published in such
place, then in a newspaper of general
circulation in the Philippines, after sending
such notice to each stockholder or member
either by registered mail or by personal
delivery at least thirty (30) days prior to said
meeting. A copy of the resolution
authorizing the dissolution shall be certified
by a majority of the board of directors or
trustees and countersigned by the secretary
of the corporation. The Securities and
Exchange Commission shall thereupon issue
the certificate of dissolution.
When a corporation is contemplating
dissolution, it must submit tax return on
the income earned by it from the
beginning of the year up to the date of
its dissolution and pay the
corresponding tax due. BPI v. Court of
Appeals, 363 SCRA 840 (2001).
Requirements where creditors are affected
Sec. 119. Voluntary dissolution where
creditors are affected. – Where the
dissolution of a corporation may prejudice
the rights of any creditor, the petition for
dissolution shall be filed with the Securities
and Exchange Commission. The petition shall
be signed by a majority of its board of
directors or trustees or other officers having
the management of its affairs, verified by its
president or secretary or one of its directors
or trustees, and shall set forth all claims and
demands against it, and that its dissolution
was resolved upon by the affirmative vote of
the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock
or by at least two-thirds (2/3) of the
members at a meeting of its stockholders or
members called for that purpose.
If the petition is sufficient in form and
substance, the Commission shall, by an order
reciting the purpose of the petition, fix a
date on or before which objections thereto
may be filed by any person, which date shall
not be less than thirty (30) days nor more
107

than sixty (60) days after the entry of the
order. Before such date, a copy of the order
shall be published at least once a week for
three (3) consecutive weeks in a newspaper
of general circulation published in the
municipality or city where the principal
office of the corporation is situated, or if
there be no such newspaper, then in a
newspaper of general circulation in the
Philippines, and a similar copy shall be
posted for three (3) consecutive weeks in
three (3) public places in such municipality or
city.
Upon five (5) days’ notice, given after the
date on which the right to file objections as
fixed in the order has expired, the
Commission shall proceed to hear the
petition and try any issue made by the
objections filed; and if no such objection is
sufficient, and the material allegations of the
petition are true, it shall render judgment
dissolving the corporation and directing such
disposition of its assets as justice requires,
and may appoint a receiver to collect such
assets and pay the debts of the corporation.
Sec. 120. Dissolution by shortening
corporate term. – A voluntary dissolution
may be effected by amending the articles of
incorporation to shorten the corporate term
pursuant to the provisions of this Code. A
copy of the amended articles of
incorporation shall be submitted to the
Securities and Exchange Commission in
accordance with this Code. Upon approval of
the amended articles of incorporation of the
expiration of the shortened term, as the case
may be, the corporation shall be deemed
dissolved without any further proceedings,
subject to the provisions of this Code on
liquidation.
SEC requirements on shortening corporate
term
1. Amended article of incorporation
shortening its corporate term in
accordance with Section 16 of the Code.
2. A director’s certificate signed by at least
a majority of the directors/trustees and
attested by the secretary, certified under
oath, stating that the amended articles
of incorporation is a true and correct
copy as amended by the stockholders
representing at least 2/3 of the
Law on Business Organizations Reviewer
outstanding capital stock or at least 2/3
of the members in case of non-stock
corporations.
3. A certification that no creditor shall be
prejudiced by the dissolution.
4. A list of creditors, if any.
5. Consent of the creditors with regard to
the dissolution.
6. Affidavit of stockholders/directors/
officers/members regarding any valid
claim against the corporation.
7. Latest balance sheet which must be
earlier than the date of the meeting of
the stockholders approving the
amendment of the articles of
incorporation.
8. Notice of dissolution.
9. Tax clearance from the BIR.
10. Affidavit of the publisher anent the
publication of the notice of the
dissolution once a week for three (3)
consecutive weeks in two (2)
newspapers of general circulation in the
Philippines.
The SEC may appoint a receiver to collect
such assets and pay the debts of the
corporation.
It has been held that where corporate
directors are guilty of a breach of trust and
intracorporate remedy is futile, the minority
stockholders may resort to the courts for
appropriate relief and, incidentally, as for
the appointment of a receiver for the
protection of their rights.
Section 121. Involuntary dissolution. – A
corporation may be dissolved by the
Securities and Exchange Commission upon
filing of a verified complaint and after proper
notice and hearing on the grounds provided
by existing laws, rules and regulations.
Rules of Court provides that a quo warranto
proceedings may be brought against a
corporation:
1. When it has offended against a provision
of an Act for its creation or renewal.
2. When it has forfeited its privileges and
franchises by non-user.
3. When it has committed or omitted an act
which amounts to a surrender of its
corporate rights, privileges, or
franchises.
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4. When it has misused a right, privilege, or 3. Liquidation by trustees to whom the

franchise conferred upon it by law, or board of directors had conveyed the
when it has exercised a right, privilege or corporate assets.
franchise in contravention of law.
Rules of corporate recovery
Section 122. Corporate liquidation. – Every The SEC approved the Rules of Procedure on
corporation whose charter expires by its Corporate recovery effective on January 15,
own limitation or is annulled by forfeiture or 2000.
otherwise, or whose corporate existence for 1. It governs the rules on definition of
other purposes is terminated in any other terms
manner, shall nevertheless be continued as 2. Common provisions
a body corporate for three (3) years after the 3. Suspension of payments
time when it would have been so dissolved, 4. Rehabilitation
for the purpose of prosecuting and 5. Dissolution and liquidation
defending suits by or against it and enabling
it to settle and close its affairs, to dispose of A corporation that has a pending action and
and convey its property and to distribute its which cannot be terminated within the
assets, but not for the purpose of continuing three-year period after dissolution is
the business for which it was established. authorized to convey all its property to
trustees to enable it to prosecute and
At any time during said three (3) years, the defend suits by or against the corporation
corporation is authorized and empowered to beyond the three-year period.
convey all of its property to trustees for the
benefit of stockholders, members, creditors, Distribution of Assets
and other persons in interest. From and after Distribution among the shareholders of the
any such conveyance by the corporation of assets in winding up, formal or informal may
its property in trust for the benefit of its be made only to the prior claim of creditors
stockholders, members, creditors and others and after all debts have been paid or
in interest, all interest which the corporation provided for. This is sometimes expressed in
had in the property terminates, the legal terms of the trust fund doctrine.
interest vests in the trustees, and the
beneficial interest in the stockholders,
Liquidation Rehabilitation
members, creditors or other persons in
interest. - Connotes a winding - Connotes a
up or setting with reopening of
Upon the winding up of the corporate affairs, creditors and reorganization
any asset distributable to any creditor or debtors. .
stockholder or member who is unknown or
cannot be found shall be escheated to the - It is a winding up of - Contemplates a
city or municipality where such assets are a corporation so that continuance of
located. assets are corporate life
distributed to those
and activities in
Except by decrease of capital stock and as entitled to receive
an effort to
otherwise allowed by this Code, no them.
restore and
corporation shall distribute any of its assets
or property except upon lawful dissolution - It is the process of reinstate the
and after payment of all its debts and reducing assets to corporation in its
liabilities. cash, discharging former position
liabilities and of successful
Methods of Liquidation dividing surplus or operation and
1. Liquidation by the directors themselves. loss. solvency.
2. Liquidation by a duly
appointed receiver.
Section 123. Definition and rights of foreign
corporations. – For the purposes of this
Code, a foreign corporation is one formed,

109

organized or existing under any laws other
than those of the Philippines and whose laws
allow Filipino citizens and corporations to do
business in its own country or state. It shall
have the right to transact business in the
Philippines after it shall have obtained a
license to transact business in this country in
accordance with this Code and a certificate
of authority from the appropriate
government agency.
Definition
Foreign Corporation is one formed,
organized or existing under any laws other
than those of the Philippines and whose laws
allow Filipino citizens and corporations to do
business in its own country or state.
Section 124. Application to existing foreign
corporations. – Every foreign corporation
which on the date of the effectivity of this
Code is authorized to do business in the
Philippines under a license therefore issued
to it, shall continue to have such authority
under the terms and condition of its license,
subject to the provisions of this Code and
other special laws.
A foreign corporation can have no legal
existence beyond the bounds of the state or
sovereignty by which it is created. It exists
only in contemplation of law and by force of
the law, and where that law ceases to
operate, the corporation can have no
existence. It must dwell in the place of its
creation, and cannot migrate to another
sovereignty.
Foreign corporations may do business in the
Philippines either by directly entering into
transactions with resident persons, firms or
corporations or by creating a domestic
subsidiary corporation which would have its
own distinct personality.
Licensed foreign corporations is authorized
to do business in the Philippines shall
continue to have such authority under the
terms and condition of its license, subject to
the provisions of the Code and other special
laws.
Section 125. Application for a license. – A
foreign corporation applying for a license to
transact business in the Philippines shall
Law on Business Organizations Reviewer
submit to the Securities and Exchange
Commission a copy of its articles of
incorporation and by-laws, certified in
accordance with law, and their translation to
an official language of the Philippines, if
necessary. The application shall be under
oath and, unless already stated in its articles
of incorporation, shall specifically set forth
the following:
1. The date and term of incorporation.
2. The address, including the street
number, of the principal office of the
corporation in the country or state of
incorporation.
3. The name and address of its resident
agent authorized to accept summons
and process in all legal proceedings and,
pending the establishment of a local
office, all notices affecting the
corporation.
4. The place in the Philippines where the
corporation intends to operate.
5. The specific purpose or purposes which
the corporation intends to pursue in the
transaction of its business in the
Philippines: Provided, That said purpose
or purposes are those specifically stated
in the certificate of authority issued by
the appropriate government agency.
6. The names and addresses of the present
directors and officers of the corporation.
7. A statement of its authorized capital
stock and the aggregate number of
shares which the corporation has
authority to issue, itemized by classes,
par value of shares, shares without par
value, and series, if any.
8. A statement of its outstanding capital
stock and the aggregate number of
shares which the corporation has issued,
itemized by classes, par value of shares,
shares without par value, and series, if
any.
9. A statement of the amount actually paid
in.
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10. Such additional information as may be
necessary or appropriate in order to
enable the Securities and Exchange
Commission to determine whether such
corporation is entitled to a license to
transact business in the Philippines, and
to determine and assess the fees
payable.
Attached to the application for license shall
be a duly executed certificate under oath by
the authorized official or officials of the
jurisdiction of its incorporation, attesting to
the fact that the laws of the country or state
of the applicant allow Filipino citizens and
corporations to do business therein, and that
the applicant is an existing corporation in
good standing. If such certificate is in a
foreign language, a translation thereof in
English under oath of the translator shall be
attached thereto.
The application for a license to transact
business in the Philippines shall likewise be
accompanied by a statement under oath of
the president or any other person
authorized by the corporation, showing to
the satisfaction of the Securities and
Exchange Commission and other
governmental agency in the proper cases
that the applicant is solvent and in sound
financial condition, and setting forth the
assets and liabilities of the corporation as of
the date not exceeding one (1) year
immediately prior to the filing of the
application.
Foreign banking, financial and insurance
corporations shall, in addition to the above
requirements, comply with the provisions of
existing laws applicable to them. In the case
of all other foreign corporations, no
application for license to transact business in
the Philippines shall be accepted by the
Securities and Exchange Commission
without previous authority from the
appropriate government agency, whenever
required by law.
Section 126. Issuance of a license. – If the
Securities and Exchange Commission is
satisfied that the applicant has complied
with all the requirements of this Code and
other special laws, rules and regulations, the
Law on Business Organizations Reviewer
Commission shall issue a license to the
applicant to transact business in the
Philippines for the purpose or purposes
specified in such license. Upon issuance of
the license, such foreign corporation may
commence to transact business in the
Philippines and continue to do so for as long
as it retains its authority to act as a
corporation under the laws of the country or
state of its incorporation, unless such license
is sooner surrendered, revoked, suspended
or annulled in accordance with this Code or
other special laws.
Within sixty (60) days after the issuance of
the license to transact business in the
Philippines, the license, except foreign
banking or insurance corporation, shall
deposit with the Securities and Exchange
Commission for the benefit of present and
future creditors of the licensee in the
Philippines, securities satisfactory to the
Securities and Exchange Commission,
consisting of bonds or other evidence of
indebtedness of the Government of the
Philippines, its political subdivisions and
instrumentalities, or of government-owned
or controlled corporations and entities,
shares of stock in “registered enterprises” as
this term is defined in Republic Act No. 5186,
shares of stock in domestic corporations
registered in the stock exchange, or shares
of stock in domestic insurance companies
and banks, or any combination of these kinds
of securities, with an actual market value of
at least one hundred thousand (P100,000.)
pesos; Provided, however, That within six (6)
months after each fiscal year of the licensee,
the Securities and Exchange Commission
shall require the licensee to deposit
additional securities equivalent in actual
market value to two (2%) percent of the
amount by which the licensee’s gross
income for that fiscal year exceeds five
million (P5,000,000.00) pesos. The Securities
and Exchange Commission shall also require
deposit of additional securities if the actual
market value of the securities on deposit has
decreased by at least ten (10%) percent of
their actual market value at the time they
were deposited. The Securities and
Exchange Commission may at its discretion
release part of the additional securities
deposited with it if the gross income of the
licensee has decreased, or if the actual
market value of the total securities on
111

deposit has increased, by more than ten
(10%) percent of the actual market value of
the securities at the time they were
deposited. The Securities and Exchange
Commission may, from time to time, allow
the licensee to substitute other securities for
those already on deposit as long as the
licensee is solvent. Such licensee shall be
entitled to collect the interest or dividends
on the securities deposited. In the event the
licensee ceases to do business in the
Philippines, the securities deposited as
aforesaid shall be returned, upon the
licensee’s application therefor and upon
proof to the satisfaction of the Securities and
Exchange Commission that the licensee has
no liability to Philippine residents, including
the Government of the Republic of the
Philippines.
Definition
Transacting business means the carrying on
of the operations of the corporation, or
some portion of them, in the usual and
regular course of the prosecution of the
corporate enterprise for profit.
The Corporation Code outlines the
procedural requirements for the application
and issuance of a license before a foreign
corporation may transact business in the
Philippines. Except in the case of foreign
banking, financial and insurance
corporations and other subject to special
laws, rules and regulations, if the applicant
foreign corporation has complied with all the
requirements of issuance of a license, the
SEC shall issue such license and thereafter
the foreign corporation may transact
business in the Philippines.
Republic Act No. 5455. Regulates the entry
of foreign investments whenever foreign
equity participation exceeds 30 percent of
the capital stock.
Under Republic Act no. 5455 “doing
business includes”:
a. Soliciting orders, purchases, service
contracts, opening offices whether
called liaison offices or branches.
b. Appointing representatives or
distributors who are domiciled in the
Philippines or who in any calendar year
stay in the Philippines for a period or
Law on Business Organizations Reviewer
periods totalling one hundred eighty
days or more.
c. Participating in the management,
supervision, or control of any domestic
business firm, entity, or corporation in
the Philippines.
d. Any other act or acts that imply a
continuity of commercial dealings or
arrangements, and contemplates to that
extent the performance of acts or works,
or the exercise of some of the function
normally incident to, and in progressive
prosecution of, commercial gain or of
the purpose and object of the business
organization.
The Board of Investments requires license
not only of corporations organized abroad
but also of domestic corporations, if more
than 40% of its voting shares are owned and
held by aliens or more than 30% of its total
capitalization is in the hands of aliens.
Guidelines for issuance of certificate of
authority to do business under BOI (Rep.
Act No.5455)
1. That the operation or activity is not
inconsistent with the Investment
Priorities Plan.
2. That the business or economic activity
will contribute to the sound and
balanced development of the national
economy on a self-sustaining basis.
3. That the activity will not conflict with the
Constitution and laws of the
Philippines.
4. That the nosiness or economic activity is
not one (1) adequately exploited by
Philippine Nationals.
5. That the entry of the applicant will not
pose a clear and present danger of
promoting monopolies or combination
in restraint of trade.
Presidential Decree No. 151 allows citizens
of the Philippines or corporations which
have acquired lands of the public domain or
which or any other law, to enter into service
contracts for financial, technical,
management or other forms of assistance
with any foreign person or entity whenever
and wherever such contracts are vital to
achieve sound and more expeditious
exploration, development, exploitation or
112

utilization of such lands owned, held or
controlled by such citizens or corporations.
Section 127. Who may be a resident agent.
– A resident agent may be either an
individual residing in the Philippines or a
domestic corporation lawfully transacting
business in the Philippines: Provided, That in
the case of an individual, he must be of good
moral character and of sound financial
standing.
Section 128. Resident agent; service of
process. – The Securities and Exchange
Commission shall require as a condition
precedent to the issuance of the license to
transact business in the Philippines by any
foreign corporation that such corporation
file with the Securities and Exchange
Commission a written power of attorney
designating some person who must be a
resident of the Philippines, on whom any
summons and other legal processes may be
served in all actions or other legal
proceedings against such corporation, and
consenting that service upon such resident
agent shall be admitted and held as valid as
if served upon the duly authorized officers of
the foreign corporation at its home office.
Any such foreign corporation shall likewise
execute and file with the Securities and
Exchange Commission an agreement or
stipulation, executed by the proper
authorities of said corporation, in form and
substance as follows:
“The (name of foreign corporation) does
hereby stipulate and agree, in consideration
of its being granted by the Securities and
Exchange Commission a license to transact
business in the Philippines, that if at any time
said corporation shall cease to transact
business in the Philippines, or shall be
without any resident agent in the Philippines
on whom any summons or other legal
processes may be served, then in any action
or proceeding arising out of any business or
transaction which occurred in the
Philippines, service of any summons or other
legal process may be made upon the
Securities and Exchange Commission and
that such service shall have the same force
and effect as if made upon the
dulyauthorized officers of the corporation at
its home office.”
Law on Business Organizations Reviewer
Whenever such service of summons or other
process shall be made upon the Securities
and Exchange Commission, the Commission
shall, within ten (10) days thereafter,
transmit by mail a copy of such summons or
other legal process to the corporation at its
home or principal office.
The sending of such copy by the
Commission shall be necessary part of and
shall complete such service. All expenses
incurred by the Commission for such service
shall be paid in advance by the party at
whose instance the service is made. In case
of a change of address of the resident agent,
it shall be his or its duty to immediately
notify in writing the Securities and Exchange
Commission of the new address.
The SEC shall require as a condition
precedent to the issuance of the license to
transact business in the Philippines by any
foreign corporation that such corporation
file with the SEC, a written power of attorney
designating some person who must be a
resident of the Philippines, on whom any
summons and other legal processes may be
served in all actions or other legal
proceedings against such corporation.
Section 129. Law applicable. – Any foreign
corporation lawfully doing business in the
Philippines shall be bound by all laws, rules
and regulations applicable to domestic
corporations of the same class, except such
only as provide for the creation, formation,
organization or dissolution of corporations
or those which fix the relations, liabilities,
responsibilities, or duties of stockholders,
members, or officers of corporations to each
other or to the corporation.
Licensed foreign corporations lawfully doing
business in the Philippines shall be subject to
our laws just like domestic corporations of
the same class.
Philippine laws will not apply when it refers
to the creation, formation, organization or
dissolution of corporations or such as fux the
relations, liabilities, responsibilities, or
duties of stockholders, members, or officers
of corporations to each other or to the
corporation.
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Section 130. Amendments to articles of
incorporation or by-laws of foreign
corporations. – Whenever the articles of
incorporation or by-laws of a foreign
corporation authorized to transact business
in the Philippines are amended, such foreign
corporation shall, within sixty (60) days after
the amendment becomes effective, file with
the Securities and Exchange Commission,
and in the proper cases with the appropriate
government agency, a duly authenticated
copy of the articles of incorporation or by-
laws, as amended, indicating clearly in
capital letters or by underscoring the change
or changes made, duly certified by the
authorized official or officials of the country
or state of incorporation. The filing thereof
shall not of itself enlarge or alter the purpose
or purposes for which such corporation is
authorized to transact business in the
Philippines.
Section 131. Amended license. – A foreign
corporation authorized to transact business
in the Philippines shall obtain an amended
license in the event it changes its corporate
name, or desires to pursue in the
Philippines other or additional purposes, by
submitting an application therefor to the
Securities and Exchange Commission,
favorably endorsed by the appropriate
government agency in the proper cases.
Section 132. Merger or consolidation
involving a foreign corporation licensed in
the Philippines. – One or more foreign
corporations authorized to transact business
in the Philippines may merge or consolidate
with any domestic corporation or
corporations if such is permitted under
Philippine laws and by the law of its
incorporation: Provided, That the
requirements on merger or consolidation as
provided in this Code are followed.
Whenever a foreign corporation authorized
to transact business in the Philippines shall
be a party to a merger or consolidation in its
home country or state as permitted by the
law of its incorporation, such foreign
corporation shall, within sixty (60) days after
such merger or consolidation becomes
effective, file with the Securities and
Exchange Commission, and in proper cases
with the appropriate government agency, a
copy of the articles of merger or
consolidation duly authenticated by the
Law on Business Organizations Reviewer
proper official or officials of the country or
state under the laws of which merger or
consolidation was effected: Provided,
however, That if the absorbed corporation is
the foreign corporation doing business in the
Philippines, the latter shall at the same time
file a petition for withdrawal of it license in
accordance with this Title.
Section 132 covers two legal situations:
1. The merger of a licensed foreign
corporation with a domestic
corporation.
• Must be accomplished by complying
with the provisions of the
Corporation Code.
2. The merger of a licensed foreign
corporation with another corporation in
its country of origin which is not doing
business in the Philippines.
• If the licensed foreign corporation is
absorbed by merger or
consolidation, it must withdraw its
license to do business in the
Philippines.
• Nevertheless, if the foreign
absorbing corporation desire to
continue the business of the
absorbed corporation in the
Philippines, it has to file an
application for a license to do
business pursuant to the
requirements of Philippines law on
the matter.
Section 133. Doing business without a
license. – No foreign corporation transacting
business in the Philippines without a license,
or its successors or assigns, shall be
permitted to maintain or intervene in any
action, suit or proceeding in any court or
administrative agency of the Philippines; but
such corporation may be sued or proceeded
against before Philippine courts or
administrative tribunals on any valid cause
of action recognized under Philippine laws.
Unlicensed foreign corporations doing
business in the Philippine do not have the
capacity to sue before the local court is well-
established.
A foreign corporation which is not licensed
to transact business therein can maintain an
action in the courts of the Philippines for the
114

purpose of protecting its reputation,
corporate name and goodwill.
A foreign corporation doing business in the
Philippines without a license may maintain
suit in the Philippines against a domestic
corporation or person who is party to a
contract as the domestic corporation or
person is deemed estopped from
challenging the personality of the foreign
corporation.
Section 134. Revocation of license. –
Without prejudice to other grounds
provided by special laws, the license of a
foreign corporation to transact business in
the Philippines may be revoked or
suspended by the Securities and Exchange
Commission upon any of the following
grounds:
1. Failure to file its annual report or pay any
fees as required by this Code.
2. Failure to appoint and maintain a
resident agent in the Philippines as
required by this Title.
3. Failure, after change of its resident agent
or of his address, to submit to the
Securities and Exchange Commission a
statement of such change as required by
this Title.
4. Failure to submit to the Securities and
Exchange Commission an authenticated
copy of any amendment to its articles of
incorporation or by-laws or of any
articles of merger or consolidation
within the time prescribed by this Title.
5. A misrepresentation of any material
matter in any application, report,
affidavit or other document submitted
by such corporation pursuant to this
Title.
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully
due to the Philippine Government or any
of its agencies or political subdivisions.
7. Transacting business in the Philippines
outside of the purpose or purposes for
Law on Business Organizations Reviewer
which such corporation is authorized
under its license.
8. Transacting business in the Philippines as
agent of or acting for and in behalf of any
foreign corporation or entity not duly
licensed to do business in the
Philippines.
9. Any other ground as would render it
unfit to transact business in the
Philippines.
Sec. 135. Issuance of certificate of
revocation. – Upon the revocation of any
such license to transact business in the
Philippines, the Securities and Exchange
Commission shall issue a corresponding
certificate of revocation, furnishing a copy
thereof to the appropriate government
agency in the proper cases. The Securities
and Exchange Commission shall also mail to
the corporation at its registered office in the
Philippines a notice of such revocation
accompanied by a copy of the certificate of
revocation.
Sec. 136. Withdrawal of foreign
corporations. – Subject to existing laws and
regulations, a foreign corporation licensed to
transact business in the Philippines may be
allowed to withdraw from the Philippines by
filing a petition for withdrawal of license. No
certificate of withdrawal shall be issued by
the Securities and Exchange Commission
unless all the following requirements are
met:
1. All claims which have accrued in the
Philippines have been paid,
compromised or settled.
2. All taxes, imposts, assessments, and
penalties, if any, lawfully due to the
Philippine Government or any of its
agencies or political subdivisions have
been paid.
3. The petition for withdrawal of license
has been published once a week for
three (3) consecutive weeks in a
newspaper of general circulation in the
Philippines.
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Sec. 137. Outstanding capital stock defined.
– The term "outstanding capital stock", as
used in this Code, means the total shares of
stock issued under binding subscription
agreements to subscribers or stockholders,
whether or not fully or partially paid, except
treasury shares.
Sec. 138. Designation of governing boards.
– The provisions of specific provisions of this
Code to the contrary notwithstanding, non-
stock or special corporations may, through
their articles of incorporation or their by-
laws, designate their governing boards by
any name other than as board of trustees.
Sec. 139. Incorporation and other fees. –
The Securities and Exchange Commission is
hereby authorized to collect and receive fees
as authorized by law or by rules and
regulations promulgated by the
Commission.
Sec. 140. Stock ownership in certain
corporations. – Pursuant to the duties
specified by Article XIV of the Constitution,
the National Economic and Development
Authority shall, from time to time, make a
determination of whether the corporate
vehicle has been used by any corporation or
by business or industry to frustrate the
provisions thereof or of applicable laws, and
shall submit to the Batasang Pambansa,
whenever deemed necessary, a report of its
findings, including recommendations for
their prevention or correction. Maximum
limits may be set by the Batasang Pambansa
for stockholdings in corporations declared
by it to be vested with a public interest
pursuant to the provisions of this section,
belonging to individuals or groups of
individuals related to each other by
consanguinity or affinity or by close business
interests, or whenever it is necessary to
achieve national objectives, prevent illegal
monopolies or combinations in restraint or
trade, or to implement national economic
policies declared in laws, rules and
regulations designed to promote the general
welfare and foster economic development.
In recommending to the Batasang Pambansa
corporations, business or industries to be
declared vested with a public interest and in
formulating proposals for limitations on
Law on Business Organizations Reviewer
stock ownership, the National Economic and
Development
Authority shall consider the type and nature
of the industry, the size of the enterprise, the
economies of scale, the geographic location,
the extent of Filipino ownership, the labor
intensity of the activity, the export potential,
as well as other factors which are germane
to the realization and promotion of business
and industry.
Sec. 141. Annual report or corporations. –
Every corporation, domestic or foreign,
lawfully doing business in the Philippines
shall submit to the Securities and Exchange
Commission an annual report of its
operations, together with a financial
statement of its assets and liabilities,
certified by any independent certified public
accountant in appropriate cases, covering
the preceding fiscal year and such other
requirements as the Securities and Exchange
Commission may require. Such report shall
be submitted within such period as may be
prescribed by the Securities and Exchange
Commission.
Sec. 142. Confidential nature of
examination results. – All interrogatories
propounded by the Securities and Exchange
Commission and the answers thereto, as
well as the results of any examination made
by the Commission or by any other official
authorized by law to make an examination of
the operations, books and records of any
corporation, shall be kept strictly
confidential, except insofar as the law may
require the same to be made public or where
such interrogatories, answers or results are
necessary to be presented as evidence
before any court.
Sec. 143. Rule making power of the
Securities and Exchange Commission. – The
Securities and Exchange Commission shall
have the power and authority to implement
the provisions of this Code, and to
promulgate rules and regulations reasonably
necessary to enable it to perform its duties
hereunder, particularly in the prevention of
fraud and abuses on the part of the
controlling stockholders, members,
directors, trustees or officers.
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Sec. 144. Violations of the Code. – Violations the terms and conditions of its license, and
of any of the provisions of this Code or its shall be governed by the provisions hereof:
amendments not otherwise specifically Provided, That if any such corporation is
penalized therein shall be punished by a fine affected by the new requirements of this
of not less than one thousand (P1,000.00) Code, said corporation shall, unless
pesos but not more than ten thousand otherwise herein provided, be given a period
(P10,000.00) pesos or by imprisonment for of not more than two (2) years from the
not less than thirty (30) days but not more effectivity of this Code within which to
than five (5) years, or both, in the discretion comply with the same.
of the court. If the violation is committed by
a corporation, the same may, after notice Sec. 149. Effectivity. – This Code shall take
and hearing, be dissolved in appropriate effect immediately upon its approval.
proceedings before the Securities and Approved: May 1, 1980
Exchange Commission: Provided, That such
dissolution shall not preclude the institution
of appropriate action against the director,
trustee or officer of the corporation
responsible for said violation: Provided,
further, That nothing in this section shall be
construed to repeal the other causes for
dissolution of a corporation provided in this
Code.

Sec. 145. Amendment or repeal. – No right

or remedy in favor of or against any
corporation, its stockholders, members,
directors, trustees, or officers, nor any
liability incurred by any such corporation,
stockholders, members, directors, trustees,
or officers, shall be removed or impaired
either by the subsequent dissolution of said
corporation or by any subsequent
amendment or repeal of this Code or of any
part thereof.

Sec. 146. Repealing clause. – Except as

expressly provided by this Code, all laws or
parts thereof inconsistent with any provision
of this Code shall be deemed repealed.

Sec. 147. Separability of provisions. – Should

any provision of this Code or any part
thereof be declared invalid or
unconstitutional, the other provisions, so far
as they are separable, shall remain in force.

Sec. 148. Applicability to existing

corporations. – All corporations lawfully
existing and doing business in the
Philippines on the date of the effectivity of
this Code and heretofore authorized,
licensed or registered by the Securities and
Exchange Commission, shall be deemed to
have been authorized, licensed or registered
under the provisions of this Code, subject to

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