lOMoARcPSD|37015541
Law on partnership and corporation by hector de leon
BS Accountancy (Central Colleges of the Philippines)
Scan to open on Studocu
Studocu is not sponsored or endorsed by any college or university
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
Law on Business Organizations Reviewer
PARTNERSHIP
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.
Principle of Delectus Personae (choice of
persons) – a person has the right to select
persons with whom he wants to be
associated with in partnership.
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.
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.
1
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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. 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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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:
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;
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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.
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 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.
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.
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.
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.
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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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 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 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 3 rd 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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
accurately their membership and capital
before dealing with them.
When partnership considered registered
The objective of the law is to make the
recorded instrument open to all and to give
notice thereof to interested parties. This
objective is achieved from the date the
partnership papers are presented to and left
for record in the Commission. This is the
effective date of registration. If the
certificate of recording is issued on a
subsequent date, 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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
As to extent of its subject matter
1. Universal partnership. (Art. 1777)
a. Universal partnership of all present
property. (Art. 1778)
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.
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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
3.
4.
5.
6.
7.
out as a partner by the other partners.
He is an actual partner.
Silent partner: one who does not take
any active part in the business although
he may be known to be a partner.
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.
Original partner: one who is a member
of the partnership from the time of its
organization.
Incoming partner: a person lately, or
about to be, taken into an existing
partnership as a member.
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 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 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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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 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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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 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.
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.
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.
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
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.
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.
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.
Art. 1794. Every partner is responsible to
the partnership for damages suffered by it
through his fault, and he cannot
Things fungible or perishable
If the things contributed are fungible or
cannot be kept without deteriorating
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
(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 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 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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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 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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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;
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.
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
alteration in the immovable property of
the partnership, even if it may be useful
to the partnership, but if there ids
refusal of the consent by the other
partners is manifestly prejudicial to the
interest of the partnership, the court’s
intervention may be sought.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
Rules when manner of the management that
has not agreed upon all partners considered as
managers and agents
All partners shall have equal rights in the
mgmt. and conduct of partnership affairs. All
of them shall considered mgrs. and agents
and whatever any one of them may do
alone shall bind the partnership. If there is
timely opposition, however, the matter shall
decided by majority vote. In case of tie,
vote of partners representing controlling
interest.
Unanimous consent required for alteration of
immovable property
The consent need not be express. It may
presume from the fact of knowledge of the
alteration
without
interposing
any
objection. Prohibition
only
applies
to immovable property because of the
greater importance of this kind of property,
and the alteration thereof must be
important. This would be an act of strict
dominion. If refusal to give consent is
manifestly prejudicial to the interest of the
partnership, court intervention maybe
sought. Consent may presume from silence
(lack of opposition despite knowledge).If
alteration is necessary for preservation of
the property, consent of the other partners
not required.
Art. 1804. Every partner may associate
another person with him in his share, but
the associates shall not admitted into the
partnership without the consent of all other
partners, even of the partner having an
associate should be a manager of
subpartnership nature
The partnership formed between a
member of a partnership and a third
Person for a division of the profits coming to
him from the partnership enterprise is
termed subpartnership.
It is a partnership within a partnership and
is distinct and separate from the main or
principal partnership.
Right of the person associated with the
partnership’s share
Subpartnership agreements
do
not
affect the composition, existence, or
operations of the firm. The subpartners are
partners interest,
However, in the absence of the mutual
assent of all the parties, a subpartner does
not become a member of the partnership,
even if the other partners know about the
agreement. Not being a member of
the partnership, he does not acquire the
rights of a partner nor is he liable for its
debts.
Reason for the rule
Partnership is based on mutual trust and
confidence among the partners. Inclusion of
new partner would be a modification of the
original contract of partnership requiring
unanimous consent of all the partners.
Prohibition applies even if person
associated is already a partner.
Art. 1805. The partnership books shall be
kept, subject to any agreement between the
partners, at the principal place of the
business of the partnership, and every
partner shall at any reasonable hour have
access to and may inspect and copy any of
them.
Keeping of partnership books
Partner with duty to keep partnership
books
The duty to keep true and correct books
showing the firm’s accounts, such books
being at all times open to inspection of all
members of the firm, primarily rests on the
managing or active partner. It is presume
that the partners have knowledge of the
contents of the partnership books and that
said books state accurately the state
of accounts, but errors can corrected.
Rights with the respect to partnership books
Books should kept at the principal place of
business as each partner has the right to
free access to them and to inspect or copy
any of them at any reasonable time, even
after dissolution. Inspection rights not
absolute can 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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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;
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
indemnification for risks inconsequence
of management (art. 1796).
2. Right of access and inspection of
partnership books (art. 1805).
3. Right to true and full information of all
things affecting partnership (art. 1806).
4. Right to formal account of partnership
affairs under certain circumstances (art.
1809).
5. Right to have partnership dissolved also
under certain conditions (arts. 18301831).
Partnership
property
capital distinguished
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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
and
partnership
lOMoARcPSD|37015541
Changes
value
Partnership
property
Variable:
its
value may vary
from day today
w/
changes
in
market value
Partnership
capital
Constant: it
remains
unchanged as
the
amount is fix
by agreement
of
the
partners, and
is not
affected
by
fluctuations in
the value of
the
partnership
property,
although
it
may
be
increased and
decreased by
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
Assets
Included
partners;
unanimous
consent of
the partners.
Includes not The
only
the aggregate
original
of the
capital
individual
contributions, contributions
but also all
made by the
property
partners in
subsequently establishing
acquired
or continuing
because
of the
the
partnership.
partnership
or
w/
partnership
funds,
including
partnership
name
and
goodwill.
Ownership of certain property
Property use by the partnership – Where
there is no express agreement that property
used by a partnership constitutes
partnership property, such use does not
make it partnership property, and whether
it is so depends on the intention of the
parties, w/c may be shown by proving an
express agreement or acts of particular
conduct. The intent of the parties is the
controlling factor.
Property acquired by a partner with
partnership funds – Unless a contrary
intention appears, property acquired by a
partner in his own name w/ partnership
funds is partnership property. However,
if the property was acquired after
dissolution but before the winding up of the
partnership affairs, it would be his separate
property but he would be liable to account
to the partnership for the funds used in its
acquisition.
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 property for any other
purpose without the consent of his
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 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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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 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 specificpartnership
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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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;
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
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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 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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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 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 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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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.
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.
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.
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.
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.
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.
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 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
Art. 1823. The partnership is bound to
make good the loss:
1.
Where one partner acting within the
scope of his apparent authority receives
money or property of a third person and
misapplies it.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
2. Where the partnership in the course of
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
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:
1.
When a partnership liability results, he
is liable as though he were an actual
member of the partnership.
2. When no partnership liability results, he
is liable pro rata with the other persons,
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
the existing partnership consent to the
representation, a partnership act or
obligation results; but in all other cases it is
the joint act or obligation of the person
acting and the persons consenting to the
representation.
Estoppel – A preclusion, in law, which
prevents a man from alleging or denying a
fact, in consequence of his own previous
act, allegation, or denial of a contrary tenor.
Person bound by his representation
A person who hold himself out as a partner
in a business, or consents to his being so
held out, is liable on contracts made with
third persons who deal with the persons
carrying on the business on the faith of the
representation. He is stopped to deny the
apparent agency.
Art. 1826. A person admitted as a partner
into an existing partnership is liable for all
the obligations of the partnership arising
before his admission as though he had been
a partner when such obligations were
incurred, except that this liability shall be
satisfied only out of partnership property,
unless there is a stipulation to the contrary.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
Incoming partner liable for existing obligations
A newly admitted partner is liable for
obligations of the partnership at the time of
his admission. The obligation of the
incoming partner shall be satisfied only out
of partnership property. This is not a harsh
rule because the incoming partner “partakes
of the benefit of the partnership property,
and an established business. He has every
means of obtaining full knowledge of
protecting himself, because he may insist on
the liquidation or settlement of existing
partnership debts. On the other hand, the
creditors have no means of protecting
themselves.
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 may ask the
attachment and public sale of the share of
the latter in the partnership assets.
Art. 1828. The dissolution of a partnership
is the change in the relation of the partners
caused by any partner ceasing to be
associated in the carrying on as
distinguished from the winding up of the
business.
Art. 1829. On dissolution the partnership is
not terminated, but continues until the
winding up of partnership affairs is
completed.
“Dissolution,” “Winding
up,”
and
“Termination” explained
Dissolution, winding up, and termination
should not be confused because they are
distinct terms in law. Dissolution “designates
the point in time when the partners cease
to carry on the business together:
termination is the point in time when all
partnership affairs are wound up; winding
up is the process of settling
partnership affairs after dissolution.”
Art.
1830.
Dissolution
is
b. By the express will of any partner,
who must act in good faith, when
no definite term or particular is
specified.
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
partner
at any
time.
this article,
by the
express will of any
3.
By any event which makes it unlawful
for the business of the partnership to
be carried on or for the members to
carry it on in partnership.
4. When a specific thing which a partner
had promised to contribute to the
partnership, perishes before the
delivery; in any case by the loss of the
thing, when the partner who
contributed it having reserved the
ownership thereof, has only transferred
to the partnership the use or enjoyment
of the same; but the partnership shall
not be dissolved by the loss of the thing
when it occurs after the partnership has
acquired the ownership thereof.
5. By the death of any partner.
6. By the insolvency of any partner or of
the partnership.
caused:
7. By the civil interdiction of any partner.
1. Without violation of the agreement
between the partners:
a. By the termination of the definite
term or particular undertaking
specified in the agreement.
8. By decree of court under the following
article.
Causes of dissolution in general
Generally, a partnership may be dissolved
by causes: (1) without violation of the
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
agreement between the partners; or (2) in
contravention of the agreement. Other
specific causes are; (3) an event which
makes the business of the partnership
unlawful; (4) loss of a specific thing which a
partner had promised to contribute to the
partnership; (5) the death of a partner; (6)
the insolvency of any partner or of the
partnership itself; (7) civil interdiction of any
partner; and lastly (8) by judicial decree.
Partnership ceased upon expiration of
term; no more juridical personality
A partnership having ceased to exist since
1959, the partnership has no more juridical
personality nor capacity to sue and be sued.
(Reynolds Philippine Corporation vs. Court
of appeals, G.R. No. 36187, Jan. 17, 1989)
agreement, or otherwise so conducts
himself in matters relating to the
partnership business that it is not
reasonably practicable to carry on the
business in partnership with him.
5. The business of the partnership can
only be carried on at a loss.
6. Other
circumstances
dissolution equitable.
Art. 1831. On application by or for a partner
the court shall decree a dissolution
whenever:
1. A partner has been declared insane in
any judicial proceeding or is shown to
be of unsound mind.
2.
A partner becomes in any other way
incapable of performing his part of the
partnership contract.
3.
A partner has been guilty of such
conduct as tends to affect prejudicially
the carrying on of the business.
4.
Apartnerwillfullyorpersistently
commits a breach of the partnership
a
On the application of the purchaser of a
partner's interest under Article 1813 or
1814:
1. After the termination of the specified
term or particular undertaking.
2.
Effect of Withdrawal before expiration of
the term
Under Article 1830, even if there is a
specified term, one partners cause its
dissolution by expressly withdrawing eve n
before the expiration of the period, with or
without justifiable cause. Of course, if the
cause is not justified or no cause was given,
the withdrawing partner is liable for
damages but in no case can he be
compelled to remain in the firm. With his
withdrawal, the number of members is
decreased, hence, the dissolution. And in
whatever way we view the situation, the
conclusion is inevitable that the partners
were to be guided in the liquidation of the
partnership by the provisions of its duly
registered articles of partnership. (Roxas vs.
Maglana, G.R. L-30616, Dec. 10, 1990)
render
At any time if the partnership was a
partnership at will when the interest
was assigned or when the charging
order was issued.
Who may petition for dissolution
Dissolution of a partnership may be decreed
by the court on application either (1) by a
partner or, in case he has assigned his
interest, (2) by his assignee.
Art. 1832. Except so far as may be necessary
to wind up partnership affairs or to
complete transactions begun but not then
finished, dissolution terminates all authority
of any partner to act for the partnership:
1. With respect to the partners
a. When the dissolution is not by the
act, insolvency or death of a
partner.
b. When the dissolution is by such act,
insolvency or death of a partner, in
cases where article 1833 so
requires.
2. With respect to persons not partners,
as declared in article 1834.
General Rule
If the cause of dissolution is not by act,
death, or insolvency of a partner, the
authority ceases immediately.
Exception
For the purposes of winding-up partnership
affairs.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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
insolvent.
partner
has
become
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.
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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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 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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
dissolution wrongfully shall have:
the
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
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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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
creditors.
to
partnership
c. Those owing to partners by way of
contribution.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
2.
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.
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
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
without new partners, the old creditors are
creditors of the person or partnership that is
continuing the business.
person or partnership continuing the
business, at the date of dissolution, in the
absence of any agreement to the contrary.
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,
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.
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
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
Art. 1843. A limited partnership is one
formed by two or more persons under the
provisions of the following article, having as
members one or more general partners and
one or more limited partners. The limited
partners as such shall not be bound by the
obligations of the partnership.
General partner
Personally liable for
partnership
obligations
Have equal right in
management
of
partnership
May
contribute
money, property or
industry
Proper party to
proceedings
Interest cannot be
assigned to make new
partner
His
name
may
appear in the firm
name
Prohibited
from
engaging
in
a
business
like
partnership’s
His
retirement,
insolvencyand death
dissolves
the
partnership
Limited partner
Liability
extends
only to his capital
contribution.
No
share
in
management
of
partnership.
May
contribute
money and property
Not proper party to
proceedings
Interest is assignable
with
assignee
acquiring all rights of
the limited partner
Name not included
in firm name
No prohibition
His
retirement,
insolvency
and
death does not
dissolve
the
partnership
Characteristics of limited partnership
1. Must be formed in accordance with the
requirements of the law.
2. There must be one or more general
partners who control the management
of the business.
3. There must be one or more limited
partners contributing to the capital and
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
sharing in the profits but have nothing
to do with the management.
4. Obligations of the partnership must be
paid out of common fund and in the
separate properties of the general
partners.
l.
Art. 1844. Two or more persons desiring to
form a limited partnership shall:
m. The right, if given, of the remaining
general partner or partners to
continue the business on the death,
retirement,
civil
interdiction,
insanity or insolvency of a general
partner.
1. Sign and swear to a certificate, which
shall state —
a. The name of the partnership,
adding thereto the word "Limited".
b. The character of the business.
c. The location of the principal place
of business.
d. The name and place of residence of
each member, general and limited
partners
being
respectively
designated.
e. The term for which the partnership
is to exist.
f. The amount of cash and a
description of and the agreed value
of the other property contributed
by each limited partner.
The right, if given, of one or more of
the limited partners to priority over
other limited partners, as to
contributions
or
as
to
compensation by way of income,
and the nature of such priority.
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
g. The additional contributions, if any,
to be made by each limited partner
and the times at which or events on
the happening of which they shall
be made.
Art. 1845. The contributions of a limited
partner may be cash or property, but not
services.
h. The time, if agreed upon, when the
contribution of each limited partner
is to be returned.
Limited partners can only contribute money
and property and cannot contribute
services to the partnership to protect
persons dealing with the firms with frauds.
i.
j.
The share of the profits or the other
compensation by way of income
which each limited partner shall
receive
by
reason
of
his
contribution.
The right, if given, of a limited
partner to substitute an assignee as
contributor in his place, and the
terms and conditions of the
substitution.
k. The right, if given, of the partners to
admit additional limited partners.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
a general partner to partnership creditors
who extend credit to the partnership
without actual knowledge that he is not a
general partner.
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.
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
partnership.
against
the
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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
2. Non-inclusion of limited partner’s name
in the firm name.
3. Non-participation in the management
of the business.
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.
Limited partner not allowed to hold collateral
security
A limited partner may not receive
partnership property as collateral security.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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:
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.
1. On the dissolution of a partnership.
ART. 1858. A limited partner is liable to the
partnership:
2. When the date specified in the
certificate for its return has arrived.
1.
For the difference between his
contribution as actually made and that
stated in the certificate as having been
made.
2.
For any unpaid contribution which he
agreed in the certificate to make in the
3. After he has given six months’ notice in
writing to all other members, if no time
is specified in the certificate, either for
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
future at the time and on the
conditions stated in the certificate.
return of his contribution, to which his
assignor would otherwise be entitled.
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.
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.
2. Money or other property wrongfully
paid or conveyed to him on account of
his contribution.
An assignee becomes a substituted limited
partner
when
the
certificate
is
appropriately amended in accordance with
Article 1865.
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.
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
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.
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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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
admitted.
limited
partner
is
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. Those to limited partners in respect to
their share of the profits and other
compensation by way of income on
their contributions.
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.
3. Those to limited partners in respect to
the capital of their contributions.
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.
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
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.
2.
Be signed and sworn to by all members,
and an amendment substituting a
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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 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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
4. It has only the powers, attributes and
properties expressly authorized by law
or incident to its existence.
Similarities between a partnership and a
corporation
1. Juridical personality separate and
distinct from the individuals composing
it.
2. Act only through its agents.
3. Composed of an aggregate of
individuals.
4. Distribute profits to those who
contribute to capital.
5. May be organized only when there is a
law authorizing it.
6. Subject to income tax.
Right
of
Succession
Extent
of
Liability
to
Third Persons
Transferability
of interest
Distinctions between a partnership and a
corporation
Point of
Comparison
Manner
of
Creation
Number
Parties
of
Commencement
of
Juridical
Personality
Powers
Management
Partnership
By
mere
agreement
of
the
parties
By
a
minimum of
two
(2)
persons
Generally
from
the
moment of
execution of
the contract
May exercise
powers
authorized
by partners
provided the
same
are
not contrary
to
law,
morals,
good
customs,
public policy
or
public
order.
When it is
not agreed
upon, each
partner is an
agent of the
Corporation
By law
operation
law
or
of
Requires
at
least five (5)
incorporators
From the date
of
the
issuance
of
the certificate
of
incorporation
of
the
Securities and
Exchange
Commission
(SEC)
Can exercise
only
the
powers
expressly
granted
by
law
or
incident to its
existence.
Term
existence
Firm name
Dissolution
Governing
Laws
It is vested in
the board of
directors
or
trustees.
of
partnership.
No right of
succession
Partners
(except
limited
partners)
are
liable
personally
and
subsidiarily
for
partnership
debts
to
third
persons.
A
partner
cannot
transfer
interest so
as to make a
partner
without the
consent of
all
other
existing
partners.
May
be
established
for
any
period
of
time
stipulated by
the
partners.
A
limited
partnership
is required
to add the
word ‘Ltd.’
to its name.
May
be
dissolved at
any time by
the will of
any or all
partners.
Civil Code
Possesses
right
of
succession
Stockholders
are liable only
to the extent
of
their
investments
as
represented
by the shares
subscribed by
them.
A stockholder
has the right
to transfer his
shares
without the
prior consent
of the other
stockholders.
May not be
formed for a
term in excess
of 50 years
extendible to
not more than
50 years.
A corporation
may adopt a
firm
name
provided it is
not identical
or deceptively
similar to any
registered firm
name or
contrary
to
existing laws.
May only be
dissolved with
the consent of
the state.
Corporation
Code
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.
2. Exemption of shareholders from
individual liability.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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 authorized in the articles of
incorporation, may fix the terms and
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
incorporation.
the
articles
of
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.
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
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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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;
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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
redeemable shares of specified dates in the
future.
extension as may be determined by the
Securities and Exchange Commission.
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)
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.
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.
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.
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, 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
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 500no 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
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
of the Philippines or to corporations or
association wholly-owned and manage
by such citizen”.
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.
4. The term for which the corporation is to
exist.
5. The names, nationalities and residences
of the incorporators.
6. Under the Retail Trade Nationalization
law “no person who is not a citizen of
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
corporations shall supply substantially the
following requirements in the form as
provided for by the SEC:
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 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.
1. The name of the corporation.
6. Number of directors and trustees.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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:
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
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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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
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
shall be subject to amendment, alteration,
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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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”).
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
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 ,
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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 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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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.
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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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 twothirds (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 nonstock 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
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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)
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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 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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
2. The amount of the increase
diminution of the capital stock.
or
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
incurred, created, or increased.
be
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 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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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 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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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 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
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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 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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
natural resources may be entered into for
such periods as may be provided by the
pertinent laws or regulations.
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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
the appropriate government agency to the
effect that such by-laws or amendments are
in accordance with law.
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
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.
Corporation has inherent power to adopt bylaws
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.
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
Necessity of by-laws
The corporation must adopt the code of bylaws for its internal government.
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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
stockholders of a stock corporation or the
members of the non-stick corporation adopt
or make the original by-laws.
Notice of any meeting may be waived,
expressly or impliedly, by any stockholder or
member.
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.
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.
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.
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
transacted at any meeting of the
stockholders or members, if within the
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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 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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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.
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 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.
Binding effect of subscription
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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. 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:
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.
4. Previously incurred indebtedness of the
corporation.
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:
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.
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.
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 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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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 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-in-
fact 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 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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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.
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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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
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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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 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.
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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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 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
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
corporation is not precluded from
performing or making transfer of its own
stocks, in which case all the rules and
regulations imposed on stock transfer
agents, except the payment of a license fee
herein provided, shall be applicable.
Books and records to be kept by Corporation
1. Record of all business transactions
2. Minutes of all meetings of stockholders
or members, or of board of directors or
trustees
3. Stock and transfer books
4. Optional records and supplementary
books as many be necessary or required
by special laws
SEC Rules requiring filing of documents. The
SEC requires all corporations whose
securities are listed in any stock exchange or
with permits to sell shares to the public or
with twenty or more stockholders shall
hereafter submit to this Commission within
thirty (30) days after approval of the
corporate action, certified true copies of
the following documents evidencing the
same, to wit:
a. Minute of meetings
1. Calling for payment of unpaid
subscriptions
2. Increasing or decreasing the capital
stock
3. Changing the nomenclature of
shares of stock or certificates of
indebtedness
4. Authorizing the borrowing of
material sums of money
b. Other documents, such as:
1. Certificated
changing
the
composition of the board of
directors and officers
2. Certificates changing the ownership
of the controlling interest in the
corporation
Management contracts duly approved by
the stockholders.
Sec. 75. Right to financial statements. –
Within ten (10) days from receipt of a
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 the last taxable year and a profit or
loss statement for said taxable year,
showing in reasonable detail its assets and
liabilities and the result of its operations.
At the regular meeting of stockholders or
members, the board of directors or trustees
shall present to such stockholders or
members a financial report of the
operations of the corporation for the
preceding year, which shall include financial
statements, duly signed and certified by an
independent certified public accountant.
However, if the paid-up capital of the
corporation is less than P50,000.00, the
financial statements may be certified under
oath by the treasurer or any responsible
officer of the corporation.
Stockholder’s rights to financial statements
and reports
1. Balance sheet as of the end of the last
taxable year.
2. A profit and loss statement for said
taxable year.
3. The board of directors or trustees shall
present “a financial report” to
stockholders or members.
SEC REPORTORIAL REQUIREMENTS
Period
Requirements
Within 30 days from a) Set up books of
registration
of accounts
duly
articles
onaf registered with the
incorporation
BIR wherein receipts
and disbursements
made
are
immediately
recorded.
b)
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
Set up and
lOMoARcPSD|37015541
register with the SEC
its stock and transfer
book.
Within 15 days from
end of 3 months from
registration
a) Within 105 days
after the end of its
fiscal year
c) File its by-laws with
the
Commission.
Submit a statement of
sources
and
application of funds
certified by an
independent CPA.
i) If paid-up capital >
P50,000, file a copy
of BS and P&L
statement.
ii) If paid-up capital
< P50,000, same as
(i) and certified under
oath by the Treasurer
or any responsible
officer.
b) Within 45 days
Certified under oath
by the Treasurer or
any
responsible
officer.
Within 30 days from Submit:
General
the date of annual 1)
information
sheet
meeting
for the fiscal year.
2)
Minutes
of
meeting
of
stockholders/memb
ers electing the BoD
certified
by the
Secretary
and
subscribed
and
sworn to before a
notary public.
3)
Minutes
of
meeting of BoD
electing the officers,
certified by the
secretary
and
subscribed
and
sworn to before a
notary public
Within 5 days from Submit
list
of
stockholders/memb stockholders/memb
ers meeting
ers as of the date of
annual
or special
stockholders/memb
ers’
meeting,
showing:
 Name of the
stockholder
 Address
 Nationality
 No. of shares
subscribed
 Amt. subscribed
by each
Shall be made for
inspection.
Within 5 days before Submit
list
of
the date of annual stockholders/memb
meeting
ers entitled to vote
as of a date prior to
the meeting.
The SEC must be notified of any:
1. Change or transfer of address.
2. Any investment of corporate funds in
any of the secondary purposes of the
corporation by filing a copy of the
resolution approved by 2/3 of the
subscribed capital stock entitled to vote
authorizing the BoD to invest in any of
the secondary purposes.
Sec. 76. Plan of merger or consolidation. –
Two or more corporations may merge into a
single corporation which shall be one
constituent corporations or
may
consolidate into a new single corporation
which shall be consolidated corporation.
The board of directors or trustees of each
corporation, party to the merger or
consolidation, shall approve a plan of
merger or consolidation setting forth the
following:
1. The names of the corporations
proposing to merge or consolidate,
hereinafter referred to as the
constituent corporations.
2. The terms of the merger or
consolidation and the mode of carrying
the same into effect.
3. A statement of the changes. If any, in
the articles of incorporation of the
surviving corporation in case of merger;
and, with respect to the consolidated
corporation in case of consolidation, all
the statements required to be set forth
in the articles of incorporation for
corporations organized under this Code.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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
concerned the opportunity to be heard.
Written notice of the date, time and place
of said hearing shall be given to each
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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; 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.
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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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:
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.
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
Restore
by
Insufficiency of the
reacquiring
his
unrestricted RE
former status as a
stockholder.
Abandoned;
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541


The rate of dividends
Rescinded;
The regularity
with which they have been paid
Unsecured
approval
of the SEC;
Same effects as
Stockholder is not
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 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 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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
the furtherance of the purpose or purposes
for which the corporation was organized,
subject to the provisions of this Title.
under such conditions which may be,
prescribed by, the Securities and Exchange
Commission.
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.
Voting by proxy may be denied in articles or bylaws
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.
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 Consent
of
of stock
the
associates
Solicitation of gifts, donations or
contributions by non-stock corporations
A certificate of registration must be secured
from
the
Insurance
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
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.
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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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 non- stock
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.
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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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 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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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.
“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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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 inconsistentwith
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
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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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.
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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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.
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
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
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
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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)
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.
• The corporation is not a close corporation
even if the shares belong to less than
twenty if not all the requisites are present.
San Juan Structural and Steel Fabricators v.
CA (1998)
For institutions organized as stock
corporations, the number and term of
directors shall be governed by the
provisions on stock corporations.
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,
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
davit. The affidavit will state that the affiant is the head of a religious denomination or sect and would want to become a corporation sole.
nt of the position. The Iglesia ni Kristo is incorporated as a corporation sole.
operty really
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
Who may form and for what purpose?
l property and that is usually the case.
110. Corporation
– For the
east 2/3 of the members have agreed to incorporate, that the rules allow themSec.
to incorporate
they desiresole.
to incorporate
to manage their pr
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
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:
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)
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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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 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 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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
The declaration of dissolution shall set
forth:
1. The name of the corporation.
2. The reason for dissolution and winding
up.
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:
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
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).
1. That the religious society or religious
order, or diocese, synod, or district
organization is a religious organization
of a religious
SEC Opinion
No. 04-45,denomination,
(Nov. 28, 2004)sect or
church.
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
2. That at least two-thirds (2/3) of its
membership have given their written
consent or have voted to incorporate,
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
Case
Long v. Basa (2001)
Sincein
matters
purely
ivil tribunals, then a church member who is expelled from the membership by the church authorities, or a priest or minister who is by them
5, Nov.28, 2004 to Ferrer and Ferrer Law Office re term of existence of religious corporation.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
corporation sole or a corporation aggregate. As such, the
law intends
religious organizations
dissolve
thethatjuridical
entity. For may exist perpe
dissolution to be effective “[t]he
requirements mandated by the
Corporation Code should have been
strictly complied with.” Vesagas v. Court
of Appeals, 371 SCRA 509, 516 (2002).
 A corporation cannot extend its life by
amendment of its articles of
incorporation effected during the threeyear statutory period for liquidation
when its original term of existence had
DISSOLUTION
already expired, as the same would
Dissolution of a corporation is the
constitute new business. Alhambra
extinguishment of the franchise of a
Cigar & Cigarette Manufacturing
corporation and termination of its corporate
Company, Inc. v. SEC, 24 SCRA 269
existence.
(1968).
 When the period of corporate life
Modes of Dissolution:
expires, the corporation ceases to be a
1. Voluntary Dissolution
body corporate for the purpose of
2. Involuntary Dissolution
continuing the business for which it was
3. Shortening of term
organized. PNB v. Court of First Instance
4. Expiration of term (JRS at 311)
of Rizal, Pasig, Br. XXI, 209 SCRA 294
5. Failure to organize and commence
(1992).
business within two years from the date
of
issuance
of
certificate
of
incorporation
6. Legislative Dissolution (CLV’s CLR at 936)
Effects of Dissolution:
1. Transfer of Legal title to corporate
property.
2. The corporation ceases as a body
corporate to continue the business for
which it was established.
3. Continuation of a body corporation (the
corporation continues as a body
corporate for 3 years for purposes of
winding up or liquidation).
4. After the expiration of the 3 year
winding up period, the corporation
ceases to exist for all purposes. (JRS at
314).


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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
esolution approved by a majority of directors and a resolution approved by at least 2/3 of the stockholders In Section 118, where no credito
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 entr
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
places like the bulletin board of a municipal
hall, post
office,that
the is
plaza
andrequirement?
then the SEC
going to dissolve a corporation
because
a legal
set that that
for hearing
and determine
w/n a minority stockholder files a case and asks to dissolve the corporati
rom the public, the courtwill
considered
as a serious
violation. When
corporation
be dissolved.
dissolution was approvedthe
by the
SEC evenshould
if the directors
and stockholders pass a resolution dissolving the corporation that is not effective
The of
third
one
you will
just
shorten
theconcern.
or example renew its contract
lease
because
it is no
longer
a going
life and this is the simplest and
o distribute balance to thecorporate
stockholders.
fastestlikeway
of Ford
dissolving
the decided
corporation
or they may appoint a trustee
when
Philippines
to close its subsidiary here one of the last acts of the BOD was to pass a
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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 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 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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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 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.
4. When it has misused a right, privilege,
or franchise conferred upon it by law,
or when it has exercised a right,
privilege or franchise in contravention
of law.
Section 122. Corporate liquidation. – Every
corporation whose charter expires by its
own limitation or is annulled by forfeiture or
otherwise, or whose corporate existence
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
for other purposes is terminated in any
other manner, shall nevertheless be
continued as a body corporate for three (3)
years after the time when it would have
been so dissolved, 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, but not
for the purpose of continuing the business
for which it was established.
At any time during said three (3) years, the
corporation is authorized and empowered
to convey all of its property to trustees for
the benefit of stockholders, members,
creditors, and other persons in interest.
From and after any such conveyance by the
corporation of its property in trust for the
benefit of its stockholders, members,
creditors and others in interest, all interest which the corporation had in the property
terminates, the legal interest vests in the
trustees, and the beneficial interest in the
stockholders, members, creditors or other
persons in interest.
Upon the winding up of the corporate
affairs, any asset distributable to any
creditor or stockholder or member who is
unknown or cannot be found shall be
escheated to the city or municipality where
such assets are located.
Except by decrease of capital stock and as
otherwise allowed by this Code, no
corporation shall distribute any of its assets
or property except upon lawful dissolution
and after payment of all its debts and
liabilities.
Methods of Liquidation
1. Liquidation by the directors themselves.
2. Liquidation by a duly appointed
receiver.
3. Liquidation by trustees to whom the
board of directors had conveyed the
corporate assets.
Rules of corporate recovery
The SEC approved the Rules of Procedure
on Corporate recovery effective on January
15, 2000.
1. It governs the rules on definition of
terms
2. Common provisions
3. Suspension of payments
4. Rehabilitation
5. Dissolution and liquidation
A corporation that has a pending action and
which cannot be terminated within the
three-year period after dissolution is
authorized to convey all its property to
trustees to enable it to prosecute and
defend suits by or against the corporation
beyond the three-year period.
Distribution of Assets
Distribution among the shareholders of the
assets in winding up, formal or informal may be
made only to the prior claim of creditors and
after all debts have been paid or provided for.
This is sometimes expressed in terms of the trust
fund doctrine.
Liquidation
Connotes a winding
up or setting with
creditors and
debtors.
Rehabilitation
- Connotes
a
reopening of
reorganization
.
It is a winding up of
a corporation so
that assets are
distributed to those
entitled to receive
them.
-
Contemplates
a continuance
of corporate
life
and
activities in an
effort
to
restore
and
It is the process of
reinstate the
reducing assets to
corporation in
cash,
discharging
its
former
liabilities
and
position
of
dividing surplus or
successful
loss.
operation and
solvency.
Section 123. Definition and rights of
foreign corporations. – For the purposes of
this Code, a 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. 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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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.
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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 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 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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
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
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.”
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.
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.
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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.
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.
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
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.
Unlicensed foreign corporations doing
business in the Philippine do not have the
capacity to sue before the local court is
well-established.
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.
A foreign corporation which is not licensed
to transact business therein can maintain an
action in the courts of the Philippines for
the 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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
incorporation or by-laws or of any
articles of merger or consolidation
within the time prescribed by this Title.
1. All claims which have accrued in the
Philippines
have
been
paid,
compromised or settled.
5. A misrepresentation of any material
matter in any application, report,
affidavit or other document submitted
by such corporation pursuant to this
Title.
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.
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.
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.
7. Transacting business in the Philippines
outside of the purpose or purposes for
which such corporation is authorized
under its license.
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.
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:
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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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 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.
Sec. 144. Violations of the Code. –
Violations of any of the provisions of this
Code or its amendments not otherwise
specifically penalized therein shall be
punished by a fine of not less than one
thousand (P1,000.00) pesos but not more
than ten thousand (P10,000.00) pesos or by
imprisonment for not less than thirty (30)
days but not more than five (5) years, or
both, in the discretion of the court. If the
violation is committed by a corporation, the
same may, after notice and hearing, be
dissolved in appropriate proceedings before
the Securities and 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
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)
lOMoARcPSD|37015541
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
the terms and conditions of its license, and
shall be governed by the provisions hereof:
Provided, That if any such corporation is
affected by the new requirements of this
Code, said corporation shall, unless
otherwise herein provided, be given a
period of not more than two (2) years from
the effectivity of this Code within which to
comply with the same.
Sec. 149. Effectivity. – This Code shall take
effect immediately upon its approval.
Approved: May 1, 1980
Downloaded by Patrick John Peñaflor (patrickjohndpenaflor@gmail.com)