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PARTNERSHIP
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.
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.
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.
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.
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.
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.
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.
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.
Registration of partnership
Purpose of registration
Registration is necessary as a condition for the issuance of licenses to engage in
business and trade. In this way, the tax liabilities of big partnerships cannot
be evaded and the public can determine more accurately their membership and
capital before dealing with them.
When partnership considered registered the objective of the law is to make the
recorded instrument open to all and to give notice thereof to interested parties.
This objective is achieved from the date the partnership papers are presented
to and left for record in the Commission. This is the effective date of registration.
If the certificate of recording is issued on a subsequent date, it’s effectively
retroacts to date of presentation.
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
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 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
1. 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.
2. Open or notorious partnership: one whose existence is avowed or made
known to the public by the members of the firm.
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As to purpose
Commercial or trading partnership: one formed or the transaction of business.
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. Sub partner: 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
3. out as a partner by the other partners. He is an actual partner.
4. Silent partner: one who does not take any active part in the business
although he may be known to be a partner.
5. 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.
6. Original partner: one who is a member of the partnership from the time of
its organization.
7. Incoming partner: a person lately, or about to be, taken into an existing
partnership as a member.
8. 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.
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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. 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.
Ownership of present and future property The partners retain their ownership
over their present and future property. What passes to the partnership are the
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profits or income and the use or usufruct of the same. Consequently, upon
dissolution, such property is returned to the partners who own it.
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.
Joint venture
While a joint venture is not a formal partnership in the legal or technical sense,
both are governed, subject to certain qualifications, practically by the same
rules or principles of partnership. This is logical since in a joint venture,
like in a partnership, there is a community of interest in the business and
a mutual right of control and an agreement to share jointly in profits and losses.
Corporation as a partner
While under the Philippine Civil Code, a joint venture is a form of partnership
w/ a legal personality separate and distinct from the parties composing it, and
should thus be governed by the law of partnership, the Supreme Court has
recognized the distinction between these two business forms, and has held
that although a corporation cannot enter into a partnership contract, it may,
however, engage in a joint venture if the nature of the venture is authorized by
its charter.
Art. 1784. A partnership begins from the moment of the execution of the
contract, unless it is otherwise stipulated. (1679)
Partnership at will is one in which no term of existence has been fixed and
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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.
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.
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
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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.
The provisions of this article are understood to be without prejudice to the right
granted to the debtor by Art. 1252, but only if the personal credit of the
partner should be more onerous to him.
Requisites:
1. Two existing debts
2. Both debts must be demandable
3. The one who collected the debt is a partner who is authorized to manage
and is actually managing the partnership
Art. 1793. A partner who has received, in whole or in part, his share of a
partnership credit, when the other partners have not collected theirs, shall be
obliged, if the debtor should thereafter become insolvent, to bring to the
partnership capital what he received even though he may have given receipt
for his share only.
Art. 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.
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
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in the interest of the partnership business, and for the risk inconsequence of its
management.
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.
Art. 1798. If the partners have agreed to entrust to a third person the
designation of the share of each one in the profits and losses, such designation
may be impugned only when it is manifestly inequitable. In no case may a
partner who has begun to execute the decision of the third person, or who has
not impugned the same within a period of three months from the time he had
knowledge thereof, complain of such decision.
The designation of profits and losses cannot be entrusted to one of the partners.
Art. 1799. A stipulation which excludes one or more partners from any share
in the profits or losses is void.
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.
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
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not specifies.
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.
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.
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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 be decided by majority vote. In case of tie, vote of
partners representing controlling interest.
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 sub partnership nature
However, in the absence of the mutual assent of all the parties, a sub partner
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.
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
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Art. 1806. Partners shall render on demand true and full information of all
things affecting the partnership to any partner or the legal representative of
any deceased partner or of any partner under legal disability. Duty to render
information, there must be no concealment between partners in all matters
affecting the partnership. Information must use only for partnership purpose.
Not just on demand but partner also has duty of voluntary disclosure.
However, duty to render info does notarise with respect to matters
appearing in partnership books since each partner has the right to inspect those.
Good faith not only requires that a partner should not make a false statement
but also that he should abstain from any false concealment.
Art. 1807. Every partner must account the partnership for any benefit, and
hold as trustee for it any profits derived from him without the consent of the
partners from any transaction connected with the formation, conduct, or
liquidation of the partnership or from any use by him of his property.
The relation between the partners is essentially fiduciary involving trust and
confidence, each partner considered in law, as he is, in fact, the confidential agent
of the others. The duties of a partner are analogous to those of a trustee.
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.
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.
Art. 1809. Any partner shall have the right to a formal account as partnership
affairs:
Principal Rights
1. Rights in specific partner property;
2. Interest in partnership;
3. Right to participate in management.
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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. 1830-
1831).
1. A partner, subject to the provision of this title and any agreement between
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the partners, 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 partners;
Art. 1811 contemplates tangible property but not intangible things. A partner
is a co- owner w/ his partners of specific partnership property, but the rules
on co- ownership do not necessarily apply. The legal incidents of this tenancy
in partnership are distinctively characteristic of the partnership relation. They
are as follows:
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.
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 specific partnership property is not subject to legal support
since the property belongs to the partnership and not to the partners. However,
their interest in the partnership is. The method of reaching a judgment
debtor’s interest in partnership property is specifically set forth in art.1814.
Art. 1812. A partner’s interest in the partnership is his share of the profits
and surplus.
Share of profits and surplus – The partner’s interest in the partnership consists
of his share in the undistributed profits during the life of the partnership as a
going concern and his share in the undistributed surplus after its dissolution.
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.
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.
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:
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.
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.
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
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.
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
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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 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.
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.
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:
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 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 one or more but not all the
partners, and the record does not disclose the right of the partnership, the
partners in whose name the title stands may convey title to such property,
but the partnership may recover such property if the partners’ act does not
bind the partnership under the provisions of the first paragraph of Article 1818,
unless the purchaser or his assignee, is a holder for value, without knowledge.
Where the title to real property is in the name of one or more or all the partners,
or in a third person in trust for the partnership, a conveyance executed by a
partner in the partnership name, or in his own name, passes the equitable
interest of the partnership, provided the act is one within the authority of the
partner under the provisions of the first paragraph of Article 1818.
Where the title to real property is in the name of all the partners a conveyance
executed by all the partners passes all their rights in such property.
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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 partnership, except in the
case of fraud on the partnership, committed by or with the consent of that
partner.
Art. 1822. Where, by any wrongful act or omission of any partner acting in
the ordinary course of the business of the partnership or with the authority
of co- partners, loss or injury is caused to any person, not being a partner in
the partnership, or any penalty is incurred, the partnership is liable therefor
to the same extent as the partner so acting or omitting to act.
Partner liable for wrongful act of a partner The partners are liable for the
negligent operation of a vehicle by a partner, acting in the course of business,
which results in a traffic accident.
1. Where one partner acting within the scope of his apparent authority receives
money or property of a third person and misapplies it.
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
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Art. 1824. All partners are liable solidarily with the partnership for everything
chargeable to the partnership under Articles 1822 and 1823.
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.
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.
in time when all partnership affairs are wound up; winding up is the process
of settling partnership affairs after dissolution.”
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.
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.
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.
2. At any time if the partnership was a partnership at will when the interest
was assigned or when the charging order was issued.
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.
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.
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.
Art. 1834. After dissolution, a partner can bind the partnership, except as
provided in the third paragraph of this article:
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:
Nothing in this article shall affect the liability under article 1825 of any person
who after dissolution represents himself or consents to another representing
him as a partner in a partnership engaged in carrying on business.
General Rule
Dissolution terminates the authority of the partners to bind partnership.
Exceptions
Any act appropriate for winding-up partnership affairs or completing
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Art. 1835. The dissolution of the partnership does not of itself discharge the
existing liability of any partner.
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.
If all partners died, the legal representative of the last surviving partner
provided that the partner is not insolvent.
*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.
1. Each partner who has not caused dissolution wrongfully shall have:
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
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.
Art. 1839. In settling accounts between the partners after dissolution, the
following rules shall be observed, subject to any agreement to the contrary:
3. The assets shall be applied in the order of their declaration in No. 1 of this
article to the satisfaction of 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:
Art. 1840. In the following cases creditors of the dissolved partnership are also
creditors of the person or partnership continuing the business:
1. When any new partner is admitted into an existing partnership, or when any
partner retires and assigns (or the representative of the deceased partner
assigns) his rights in partnership property to two or more of the partners,
or to one or more of the partners and one or more third persons, if the
business is continued without liquidation of the partnership affairs.
2. When all but one partner retire and assign (or the representative of a
deceased partner assigns) their rights in partnership property to the
remaining partner, who continues the business without liquidation of
partnership affairs, either alone or with others.
3. When any partner retires or dies and the business of the dissolved
partnership is continued as set forth in Nos. 1 and 2 of this article, with the
consent of the retired partners or the representative of the deceased
partner, but without any assignment of his right in partnership property.
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.
Nothing in this article shall be held to modify any right of creditors to set aside
any assignment on the ground of fraud.
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.
General Rule
When partner retires from the partnership, he is entitled to the payment of
what may be due to him after liquidation.
Exception
No liquidation needed when there is settlement as to what retiring partner
shall receive.
Art. 1842. The right to an account of his interest shall accrue to any partner,
or his legal representative as against the winding up partners or the surviving
partners or the person or partnership continuing the business, at the date of
dissolution, in the absence of any agreement to the contrary.
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.
Art. 1844. Two or more persons desiring to form a limited partnership shall:
2. File for record the certificate in the Office of the Securities and Exchange
Commission.
Limited partners can only contribute money and property and cannot contribute
services to the partnership to protect persons dealing with the firms with
frauds.
Art. 1846. The surname of a limited partner shall not appear in the partnership
name unless:
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.
Limited partner’s surname is not included in the firm name provided these
circumstances
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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:
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.
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.
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.
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.
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:
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
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ART. 1857. A limited partner shall not receive from a general partner or out
of partnership property any part of his contributions until:
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.
2. When the date specified in the certificate for its return has arrived.
3. After he has given six months’ notice in writing to all other members, if no
time is specified in the certificate, either for the return of the contribution
or for the dissolution of the partnership.
In the absence of any statement in the certificate to the contrary or the consent
of all members, a limited partner, irrespective of the nature of his contribution,
has only the right to demand and receive cash in return for his contribution.
A limited partner may have the partnership dissolved and its affairs wound up
when:
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.
1. For the difference between his contribution as actually made and that
stated in the certificate as having been made.
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.
An assignee, who does not become a substituted limited partner, has no right
to require any information or account of the partnership transactions or to
inspect the partnership books; he is only entitled to receive the share of the
profits or other compensation by way of income, or the return of his
contribution, to which his assignor would otherwise be entitled.
An assignee shall have the right to become a substituted partner if all the
members consent thereto or if the assignor, being thereunto empowered by
the certificate, gives the assignee that right.
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.
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.
The estate of a deceased limited partner shall be liable for all his liabilities as
a limited partner.
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. 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:
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:
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.
Art. 1867. A limited partnership formed under the law prior to the effectivity
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1. The amount of the original contribution of each limited partner, and the
time when the contribution was made.
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”.
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.
4. It has only the powers, attributes and properties expressly authorized by law
or incident to its existence.
Point of
Partnership Corporation
Comparison
Manner of By mere agreement of By law or operation of law
Creation the parties
Number of By a minimum of two(2) Requires at least five(5)
Parties persons incorporators
Commenceme Generally from the From the date of the issuance
nt of Juridical moment of execution of of the certificate of
Personality the contract incorporation of the Securities
and Exchange Commission
(SEC)
Powers May exercise powers Can exercise only the powers
authorized by partners expressly granted by Law or
provided the same are incident to its existence.
not contrary to law,
morals, good customs,
public policy or public
order.
Management When it is not agreed It is vested in the board of
upon, each partner is an directors or trustees.
agent of the
partnership.
Right of No right of succession Possesses right of succession
Succession
Extent of Partners (except limited Stockholders are liable only to
Liability to partners) are liable the extent of their investments
Third Persons personally and as represented by the shares
subsidiarily for subscribed by them.
partnership debts to
third persons.
Transferability A partner cannot A stockholder has the right to
of interest transfer interest so as to transfer his shares without the
make a partner without prior consent of the other
the consent of all other stockholders.
existing partners.
Term of Maybe established for May not be formed for a term in
existence any period of time excess of 50 years extendible to
stipulated by the not more than 50 years.
partners.
Firm name A limited partnership is A corporation may adopt a firm
required to add the name provided it is not identical
word ‘Ltd.’ to its name. or deceptively similar to any
registered firm name or
contrary to existing laws.
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Components of a Corporation
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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.
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 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
non- assessable 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.
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
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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.
7. Founder’s Shares;
8. Redeemable “Callable” Shares;
9. Treasury Shares;
10. Other shares classified to comply with constitutional or legal
requirements.
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.
Definition
Redeemable (“Callable”) shares of stock which are usually preferred are
frequently issued subject to redemption at the option of either the corporation,
the stockholder, or both, at a definite price representing premium above the
amount originally paid.
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Sinking fund refers to a fund set-up by the corporation where cash is gradually
set aside in order to accumulate the amount necessary to meet the redemption
price of redeemable shares of specified dates in the future.
Sec. 9. Treasury shares. - Treasury shares are shares of stock which have been
issued and fully paid for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation or through some other lawful
means. Such shares may again be disposed of for a reasonable price fixed by the
board of directors. (n)
Definition
Treasury shares are owned by the corporation having been reacquired by the
issuing corporation by “purchase, redemption, donation or through some
other lawful means.” It has no voting rights or rights as to dividends or
distributions.
Definition
Incorporation is the act of creating a 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 extension as may be determined by the
Securities and Exchange Commission.
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 stock is required,
the abuse of the privileges of a corporation would be minimized.
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
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6. Under the Retail Trade Nationalization law “no person who is not a citizen of
the Philippines, and no association, partnership, or corporation the capital
of which is not wholly owned by citizens of the Philippines, shall engage
directly or indirectly in the retail trade business.
3. The place where the principal office of the corporation is to be located, which
must be within the Philippines.
6. The number of directors or trustees which shall not be less than five (5) nor
more than fifteen (15).
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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.
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).
The number of the director and trustees must not be less than five (5) nor more
than fifteen (15).
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.
convenient”.
2. 25% of the subscription has been fully paid in actual cash or property.
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.
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.
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.
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.
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:
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
Law on Business Organizations Reviewer
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”).
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.
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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.
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.
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.
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.
candidates 100 votes, hence, he distribute equally his vote without preference
or discrimination.
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.
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,
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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.
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.
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.
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.
Directors representing minority may not be removed without cause. The power
to removed director or trustee even without cause given to shareholders or
members may not be used to deprived minority shareholders or members of
the right of representation to which they may be entitled under Section 24 of
the Corporation Code. Cumulative voting of directors in a stock corporation
is mandatory and cannot be dispensed with in the by-laws. Being a statutory
right, the stockholders cannot be deprived of the use of cumulative voting.
May the result of the duly held election of directors be altered by mere
agreement of the directors?
The Securities and Exchange Commission ruled that: “An agreement by which
director is reposed in any body except majority of stockholders is in violation
of ‘public policy’ and ‘enforceable’ ”.
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.
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.
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2. That the vote of such director or trustee was not necessary for the
approval of the contract.
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,
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however, That the contract is fair and reasonable under the circumstances.
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.
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 by- laws 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 by- laws 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.
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2. Of succession by its corporate name for the period of time stated in the articles
of incorporation and the certificate of incorporation.
9. To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or foreign, shall give donations in aid
of any political party or candidate or for purposes of partisan political
activity.
10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees.
11. To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in its articles of incorporation.
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.
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7. The vote authorizing the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.
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
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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 two- thirds (2/3) of the members in a meeting duly called for the purpose.
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.
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.
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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.
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:
Concept of dividends
A dividend is a corporate profit set aside, declared and ordered by the directors
to be paid to the stockholders on demand or at a fixed time.
Classes of dividends
Dividends which a corporation may declare and distribute to its stockholders
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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.
The provisions of the next preceding paragraph shall apply to any contract
whereby a corporation undertakes to manage or operate all or substantially all
of the business of the other corporation, whether such contracts are called
service contracts, operating agreements or otherwise: Provided, however, That
such service contracts or operating agreements which relate to the exploration,
development, exploitation or utilization of natural resources may be entered
into for such periods as may be provided by the pertinent laws or regulations.
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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.
Acts which are ultra vires are voidable but may be ratified. In order that such
ultra vires may be ratified it must be shown that
1. The act was consummated or executed.
2. No creditors are prejudiced or they have given their consent thereto.
3. The right of the public or the state are not involved.
4. All of the stockholders consent thereto.
A corporation, like an individual, may ratify and thereby render binding upon
it the originally authorized acts of its officers or other agents. This is true
because the questioned investment is neither contrary to law, morals, public
order or public policy. It is a corporate transaction or contract which is within
the corporate powers but which is defective from a purported failure to observe
in its execution the requirement of the law that the investment must be
authorized by the affirmative vote of the stockholders holding 2/3 of the
voting power.
Sec. 46. By-laws Adoption. – Every corporation formed under this code,
must, within one month after receipt of official notice of the issuance of its
certificate of 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 by-
laws 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.
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
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Necessity of by-laws
The corporation must adopt the code of by- laws 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 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.
not be presumed.
1. The time, place and manner of calling and conducting regular or special
meetings of the directors or trustees.
4. The form for proxies of stockholders and members and the manner of
voting them.
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.
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 by- laws within the prescribed period
does not ipso facto lost its powers as such.
Whenever any amendment or new by-laws are adopted, such amendment or new
by- laws shall be attached to the original by- laws 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 by- laws.
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.
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.
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.
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 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.
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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.
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
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 by- laws provide otherwise.
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.
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 co- owners 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 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.
Sec. 58. Proxies. – Stockholders and members may vote in person or by proxy
in all meetings of stock holders or members. Proxies shall be in writing, signed
by the stock holder or member and filed before the scheduled meeting with
the corporate secretary. Unless otherwise provided in the proxy, it shall be valid
only for the meeting for which it is intended. No proxy shall be valid and
effective for a period longer than five years at any one time.
Proxy – In corporate law, is a person who votes for and this represents the
stockholders or members.
Voting by proxy
Ordinarily the right to vote shall be exercised by the stockholders themselves or
by their duly authorized representatives. Proxy to be valid must be:
1. In writing, signed by the stockholder or member giving it.
2. Filed with the corporate secretary before the scheduled meeting.
3. It is valid only for the meeting for which it is intended unless otherwise
stipulated.
4. Even if the proxy is a continuing one it shall not be longer than 5 year at
any one time.
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Sec 59. Voting trusts. – One or more stockholders of a stock corporation may
be create a voting trust for the purpose of conferring upon a trustee or
trustees the right to vote and other rights pertaining to the share for a period
not exceeding 5 years at any one time: Provided, that in the case of a voting
trust specifically required as a condition in a loan agreement, said voting trust
may be for a period exceeding 5 years but shall automatically expire upon full
payment of the loan. A voting trust agreement must be in writing and
notarized, and shall specify the terms and conditions thereof. A certified copy
of such agreement shall be filed with the corporation and with the SEC:
otherwise, said agreement is ineffective and unenforceable. The certificate or
of stock covered by the voting trust agreement shall be cancelled and new one
shall be issued in the name of the trustee or trustees stating that they are
issued pursuant to said agreement. In the books of the corporation, it shall be
noted that the transfer in the name of the trustee or trustees is made
pursuant to said voting trust agreement.
The Trustee or trustees shall be execute and deliver to the transferors voting trust
certificates, which shall be transferable in the same manner and with the same
effect as certificates of stock.
The voting trust agreement filed with the corporation shall be subject to
examination by any stockholder of the corporation in the same manner as any
other corporate book or record: Provided, That both the transferor and the
trustee or trustees may exercise the right of inspection of all corporate books
and records in accordance with the provisions of this code.
Any other stock holder may transfer his shares to the same trustee or trustees
upon the terms and conditions stated in the voting trust agreement, and there
upon shall be bound by all the provisions of said agreement.
Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period, and the voting trust
certificates as well as the certificates of stick in the name of the trustee or
trustees shall thereby be deemed cancelled and new certificates of stock shall be
reissued in the name of the transferors.
The voting trustee or trustees may vote by proxy unless the agreement provides
otherwise.
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
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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.
Kinds of Subscription:
1.1. Pre-incorporation – is one agreed upon before the incorporation of the
proposed corporation.
1.2. Post-incorporation Subscription – entered into after the incorporation
or formation of the corporation.
2. Absolute Subscription – one not subject to any condition or happening of
certain unknown events.
3. Conditional Subscription – its fulfillment depends upon the happening of
uncertain events of contingencies. It does not make the subscriber a
stockholder or render him liable to pay the amount of the subscription,
until performance or fulfillment of the condition.
4. Subscription upon special terms – where “the corporation agreed, as an
independent element, to do a certain thing or things, but not as
condition to the accrual of liability of the subscriber or the acquisition of
the rights of a stockholder.
Sec. 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:
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 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
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.
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.
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.
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)
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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.
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.
While stock dividends, corporation to withhold the same from the delinquent
stockholder until his unpaid subscription is fully paid.
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.
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.
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
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Sec. 70. Court action to recover unpaid subscription. – Nothing in this Code
shall prevent the corporation from collecting by action in a court of proper
jurisdiction the amount due on any unpaid subscription, with accrued
interest, costs and expenses.
As a general rule, a corporation may not maintain a suit for the enforcement
of unpaid subscription without first making a call.
Judicial remedy is limited to the amount due on any unpaid subscription with
accrued interest, costs and expenses
SEC. 71 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.
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.
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 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.
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
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Any officer or agent of the corporation who shall refuse to allow any director,
trustees, stockholder or member of the corporation to examine and copy
excerpts from its records or minutes, in accordance with the provisions of this
Code, shall be liable to such director, trustee, stockholder or member for
damages, and in addition, shall be guilty of an offense which shall be punishable
under Section 144 of this Code: Provided, That if such refusal is made pursuant
to a resolution or order of the board of directors or trustees, the liability under
this section for such action shall be imposed upon the directors or trustees who
voted for such refusal: and Provided, further, That it shall be a defense to any
action under this section that the person demanding to examine and copy
excerpts from the corporation's records and minutes has improperly used any
information secured through any prior examination of the records or minutes
of such corporation or of any other corporation, or was not acting in good faith
or for a legitimate purpose in making his demand.
Stock corporations must also keep a book to be known as the "stock and transfer
book", in which must be kept a record of all stocks in the names of the
stockholders alphabetically arranged; the installments paid and unpaid on
all stock for which subscription has been made, and the date of payment of any
installment; a statement of every alienation, sale or transfer of stock made, the
date thereof, and by and to whom made; and such other entries as the by-laws
may prescribe. The stock and transfer book shall be kept in the principal office
of the corporation or in the office of its stock transfer agent and shall be open
for inspection by any director or stockholder of the corporation at reasonable
hours on business days.
rules and regulations imposed on stock transfer agents, except the payment of
a license fee herein provided, shall be applicable.
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
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.
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.
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.
2. The terms of the merger or consolidation and the mode of carrying the same
into effect.
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.
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 constituent
corporation at least two (2) weeks before said hearing. The Commission shall
thereafter proceed as provided in this Code.
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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.
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.
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
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of the agreed or awarded price, the stockholder shall forthwith transfer his
shares to the corporation.
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.
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
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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.
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.
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Sec. 87. Definition. – For the purposes of this Code, a non-stock corporation
is one where no part of its income is distributable as dividends to its members,
trustees, or officers, subject to the provisions of this Code on dissolution:
Provided, That, any profit which a non-stock corporation may obtain as an
incident to its operation shall, whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which the corporation was
organized, subject to the provisions of this Title.
Definition
Non-stock Corporation – one where no part of its income is distributable as
dividends to its members, trustees, or officers.
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.
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
non- stock 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.
1. All liabilities and obligations of the corporation shall be paid, satisfied and
discharged, or adequate provision shall be made therefore.
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:
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
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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.
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.
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.
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.
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.
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.
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:
to cope with them. Many of the problems that arise can be settled by
arbitration, Arbitration (the determination of a matter of difference between
contending parties) may be provided either for directorial disputes or for
stockholder disputes. Although there are some disadvantages of arbitration
proceedings, nevertheless, the advantages of arbitration, in saving both money
and hard feelings, would seem to outweigh the disadvantages in most cases.
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.”
• 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)
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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.
**
There are three (3) ways by which a religious organization can provide for the
administration of its properties:
1. by forming a non-stock corporation
2. by corporation sole
3. by religious aggregate or society
Corporation sole may constitute of one person only so the head of a religious
sect would incorporate himself for the purpose of administering the properties
of a religious sect. To incorporate what you will file with the SEC is an affidavit.
The affidavit will state that the affiant is the head of a religious denomination
or sect and would want to become a corporation sole. and the rules of his
religion allow him to incorporate as a corporation sole and that he is charged
with the administration of its properties and in fact he will be required to submit
an inventory and the manner in which the successor will be chosen and the
place where he will hold his office.
The Roman Catholic Archbishop of Manila is a corporation sole so if Cardinal
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Sin dies the new archbishop will simply submit his appointment and he need
not incorporate again because the corporation is different from the occupant of
the position. The Iglesia ni Kristo is incorporated as a corporation sole.
The court has held in Roman Catholic Apostolic Adm. of Davao, Inc. v. Land
Registration Commission that although the Bishop was a foreigner, he could
register a parcel of land in his name because he is a mere administrator the
property really belongs to the faithful and since they are Filipinos they could
register the land in the administrator’s name.
Under the law if a corporation sole wants to dispose of or mortgage real
property, he has to get authorization from the Regional Trial Court unless the
rules of the religious sect allow him to dispose of or mortgage real property and
that is usually the case.
The last is the religious aggregate or religious society. It can incorporate for the
purpose of managing its properties and the articles would indicate that the
members constitute a religious order or society and that at least 2/3 of the
members have agreed to incorporate, that the rules allow them to incorporate
they desire to incorporate to manage their properties in the place where located.
The recollects are incorporated to manage their properties, they are the single
biggest bloc of stockholder of San Miguel Corporation.
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 corporation 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
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The articles of incorporation may include any other provision not contrary to
law for the regulation of the affairs of the corporation.
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,
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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.
4. The names and addresses of the persons who are to supervise the winding
up of the affairs of the corporation.
2. That at least two-thirds (2/3) of its membership have given their written
consent or have voted to incorporate, at a duly convened meeting of the
body.
Case
Long v. Basa (2001)
• Since in matters purely ecclesiastical the decisions of the proper church
tribunals are conclusive upon the civil tribunals, then a church member
who is expelled from the membership by the church authorities, or a priest
or minister who is by them deprived of his sacred office, is without remedy
in the civil courts. Long v. Basa, 366 SCRA 113 (2001).
Additional Material: SEC Opinion No. 04-45, Nov.28, 2004 to Ferrer and
Ferrer Law Office re term of existence of religious corporation.
DISSOLUTION
Dissolution of a corporation is the extinguishment of the franchise of a
corporation and termination of its corporate existence.
Modes of Dissolution:
1. Voluntary Dissolution
2. Involuntary Dissolution
3. Shortening of term
4. Expiration of term (JRS at 311)
5. Failure to organize and commence business within two years from the
date of issuance of certificate of incorporation
6. Legislative Dissolution (CLV’s CLR at 936)
Effects of Dissolution:
1. Transfer of Legal title to corporate property.
2. The corporation ceases as a body corporate to continue the business for
which it was established.
3. Continuation of a body corporation (the corporation continues as a body
corporate for 3 years for purposes of winding up or liquidation).
4. After the expiration of the 3 year winding up period, the corporation
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• The termination of the life of a juridical entity does not by itself cause the
extinction or diminution of the rights and liability of such entity, since it
is allowed to continue as a juridical entity for 3 years for the purpose of
prosecuting and defending suits by or against it and enabling it to settle
and close its affairs, to dispose of and convey its property, and to distribute
its assets. Republic v. Tancinco, 394 SCRA 386 (2002).
• A board resolution to dissolve the corporation does not operate to so
dissolve the juridical entity. For dissolution to be effective “[t]he
requirements mandated by the Corporation Code should have been strictly
complied with.” Vesagas v. Court of Appeals, 371 SCRA 509, 516 (2002).
• 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, as the same would
constitute new business. Alhambra Cigar & Cigarette Manufacturing
Company, Inc. v. SEC, 24 SCRA 269 (1968).
• When the period of corporate life expires, the corporation ceases to be a
body corporate for the purpose of continuing the business for which it was
organized. PNB v. Court of First Instance of Rizal, Pasig, Br. XXI, 209 SCRA 294
(1992).
DISSOLUTION **
There are different ways to dissolve a corporation one is voluntarily and the
other involuntarily, under the law there are three provisions governing
voluntary dissolution. The first one is if no creditors are affected. In all the
methods of voluntary dissolution, you need a resolution approved by a
majority of directors and a resolution approved by at least 2/3 of the
stockholders In Section 118, where no creditors are affected the directors
and the stockholders pass the resolution dissolving the corporation and
that will be filed in the SEC for approval. In a case where a suit was filed
and the corporation said, we have already been dissolved and they
submitted a board resolution, the SC held that it is not enough to dissolve
a corporation.
The Second one, is under Section 119 where creditors are affected. Here the
board and the stockholders will approve the dissolution but a petition will
be filed signed by the majority of the directors and verified by the president,
secretary or one of the directors which will indicate the claims of creditors.
That will be set for hearing and not less than thirty (30) days nor more than
sixty (60) days after the entry of the issuance of the order and a copy of the
order will be published once a week for three consecutive weeks in a
newspaper of general circulation and that will also be posted for three weeks
in three public places like the bulletin board of a municipal hall, post office,
the plaza and then the SEC will set that for hearing and determine w/n the
corporation should be dissolved.
The third one you will just shorten the corporate life and this is the simplest
and fastest way of dissolving the corporation voluntarily like when Ford
Philippines decided to close its subsidiary they simply amended the articles
of corporation that the corporation will exist until December 31, 1978.
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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 corporation for every infraction, the infraction must
be serious, because dissolution is imposing the death penalty upon the
corporation.
The Court said the employees of a railroad are required to wear uniform
indicating their positions in their nameplate, now tell me if one employee
did not have such a nameplate you are going to dissolve a corporation
because that is a legal requirement?
It has to be a serious violation! But in one case, the SC dissolved a
corporation which was engaging in banking without authorization from the
monetary board, it was accepting deposits from the public, the court
considered that as a serious violation. When a minority stockholder files a
case and asks to dissolve the corporation, the court said that that is a harsh
remedy unless the situation is really beyond redemption you should not
impose that remedy.
The corporation has three years after it should have been dissolved for the
purpose of winding up its affairs. The SEC has said the three year period
should be counted from the time the dissolution was approved by the SEC
even if the directors and stockholders pass a resolution dissolving the
corporation that is not effective until it has been approved by the SEC.
For three years, the corporation will continue to exist it will no longer be a
going concern but only for the purpose of winding up that is why the SC
has said that the corporation cannot for example renew its contract of lease
because it is no longer a going concern.
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During the three year period, it should devote its time prosecuting and
defending law suits, winding up its affairs disposing its properties so they
can be used to pay off its creditors and to distribute balance to the
stockholders.
There are two ways of providing for the winding up of its affairs under the
law. This is voluntary either the directors themselves may take care of
winding up the affairs of the corporation or they may appoint a trustee like
when Ford Philippines decided to close its subsidiary here one of the last
acts of the BOD was to pass a resolution appointing Ricardo Romulo as
trustee vesting upon him legal title to all the assets of Ford Philippines to
be used to pay off its creditors and to dispose of its properties of Ford
Philippines. to distribute the balance as liquidating dividends. 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.
Voluntary
Requirements where no creditors are affected.
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.
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.
corporate existence
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.
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.
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
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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 Rehabilitation
Connotes a winding up or setting Connotes a reopening of
with creditors and debtors. reorganization.
It is a winding up of a corporation Contemplates a continuance of
so that assets are distributed to corporate life and activities in an
those entitled to receive them. effort to restore and reinstate the
It is the process of reducing assets corporation in its former position
to cash, discharging liabilities and of successful operation and
dividing surplus or loss. solvency.
Definition
Foreign Corporation is one formed, organized or existing under any laws other
than those of the Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country or state.
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.
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.
6. The names and addresses of the present directors and officers of the
corporation.
Attached to the application for license shall be a duly executed certificate under
oath by the authorized official or officials of the jurisdiction of its
incorporation, attesting to the fact that the laws of the country or state of the
applicant allow Filipino citizens and corporations to do business therein, and
that the applicant is an existing corporation in good standing. If such
certificate is in a foreign language, a translation thereof in English under oath
of the translator shall be attached thereto.
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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
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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 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.
made upon the duly- authorized 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.
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.
Unlicensed foreign corporations doing business in the Philippine do not have the
capacity to sue before the local court is well-established.
maintain an action in the courts of the Philippines for the purpose of protecting
its reputation, corporate name and goodwill.
1. Failure to file its annual report or pay any fees as required by this Code.
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.
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.
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.
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the
Philippine Government or any of its agencies or political subdivisions have
been paid.
3. The petition for withdrawal of license has been published once a week for
three (3) consecutive weeks in a newspaper of general circulation in the
Philippines.
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. 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 saidviolation: Provided, further, That nothing
in this section shall be construed to repeal the other causes for dissolution of a
corporation provided in this Code.
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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. 149. Effectivity. – This Code shall take effect immediately upon its
approval. Approved: May 1, 1980