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ONG (OCT 2018)

Lecture Notes 4. Commencement

Business Law 5. Purpose

PARTNERSHIP 6. Distribution of profits

PARTNERSHIP 7. Management

 By the contract of partnership two or 8. Disposition of shares

more persons bind themselves to
contribute money, property, or industry Distinction between partnership and voluntary
to a common fund, with the intention of association
dividing the profits among themselves.
Two or more persons may also form a 1. Juridical personality
partnership for the exercise of a
profession (1767) 2. Purpose

Note: Since a partnership is a contract, all 3. Contribution of members

agreement between the parties has the force of
law between the contracting parties (1159)
4. Liability of members
provided it is not contrary to law, moral, good
custom, public order and public policy. (1306)
Distinction between partnership and Co-
1. Consensual
1 Creation
2. Nominate
2. Juridical personality
3. Bilateral
3. Purpose
4. Onerous
4. Duration
5. Commutative
5. Disposal of interest
6. Principal
6. Power to act with third person
7. Preparatory
7. Effect of death
 A partnership may be constituted in any
Distinction between Partnership and conjugal form, except where immovable property
partnership of gain or real rights are contributed thereto, in
which case a public instrument shall be
necessary. (1771)
1. Parties
 A contract of partnership is void,
whenever immovable property is
2. Laws which govern
contributed thereto, il an inventory of
said property is not made, signed by the
3. Juridical personality

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parties, and attached to the public 2. The profits shall be confiscated in

instrument (1773) favor of thegovernment
 Every contract of partnership having a
capital of three thousand pesos or more, 3: The instruments or tools and proceeds
in money or property, shall appear in a of the crime shallalso be forfeited in
public instrument, which must be favor of the government 4. The
recorded in the Office of the Securities contributions of the partners shall not be
and Exchange Commission. confiscatedunless they fall under no. 3
 Failure to comply with the requirements
of the precedingparagraph shall not 3.Contribution of money, property or industry to
affect the liability of the partnership and a commonfund.
the members thereof to third persons.
(1772) Obligations with respect to contribution to
partnership capital
1. Partners must contribute equal shares to the
1. Valid Contract capital of thepartnership unless there is
stipulation to contrary. (Art1790).
The partnership has a judicial
personality separate and distinct from 2. Partners (capitalist) must contribute additional
that of each of the partners, even in case capital incase of imminent loss to the business of
of failure to comply with the the partnership and there is no stipulation
requirements of article 1772, first otherwise, refusal to do so shall create an
paragraph (1768). However, obligation on his part to sell his interest tothe
Associations and societies, whose other partners. (Art. 1791) Requisites:
articles are kept secret among the
members, and wherein any one of the a. There is an imminent loss of the business of
members may contract in his own name thepartnership
with third persons, shall have no
juridical personality, (1775) b. The majority of the capitalist partners are of
the opinionthat an additional contribution to the
A partnership begins from the moment common fund would save the business c. The
of the execution ofthe contract, unless it capitalist partner refuses deliberately to
is otherwise stipulated. (1784) contribute(not due to financial inability)

2. Lawful object or purpose (1770). Any d. There is no agreement to the contrary

event which makesit unlawful for the
business of the partnership to be carried
on or for the members to carry it on in
partnership caused for automatic
dissolution of the partnership. (1830)

1. The contract is void ab initio and the

partnership neverexisted in the eyes of
the law

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Loss to be borne by
 If one of the Partners refused to give
contribution, theother partner may compel him to Contributed property
deliver (Specific performance) what he has
promised. Partnership Partner
 The partnership is dissolved when a specific
thing which a partner had promised to contribute Specific and determinate 
to the partnership, perishes before the delivery. things which are not fungible
(1830,4) where only the use is
4. Intent to divide the profit among the partners.
(1767). 

RULES FOR DISTRIBUTION OF Specific and determinate

PROFITS AND LOSSES things the ownership of which
is transferred to the
Fungible things (consumable) 
ON OF OF LOSSES Cannot be kept without 
PROFITS deteriorating
Things contributed to be sold 
With According to According to
agreeme agreement agreement Things brought and appraised 
nt in the inventory (limited to
value appraised)
Without 1. Share of 1. If sharing of a. Profit or losses shall be distributed in
agreeme capitalist profits agreement conformity with the agreement;
nt partner is in is stipulated –
proportion to apply to sharing b. If only the share of each partner in the profits
his capital of losses has been agreed upon, the share of each in the
contribution losses shall be in the same proportion
2. If no profit
2. Share of sharing stipulated c. In the absence of stipulation, the share of each
industrial - losses shall be partner in the profits and losses shall be in
partner is not borne according proportion to what he may have contributed, but
fixed - as may to capital the industrial partner shall not be liable for the
be contribution contribution losses.
just and
equitable under 3. Purely d. As for the profits, the industrial partner shall
the industrial partner receive such share as may be just and equitable
circumstances not liable for under the circumstances. If besides his services
losses he has contributed capital, he shall also receive a
share in the profits in proportion to his capital.

Designation of profit and losses

Distribution of profit and losses: (1797)
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1. The designation of losses and profits cannot 2. Co-ownership or co-possession does not
be entrusted to one of the partners. of itself establish a partnership, whether
such-co-owners or co-possessors do or
2. If the partners have agreed to entrust to a third do not share any profits made by the use
person the designation of the share of each one of the property;
in the profits and losses, such designation may 3. The sharing of gross returns does not of
be impugned only when it is manifestly itself establish a partnership, whether or
inequitable. In no case may a partner who has not the persons sharing them have a
begun to execute the decision of the third joint or common right or interest in any
person, or who has not impugned the same property from which the returns are
within a period of three months from the time he derived;
had knowledge thereof, complain of such 4. The receipt by a person of a share of the
decision. (1798) profits of a business is prima facie
evidence that he is a partner in the
Nota Bene: business, but no such inference shall be
drawn if such profits were received in
All partners, including industrial ones, shall be payment: (DRAWING) a. Debt by
liable pro rata with all their property and installments or otherwise;
after all the partnership assets have been
exhausted, for the contracts which may be b. As Rent to a landlord or
entered into the name and for the account of the
partnership, under its signature and by a person c. As an Annuity to a widow or representative
authorized to act for the partnership. of a deceased partner;

However, any partner may enter into a separate d. Wages of an employee

obligation to perform a partnership contract.
(1816) Any stipulation exempting any partner e. As Interest on a loan, though the amount of
against the liability shall be void as far as 3rd payment vary with the profits of the business;
person is concerned. But the stipulation is valid
among the partners.(1817) f. As the consideration for the sale of a
Goodwill of a business or other property by
5. Established for the common benefit or interest installments or otherwise.
of the partners. (1770) Hence, A stipulation
which excludes one or more partners from any Reason: It s not merely the sharing of profits,
share in the profits or losses is void. (1799). but rather the sharing of them as a co-owner of
the business that makes one a partner. Hence,
Note: Only the agreement as to profit and loss is the test is "Does the recipient of profit received
void not the partnership itself. In such case, as if it as co-owner/proprietor of the business”, if the
there is no agreement as to profit and loss and answer is in affirmative a partnership exists.
the profit and loss are distributed in accordance
with capital contribution. Classifications of Partnership

Test to determine whether partnership exists: As to liability of partners

1. Persons who are not partners as to each 1. General partnership - consists of general
other are not partners as to third persons; partners who are liable pro rata and
except estoppels (1825). subsidiarily and sometimes solidarily
with their separate property for

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partnership debts 2. Limited partnership the time of the celebration of the contract
- one formed by 2 or more persons shall continue to pertain exclusively to each,
having as members one or more general only the usufruct passing to the partnership.
partners and one or more limited (1780)
partners, the latter not being personally
liable for the obligations of the Note: Persons who are prohibited from giving
partnership each other any donation or advantage cannot
enter into universal partnership
As to duration
The following cannot enter in a universal
1. Partnership at will - one in which no partnership:
time is specified and is not formed for a
particular undertaking or venture which a. Between those who were guilty of adultery or
may concubinage;

be terminated anytime by mutual agreement 2. b. Between those persons found guilty of the
Partnership with a fixed term or particular same criminal offense (adultery or concubinage),
undertaking – the term for which the partnership in consideration thereof;
is to exist is fixed or agreed upon or one formed
for a particular undertaking c. Between a person and Public officer or his
wife, descendants and ascendants, by reason of
As to extent of its subject matter his office.(739)

1. Universal partnership is either 2. Particular partnership - object determinate

things, their use or fruits, or specific
a. Universal partnership of all present undertaking. or the exercise of a profession or
property – the property which belongs to vocation (1783)
each of the partners at the time of the
constitution of the partnership, becomes the As to representation to others
common property of all the partners, as well
as all the profits which they may acquire 1. Ordinary or real partnership - one which
therewith. (1779) A stipulation for the actually exists among the partners and also as to
common enjoyment of any other profits may 3rd persons
also be made (There must be a stipulation.
e.g. salary that may be earn by the partner); 2. Ostensible or partnership by estoppel- one
but the property which the partners may which in reality is not a partnership but is
acquire subsequently by inheritance, legacy, considered a partnership only in relation to those
or donation cannot be included in such who, by their conduct or omission, are precluded
stipulation, except the fruits thereof. Articles to deny or disprove its existence As to legality
of universal partnership, entered into of existence
without specification of its nature, only
constitute a universal partnership of profits. 1. De jure partnership - comply all requirement
(1781) of the law
b. Universal partnership of all profits - all 2. De facto partnership - do not comply all
that the partners may acquire by their requirement of the
industry or work during the existence of the
partnership. Movable or immovable property
As to publicity
which each of the partners may possess at
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1. Secret partnership - one wherein the existence 9. Sub partner - one who is not a member of the
of certain persons as partners is not avowed or partnership who contracts with a partner with
made known to the public by any of the partners reference to the latter's share in the partnership

2. Open or notorious partnership - one whose 10. Secret partner - not known by third person
existence is avowed or made known to the
public by the members of the firm 11. Dormant partner - silent and secret

As to purpose 12. Ostensible partner - participate in the

management and known by third person
1. Commercial or trading partnership - one
formed for the transaction of business 13. Partners by estoppels or nominal partner -
not really partners but only as a result of
2. Professional or non-trading partnership - one misrepresentation to 3rd person
formed for the exercise of a profession
14. Managing partner - one manage the
Kinds of partners partnership

1. Capitalist partner - One who contribute 15. Liquidating partner - one who wind-up the
money or property affair of the partnership

2. Industrial partner - One contribute industry. 16. Retiring partner one who retire in the
He is not liable for loss as between the partners partnership
but liable pro rata as to 3rd person.
17. Incoming partner -- One who is admitted to
3. Capitalist-industrial partner - One who the partnership
contribute money, property or industry
4. General partner -- liable to the extent of his OF PARTNERSHIP
separate property
1. Relations among the partners themselves 2.
5. Limited partner - liable only to the extent of Relations of the partners with the partnership
his capital contribution. Not allowed to
contribute industry. 3. Relations of the partnership with 3rd persons
with whom it contracts
6. Silent partner do not participate in the
management, 4. Relations of the partners with such 3rd
7. Continuing Partner - one who continues the
business of a partnership after it has been OBLIGATIONS OF PARTNERS
dissolved by reason of the admission of a new
partner, retirement, death or expulsion of one of  A partnership begins from the moment
the partners of the execution of the contract, unless it is
otherwise stipulated. (1784)
8. Surviving Partner - one who remains after a  When a partnership for a fixed term or
partnership has been dissolved by death of any particular undertaking is continued after the
partner termination of such term or particular
undertaking without any express agreement,
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the rights and duties of the partners remain the Effect of Failure to contribute property
same as they were at such termination, so far promised:
as is consistent with a partnership at will. A
continuation of the business by the partners or 1. Partners becomes ipso jure a debtor of
such of them as habitually acted therein during the partnership even in the absence of any
the term, without any settlement or liquidation demand
of the partnership affairs, is prima facie 2. Remedy of the other partner is not
evidence of a continuation of the partnership. rescission but specific performance with
(1785) damages from defaulting partner

Obligations with respect to contribution of Obligations with respect to contribution of

property: money and money converted to personal use

1. To contribute at the beginning of the 1. To contribute on the date fixed the

partnership or at the stipulated time the money, amount he has undertaken to contribute to the
property or industry which he may have partnership
promised to contribute 2. To reimburse any amount he may have
taken from the partnership coffers and converted
2. To answer for eviction in case the partnership to his own use
is deprived of the determinate property 3. To pay for the agreed or legal interest, if
contributed he fails to pay his contribution on time or in case
he takes any amount from the common fund and
3. To answer to the partnership for the fruits of converts it to his own use
the property the contribution of which he 4. To indemnify the partnership for the
delayed, from the date they should have been damages caused to it by delay in the contribution
contributed up to the time of actual delivery or conversion of any sum for his personal
4. To preserve said property with the diligence
of a good father of a family pending delivery to  A partner who has undertaken to contribute
partnership a sum of money and fails to do so become a
debtor for the interest and damages from the
5. To indemnify partnership for any damage time he should have complied with his
caused to it by the retention of the same or by obligation. (1788)
the delay in its contribution
The same rule applies to any amount he
 Every partner is a debtor of the may have taken from the partnership coffers, and
partnership for whatever he may have his liability shall begin from the time he
promised to contribute thereto. He shall also converted the amount to his own use.
be bound for warranty in case of eviction
with regard to specific and determinate  Unless there is a stipulation to the contrary,
things which he may have contributed to the the partners shall contribute equal shares to the
partnership, in the same cases and in the capital of the partnership. (1790)
same manner as the vendor is bound with  Art. 1791 - If there is no agreement to the
respect to the vendee. He shall also be liable contrary, in case of an imminent loss of the
for the fruits thereof from the time they business of the partnership, any partner who
should have been delivered, without the refuses to contribute an additional share to the
need of any demand. (1786) capital, except an industrial partner, to save
the venture, shall he obliged to sell his interest
to the other partners.
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 Art. 1792 - If a partner authorized to Obligation of partner who receives share of

manage collects a demandable sum which was partnership credit
owed to him in his own name, from a person
who owed the partnership another sum also 1. Obliged to bring to the partnership capital
demandable, the sum thus collected shall be what he has received even though he may have
applied to the two credits in proportion to their given receipt for his share only Requisites:
amounts, even though he may have given a
receipt for his own credit only; but should he a. A partner has received in whole or in part, his
have given it for the account of the partnership share of the partnership credit
credit, the amount shall be fully applied to the
latter. The provisions of this article are b. The other partners have not collected their
understood to be without prejudice to the right shares
granted to the other debtor by article 1252
(Application for payment), but only if the c. The partnership debtor has become insolvent
personal credit of the partner should be more
onerous to him.
 Every partner is responsible to the
partnership for damages suffered by it through
Obligation of managing partners who collects his fault, and he cannot compensate them with
debt from person who also owed the the profits and benefits which he may have
partnership earned for the partnership by his industry.
However, the courts may equitably lesser this
1. Apply sum collected to 2 credits in proportion responsibility is through the partner's
to their amounts extraordinary efforts in other activities of the
partnership, unusual profits have been realized.
2. If he received it for the account of partnership, (1794)
the whole sum shall be applied to partnership  The risk of specific and determinate things,
credit which are not fungible, contributed to the
partnership so that only their use and fruits may
Requisites: be for the common benefit, shall be borne by the
partner who owns them. If the things contribute
1. The partner who collects is authorized to are fungible, or cannot be kept without
manage and actually manages the partnership deteriorating, or if they were contributed to be
sold, the risk shall be borne by the partnership.
2. The person owed him and the partnership 3. In the absence of stipulation, the risk of the
The partner issues a receipt in his own name things brought and appraised in the inventory,
only. shall also be borne by the partnership, and in
such case the claim shall be limited to the value
4. The claim of the partnership and the partner at which they were appraised. (1795)
are both due and demandable.  The partnership shall be responsible to every
partner for the amounts he may have disbursed
 Art. 1793.- A partner who has received, on behalf of the partnership and for the
in whole or in part, his share of a partnership corresponding interest, from the time the
credit, when the other partners have not expense are made; it shall also answer to each
collected theirs, shall be obliged, if the debtor partner for the obligations he may have
should thereafter become insolvent, to bring to contracted in good faith in the interest of the
the partnership capital what he received even partnership business, and for risks in
though he may have given receipt for his share consequence of its Management. (1796)
only.  Every partner may associate another person
with him in his share, but the associate shall not
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be admitted into the partnership without the Revocable power

consent of all the other partners, even if the only when in
partner having an associate should be a manager. bad faith
(1804) Partner is Power is
 The partnership books shall be kept, subject appointed revocable any
to any agreement between the partners, at the manager after time for any
principal place of business of the partnership, constitution of cause
and every partner shall at any reasonable hour partnership
have access to and may inspect and copy any of
them. (1805) 2 or more Each may In case of
 Partners shall render on demand true and full persons execute all opposition,
information of all things affecting the entrusted with acts of decision of
partnership to any partner or the legal management of administration majority
representative of any deceased partner or of any partnership shall
partner under legal disability. (1806) without prevail; In
 Every partner must account to the specification of case of tie,
partnership for any benefit, and hold as trustee duties/stipulatio decision of
for it any profits derived by him without the n that each shall partners
consent of the other partners from any not act w/o the owning
transaction connected with the formation, other's consent controlling
conduct, or liquidation of the partnership or interest
from any use by him of its property. (1807) shall prevail

Any partner shall have the right to a formal Stipulated that Concurrence Absence or
account as to partnership affairs: (1809) none of the of all disability of
managing necessary for any one
a. If he is wrongfully excluded from the partners shall act the validity of cannot be
partnership business or possession of its w/o the consent acts alleged
property by his co-partners; of others unless there
b. If the right exists under the terms of any is imminent
agreement; danger of
c. When any partner must account to the grave or
partnership from profit derived by him irreparable
without the consent of other partners injury to
(1807); partnership
d. Whenever other circumstances render it
just and reasonable. Manner of 1.All If refusal of
management not partners are partner
MANAGEMENT OF THE PARTNERSHIP agreed upon agents of manifestly
RESPECT TO MANAGEMENT partnership to interest
Partner is Power of Vote of 2. Unanimo partnership,
appointed managing partners us consent court’s
manager in the partner Is representing required for intervention
articles irrevocable controlling alteration of may be
partnership without interest immovable sought.
just/lawful necessary to property
cause; revoke
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 The partner who has been appointed considered agents and whatever any one of
manager in the articles of partnership may them may do alone shall bind the partnership,
execute all acts of administration despite the without prejudice to the provisions of article
opposition of his partners, unless he should do 1801. However, none of the partners may,
faith; and his power is irrevocable without just without the consent of the others, make any
or lawful cause. The vote of the partners important alteration in the immovable property
representing the interest shall be necessary for of the partnership, even if it may be useful to the
such revocation of power. A power granted after partnership. But if the refusal of consent by the
the partnership has been constituted may be other partners is manifestly prejudicial to the
revoked at any time. (1800) interest of the partnership, the court's
 If two or more partners have been intervention may be sought. (1803)
entrusted with the management of the
partnership without specification of them An act of a partner which is not apparently for
respective duties, or without a stipulation that the carrying on of business of the partnership in
one o shall not act without the consent of all the the usual way does not bind the partnership
others, each may separately execute all acts of unless authorized by the other partners. Except
administration, but of them should oppose the when authorized by the other partners or unless
acts of the others, the decision the majority shall they have abandoned the business, one or more
prevail. In case of a tie, the matter shall decided but less than all the partners have no authority to
by the partners owning the controlling (1801) (GARCI CA)
 In case it should have been stipulated that
none of the managing partners shall act without 1. Assign the partnership property in trust
the consent of the o the concurrence of all shall for creditors or on the assignee's promise to pay
be necessary for the validity of the acts, and the the debts of the partnership; 2. Dispose of the
absence or disability of any one of the cannot be goodwill of the business; 3. Do any other act
alleged, unless there is imminent danger of which would make it impossible to carry on
grave or irreparable injury to the partnership. the ordinary business of a partnership;
 When the manner of management has not 4. Confess a judgment;
been agreed upon, the following rules shall be
observed: (1803) 5. Enter into a compromise concerning a
partnership claim or liability;
a. All the partners shall be considered agents
and what any one of them may do alone shall 6. Submit a partnership claim or liability to
bind the partners without prejudice to the arbitration;
provisions of article 1801.
b. None of the partners may, without the consent
7. Renounce a claim of the partnership.
of the others, make any important alteration in
the immovable property of the partnership,
even if it may be useful to the partnership. But No act of a partner in contravention of a
if the refusal of consent by the other partners restriction on authority shall bind the partnership
is manifestly prejudicial to the interest of the to persons having knowledge of the restriction.
partnership, the court's intervention may be (1818)
Appointment of managing partner
General Rule:
1. Appointment in the article of incorporation
When the manner of management has not been (1800)
agreed upon, all the partners shall be
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a. Execute all act of administration despite

opposition of his partners except he acted in bad interest.

b. His power is irrevocable without just or

lawful cause. Prohibition against engaging in business

c. Partners representing controlling interest shall Capitalist partner Industrial partner

be necessary for revocation of power. (1808) (1789)

2. Other appointment Cannot engage in same Industrial partner

kind of business in cannot engage in
a. Revocable at any time, with or without just or which the partnership business for himself
lawful is engaged except if (any business) except
there is stipulation if there is stipulation
Reason: To avoid Reason: Industrial
Two or more partners have been intrusted conflict of interest partners must devote
with the management his entire industry to
the partnership
Art. 1801 Article 1802 Violation: Violation

Without specification 1. Bring to the 1. Exclude him from

of their respective common funds any the firm
duties profits accruing to him
from his transactions 2. Avail themselves of
Without a stipulation There is stipulated that the benefits which he
that one of them shall none of the managing 2. Shall personally may have obtained
not act without the partners shall act bear all the losses
consent of all the without the consent of 3. Damages, in either
others the others case.
Rule: Rule:
Property Rights of a Partner (1810)
a. Each one may a. The concurrence of
separately execute all all shall be necessary The property rights of a partner are:
acts of for the validity of the
administration, acts 1. His rights in specific partnership property

b. But if any of them b. The absence or A partner is co-owner with his partners of
should oppose the acts disability of any one of specific partnership property. (1811)
of the others, the them cannot be
decision of the
 Equal right with his partners to possess
majority shall prevail. alleged, unless there specific partnership property for partnership
imminent danger of purposes but not for any other purpose without
c. In case of a tie, the grave or irreparable the consent of his partners.
matter shall be decided injury to the
by the is partners partnership
owning the controlling
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 Not assignable except in connection with the partner, the court may charge the interest of the
assignment of rights of all the partners in the debtor partner with payment of the unsatisfied
same property amount of such judgment debt with interest
 Not subject to attachment or execution , except thereon; and may then or later appoint a receiver
on a claim against the partnership. But of his share of the profits, and of any other
partnership property can be attached for money due or to fall due to him in respect of the
partnership debt. partnership, and make all other orders,
 Not subject to legal support directions, accounts and inquiries which the
debtor partner might have made, or which the
2. His interest in the partnership - A partner's circumstances of the case may require.
interest in the partnership is his share of the
profits and surplus. (1812) The interest charged may be redeemed at any
time before foreclosure, or in case of a sale
 A conveyance by a partner of his whole being directed by the court, may be purchased
interest in the partnership does not of itself without thereby causing dissolution:
dissolve the partnership, or, as against the other
partners in the absence of agreement. 1. with separate property, by any one or more
of the partners.
Right of the assignee: Entitles the assignee to
receive in accordance with his contract the or
profits to which the assigning partner would
otherwise be entitled. 2. With partnership property, by any one or
more of me partners with the consent of all the
Assignee has no right: partners whose interests are not so charged
or sold.
a. To interfere in the management or
administration of the partnership Rule on conveyance of real property (by any
business or affairs; partner or all partners)
b. To require any information or account of
partnership transactions, Conveye Title Executed Passing of the
c. To inspect the partnership books; d by of real in the Title/Right of
proper name of the partnership
 In case of fraud in the management of ty
the partnership, the assignee may avail
himself of the usual remedies. Any Partne Partnersh Title passes to
 In case of dissolution of the partnership, the Partner rship ip the buyer but
assignee is entitled to receive his assignor's the Partnership
interest and may require an account from the may recover
date only of the last account agreed to by all the
partners. (1813) Exception:

3.His right to participate in the management (n) 1. Conveyanc

e was in the
Right of partner's creditor (1814) usual way of
Without prejudice to the preferred rights of except when
partnership creditors, on due application to a the buyer has
competent court by any judgment creditor of a knowledge of

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the partner rs, or act is one

lack of in a within the
authority. third authority of the
2. Real person partner. (usual
Property was in way of
transferred to trust business)
3rd person in for the
good faith. partne
Any Partne Partnersh Passes the
Partner rship ip equitable All All All Passes all their
interest of the Partner partne partners rights in such
partnership, r property
provided the
act is one
within the
authority of the Obligation of the partners with regards to
partner. (usual third person
way of
business)  An admission or representation made by any
partner concerning partnership affairs within the
By One One or Title passes to scope of his authority is evidence against the
partner or more but the buyer but partnership. (1820)
whose more not all the Partnership  Notice to any partner of any matter relating to
name but partners may recover partnership affairs, and the knowledge of the
title not all partner acting in the particular matter, acquired
stands partne Exception: while a partner or then present to his mind, and
r (no the knowledge of any other partner who
right 1. Conveyance reasonably could and should have communicated
of was in the it to the acting partner, operate as notice to or
partne usual way of knowledge of the partnership. (1821)
rship business,
disclo except when Exception: In case of fraud on the partnership,
se) the buyer has committed by or with the consent of that partner.
knowledge of
the partner lack  All partners and the partnership are solidary
of authority. liability for everything chargeable to the
partnership. (1824)
Real Property
was transferred a. Any wrongful act or omission of any partner
to 3rd person in acting in the ordinary course of the business of
good faith. the partnership or an with the authority of co-
partners, loss or injury is caused to any person,
Partner One Partnersh Passes the not being a partner in the partnership, or any
or ip/ equitable penalty is incurred, the partnership the is liable
more Partner interest of the therefore to the same extent as the partner so
or all own partnership, acting or omitting to act. (1822)
partne name provided the

Page 13 of 103 BL.2401


b. Where one partner acting within the scope of partnership & all those represented himself &
his apparent authority receives money or property represented consented; all those who made
of a third person and misapplies it; (1823, 1) Not all partners of representation liable
existing partnership pro-rata/jointly
c. Where the partnership in the course of its consents
business receives money or property of a third
person and the money or property so received is to representation
misapplied by any partner while it is in the No existing Person who
custody of the partnership.(1823,2) partnership & not all represented himself
represented consented; liable & those who
 Partnership by estoppels None of partners in made/consented to
existing partnership representation
When a person represents himself or consent consented separately liable
to another to another representing him to
anyone (he is an agent of the persons consenting  A person admitted as a partner into an
to such representation) as a partner in an existing existing partnership is liable for all the
partnership, he is liable to obligations of the partnership arising
before his admission as though he had
a. Any such persons to whom such been a partner when such obligations
representation has been made. were incurred, except that this liability
shall be satisfied only out of partnership
b. The representation was made in a public property, unless there is a stipulation to
manner, he is liable to such person, whether the the contrary. (1826)
representation has or has not been made or  The creditors of the partnership shall be
communicated to such person. Partnership preferred to those of each partner as
liability result regards the partnership property. Without
prejudice to this right, the private
1. When all the members of the existing creditors of each partner may ask the
partnership consent to the representation. attachment and public sale of the share of
the latter in the partnership assets. (1827)
2. Liable as though he was an actual member of
the partnership DISSSOLUTION

No partnership liability result Dissolution is change in the relation of the

partners caused by any partner ceasing to be
1. He is liable pro rata with the other persons, associated in the carrying on as distinguished
if any, so consenting to the contract or from the winding up of the business. (1828) On
representation as to incur liability, otherwise dissolution the partnership is not terminated, but
separately. continues until the winding up of partnership
affairs is completed. (1829)

Liabilities in estoppels
Automatic dissolution Judicial dissolution
All partners consented Partnership is liable
representation (1831)

No existing person who 1. Without violation of 1. A partner has been

Page 14 of 103 BL.2401

the agreement between declared insane in

the partners: any judicial 4. When a specific thing 1814:
proceeding or is which a partner had
a. By the termination of shown to be of promised to contribute to 1. After the
the definite term or unsound mind; the partnership perishes termination of the
particular undertaking before the delivery; in specified term or
specified in the 2.A partner becomes any case by the loss of particular
agreement; incapable of the thing, when the undertaking;
performing his part partner who contributed
b. By the express will of the partnership it having reserved the 2.At any time if the
any partner, who must contract: ownership thereof, has partnership was a
act in good faith, when only transferred . to the partnership at will
no definite term or 3. A partner has been partnership the use or when the interest
particular is specified; guilty of such enjoyment of the same; was assigned or
conduct as tends to but the partnership shall
C. By the express will of affect prejudicially not be dissolved by the when the charging
all the partners who have the carrying on of loss of the thing when it order was issued.
not assigned their the business, occurs after the
interests or suffered partnership has acquired
them to be charged for 4. A partner wilfully the ownership thereof,
their separate debts, or persistently
either before or after the commits a breach of 5.Death of any partner;
of any specified term or the partnership
particular undertaking; agreement, or 6. Insolvency of any
otherwise so partner or of the
d. By the expulsion of conducts himself in partnership;
any partner from the matters relating to
business bona fide in the partnership 7.Civil interdiction of
accordance with such a business that it is not any partner,
power conferred by the reasonably
agreement between the practicable to carry
partners on the business in
partnership with
2. In contravention of the him;
agreement between the
partners, where the 5. The business of
circumstances do not the partnership can
permit a dissolution only be carried on at
under any other a loss;
provision of this article,
Effect of dissolution
by the express will of 6.Other
any partner at any time; circumstances render
a dissolution General Rule: Dissolution terminates all
authority of any partner to act for the
3.Any event which equitable.
partnership: (1832)
makes it unlawful for the
business of the On the application of
partnership to be carried to the purchaser of a Exception:
on or for the members partner's interest
carry it on in partnership under article 1813 or
Page 15 of 103 BL.2401

1. By any act appropriate for winding up partnership as if the partnership had not been
partnership affairs or completing dissolved unless: (1833)
transactions unfinished at dissolution;
2. By any transaction which would bind 1. The dissolution being by act of any
the partnership if dissolution had not partner, the partner acting for the partnership had
taken place, provided the other party to knowledge of the dissolution, or
the transaction:
2. The dissolution being by the death or
a. Had extended credit to the partnership insolvency of a partner, the partner acting for the
prior to dissolution and had no partnership had knowledge or notice of the death
knowledge or notice of the dissolution; or insolvency.
2. With respect to persons not partners, the
b. Though he had not so extended credit, partnership is in no case bound by any act of a
had nevertheless known of the partner after dissolution:
partnership prior to dissolution, and,
having no knowledge or notice of a. Where the partnership is dissolved because it
dissolution, the fact of dissolution had is unlawful to carry on the business, unless the
not been advertised in a newspaper of act is appropriate for winding up partnership
general circulation in the place (or in affairs; or
each place if more than one) at which
the partnership business was regularly b. Where the partner has become insolvent; or
carried on.
c. Where the partner has no authority to wind up
Liability of a partner shall be satisfied out of partnership affairs, except by a transaction with
partnership assets alone when such partner had one who:
been prior to dissolution
1. Had extended credit to the partnership prior to
1. Unknown as a partner to the person with dissolution and had no knowledge or notice of
whom the contract is made; and his want of authority; or

2. So far unknown and inactive in partnership 2. Had not extended credit to the partnership
affairs that prior to dissolution, and, having no knowledge
or notice of his want of authority, the fact of his
the business reputation of the partnership could want of authority has not been advertised in the
not be said to have been in any degree due to his manner provided for advertising the fact of
connection with it. dissolution.

1. With respect to the partners,  The dissolution of the partnership does not of
itself discharge the existing liability of any
a. When the dissolution is not by the act, partner (1835)
insolvency or death of a partner, or

b. When the dissolution is by such act,

insolvency or death of a partner, each partner is Exception:
liable to his co-partners for his share of any
liability created by any partner acting for the A partner is discharged from any existing
liability upon dissolution of the partnership by
Page 16 of 103 BL.2401

an agreement to that effect between himself, 2. When management 2. Limited partner has
the partnership creditor and the person or has not been agreed no share in the
partnership continuing the business; and such upon, all general management of a
agreement may be inferred from the course of partner have equal right limited partnership
dealing between the creditor having in the management of
knowledge of the dissolution and the person or the partnership.
partnership continuing the business. 3.General partner may 3. Limited partner must
contribute money, contribute money or
 The individual property of a deceased partner property or industry contribute property but
shall be liable for all obligations of the not industry
partnership incurred while he was a partner, 4.General partner is a 4. Limited partner is
but subject to the prior payment of his separate proper party to not a proper party to
debts. (ibid) proceedings by or proceeding by or
 Where a partnership contract is rescinded on against a partnership. against a partnership
the ground of the fraud or misrepresentation of
one of the parties thereto, the party entitled to 5.General partner may 5.Limited partner name
rescind is, without prejudice to any other right, appear in the firm name must not appear in the
entitled: (1838) firm name
6. General partner 6.No prohibition in
1. To a lien on, or right of retention of the cannot engage in a case of Limited partner
surplus of the partnership property after business which is of the
satisfying the partnership liabilities to third kind of business in
persons for any sum of money paid by him for which the partnership is
the purchase of an interest in the partnership engage
and for any capital or advances contributed by 7.Retirement, death, 7. Do not the same of
him; insanity or insolvency general effect, executor
dissolves the or administrator shall
2. To stand, after all liabilities to third persons partnership have all the rights of a
have been satisfied, in the place of the limited partner for a the
creditors of the partnership for any payments purpose of setting his
made by him in respect of the partnership estate.
liabilities; and
8. Can be constituted in 8. Must follow all the
3. To be indemnified by the person guilty of whatever form requirement of the law
the fraud or making the representation against for limited partnership
all debts and liabilities of the partnership 9. Composed of all 9. Composed of at least
general partner one general partner and
LIMITED PARTNERSHIP at least one limited
Members one or more general partners and one 10. No need to include 10. Must include in the
or more limited partners. in the partnership name partnership name the
the word "LTD" word "LIMITED" or
General Limited "LTD"
Partner/partnership partner/partnership 11. When the interest of 11. When the interest of
one of the general the limited partner is
partner is charged, his charged, the interest be
1. General partner is 1. Limited partner's
interest may be redeemed with separate
personally liable for the liability extends only to
redeemed with the property of any general
partnership obligation his capita contribution
separate property of partner, but property
Page 17 of 103 BL.2401

one or more partners may not be redeemed reasonable hour have

or; partnership property with partnership access to and may inspect and copy any
with the consent of all property. (1862) inspect and copy any of them;
partners whose interest of them. (1805)
is not so charged or (2) Have on demand
sold. (1814) 2.Partners shall render true and full
on demand true and information of all
full information of all things affecting the
General Rule: The limited partners as such shall things affecting the partnership, and a
not be bound by the obligations of the partnership to any formal account of
partnership.(1843) partner or the legal partnership affairs
representative of any whenever
deceased partner or of circumstances render it
any partner under legal just and reasonable;
Exception: disability. (1806) and

 The name of the partnership failed to add the 3.Any partner shall (3) Have dissolution
word "Limited" or "Ltd" have the right to a winding up by decree
 Failure to file the article of co-partnership to formal account as to of court. A limited
the SEC partnership affairs: partner shall have the
 The contributions of a limited partner may be right to receive a share
cash or property, but not services. (1845) a. If he is wrongfully of the profits or other
 The surname of a limited partner appear in excluded from the compensation by way
the partnership name unless: partnership business or of income, and to the
and possession of its return of his
property by his co- contribution,(1851)
(1) It is also the surname of a general partner,
partners; provided that after
such payment is made,
b. If the right exists whether from property
(2) Prior to the time when the limited partner of the partnership or
under the terms of any
became such, the business has been carried that of a general
on under a name in which his surname partner, the partnership
appeared. (1846) assets are in excess of
c. As provided by
article 1807; all liabilities of the
 A limited partner takes part in the control of partnership except
the business (1848) liabilities to limited
d. Whenever other
circumstances render it partners on account of
Right of General Right of limited just and reasonable. their contributions and
partner partner (Art. 1851) to general partners
A general partner shall (1856).
1. The partnership A limited partner shall have all the rights and
books shall be kept have the same rights powers and be subject
subject to any as a general partner to: to all the restrictions
agreement between the and liabilities of a
partners, at the (1) Have partnership partner in a partnership
principal place of books kept at the without limited
business of the principal place of partners. However,
partnership, and every business of the without the written
partner shall at any partnership, and to
Page 18 of 103 BL.2401

 A person may be a general partner and a

consent or ratification limited partner in the same partnership at the
of the specific act by same time, provided that this fact shall be stated
all the limited partners, in the certificate.
a general partner or all  A person who is a general, and also at the
of the general partners same time d limited partner, shall have all the
have no authority to: rights and powers and be subject to all the
restrictions of a general partner, except that, in
(1) Do any act in respect to his contribution, he shall have the
contravention of the rights against the other members which he
certificate; would have had if he were not also a general
partner. (1853)
(2) Do any act which  Allowable transaction of limited partner (not
would make it also general partner)
impossible to carry on
the ordinary business a. Loan money to the partnership
of the partnership;
b. Transact other business with the partnership,
(3)Confess a judgment
against the partnership; c. Received a pro rata share of the assets with
the general creditors (if he is not also a general
(4)Possess partnership partner)
property, or assign
their rights in specific  Prohibited transactions
partnership property,
for other than a a. Receive or hold as collateral security and
partnership purpose; partnership property, or
(5)Admit a person as a
general partner; b. Receive from a general partner or the
partnership any payment, conveyance, or
(6) Admit a person as release from liability is at the time the assets
a limited partner, of the partnership are not sufficient to
unless the right so to discharge partnership liabilities to persons not
do is given in the claiming as general or limited partners.
The receiving of collateral security, or payment,
(7) Continue the conveyance, or release in violation of the
business with foregoing prohibition is a fraud on the creditors
partnership property of the partnership. (Reason 3rd persons enjoy
on the death, preferential rights insofar as partnership assets
retirement, insanity, are concerned) (1854)
civil interdiction or
insolvency of a general  A limited partner may receive from the
partner, unless the partnership the share of the profits or the
right so to do is given compensation by way of income stipulated for
in the certificate. in the certificate. (provided that Partnership
(1850) assets > All outside liabilities) (1856)

Page 19 of 103 BL.2401


 Where there are several limited partners the b. For any unpaid contribution which he
members may agree that one or more of the agreed in the certificate to make in the future
limited partners shall have a priority over at the line and on the conditions stated in the
other limited partners as to the return of their certificate
contributions, as to their compensation by way
of income, or as to any other matter. If such an Liability limited partner as trustee - A limited
agreement is made it shall be stated in the partner is considered as trustee for the
certificate, and in the absence of such a partnership.
statement all the limited partners shall stand
upon equal footing. (1855) a Specific property stated in the certificate as
 Requisites for return of contribution of limited contributed by him, but which was not
partner. (1857) contributed or which has been wrongfully
returned, and
a. All liabilities of the partnership, except
liabilities to general partners and to b. Money or other property wrongfully paid or
limited partners on account of their conveyed to him on account of his
contributions, have been paid or there contribution.
remains property of the partnership
sufficient to pay them; Requisites for waiver or compromise
b.The consent of all members is had, unless
the return of the contribution may be a. Consent of all members;
rightfully demanded under the provisions
of the second paragraphs; and b. It does not affect the right of a creditor of a
c. The certificate is cancelled or so amended as partnership
to set forth the withdrawal or reduction.
who extended credit or whose claim arose after
 Return of contribution of limited partner as a the filing and before a cancellation or
matter right - Limited partner may rightfully amendment of the
demand the return his contribution: (1857)
certificate, to enforce such liabilities.
a. On the dissolution of a partnership, or b.
Arrival of the date specified in the certificate
 A limited partner's interest is assignable.
for its return;
 An assignee, who does not become a
c. After he has six months' notice in writing
substituted limited partner, has no right to
to all other members, if no time is specified
require any information or account of the
in the certificate, either for the return of the
partnership transactions or to inspect the
contribution or for the dissolution of 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
 Liability of limited partner to the partnership contribution, to which his assignor would
(1858) otherwise be entitled. (Right are similar to
those of a person to whom a partner conveyed
a. For the difference between his his whole interest in the partnership)
contribution as actually made and that
stated in the certificate as having been A substituted limited partner - is a person
made, and admitted to all the rights of a limited partner

Page 20 of 103 BL.2401


who has died or has assigned his interest in a a. Those owing to a. Those to creditors, in
partnership creditors other the order of priority as
than partners; provided by law,
Requisites when assignee become substituted b.Those owing to except those to limited
limited partner partners other than partners on account of
for capital and their contributions,
a. All the members consent thereto or if the profits. and to general
assignor, being thereunto empowered by the c. Those owing to partners;
certificate, gives the assignee that right. b. An partners in respect b. Those to limited
assignee becomes a substituted limited partner of capital; partners in respect to
when the certificate is appropriately amended d. Those owing to their share of the
in accordance with article 1865. partners in respect profits and other
of profits. compensation by way
c. The certificate as amended must be of income o their
registered in the SEC contributions;
c. Those to limited
•The retirement, death, insolvency, insanity or partners in respect to
civil interdiction of a general partner dissolves the capital of their
the partnership, unless the business is continued contributions;
by the remaining general partners: d. Those to general
partners other than for
capital and profits;
(1) Under a right so to do stated in the
e. Those to general
certificate, or
partners in respect to
(2) With the consent of all members. (1860) •On f. Those to general
the death of a limited partner his executor or partners in respect to
administrator shall have all the rights of a capital.
limited partner for the purpose of setting his
estate, and such power as the deceased had to Note: In general partnership, the payment of
constitute his assignee a substituted limited
capital is preferred than with respect to profits.
partner. In limited partnership, the payment of profit has
preference over capital.
•The estate of a deceased limited partner shall be
liable for all his liabilities as a limited partner. CORPORATION
Element of Corporation
1. It is an artificial being
2. Created by operation of law
3. Having the right of succession
4. The powers attributes and properties
expressly authorized by law or incident to its
Liabilities of the partnership shall rank in Doctrine of separate judicial personality
order of payment
Corporation has juridical personality separate
General Partnership Limited Partnership and distinct from the stockholders composing
(1839) (1863) the corporation.

Page 21 of 103 BL.2401


Piercing the veil of corporate entity 1. Manner of creation

2. Number of incorporators
When the veil of corporate fiction is used as a 3. Commencement of juridical personality
shield to perpetuate fraud, to defeat public 4. Powers
convenience, justify wrong or defend crime, this 5. Management
fiction shall be disregarded and the individuals 6. Effect of mismanagement
composing it will be treated identically. 7. Right of succession
Doctrine of limited capacity 8. Transferability of interest
9. Term of existence
Corporation may exercise only powers expressly 10. Firm name
authorized by law or incident to its existence. 11. Dissolution
12. Laws which govern
Theory of Corporation
Classification of corporation
1. Theory of concession – Exist by grant of the
state (Philippine Setting) 1. Stock corporation – Corporations which have
2. Gennosenshaft Theory – It exist because the capital stock divided into shares and are
parties want it to exist. authorized to distribute to the holders of such
share dividends or allotments of the surplus
Private Corporation can only be created by
profits on the basis of the shares held (Sec 4,
corporation code (B.P. 68)
BP 68)
Under Art. XII, Sec. 16 of the 1987 Constitution 2. Non-stock corporation – all other
which provides as follows: corporations are non-stock corporation.

"The Congress shall not, except by general law, Other classification of Corporations
provide for the formation, organization, or
1. Number of persons
regulation of private corporations. Government-
a. Corporation aggregate – more than one
owned or controlled corporations may be created
or established by special charters in the interest
b. Corporation sole – one member or
of the common good and subject to the test of
economic viability"
2. Religious purpose or not
Special law can create only: a. Ecclesiastical corporation – religious
b. Lay corporation – other than religious
1. Public corporation purpose. (Either eleemosynary or civil)
2. Government owned or controlled corporation 3. Charitable or not
provided: a. Eleemosynary corporation – charitable
a. In the interest of common goods b. Civil corporation – business of profit
b. Subject to test of economic viability. 4. Country of creation
Corporation not entitled to moral damages a. Domestic corporation – incorporated
under Philippine law
A corporation, being an artificial person and b. Foreign corporation – incorporated
having existence only in legal contemplation, under foreign law
has no feeling, no emotions, no senses; 5. Legal right to corporate existence
therefore, it cannot experience physical a. De jure corporation – exist in fact and in
suffering, mental anguish, fright, serious law
anxiety, wounded feelings, etc. b. De facto corporation – exist in fact but not
in law
Distinction between Partnership and 6. Public or not
Corporation a. Close corporation – limited to selected
Page 22 of 103 BL.2401

b. Open corporation – open to any person  That no share may be deprived of voting
7. Relation to others corporation rights except those classified and issued as
a. Parent corporation – owner of more than "preferred" or "redeemable" shares.
50% of another corporation 4. Non-voting share – shares without right to
b. Subsidiary corporation – acquire of parent vote
company Non-voting shares classified as such may still
8. True or limited sense vote under the following circumstances:
a. True corporation a. Amendment of the articles of
b. Quasi corporation incorporation;
1. Corporation by prescription – exercise b. Adoption and amendment of by-laws;
power for indefinite period without c. Sale, lease, exchange, mortgage, pledge or
interference from sovereign power. other disposition of all or substantially all
(Roman Catholic Church) of the corporate property;
2. Corporation by estoppels d. Incurring, creating or increasing bonded
9. Public or private purpose indebtedness;
a. Public corporation e. Increase or decrease of capital stock;
b. Private corporation f. Merger or consolidation;
10. Going public or not g. Investment of corporate funds in another
a. Going public – decide to list its share in corporation or business except where the
the stock exchange investment by the corporation is
b. Going private – restrict the share to reasonably necessary to accomplish its
certain group. primary purpose as stated in the articles of
h. Dissolution of the corporation.
5. Common stock – equal right. Except as
Classes of shares otherwise provided in the articles of
1. Par value share incorporation and stated in the certificate of
2. No par value shares stock, each share shall be equal in all respects
Limitation: to every other share (6)
a. Cannot be issued by the following 6. Preferred stock – preferred shares of stock
corporation: (BPI-TB) issued by any corporation may be given
1. Bank preference in the distribution of the assets of
2. Public utilities the corporation in case of liquidation and in
3. Insurance company the distribution of dividends, or such other
4. Trust company preferences as may be stated in the articles of
5. Building and loan association incorporation.
b. Preferred shares not allowed 7. Promotion stock – issued to promoter
c. Cannot be issued for a consideration less 8. Share in escrow – subject to agreement where
than five peso (P5) the stock is deposited to third and kept by the
d. Deemed fully paid and non-assessable. depositary until the condition contained in
e. Entire consideration received shall be agreement happened.
treated as capital and not available for 9. Convertible stock – convertible to other
dividend distribution. shares
3. Voting share 10. Founder share – issued to founder or
 That there shall always be a class or series organizer having a right granted (Sec 7)
of shares which have complete voting 11. Redeemable share (Sec 8)
rights. a. Must be expressly so provided in the
articles of incorporation

Page 23 of 103 BL.2401


b. Purchased or taken up by the 5. The names, nationalities and residences of

corporation upon the expiration of a the incorporators;
fixed period, regardless of the existence 6. The number of directors or trustees, which
of unrestricted retained earnings. shall not be less than five (5) nor more than
c. Terms and conditions must be stated in fifteen (15);
the articles of incorporation and 7. The names, nationalities and residence of
certificate of stock. persons who shall act as directors or trustees
12. Treasury stock – shares of stock which have until the first regular directors or trustees are
been issued and fully paid but subsequently duly elected and qualified in accordance with
reacquired by the issuing corporation by this Code;
purchase, redemption, donation or other 8. If it be a stock corporation, the amount of its
lawful means. (Sec 9) authorized capital stock in lawful money of
the Philippines, the number of shares into
Term of Corporation which it is divided, and in case the share are
Corporate term – 50 years may be extended for par value shares, the par value of each, the
periods not exceeding fifty (50) years in any names, nationalities and residences of the
single instance by an amendment of the articles original subscribers, and the amount
of incorporation. No extension can be made subscribed and paid by each on his
earlier than five (5) years prior to the original or subscription, and if some or all of the shares
subsequent expiry date(s) unless there are are without par value, such fact must be
justifiable reasons for an earlier extension. (Sec stated;
11) 9. If it be a non-stock corporation, the amount
of its capital, the names, nationalities and
Contents of the articles of Incorporation (Sec residences of the contributors and the amount
14) contribute by each; and
10. Such other matters as are not inconsistent
All corporations organized under this code shall
with law which the incorporators may deem
file with the Securities and Exchange
necessary and convenient.
Commission articles of incorporation in any of
the official languages duly signed and Minimum Capital Requirement
acknowledged by all of the incorporators,
containing substantially the following matters, General Rule: no minimum authorized capital
except as otherwise prescribed by this Code or stock (Sec 12)
by special law: Exception:
1. The name of the corporation; 1. Sec 13
2. The specific purpose or purposes for which  25% of the authorized capital stock must
the corporation is being incorporated. Where be subscribed
a corporation has more than one stated  25% of the total subscription be paid.
purpose, the articles of incorporation shall  In no case the paid-up capital be less than
state which is the primary purpose and which P5,000
is/are the secondary purpose or purposes: 2. Special Law
Provided, that a non-stock corporation may Percentage of Filipino ownership
not include which would change or contradict (Nationalize Corporation)
its nature as such; 1. 100% Filipino
3. The place where the principal office of the a. Mass Media
corporation is to be located, which must be b. Practice of professions
within the Philippines; c. Retail trade enterprises with paid-
4. The term for which must be within the up capital of less than
Philippines; US$2,500,000
Page 24 of 103 BL.2401

d. Private Security Agencies facility requiring a public utility

e. Small scale mining franchise
f. Utilization of marine resources in h. Operation of deep-sea commercial
archipelagic waters, territorial sea, fishing vessel]
and exclusive economic zone as i. Adjustment companies
well as small-scale utilization of j. Ownership of condominium units
natural resources in rivers, lakes, k. Manufacture , repair, storage,
bays and lagoons. and/or distribution of products
g. Ownership, operation and requiring Philippine National Police
management of cockpits (PNP) clearance
h. Manufacture of firecrackers and l. Manufacture, repair, storage and/or
other pyrotechnic devices. distribution of products requiring
2. 80% Filipino Department of National Defense
a. Private radio communication (DND) clearance
network m. Manufacture and distribution of
3. 75% dangerous drugs
a. Private radio communication n. Sauna and steam bathhouses,
network massage clinics and like other
b. Private recruitment whether for activities regulated by law because
local of overseas recruitment of risks posed to public health and
c. Contract for the construction and morals
repair of locally funded public o. Domestic market enterprises with
works paid-in equity capital of less than
d. Contract for the construction of the equivalent of US$200,000
defense related structures, p. Domestic market enterprises, which
4. 70% involved advanced technology or
a. Pawnshop business employ at least fifty direct
b. Business activity of advertising employees with paid-in equity
5. 60% capital or less than the equivalent of
a. Exploration, development and US$100,000
utilization of natural resources 6. 40%
b. Ownership of private lands a. Financing companies
c. Operation of public utilities b. Investment house
d. Educational institutions other than
those established by religious Business activities wherein foreigner's
groups and mission boards ownership could be more than forty (40)
e. Culture, production, milling, percent up to one hundred percent
processing, trading except retailing 1. Export enterprises and
of rice and corn and acquiring by 2. Domestic market enterprises with paid-in
barter purchase or otherwise, rice equity capital of at least the equivalent of
and corn and by-products thereof US$200,000
f. Contracts for the supply materials, 3. Domestic market enterprises, which involved
goods and commodities to advanced technology or employ at least fifty
government-owned or controlled direct employees with paid-in equity capital
corporation, company, agency or of at least the equivalent of US$100,000
g. Facility operator of an Corporate Name not allowed (Sec 18)
infrastructure or a development
1. Identical
2. Deceptive
Page 25 of 103 BL.2401

3. Confusingly similar to that existing Distinction between corporators and

corporation incorporators
4. Any name already protected by law
5. Patently deceptive, confusing or contrary to Corporators (Sec 5) Incorporators (Sec 10)
existing laws. Limited depending on Limit only to not less than
the available authorized five but not more than 15
Note: when approved – Commission issue capital stock
amended certificate of incorporation under the Not signatories in the Originally formed and
amended name. article of incorporation. signatories of the article
of incorporation.
Commencement of corporate existence (Sec
They cease to be Remain as incorporators
corporators when they even no longer a holder of
From the issuance of certificate of incorporation are no longer a holder of shares of stock
by the SEC under its official seal. shares of stock
De Facto Corporation (Sec 20)
a. Stock corporation - Stockholder or
Requisites of de facto corporatiom shareholder
1. Valid law b. Non-stock corporation-Member
2. Bonafide intent to incorporate under such Number and Qualifications of Incorporators
valid law
3. Actual exercise in good faith of such 1. Not less than 5 but not more than 15 (Sec 14)
corporate power 2. Must be a natural person
 i.e. Majority of incorporators are not 3. All must be of legal age
resident of the Philippines; defect in form; 4. Majority must be resident of the Philippines
acknowledged before a person without 5. Must be an owner or subscriber of at least
authority one(I)share of capital stock
 only direct proceeding of quo warranto is
Number and Qualifications of Director (Sec
allowed. Collateral attack not allowed.
 Initiated by the solicitor general.
1. Not less than five but not more than 15(Sec
Corporation by estoppel (Sec 21)
 Liable as general partner for all debts, 2. Owner of at least one share
liabilities and damages. 3. The ownership (Legal not beneficial
ownership e.g. pledgor, mortgagor)must be
Effects on non-use of corporate charter and stand in the name of the director in the book
continuous inoperation of a corporation (Sec. of the corporation.
22) 4. Majority must be residence of the Philippines
5. Not convicted by final judgment for an
offense punishable by imprisonment of more
than 6 years
6. Do not commit a violation of the corporation
code within 5 years prior to the date of his
election or appointment.

Qualification of Corporate Officer (Sec 25)

1. President-Must be director
2. Secretary-Resident and citizen of the

Page 26 of 103 BL.2401


3. *Treasurer-May or may not be a director Apply to registered corporations and to branches

Apply to all: or subsidiaries of foreign corporations operating
a. Not convicted by final judgment for an in the Philippines that
offense punishable by imprisonment of
more than 6 years a. Sell equity and/or debt securities to the public
b. Do not commit a violation of the that arerequired to be registered with the
corporation code within 5 years prior to Commission,or
the date of his election or appointment. b. Have assets in excess of Fifty Million Pesos
(Sec 27) and at least twohundred(200) stockholders
*Corporate treasurer must be a resident of the who own at least one hundred(100)shares
Philippines. (Policy of the SEC) each of equity securities,or
c. Whose equity securities are listed on an
Concurrent position of corporate officer Exchange;or
(Sec 25) d. Grantees of secondary licenses from the
1. President + secretary-Not allowed Commission.
2. President + treasurer-Not allowed Interpretation in case of doubt
3. Secretary + treasurer-Allowed
*Chairman and Vice chairman not allowed All doubts or questions that may arise in the
(SEC Opinion) interpretation or application of this Code shall be
By Laws resolved in favor of promoting
 May provide for the qualification of the transparency,accountability and fairness to the
director stockholders and investors of the corporation.
a. At least 25 years of age
Board of Director
b. Have some experience in business,
finance or law The Board of Directors(the"Board") is primarily
c. Disqualify anyone who is competing responsible for the governance of the
with the corporation corporation. Corollary to setting the policies for
the accomplishment of the corporate objectives,
As long as the qualification imposed are
it shall provide an independent check on
reasonable and not meant to unjustly or unfairly
deprive the minority of their rightful
representation in the Board of Directors, it is Composition of the Board
The Board shall be composed of at least five (5),
REVISED CODE OF CORPORATE but not more than fifteen(15),members who are
GOVERNANCE (SEC Memorandum elected by the stockholders.
Circular 6-2009)
Number of independent director in the board
Effective:July 15,2009
1. Covered by this code
Corporate Governance-the framework of rules, At least two(2)independent directors or such
systems and processes in the corporation that number ofindependent directors that
governs the performance by the Board of constitutes twenty percent(20%) of the
Directors and Management of their respective members of the Board,whichever is lesser,but
duties and responsibilities to the stockholders. in nocase less than two(2).
2. All other companies
Covered by Revised Code of Corporate
Are encouraged to have independent
directors in theirboards.
Independent director-a person who, apart from
his fees and shareholdings,is independent of
Page 27 of 103 BL.2401

management and free from any business or other accountability and better capacity for
relationship which could, or could reasonably be independent decision-making by the Board.
perceived to,materially interfere with his A clear delineation of functions should be
exercise of independent judgment in carrying made between the Chair and CEO upon their
out his responsibilities as a director. election. If the positions of Chair and CEO
are unified, the proper checks and balances
Membership of the board should be laid down to ensure that the Board
1. Executive - a director who is also the head of gets the benefit of independent views and
a department or unit of the corporation or perspectives.
performs any work related to its operation
2. Non-executive directors - a director who is Duties and Responsibilities of Chair
not the head of a department or unit of the The duties and responsibilities of the Chair in
corporation nor performs any work related to relation to the Board may include, among
its operation. others, the following:
Qualification 1. Ensure that the meetings of the Board are
Should possess such qualifications and held in accordance with the by-laws or as the
stature that would enable them to effectively Chair may deem necessary;
participate in the deliberations of the Board. 2. Supervise the preparation of the agenda of
Reason for inclusion of non-executive the meeting in coordination with the
director (which include independent Corporate Secretary, taking into
director) consideration the suggestions of the CEO,
In order that no director or small group of Management and the directors, and
directors can dominate for 3. Maintain qualitative and timely lines of
the decision-making process. communication and information between the
Multiple Board Seats Board and Management.
The Board may consider the adoption of Qualifications of Directors
guidelines on the number of directorships
that its members can hold in stock and In addition to the qualifications for membership
non-stock corporations. The optimum in the Board provided for in the Corporation
number should take into consideration the Code, Securities Regulation Code and other
capacity of a director to diligently and relevant laws, the Board may provide for
efficiently perform his duties and additional qualifications which include, among
responsibilities. The Chief Executive Officer others, the following:
("CEO") and other executive directors may
be covered by a lower indicative limit for 1. College education or equivalent academic
membership in other degree;
boards. A similar limit may apply to 2. Practical understanding of the business of the
independent or non-executive directors, who corporation;
at the same time, serve as full-time 3. Membership in good standing in relevant
executives in other corporations. In any case, industry, business or professional
the capacity of the directors to diligently and organizations and
efficiently perform their duties and 4. Previous business experience.
responsibilities to the boards they serve Disqualifications of Directors
should not be compromised.
1. Permanent Disqualification
The Chair and Chief Executive Officer The following should be grounds for the
The roles of Chair and CEO should, as much permanent disqualification of a director:
as practicable, be separate to foster an a. Any person convicted by a final judgment
appropriate balance of power, increased or order by a competent judicial or
Page 28 of 103 BL.2401

administrative body of any crime that (a) association with a member or participant
involves the purchase or sale of securities, of the organization;
as defined in the Securities Regulation c. Any person convicted by final judgment
Code; (b) arises out of the person's or order by a court or competent
conduct as an underwriter, broker, dealer, administrative body of an offense
investment adviser, principal, distributor, involving moral turpitude, fraud,
mutual fund dealer, futures commission embezzlement, theft, estafa,
merchant, commodity trading advisor, or counterfeiting, misappropriation, forgery,
floor broker; or (c) arises out of his bribery, false affirmation, perjury or other
fiduciary relationship with a bank, quasi- fraudulent acts;
bank, trust company, investment house or d. Any person who has been adjudged by
as an affiliated person of any of them; final judgment or order of the
b. Any person who, by reason of Commission, court, or competent
misconduct, after hearing, is permanently administrative body to have willfully
enjoined by a final judgment or order of violated, or willfully aided, abetted,
the Commission or any court or counseled, induced or procured
administrative body of competent the violation of any provision of the
jurisdiction from: (a) acting as Corporation Code, other law
underwriter, broker, dealer, investment Securities Regulation Code or any
adviser, principal distributor, mutual fund administered by the Commission or BSP,
dealer, futures commission merchant, or any of its
commodity trading advisor, or floor rule, regulation or order;
broker (b) acting as director or officer of a e. Any person earlier elected as independent
bank, quasi bank, trust company, director who becomes an officer,
investment house, or investment employee or consultant of the same
company; (c) engaging in or continuing corporation;
any conduct or practice in any of the f. Any person judicially declared as
capacities mentioned in sub-paragraphs insolvent;
(a) and (b) above, or willfully violating g. Any person found guilty by final
the laws that govern securities and judgment or order of a foreign court or
banking activities. The disqualification equivalent financial regulatory authority
shall also apply if such person is of acts, violations or misconduct similar to
currently the subject of an order of the any of the acts, violations or misconduct
Commission or any court or enumerated in sub-paragraphs (i) to (v)
administrative body denying, revoking or above;
suspending any registration, license or per h. Conviction by final judgment of an
unit issued to him under the Corporation offense punishable by imprisonment for
Code, Securities Regulation Code or any more than six (6) years, or a violation of
other law administered by the the Corporation Code committed within
Commission five (5) years prior to the date of his
or Bangko Sentral ng Pilipinas (BSP), or election or appointment.
under any rule or regulation issued by the 2. Temporary Disqualification
Commission or BSP, or has The Board may provide for the temporary
otherwise been restrained to engage in any disqualification of a director for any of the
activity involving securities and banking; following reasons:
or such person is currently the subject of a. Refusal to comply with the disclosure
an effective order of a self-regulatory requirements of the Securities Regulation
organization suspending or expelling him Code and its Implementing Rules and
from membership, participation or

Page 29 of 103 BL.2401


Regulations. The disqualification shall be the Board should conduct itself with
in effect as long as the refusal persists. honesty and
b. Absence in more than fifty (50) percent of integrity in the performance of, among
all regular and special meetings of the others, the following duties and functions:
Board during his incumbency, or any a) Implement a process for the selection
twelve (12) month period during the said of directors who can add value and
incumbency, unless the absence is due to contribute independent judgment to the
illness, death in the immediate family or formulation of sound corporate
serious accident. The disqualification shall strategies and policies. Appoint
apply for purposes of the succeeding competent, professional, honest and
election. highly motivated management officers.
c. Dismissal or termination for cause as Adopt an effective succession planning
director of any corporation covered by program for Management.
this Code. The disqualification shall be in b) Provide sound strategic policies and
effect until he has cleared himself from guidelines to the corporation on major
any involvement in the cause that gave capital expenditures. Establish
rise to his dismissal or termination. programs that can sustain its long-term
d. If the beneficial equity ownership of an viability and strength. Periodically
independent director in the corporation or evaluate and monitor the
its subsidiaries and affiliates exceed two implementation of such policies and
percent of its subscribed capital stock. The strategies, including the business plans,
disqualification shall be lifted if the limit operating budgets and Management's
is later complied with. overall performance.
e. If any of the judgments or orders cited in c) Ensure the corporation's faithful
the grounds for permanent disqualification compliance with all applicable laws,
has not yet become final. regulations and best business practices.
A temporarily disqualified director shall, d) Establish and maintain an investor
within sixty (60) business days from such relations that will keep the
disqualification. Take the appropriate stockholders informed of important
action to remedy or correct the developments in the corporation. If
disqualification. If he fails or refuses to do feasible, the corporation's CEO or
so for unjustified reasons, the chief financial officershall exercise
disqualification shall become permanent. oversight responsibility over this
General Responsibility of the Board program.
It is the Board's responsibility to foster the e) Identify the sectors in the community
long-term success of the corporation, and in which thecorporation operates or are
to sustain its sustain its competitiveness directly affected by its operations,and
and profitability in a manner consistent formulate a clear policy of accurate,
with its corporate objectives and the best timely and electivecommunication
interests of its stockholders. The Board with them,
should formulate the corporation's vision, f) Adopt a system of check and balance
mission, strategic objectives, policies and within the Board. Aregular review of
procedures that shall guide its activities, the effectiveness of such system
including the should beconducted to ensure the
Effectively Management's performance. integrity of the decision-making
Duties and Function of the Board andreporting processes at all times.
To ensure a high standard of best practice There should be a continuingreview of
for the corporation and its stockholders, the corporation's internal control

Page 30 of 103 BL.2401


system in orderto maintain its

adequacy and effectiveness. Specific Duties and Responsibilities
g) Identify key risk areas and of a Director
performance indicators andmonitor A director's oflice is one of trust and
these factors with due diligence to confidence. A directorshould act in the
enable thecorporation to anticipate and best interest of the corporation in a
prepare for possible threats toits mannercharacterized bytransparency,
operational and financial viability. accountability and fairness. He should
h) Formulate and implement policies and also exerciseleadership, prudence and
procedures that wouldensure the integrity in directing the
integrity and transparency of related corporationtowards sustained progress.
partytransactions between and among A director should observe the
the corporation and itsparent company, following norms of conduct:
joint ventures, subsidiaries, a. Conduct fair business
associates,affiliates, major transactions with the
stockholders, officers and directors corporation,and ensure that his
including their spouses, children and personal interest does not conflict
dependent siblings andparents, and of with the interests of the
interlocking director relationships by corporation.The basic principle to
members of the Board. be observed is that a director
i) Constitute an Audit Committee and shouldnot use his position to profit
such other committees itdeems or gain some benefit oradvantage
necessary to assist the Board in the for himself and/or his related
performance of itsduties and interests. He shouldavoid situations
responsibilities. that may compromise his
j) Establish and maintain an alternative impartiality. If anactual or potential
dispute resolutionsystem in the conflict of interest may arise on the
corporation that can amicably settle part ofa director, he should fully
conflicts ordifferences between the and immediately disclose it
corporation and its stockholders, and andshould not participate in the
the corporation and third parties, decision-making process. Adirector
including the regulatory authorities. who has a continuing material
k) Meet at such times or frequency as conflict of interest should seriously
may be needed. The minutes of such consider resigning from his
meetings should be duly recorded position. A conflict of interest shall
Independent views during Board be considered material if the
meetings should be encouraged and director's personal or business
given due consideration. interest is antagonistic to that of the
l) Keep the activities and decisions of the corporation, or stands to acquire or
Board within its authority under the gain financial advantage at the
articles of incorporation and by-laws, expense of the corporation.
and in accordance with existing laws, b. Devote the time and attention
rules and regulations. necessary to properly and
m) Appoint a Compliance Officer who effectively perform his duties and
shall have the rank of at least vice responsibilities.
president. In the absence of such A director should devote sufficient
appointment, the Corporate Secretary, time to familiarize himself within
preferably a lawyer, shall act as the corporation's business. He
Compliance Officer. should be constantly aware of and

Page 31 of 103 BL.2401


knowledgeable with the and prudent manner; (c) the organizational and
corporation's operations to enable procedural controls supported by effective
him to meaningfully contribute to management information and risk management
the Board's work. He should attend reporting systems; and (d) an independent audit
and actively participate in Board mechanism to monitor the adequacy and
and committee meetings, review effectiveness of the corporation's governance,
meeting materials and, if called for, operations, and information systems, including
ask questions or seek explanation. the reliability and integrity of financial and
c. Act judiciously. operational information, the effectiveness and
Before deciding on any matter efficiency of operations, the safeguarding of
brought before the Board, a director assets, and compliance with laws, rules,
should carefully evaluate the issues regulations and contracts.
and, if necessary, make inquiries and (i) The minimum internal control mechanisms
request clarification. for the performance of the Board's oversight
d. Exercise independent judgment. responsibility may include:
A director should view each problem a) Definition of the duties and responsibilities
or situation objectively. If a of the CEO who is ultimately accountable for
disagreement with other directors the corporation's organizational and
arises, he should not be afraid to take operational controls;
an unpopular position. Corollarily, he b) Selection of the person who possess the
should support plans and ideas that ability, integrity and expertise essential for
he thinks are beneficial to the the position of CEO.
corporation. c) Evaluation of proposed senior management
e. Have a working knowledge of the appointments;
statutory and regulatory requirements d) Selection and appointment of qualified and
that affect the corporation, including competent management officers; and
its articles of incorporation and by- e) Review of the corporation's human resource
laws, the rules and regulations of the policies, conflicts of interest situations,
Commission and, where applicable, compensation program for employees, and
the requirements of relevant management succession plan.
regulatory agencies. A director
should also keep abreast with (ii) The scope and particulars of the systems of
industry developments and business effective organizational and operational controls
trends in order to promote the may differ among corporations depending on,
corporation's competitiveness. among others, the following factors: nature and
f. Observe confidentiality complexity of the business and the business
A director should keep secure and culture; volume, size and complexity of
confidential all non-public transactions; degree of risks involved; degree of
information he may acquire or learn centralization and delegation of authority; extent
by reason of his position as director. and effectiveness of information technology; and
He should not reveal confidential extent of regulatory compliance.
information to unauthorized persons (iii) A corporation may establish an internal
without the authority of the Board. audit system that can reasonably assure the
Internal Control Responsibilities of the Board Board, Management and stockholders that its
The control environment of the corporation key organizational and operational control are
consists of (a) the Board which ensures that the faithfully complied with. The Board may
corporation is properly and effectively managed appoint an Internal Auditor to perform the audit
and supervised; (b) a Management that actively function, and may require him to report to a
manages and operates the corporation in a sound level in the organization that allows the internal
Page 32 of 103 BL.2401

audit activity to fulfill its mandate. The Internal top four (4) management officers during the
Auditor shall be guided by the International preceding fiscal year.
Standards on Professional Practice of Internal
Auditing. To protect the funds of a corporation, the
Commission may, in exceptional cases, e.g.
Board Meetings and Quorum Requirement when a corporation is under receivership or
rehabilitation, regulate the payment of the
The members of the Board should attend its compensation, allowances, fees and fringe
regular and special meetings in person or benefits to its directors and officers.
through teleconferencing conducted in
accordance with the rules and regulations of the Board Committees
Commission. Independent directors should
always attend Board meetings. Unless otherwise The Board shall constitute the proper
provided in the by-laws, their absence shall not committees to assist it in good corporate
affect the quorum requirement. However, the governance.
Board may, to promote transparency, require the (i) The Audit Committee shall consist of at
presence of at least one independent director in least three (3) directors, who shall preferably
all its meetings. have accounting and finance backgrounds,
To monitor the directors' compliance with the one of whom shall be an independent director
attendance requirements, corporations shall and another with audit experience. The chair
submit to the Commission, on or before January of the Audit Committee should be an
30 of the following year, a sworn certification independent director.
about the director's record of attendance in The committee shall have the following
Board meetings. The certification may be functions:
submitted through SEC Form 17-C or in a
separate filing. a) Assist the Board in the performance of its
oversight responsibility for the financial
Remuneration of Directors and Officers reporting process, system of internal control,
The levels of remuneration of the corporation audit process, and monitoring of compliance
should be sufficient to be able to attract and with applicable laws, rules and regulations;
retain the services of qualified and competent b) Provide oversight over Management's
directors and officers. A portion of the activities in managing credit, market,
remuneration of executive directors may be liquidity, operational, legal and other risks of
structured or be based on corporate and the corporation. This function shall include
individual performance. regular receipt from Management of
information on risk exposures and risk
Corporations may establish formal and management activities;
transparent procedures for the development of a c) Perform oversight functions over the
policy on executive remuneration or corporation's internal and external auditors. It
determination of remuneration levels for should ensure that the internal and external
individual directors and officers depending on auditors act independently from each other,
the particular needs of the corporation. No and that both auditors are given unrestricted
director should participate in deciding on his access to all records, properties and personnel
remuneration. to enable them to perform their respective
audit functions;
The corporation's annual reports and information d) Review the annual internal audit plan to
and proxy statements shall include a clear, ensure its conformity with the objectives of
concise and understandable disclosure of all the corporation. The plan shall include the
fixed and variable compensation that may be
paid, directly or indirectly, to its directors and
Page 33 of 103 BL.2401

audit scope, resources and budget necessary functionally report directly to the Audit
to implement it; Committee. The Audit Committee shall
e) Prior to the commencement of the audit, ensure that, in the performance of the work of
discuss with the external auditor the nature, the Internal Auditor, he shall be free from
scope, resource and expenses of the audit, interference by outside parties. Philippine
and ensure proper coordination if more than branches corporations covered by the their
one audit firm is involved in the activity to Internal Auditor, he shall be free from
secure proper coverage and minimize interference by outside parties. For Philippine
duplication of efforts; branches or subsidiaries of foreign
f) Organize an internal audit department, and corporations covered by this Code, their
consider the appointment of an independent Internal Auditor should be independent of the
internal auditor and the terms and conditions Philippine operations and should report to the
of its engagement and removal; regional or corporate headquarters.
g) Monitor and evaluate the adequacy and
effectiveness of the corporation's internal (ii) The Board may also organize the
control system, including financial reporting following committees:
control and information technology security. a) A Nomination Committee, which may be
h) Review the reports submitted by the internal composed of at least three (3) members and
and external auditors; one of whom should be an independent
i) Review the quarterly, half-year and annual director, to review and evaluate the
financial statements before their submission qualifications of all persons nominated to the
to the Board, with particular focus on the Board and other appointments that require
following matters: Board approval, and to assess the
1. Any change/s in accounting policies and effectiveness of the Board's processes and
practices procedures in the election or replacement of
2. Major judgmental areas directors;
3. Significant adjustments resulting from b) A Compensation or Remuneration
the audit Committee, which may be composed of at
4. Going concern assumptions least three (3) members and one of whom
5. Compliance with accounting standards should be an independent director, to
6. Compliance with tax, legal and establish a formal and transparent procedure
regulatory requirements. for developing a policy on remuneration of
j) Coordinate, monitor and facilitate directors and officers to ensure that their
compliance with laws, rules and regulations; compensation is consistent with the
k) Evaluate and determine the non-audit work, corporation's culture, strategy and the
if any, of the external auditor, and review business environment in which it operates.
periodically the non-audit fees paid to the
external auditor in relation to their The Corporate Secretary
significance to the total annual income of the
The Corporate Secretary, who should be a
external auditor and to the corporation's
Filipino citizen and a resident of the Philippines,
overall consultancy expenses. The committee
is an officer of the corporation. He should—
shall disallow any non-audit work that will
conflict with his duties as an external auditor a. Be responsible for the safekeeping and
or may pose a threat to his independence. The preservation of the integrity of the minutes of
non-audit work, if allowed, should be the meetings of the Board and its committees,
disclosed in the corporation's annual report; as well as the other official records of the
l) Establish and identify the reporting line of corporation;
the Internal Auditor to enable him to properly b. Be loyal to the mission, vision and objectives
fulfil his duties and responsibilities. He shall of the corporation;
Page 34 of 103 BL.2401

c. Work fairly and objectively with the Board, Adequate and Timely Information
Management and stockholders;
d. Have appropriate administrative and To enable the members of the Board to properly
interpersonal skills; fulfil their duties and responsibilities,
e. If he is not at the same time the corporation's Management should provide them with
legal counsel, be aware of the laws, rules and complete, adequate and timely information
regulations necessary in the performance of about the matters to be taken in their meetings.
his duties and responsibilities; Reliance on information volunteered by
f. Have a working knowledge of the operations Management would not be sufficient in all
of the corporation; circumstances and further inquiries may have to
g. Inform the members of the Board, in be made by a member of the Board to enable
accordance with the bylaws, of the agenda of him to properly perform his duties and
their meetings and ensure that the members responsibilities.
have before them accurate information that Hence, the members should be given
will enable them to arrive at intelligent independent access to Management and the
decisions on matters that require their Corporate Secretary,
h. Attend all Board meetings, except when The information may include the background or
justifiable causes, such as, illness, death in explanation on matters brought before the
the immediate family and serious accidents, Board, disclosures, budgets, forecasts and
prevent him from doing so; internal financial documents.
i. Ensure that all Board procedures, rules and
The members, either individually or as a Board,
regulations are strictly followed by the
and in furtherance of their duties and
members; and
responsibilities, should have access to
j. If he is also the Compliance Officer, perform
independent professional advice at the
all the duties and responsibilities of the said
corporation's expense.
officer as provided for in this Code.
Accountability and Audit
Compliance Officer
A.) The Board is primarily accountable to the
The Board shall appoint a Compliance Officer
stockholders. It should provide them with a
who shall report directly to the Chair of the
balanced and comprehensible assessment of
Board. He shall perform the following duties:
the corporation's performance, position and
1. Monitor compliance by the corporation with prospects on a quarterly basis, including
this Code and the rules and regulations of interim and other reports that could
regulatory agencies and, if any violations are adversely affect its business, as well as
found, report the matter to the Board and reports to regulators that are required by
recommend the imposition of appropriate law. Thus, it is essential that Management
disciplinary action on the responsible parties provide all members of the Board with
and the adoption of measures to prevent a accurate and timely information that would
repetition of the violation; enable the Board to comply with its
2. Appear before the Commission when responsibilities to the stockholders.
summoned in relation to compliance with Management should formulate, under the
this. Code; and supervision of the Audit Committee, the
3. Issue a certification every January 30th of the rules and procedures on financial reporting
year on the extent of the corporation's and internal control in accordance with the
compliance with this Code for the completed following guidelines:
year and, if there are any deviations, explain 1. The extent of its responsibility in the
the reason for such deviation, preparation of the financial statements

Page 35 of 103 BL.2401


of the corporation, with the the reasons why he has not fully
corresponding delineation of the complied with the said standards.
responsibilities that pertain to the B.) The Board, after consultations with the
external auditor, should be clearly Audit Committee shall recommend to the
explained; stockholders an external auditor duly
2. An effective system of internal control accredited by the Commission who shall
that will ensure the integrity of the undertake an independent audit of the
financial reports and protection of the corporation, and shall provide an objective
assets of the corporation should be assurance on the manner by which the
maintained; financial statements shall be prepared and
3. On the basis of the approved audit plans, prepared and presented to the stockholders.
internal audit examinations should The external auditor shall not, at the same
cover, at the minimum, the evaluation of time, provide internal audit services to the
the adequacy and effectiveness of corporation. Non-audit work may be given
controls that cover the corporation's to the external auditor, provided it does not
governance, operations and information conflict with his duties as an independent
systems, including the reliability and auditor, or does not pose a threat to his
integrity of financial and operational independence.
information, effectiveness and efficiency If the external auditor resigns, is dismissed
of operations, protection of assets, and or ceases to perform his services, the
compliance with contracts, laws, rules reason/s for and the date of effectivity of
and regulations; such action shall be reported in the
4. The corporation should consistently corporation's annual and current reports.
comply with the financial reporting The report shall include a discussion of any
requirements of the Commission; disagreement between him and the
5. The external auditor should be rotated or corporation on accounting principles or
changed every five (5) years or earlier, practices, financial disclosures or audit
or the signing partner of the external procedures which the former auditor and
auditing firm assigned to the the corporation failed to resolve
corporation, should be changed with the satisfactorily. A preliminary copy of the
same frequency. The Internal Auditor said report shall be given by the corporation
should submit to the Audit Committee to the external auditor before its
and Management an annual report on the submission. If the external auditor believes
internal audit department's activities, that any statement made in an annual report,
responsibilities and performance relative information statement or any report filed
to the audit plans and strategies as with the Commission or any regulatory
approved by the Audit Committee. The body during the period of his engagement is
annual report should include significant incorrect or incomplete, he shall give his
risk exposures, control issues and such comments or views on the matter in the said
other matters as may be needed or reports.
requested by the Board and
Management. The Internal Auditor Stockholders' Rights and Protection of
should certify that he conducts his Minority Stockholders' Interests
activities in accordance with the A.) The Board shall respect the rights of the
International Standards on the stockholders as provided for in the
Professional Practice of Internal Corporation Code, namely:
Auditing. If he does not, he shall 1. Right to vote on all matters that require
disclose to the Board and Management their consent or approval;

Page 36 of 103 BL.2401


2. Pre-emptive right to all stock issuances including its salient features, may be disclosed
of the corporation; in the corporation's annual report.
3. Right to inspect corporate books and
records; Disclosure and Transparency
4. Right to information; The essence of corporate governance is
5. Right to dividends; and transparency. The more transparent the internal
6. Appraisal right. workings of the corporation are, the more
B.) The Board should be transparent and fair in difficult it will be for Management and dominant
the conduct of the annual and special stockholders to mismanage the corporation or
stockholders' meetings of the corporation. misappropriate its assets. It is therefore essential
The stockholders should be encouraged to that all material information about the
personally attend such meetings. If they corporation which could adversely affect its
cannot attend, they should be apprised viability or the interests of the stockholders
ahead of time of their right to appoint a should be publicly and timely disclosed. Such
proxy. Subject to the requirements of the information should include, among others,
bylaws, the exercise of that right shall not earnings results, acquisition or disposition of
be unduly restricted and any doubt about assets, off balance sheet transactions, related
the validity of a proxy should be resolved in party transactions, and direct and indirect
the stockholder's favor. remuneration of members of the Board and
It is the duty of the Board to promote the Management. All such information should be
rights of the stockholders, remove disclosed through the appropriate Exchange
impediments to the exercise of those rights mechanisms and submissions to the
and provide an adequate avenue for them to Commission.
seek timely redress for breach of their
rights. Commitment to Good Corporate Governance
The Board should take the appropriate steps
All covered corporations shall establish and
to remove excessive or unnecessary costs
implement their corporate governance rules in
and other administrative impediments to the
accordance with this Code. The rules shall be
stockholders' meaningful participation in
embodied in a manual that can be used as
meetings, whether in person or by proxy.
reference by the members of the Board and
Accurate and timely information should be
Management. The manual should be submitted
made available to the stockholders to enable
to the Commission for its evaluation within one
them to make a sound judgment on all
hundred eighty (180) business days from the
matters brought to their attention for
date this Code becomes effective to enable the
consideration or approval.
Commission to determine its compliance with
Although all stockholders should be treated
this Code taking into consideration the nature,
equally or without discrimination, the
size and scope of the business of the
Board should give minority stockholders
corporation; provided, however, that
the right to propose the holding of meetings
corporations that have earlier submitted their
and the items for discussion in the agenda
manual may, at their option, continue to use the
that relate directly to the business of the
said manual aslong it complies with the
provisions of this Code.
Governance Self-Rating System
The manual shall be made available for
The Board may create an internal self-rating inspection by any shareholder at reasonable
system that can measure the performance of the hours on business days.
Board and Management in accordance with the
Regular Review of the Code and the
criteria provided for in this Code. The creation
and implementation of such self-rating system,
Page 37 of 103 BL.2401

To monitor the compliance by covered two-thirds (2/3) of the outstanding capital stock,
corporations with this Code, the Commission or if the corporation be a non-stock corporation,
may require them to accomplish annually a by a vote of at least two-thirds (2/3) of the
scorecard on the scope, nature and extent of the members entitled to vote. That such removal
actions they have taken to meet the objectives of shall take place either at a regular meeting of the
this Code. corporation or at a special meeting called for the
purpose, and in either case, after previous notice
The Commission shall periodically review this to stockholders or members of the corporation of
Code to ensure that it meets its objectives. the intention to propose such removal at the
Administrative Sanctions meeting

Fine of not more than Two Hundred Thousand Vacancies in the office of director (Sec 29)
Pesos (P200,000)be imposed for every year that 1. Other than removal by the stockholders or
a covered corporation violates the provisions of members or expiration of term - Majority of
this Code, without prejudice to other sanctions the remaining directors or trustees if still
that the Commission may be authorized to constituting quorum.
impose under the law. 2. Removal by stockholder or members or
Any violation of the Securities Regulation Code expiration of term or increase in the number
(SRC) punishable by a specific penalty shall be of director or other than (Removal, expiration
assessed separately and shall not be covered by or increase) but was referred by the BOD to
the above mentioned fine. the stockholders - Stockholder in a regular or
special meeting called for that purpose. (Sec
End of Revised Rules on Corporate 29) Director or trustee elected - served only
Governance the unexpired term of his predecessor in
Report of election
Compensation of director (Sec 30)
Submit to the SEC within 30 days by the
secretary or any other officer of the corporation General rule: No compensation except for
the result of the election containing the reasonable per diems
Exception: Provided for in by laws
1. Names
2. Nationalities 1. Vote of the stockholders representing at least
3. Residence of the director, trustee or officer a majority of the outstanding capital stock at
elected. regular or special meeting
2. Total yearly compensation shall not exceed
In case of: 10% of the net income before income tax of
the preceding year.
a. Death - heir, secretary, or any officer, or
3. Extraordinary or usual service outsole of
director or trustee himself
their regular duties.
b. Resign - secretary, or any officer, or director
or trustee himself Liability of Corporate officers (Sec 31)
c. Any manner cease to hold office - secretary,
or any officer, or director or trustee himself Liability: Jointly and severally for all damages
report such fact to the SEC suffered by the corporation, stockholders or
members and other person when such director or
Removal of directors or trustees (Sec. 28) trustee:
Any director or trustee of a corporation may be 1. Knowingly vote for or assent to patently
removed from office by a vote of the unlawful acts of the corporation;
stockholders holding or representing at least
Page 38 of 103 BL.2401

2. Guilty of gross negligence or bad faith in

directing the affairs of the corporation;
3. Acquire any personal or pecuniary interest in
conflict with their duty as director or trustee
Liable as trustee for the corporation + account
for the profit(otherwise accrued to the
corporation) when the director, trustee or officer
attempts to acquire/acquires in violation of his
1. Any interest adverse to the corporation which
has reposed to him in confidence
2. Where equity imposes a disability upon him
to deal in his own behalf
Self dealing director (Sec 32)
Rule: A contract of the corporation with one or
more of its directors or trustees or officers is Substantial Interest Nominal Interes
voidable, at the option of such corporation
Exception: Valid when all the requisites are Corporation 1
present Corporation 2
1. That the presence of such director or trustee
in the board meeting in which the contract
was approved was not necessary to Disloyalty of a director (Sec34)
constitute a quorum for such meeting;
2. That the vote of such director or trustee was Where a director, by virtue of his office,
not necessary for the approval of the contract; acquires for himself a business opportunity
3. That the contract is fair and reasonable under which should belong to the corporation, thereby
the circumstances; obtaining profits to the prejudice of such
4. That in case of an officer, the contract has corporation, he must account to the latter for
been previously authorized by the board of all such profits by refunding the same, unless
directors. his act has been ratified by a vote of the
5. Full disclosure of the adverse interest of the stockholders owning or representing at least
directors or trustees involved is made at such two-thirds (2/3) of the outstanding capital stock.
meeting, The provision shall be applicable,
notwithstanding the fact that the director risked
Absence of requisites 1 or 2 - Can be ratified by his own funds in the venture.
2/3 of the outstanding capital stock or 2/3 of the
members. Executive committee (Sec 35)

Absence of requisite 3 - Cannot be ratified 1. The by-laws of a corporation may

create an executive committee,
Interlocking director (Sec 33) composed of not less than three
members of the board, to be appointed
Rule: Except in cases of fraud, and provided the by the board.
contract is fair and reasonable under the 2. Said committee may act, by majority
circumstances, a contract between two or more vote of all its members, on such specific
corporations having interlocking directors shall matters within the competence of the
not be invalidated on that ground alone. board, as may be delegated to it in the
Page 39 of 103 BL.2401

by-laws or on a majority vote of the corporations, to issue

board. or sell stocks to
subscribers and to No
Executive committee have no power to: sell treasury stocks
a. Approval of any action for which in accordance with
shareholders’ approval is also required; the provisions of this
b. The filing of vacancies in the board; Code; and to admit
c. The amendment or repeal of by-laws or members to the
the adoption of new by-laws; corporation if it be a
d. The amendment or repeal of any non-stock
resolution of the board which by its corporation;
express terms is not so amendable or 7. To purchase,
repealable; receive, take or
e. Distribution of cash dividends to the grant, hold, convey,
shareholders. sell, lease,pledge,
mortgage and
otherwise deal with Yes
such real and
Corporate powers and capacity (Sec 36) personal property,
including securities
Every corporation incorporated under this Code
and bonds of other Yes
has the power and capacity;
corporations, as the
Express Power Stockholders transaction of the
vote lawful business of
1. To sue and be sued No the corporation may
in its corporate reasonably and
name; necessarily require,
2. Of succession by its subject to the
corporate name for limitations
the period of time prescribed by law
stated in the articles and the constitution;
of incorporation and No 8. To enter into merger No
the certificate of or consolidation with
incorporation; No other corporations as
3. To adopt and use provided in this
corporate seal Code;
4. To amend its articles 9. To make reasonable No
of incorporation in Yes donations, including
accordance with the those for the public
provisions of this welfare or for
Code; hospital, charitable,
5. To adopt by-laws, cultural, scientific,
not contrary to law, Yes civic, or similar
morals, or publice purposes; Provided, No
policy, nad to amend that no coporation,
or repeal the same in domestic or foreign,
accordance with this shall give donations
Code; in aid of any
6. In case of stock political party or

Page 40 of 103 BL.2401


candidate or for 3. Extension of corporate term (sec 37) or

purposes of partisan shortening the term of corporate
political activity; existence (sec 81), any dissenting
10. To establish pension stockholder may exercise his appraisal
retirement, and other right.
plans for the benefit
of its directors, Power to increase/ decrease capital stock;
trustees, officers and increase bond indebtedness (Sec 38)
employees; and 1. Written notice of the proposed increase/
11. To excercise such decrease of stock or increase in bonded
other powers as may indebtedness
be essential or 2. State the time and place of stockholders
necessary to carry meeting
out its purpose or 3. Addressed to each stockholder at his
purposes as stated in place of residence as shown in the books
the articles of of the corporation
incorporation. 4. Deposit in the post office or served
(Implied power) personally
5. Approval of SEC
Express power – (Par 1-10) 6. Certificate in Duplicate signed by the
Implied power – Reasonably necessary to majority of the directors and
exercise the express power to accomplish or countersigned by the chairman and
carry out the purpose for which the secretary stating the following
corporation was formed. a. Compliance with the requirement
Incidental power – Indipensably necessary b. Amount of increase/ decrease capital
to carry out the purpose. stock
Note: Corporation can exercise only power c. Names/ nationalities/ residence of the
conferred by corporation code or by its persons subscribing, the amount of
article of incorporation except such as are capital stock subscribes or number of no
necessary or incidental to the exercise of the par shares subscribed. If stock dividend-
powers so conferred (Intra vires act). alloted to each stockholder
Otherwise the act of the corporation is d. Bond incurred, created or increase
ultravires act (Sec 45). e. Actual indebtedness on the day of the
Power to extend or shorten corporate term f. Amount of stock represented at the
(Sec 37) meeting
g. Vote authorizing the increase/
1. Majority vote of the BOD + 2/3 of
decrease of stock or increase in bond
outstanding capital stock or 2/3 vote of
the members.
7. Duplicate certificate – one kept in the
2. Written notice of the proposed action
office of the corporation and one filed
and of the time and place of the meeting
with the SEC
shall be addressed to each stockholder or
8. For increase in stock – sworn statement
member at his place of residence as
of the treasure (lawfully at the time of
shown on the books of the coporation
filing) of the corporation showing 25%
and deposited to the addressee in the
of such increase capital stock has been
post office with postage prepaid or
subscribed and 25% of amount
served personally.
subscribed has been paid.

Page 41 of 103 BL.2401


9. Decrease in stock – not approved if it or disposition of shares of any class, in

effect prejudice the right of corporate proportion to their respective shareholdings.
creditor (Trust fund doctrine) Exception:
10. Bond – Registered with the SEC
11. Non- stock corporation – Majority of the 1. Denied in the articles of incorporation or
board of trustee + 2/3 of the member an amendment thereto
2. Shares to be issued in compliance with
Types of Bond the laws requiring stock offerings or
minimum stock ownership by the public
1. Mortgage bonds – Bonds secrued by 3. Shares to be issued in good faith with
mortgage or real properties. the approval of the stockholders
2. Collateral trust bonds – bonds secured representing two-thirds (2/3) of the
by stocks and bonds of other outstanding capital stock, in exchange
corporation. for property needed for corporate
3. Debenture bonds – bonds without purposes or in payment of a previously
collateral or security. contracted debt.
4. Registered bonds – requires the
registration of the name of the Sales or disposition of assets (Sec 40)
bondholders on the books of the Sales of all or substantially all including
corporation goodwill – if thereby the corporation would be
5. Coupon or bearer bonds – are rendered incapable of continuing the business or
unregistered bonds in the sense that the accomplishing the purpose for which it was
name of the bondholder is not recorded incorporated
on the company books
6. Convertible bonds – are those which 1. Subject to existing laws on illegal
give the holders thereof the right to combinations and monopolies
convert their bondholdings into share 2. Majority of the BOD or trustees + 2/3 of
capital or other securities of the issuing outstanding capital stock (2/3 of the
company within as specified period of members)
time 3. Written notice of the proposed action
7. Callable bonds – are bonds issued and of the time and place of the meeting
whereby another party promises to make shall be addressed to each stockholder or
payment if the borrowing company fails member at his place of residence as
to do so shown on the books of corporation and
8. Junk bonds – are high risk, high yield deposited to the addressee in the post
issued by enterprises that are heavily office with the postage prepaid, or
indebted or otherwise in weak financial served personally.
condition 4. Exercise of appraisal right
9. Treasury bonds – are company’s own 5. After approval of the stockholder –
bonds originally issued and reacquired BOD may abandon such sale subject to
but not cancelled the right of third person without further
10. Term bonds – are bonds with a single approval by the stockholder or member
date of maturity
11. Serial bonds – are those with series of
maturity dates Note:
Power of Pre-emptive Right (Sec 39) No vote of stockholder is required

Rule: All stockholders of a corporation shall 1. Sale of assets which is necessary in the
enjoy pre-emptive right to subscribe to all issues usual and regular course of business, or

Page 42 of 103 BL.2401


2. If the proceeds of the sale or other 1. Approval of the stockholders or

disposition of such property and assets members shall not be necessary
be appropriated for the conduct of its
remaining business.

Power to acquire own shares (Sec 41)

Power to declare dividend (Sec 43)
1. Legitimate corporate purpose or Rule: BOD can declare only dividend out of the
purposes, including but not limited unrestricted retained earnings
to the following cases:
a. To eliminate fractional shares Cash/ property Stock Dividend
arising out of stock dividends dividend
b. To collect or compromise and Delinquent 1st applied to Withheld until
indebtedness to the corporation, unpaid balance his unpaid
arising out of unpaid subscription, in on the subscription is
a delinquency sale, and to purchase subscription plus fully paid
delinquent shares sold during sale; cost and expenses
and Approval of Without approval 2/3 of the
c. To pay dissenting or withdrawing the of stockholders outstanding stock
stockholders entitled to payment for Stockholder (regular/special
their shares under the provisions of meeting)
this Code. Rule: Corporation prohibited to retain surplus
2. Corporation has unrestricted profit (unappropriated retained earnings) in
retained earnings in its book to excess of 100% of their paid capital
cover the share to be purchased or Exception:
1. Definite corporate project or programs
Investment of Fund in another Corporation (appropriation for expansion project)
(Sec 42) 2. Prohibition under any loan agreement
Other than primary purpose with any financial institution or creditor
1. Majority of the board of directors or without its/his consent, and such consent
trustee and ratified by the stockholders has not yet been secured; or
representing at least two-thirds (2/3) of (Appropriation for bond redemption)
the outstanding capital stock or 3. Retention is necessary under special
members stockholders’s or members’ circumstances obtaining in the
meeting duty called for the purpose. corporation, such as when there is need
2. Written notice of the proposed for special reserve for probable
investment and the time and place of the contingencies. (Appropriation for
meeting shall be addressed to each contingency)
stockholder or member at his place of 4. Addition: provided by law,
residence as shown on the books of the (appropriation for treasury stock).
corporation and deposited to the Power to enter into management to contract
addressee in the post office with postage (Sec 44)
prepaid, or served personally.
No corporation shall conclude a management
Investment of fund which is reasonably contract with another corporation (also apply to
necessary to accomplishment its primary any contract whereby a corporation undertakes
purpose as stated in the article of incorporation. to manage or operate all or substantially all of
the business of another corporation, whether

Page 43 of 103 BL.2401


such contracts are called service contracts BOD Major 2/3

operating agreements or otherwise) unless such ity
contract shall have been approved by the board
of directorsand by stockholders owning at
least the majority of the outstanding capital Amendment √ *√
stock,or by at least majority of the members in of article of
the case of non-stock corporation, of both the Incorporation
managing and the managed corporation, at a (Sec 16)
meeting duly called for the purpose: Election of √
Exception: Then the management contract must directors or
be approved by the stockholders of the managed trustees (Sec
corporation owning atleast two-thirds (2/3) of 24 & 29)
the members in the case of a non-stock Removal of √
corporation under the following: Director or
trustees (Sec
1) Where a stockholder or stockholders 28)
representing the same interest of both Calling for √
the managing and the managed special
corporations own or control more than meeting for
one-third (1/3) of the total outstanding removal of
capital stock entitled to vote of the director or
managing corporation; or trustee (Sec
2) Where a majority of the members of the 29)
board of directors of the managing Filing of ^√
corporation also constitute a majority of vacancy other
the members of the board of directors of than removal
the managed corporation or expiration
of term
General Rule: No management contract shall be
provided thae
entered into for a period longer than five years
for any one term.
Exception: That such service contract or
operating agreements which relate to the
quorum (Sec
exploration, development, exploitation or
utilization of natural resources many be
Compensation √
entered into for such periods as may be provided
of directors
by the pertinent laws or regulations.
(Sec 30)
Ultra vires act of corporations Self dealing √
No corporation under this Code shall possess or director (Sec
exercise any corporate powers except those 32)
conferred by this Code or by its article of Interlocking √
incorporation and except such as are necessary director (Sec
or incidental to the exercise of the powers so 33)
conferred. (Sec 45) Disloyalty of a √
director Sec
Summary of Majori Majorit Outstanding (34)
vote required ty of y of the capital stock Delegation of √
for corporate BOD Quorum power to
act of the executive
Page 44 of 103 BL.2401

committee power to the

(Sec 35) Board to
Extension or √ 1√ amend the by-
shortening of laws (Sec 48)
corporate To revoke the √
term (Sec 37) delegated
Increase or √ 2√ power given to
decrease the board to
capial stock amend the by-
(Sec 38) laws (Sec 48)
Incur, create √ 2√ Fixing the √
or increase issuance price
bond of no par value
indebtedness share by the
(Sec 38) BOD when
Denial of pre √ 2√ authorized by
emptive right the article of
(Sec 39) incorporation
Sale or √ 3√ (Sec 62)
disposition of Fixing the √
all or issuance price
substantially of no par value
all of share in the
corporate articles of
property (Sec incorporation
40) or authority
Investment of √ 1√ given to the
corporate BOD to fixed
fund in the issuance
another price (Sec 62)
corporation Merger or √ √
other than for consolidation
primary (Sec 77)
purposes (Sec Adopt a plan √ √
42) of
Declaration √ 2√ distribution
of stock of assets of a
dividend (Sec non-stock
43) corporation
Management √ 2√ Corporate √ √
contract (Sec dissolution
44)* (Sec 118)
Adoption of √ Adoption of by-laws prior Approved and signed by
by-laws (Sec to incorporation (Sec 46) all the incorporatros
Amendment √ √
of by-laws
(Sec 48)
Delegation of √
Page 45 of 103 BL.2401

*√ - stockholder meeting not required except porvided in the time deemed

those amendments of articles of incorporation by laws (Sec necessary +
wherein the corporation code require a regular or 53) written notice
special stockholders meeting. ● Regular and 1 week prior to
^√ - remaning director provided they constitute special meeting meeting or
quorum required a stated in by
1√ - Ratified notice of at law
2√ - Approved least 1 day
3√ - Authorized prior to
Nota Bene: Letter in bold letter are required meeting unless
to be approved by both BOD and the by law
stockholders or members. provided
*However, in case (1) where a stockholder or ● Notice can
stockholders representing the same interest of be waived
both tha managing and the managed express or
corporations own or control more than one-third implied
(1/3) of the total outstanding capital stock ● Place of ● Anywhere in ● City or
entitled to vote of the managing corporation; or meetig or out side of municipality
(2) where majority of the members of the board the Philippines where the
of directors of the managing corporation also unless the by principal
constitute a majority if the members of the board law provided office of the
of directors if the managed corporation then otherwise. (Sec corporation is
management cintract must be approved by the 53) located
stockholders of the managed corporation owning (preferred at
atleast two-thirds (2/3) of the total outstanding the principal
capital stock entitled to vote, or by at least two- office of the
thirds (2/3) of the members in the case of a non- corporation)
stock corporation. (Sec 44) ● Improperly
help of called
Director Stockholder – valid if
Meeting Meeting within the
power or
authority of
●Proxy ●Proxy vote ●Proxy vote the corporation
not allowed allowed and provided
(Sec 25) all
●Date of ● Regular ● Regular stockholders
Meeting meeting meeting or members
monthly unless annually as are present or
the by-law fixed by the by duly
provide law if not (any represented
otherwise (Sec date in April) ● Quorum ● Majority of ● Majority of
53) + written the BOD/ the
● Special notice 2 weeks Trustees as outstanding
meeting at prior to fixed in the capital stock or
anytime upon meeting article of majority of the
call of the ● Special incorporation members (Sec
president or meeting at any unless the 52)

Page 46 of 103 BL.2401


article or by recorded on the appropriate corporate

law provides a books. (Sec 55)
greater 2. Executor/ administrator/ receiver and
majority (Sec other legal representative appointed by
25) the court without any written proxy.
● Preside the ● President shall preside unless (Sec 56)
meeting the by law provide otherwise

3. Treasury shares no right to vote as long

as remain in treasury. (Sec 57)
Proper person to call meeting 4. Proxies (Sec 58)
a. In writing
1. Person designated in the by-laws have b. Signed by stockholder or member
authority to call stockholder’s or c. Filed before the scheduled meeting
member’s meeting with the corporate secretary
2. In the absence of such provision in the d. Valid only for the meeting which it is
by-laws, the meeting may be called by a intended
director or trustee or by officer entrusted e. If provided a period, it has a limit for
with the management of the corporation. a period of 5 years.
3. When there is no person authorized to 5. Voting trusts
call a meeting, the Security and a. Must be in writing and notarized
Exchange Commission, upon petition of b. Specify the term and condition
a stockholder or member on a showing c. Filed with the corporation and the
of good cause therefore, may issue an SEC
order to the petitioning stockholder or d. Period of agreement not to exceed 5
member directing him to call a meeting years except voting trust specifically
of the corporation by giving proper required as a condition in a loan
notice required by this code or by the agreement (automatically expire upon
by-laws. (Sec 50) payment of the loan)
4. A special meeting of the stockholders or e. Certificate of stock covered by voting
members of a corporation for the trust agreement incorporation or by-laws
purpose of removal of directors or shall be cancelled and a new one shall
trustees, or any of them, must be called be issued in the name of the trustee.
by the secretary on order to president or f. The book of corporation shall noted
on the written demand of the the transfer
outstanding capital stock, or, if it be a g. Not valid if the purpose is
non-stock corporation, on the written circumventing the law against
demand of a majority of the members monopolies and illegal combinations in
entitled to vote. (Sec 28) restraint of trade or used for purposes of
5. Special meeting of the board of directors fraud
or trustees may be held at any time upon h. Automatically expire at the end of the
the call of the president or as provided in agreed
the by-laws. (Sec 53) period trustees shall be held unless renewed.
May be voted by proxy unless the agreement
Voting Power prohibit it.
1. Pledgor/ mortgagor – Right to vote is
expressly given by the pledgor or Adoption of by-laws (Sec. 46)
mortgagor such right in writing which is Every corporation formed must, within one (1)
month after receipt of official notice of the
Page 47 of 103 BL.2401

issuance of its certificate of incorporation by the 6. The time for holding the annual election of
Securities and Exchange Commission, adopt a directors of trustees and the mode or manner of
code of by-laws for its government not giving notice thereof;
inconsistent with the corporation Code. 7. The manner of election or appointment and
The Securities and Exchange Commission shall the term of office of all officers other than
not accept for filing the by-laws or any directors or trustees;
amendment thereto of any bank, banking 8. The penalties for violation of the by-laws;
institution, building and loan association, trust 9. In the case of stock corporations, the manner
company, insurance company, public utility, of issuing stock certificates; and
educational institution or other special 10. Such other matters as may be necessary for
corporations governed by special laws, unless the proper or convenient transaction of its
accompanied by a certificate of the appropriate corporate business and affairs
government agency to the effect that such by-
laws or amendments are in accordance with law.

Amendments to by-laws (Sec. 48) Stock

Whenever any amendment or new by-laws are Non stock corporation
adopted, such amendment or new by-laws in the
office of the corporation, and a copy thereof, Number of Not less than 5 May be more than 15 in
duly certified under oath by the corporate director but not more number as may be fixed in
secretary and a majority of the directors or than 15 their articles of
trustees, shall be filed with the Securities and incorporation or by-laws
Exchange Commission the same to be attached Term of 1 year until their Term of office of one-
to the original articles of incorporation and office of successors are third (1/3) of their number
original by-laws. the elected and shall expire every year;
The amended or new by-laws shall only be director/ qualified (Sec. and subsequent elections
effective upon the issuance by the Securities and trustees 23) of trustees comprising one
Exchange Commission of a certification that the third (1/3) of the board of
same are not inconsistent with this Code. trustees shall be held
Contents of by-laws (Sec 47) annually and trustees so
Subject to the provisions of the Constitution, this elected shall have a term
Code, other special laws, and the articles of of three (3) years.
incorporation, a private corporation may provide
in its by-laws for: Purpose For profit Organized for charitable,
1. The time, place and manner of calling and religious, educational,
conducting regular or special meetings of the professional, cultural,
directors or trustees; fraternal,
2. The time and manner of calling and literary.
conducting regular or special meetings of the scientific, social, civic
stockholders or members; service, or similar
3. The required quorum in meetings of purposes, like trade,
stockholders or members and the manner of industry, agricultural and
voting therein; like chambers, or any
4. The form for proxies of stockholders and combination thereof. (Sec
members and the manner of voting them; 88)
5. The qualifications, duties and compensation
of directors or trustees, officers and employees;
Voting Cumulative Cumulative Non-
cumulative (entitled

Page 48 of 103 BL.2401


to 1 vote) unless still to be formed shall be deemed a subscription

authorized under the notwithstanding the fact that the parties refer to
article of incorporation orit as a purchase or some other contract. (Sec 60)
by laws. (Sec 89) Holders of subscribed shares not fully paid
which are not delinquent shall have all the rights
Manner of Voting either in Voting by mail or other of a stockholder. (Sec. 72)
voting person or by similar means by
• A subscription for shares of stock of a
representative members of non-stock corporation still to be formed (Sec 61)
authorized to corporations may be BEFORE submission of articles of
act by written authorized by the by-laws incorporation to the SEC
proxy (Sec 24) of non-stock corporations. a. Irrevocable for a period of at least six (6)
(Sec 89) months from the date of subscription
Distribution of Authorized to Not authorized to Exception:
dividends distribute distribute dividends to its 1. All of the other subscribers consent
dividends to members, trustees or to the revocation,
stockholders officers. (Sec 87) 2. The incorporation of said corporation
fails to materialize within said period or
Transferabilit Transferable Membership in a non within a longer period as may be
y of interest stock corporation and all stipulated in the
rights arising therefrom contract of subscription
are personal and non AFTER submission of articles of incorporation
transferable. unless the to the SEC
articles of incorporation No pre-incorporation subscription may be
or by-laws otherwise revoked.
provide. (Sec 90) • Consideration for stocks - Stocks shall not be
Ownership of At least owner Member of issued for a consideration less than the par or
director of one share of corporation (Sec. 92) issued price thereof otherwise it is watered
stock stock. (Sec 62)
1. Actual cash paid to the corporation;
Stockholder/ City or Any place in the
2. Property, tangible or intangible, actually
member municipality Philippines even outside received
Place of Where the The place where the by the corporation and necessary or convenient
meeting principal place principal office of the for its use and lawful purposes at a fair valuation
(Regular and office of the corporation is located equal to the par or issued value of the stock
Special) corporation is (Sec 93) issued;
located, and if 3. Labor performed for or services actually
practicable in rendered
the principal to the corporation;
place of the 4. Previously incurred indebtedness of the
corporation. corporation;
(Sec 51) Metro 5. Amounts transferred from unrestricted
manila is retained
considered city earnings to stated capital; and
or 6. Outstanding shares exchanged for stocks in
municipality. the
event of reclassification or conversion
Stock and Stockholders a. When consideration is other than actual
• Any contract for the acquisition of unissued cash, or consists of intangible property such as
stock in an existing corporation or a corporation patents of copyrights, the valuation thereof shall

Page 49 of 103 BL.2401


initially be determined by the incorporators or and at the rate of interest fixed in the by-laws. If
the board of directors, subject to approval by the no rate of interest is fixed in the by-laws, such
Securities and Exchange Commission. rate shall be deemed to be the legal rate. (Sec
b. Shares of stock shall not be issued in 66)
exchange for promissory notes or future service. • Right of stockholders to bring suits
1. Derivative suit - One brought by one or more
No par value share stockholders or members in the name and on
1. Fixed in the article of incorporation behalf of the corporation to redress wrongs
2. Board of directors pursuant to authority committed against it or to protect or vindicate
conferred upon corporate rights, whenever the officials of the
it by the articles of incorporation or the by-laws corporation refuse to sue, or are the ones to be
3. Stockholders representing at least a majority sued or hold control of the corporation
of the 2. Individual suit - Action brought by a
Outstanding capital stock at a meeting duly stockholder against the corporation for direct
called for the purpose. violation of his contractual rights as such
• Shares of stock so issued are personal property individual stockholders. Any recovery by the
and may be transferred by delivery of the stockholder belongs to him
certificate or certificates indorsed by the owner 3. Representative suit - When a wrong is
or his attorney-in-fact or other person legally committed against a group of stockholders, a
authorized to make the transfer. (Sec 63) stockholder may bring suit in behalf of himself
• No transfer, however, shall be valid, except as and all other stockholders who are similarly
between the parties, until the transfer is recorded situated.
in the books of the corporation showing the • Remedies for payment of stock subscription
names of the parties to the transaction, the date a. Extra judicial sale at public auction (Sec 67-
of the transfer, the number of the certificate or 69)
certificates and the number of shares transferred. 1. Payment of any unpaid subscription or any
(Ibid) percentage thereof, together with the interest
• No certificate of stock shall be issued to a accrued, if any, shall be made on the date
subscriber until the full amount of his specified in the contract of subscription or on the
subscription together with interest and expenses date stated in the call made by the board.
(in case of delinquent shares), if any is due, has 2. Failure to pay on such date shall render the
been paid. (Sec 64) entire balance due and payable and shall make
• Liability of directors for watered stocks (Sec the stockholder liable for interest at the legal rate
65) Any director or officer of a corporation shall on such balance, unless a different rate of
be solidarily, liable with the stockholder interest is provided in the by-laws, computed
concerned to the corporation and its creditors for from such date until full payment.
the difference between the fair value received at 3. If within thirty (30) days from the said date no
the time of issuance of the stock and the par or payment is made, all stocks covered by said
issued value of the same. subscription shall thereupon become delinquent
a. Consenting to the issuance of stocks for a and shall be subject to sale as, unless the board
consideration less than its par or issued value or of directors orders otherwise.
for a consideration in any form other than cash, 4. Board resolution ordering the sale of
valued in excess of its fair value delinquent stock and shall specifically
b. Having knowledge thereof, does not forth state the amount due on each
with express his objection in writing and file the subscription plus all accrued interest,
same with the corporate secretary. and the date, time and place of the sale
which shall not be less than (30) days
• Subscribers for stock shall pay to the nor more than (60) days from the date
corporation interest on allampaid subscriptions the stocks become delinquent.
from the date of subscription, if so required by,
Page 50 of 103 BL.2401

5. Copy of the resolution, shall be sent to accordance with the provisions of this Code,
every delinquent stockholder either until and unless he pays the amount due on
personally or by registered mail. his subscription with accrued interest, and
6. Published once a week for two (2) the costs and expenses of advertisement, if
consecutive weeks in a newspaper of any. (Sec 71)
general circulation in the province or
city where the principal office of the CORPORATE BOOKS AND RECORDS
corporation is located.  Every corporation shall keep and carefully
7. Delinquent stock shall be sold at public preserve at its principal office a record of all
auction to such bidder who shall offer business transactions and minutes of all
to pay the full amount of the balance on meetings of stockholders or members, or of
the subscription together with accrued the board of directors or trustees (Sec 74)
interest, costs of advertisement and including stock and transfer book (Ibid)
expenses of sale, for the smallest  The records of all business transactions of
number of shares or fraction of a share. the corporation and the minutes of any
8. Stock purchased shall be transferred to meetings shall be open to inspection by any
such purchaser in the books of the director, trustee, stockholder or member of
corporation and a certificate for such the corporation at reasonable hours on
stock shall be issued in his favor. business days and he may demand, writing,
9. Should there be no bidder at the public for a copy of excerpts from said records or
auction the corporation may bid for the minutes, at his expense. (Ibid)
same, and the total amount due shall be  Liability of the officer or agent of the
credited as paid in full in the books of corporation for refusing any director,
the corporation. The shares acquired by trustees, stockholder or member of the
the corporation shall be held as treasury corporation to examine and copy excerpts
shares. from its records or minutes
b. Judicial Action – collecting by action in a a. Shall be liable to such director, trustee,
court of proper jurisdiction the amount due stockholder or member for damages, and in
on any unpaid subscription, with accrued addition, shall be guilty of an offense which
interest, costs and expenses. (Sec 70) shall be punishable under Section 144 of this
c. Collection from cash dividends and Code:
withholding of stock dividends – Any cash b. That if such refusal is made pursuant to a
dividends due on delinquent stock shall first resolution or order of the board of directors
be applied to the unpaid balance on the or trustees, the liability under this section for
subscription plus costs and expenses, while such action shall be imposed upon the
stock dividends shall be withheld from the directors or trustees who voted for such
delinquent stockholder until his unpaid refusal:
subscription is fully paid (Sec 43) Defenses under the code in refusing the person
d. To deny delinquent shares the right to vote – demanding to examine and copy excerpts from
No delinquent stock shall be voted for be the corporation’s records and minutes:
entitled to vote or to representation at any a. Improperly used any information secured
stockholder’s meeting, nor shall the holder through any prior examination of the records
thereof be entitled to any of the rights of a or minutes of such corporation or of any
stockholder. (Sec 71) other corporation,
 No delinquent stock shall be voted for be b. Was not acting in good faith or
entitled to vote or to representation at any c. Not for a legitimate purpose in making his
stockholder’s meeting, nor shall the holder demand.
thereof be entitled to any of the rights of a Stock and transfer book- in which must be kept a
stockholder except the right to dividends in record of all stocks in the names of the
Page 51 of 103 BL.2401

stockholders alphabetically arranged; the 2. The separate existence of the constituent

instalments paid and unpaid on all stock for corporations shall cease, except that of the
which subscription has been made, and the date surviving or the consolidated corporation;
of payment of any instalment; a statement of 3. The surviving or the consolidated
every alienation, sale or transfer of stock made, corporation shall possess all the rights,
the date thereof, and by and to whom made; and privileges, immunities and powers and shall
such other entries as the by-laws may prescribe. be subject to all the duties and liabilities of a
corporation organized under this Code;
Right to Financial Statement 4. The surviving or the consolidated
1. Within ten (10) days from receipt of a corporation shall thereupon and thereafter
written request of any stockholder or possess all the rights, privileges, immunities
member, the corporation shall furnish to him and franchises of each of the constituent
its most recent financial statement, which corporations; and all property, real or
shall include a balance sheet as of the end of personal, and all receivables due on
the last taxable year and a profit or loss whatever account, including subscriptions to
statement for said taxable year, showing in shares and other choses in action, and all and
reasonable detail its asset and liabilities and every other interest of, or belonging to, or
the result of its operations. due to each constituent corporation, shall be
2. At the regular meeting of stockholders or deemed transferred to and vested in such
members, the board of directors or trustees surviving or consolidated corporation
shall present to such stockholders or without further act or deed; and
members a financial report of the operations 5. The surviving or consolidated corporation
of the corporation for the preceding year, shall be responsible and liable for all the
which shall include financial statements, liabilities and obligations of each of the
duly signed and certified by an independent constituent corporations in the same manner
certified public accountant. as if such surviving or consolidated
3. However, if the paid-up capital of the corporation had itself incurred such
corporation is less than P50,000.00, the liabilities or obligations; and any pending
financial statements may be certified under claim, action or proceeding brought by or
oath by the treasurer or any responsible against any of such constituent corporations
officer of the corporation. may be prosecuted by or against the
surviving or consolidated corporation. The
MERGER AND CONSOLIDATION rights of creditors or liens upon the property
 Two or more corporations may merge into a of such any constituent corporation shall not
single corporation which shall be one of the be impaired bysuch merger or consolidation.
constituent corporations or may consolidate (Sec 80)
into a new single corporation which shall be Appraisal Right
the consolidated corporation. (Sec 76) Any stockholder of a corporation shall have the
 The merger or consolidation shall have the right to dissent and demand payment of the fair
following effects: value of his shares in the following instances:
1. The constituent corporations shall become a (Sec 81)
single corporation which, in case of merger, 1. In case any amendment to the articles of
shall be the surviving corporation designated incorporation has the effect of
in the plan of merger; and, in case of a. Changing or restricting the rights of any
consolidation, shall be the consolidated stockholder or class of shares;
corporation designated in the plan of b. Authorizing preferences in any respect
consolidation; superior to those of outstanding shares
of any class;

Page 52 of 103 BL.2401


c. Extending or shortening the term of dividend rights, shall be suspended, except

corporate existence; the right of such stockholder to receive
2. Sale, lease, exchange, transfer, mortgage, payment of the fair value thereof: Provided,
pledge or other disposition of all or That if the dissenting stockholder is not paid
substantially all of the corporate property the value of his shares within 30 days after
and assets. the award, his voting and dividend rights
3. Merger or consolidation. shall immediately be restored. (Sec 83)
4. Investment of corporate funds in another  No demand for payment may be withdrawn
corporation business or for any other unless the corporation consents thereto. If,
purpose. (Sec 42) however, such demand for payment is
withdrawn with the consent of the
 Exercise of appraisal right (Sec 82) corporation, or if the proposed corporate
a. Any stockholder who shall have voted action is abandoned or rescinded by the
against the proposed corporate action corporation or disapproved by the Securities
b. Written demand on the corporation and Exchange Commission where such
within thirty (30) days after the date on approval is necessary, or if the Securities
which the vote was taken for payment of and Exchange Commission determines that
the fair value of his shares, failure to such stockholder is not entitled to the
make the demand within such period appraisal right, then the right of said
shall be deemed a waiver of the stockholder to be paid the fair value of his
appraisal right. shares shall cease, his status as a stockholder
c. Surrender of the certificate or shall thereupon be restored, and all dividend
certificates of stock representing his distributions which would have accrued on
shares. his shares shall be paid to him. (Sec 84)
d. If within 60 days from the date the  The costs and expenses of appraisal shall be
corporate action was approved by the borne by the corporation, unless the fair
stockholders, the withdrawing value ascertained by the appraisers is
stockholder and the corporation cannot approximately the same as the price which
agree on the fair value of the shares, the the corporation may have offered to pay the
fair value of the shares shall be stockholder, in which case they shall be
determined and appraised by three (3) borne by the latter. (Sec 85)
disinterested persons, one of whom shall NON-STOCK CORPORATIONS
be named by the stockholder, another by Is one where no part of its income is
the corporation, and the third by the two distributable as dividends to its members,
thus chosen and the same shall be paid trustees, or officers. Provided that any profit
within 30 days after such awards. which a non-stock corporation may obtain as an
e. The corporation has unrestricted incident to its operations shall, whenever
retained earnings in its books to cover necessary or proper, be used for the furtherance
such payment. of the purpose or purposes for which the
f. Upon payment by the corporation of the corporation was organized (Sec 87) It may be
agreed or awarded price, the stockholder formed or organized for:
shall forthwith transfer his shares to the 1. Charitable
corporation. 2. Religious
 From the time of demand for payment of the 3. Educational
fair value of a stockholder's shares until 4. Professional
either the abandonment of the corporate 5. Cultural
action involved or the purchase of the said 6. Fraternal
shares by the corporation, all rights accruing 7. Literary
to such shares, including voting and 8. Scientific

Page 53 of 103 BL.2401



10. Civic Service
11. Similar purposes like trade, industry,  All corporation's issued shares are not
agricultural and like chambers, or any owned by not more than twenty (20) person
combination thereof.  Issued stock are subject to specified
 The right of the members of any class or restriction on transfer
classes to vote may be limited, broadened or  Cannot be listed in any stock exchange or
denied to the extent specified in the articles make any public offering of any of its stock
or the by-laws. Unless so limited, broadened of any class.
or denied, each member, regardless of class,  A corporation is not a close corporation
shall be entitled to one vote. (Sec 89) when at least two-thirds (2/3) of its voting
 Membership in a non-stock corporation and stock or voting rights is owned or controlled
all rights arising there from are personal and by another corporation which is not a close
non-transferable, unless the articles of corporation.
incorporation or the by-laws otherwise  Cannot incorporate
provide. (Sec 90) a) Mining or oil companies
 Unless otherwise provided in the articles of b) Stock exchanges
incorporation or the by-laws, the board of c) Banks
trustees of non-stock corporations, which d) Insurance companies
may be more than fifteen (!5) in number as e) Public utilities
may be fixed in their articles of f) Educational institutions
incorporation or by-laws, shall, as soon as g) Corporation vested with public interest
organized, so classify themselves that the  The articles of incorporation may provide
term of office of one-third (1/3) of their that the business of the corporation shall be
number shall expire every year; and managed by the stockholders of the
subsequent elections of trustees comprising corporation rather than by a board of
one-third (!/3) of the board of trustees shall directors. So long as this provision continues
be held annually and trustees so elected shall in effect:
have a term of three (3) years. Trustees 1. No meeting of stockholders need be
thereafter elected to fill vacancies occurring called to elect directors;
before the expiration of a particular term 2. Unless the context clearly requires
shall hold office only for the unexpired otherwise, the 10 stockholders of the
period. (Sec 92) corporation shall be deemed to be
 No person shall be elected as trustee unless directors for the purpose of applying the
he is a member of the corporation. (Ibid) provisions of this Code; and
 Unless otherwise provided in the articles of 3. The stockholders of the corporation
incorporation or the by-laws, officers of a shall be subject to all liabilities of
non-stock corporation may be directly directors The articles of incorporation
elected by the members. (Ibid) may likewise provide that all officers or
 The by-laws may provide that the members employees or that specified officers or
of a non-stock corporation may hold their employees shall be elected or appointed
regular or special meetings a place even by the stockholders, instead of by the
outside the place where the principal office board of directors.
corporation is located: Provided, That proper SPECIAL CORPORATIONS
notice is sent to all members indicating the
date, time and place of meeting and EDUCATIONAL CORPORATIONS
Provided, further, That the place of meeting
shall be within the Philippines. (Sec 93)  Trustees of educational institutions
organized as non-stock corporations
Page 54 of 103 BL.2401

shall not be less than five (5) nor more 2. Any corporation sole may purchase
than fifteen (15): Provided, however, and hold real estate and personal
That the number of trustees shall be in property for its church, charitable,
multiples of five (5) (Sec 108) benevolent or educational purposes,
 Unless otherwise provided in the articles and may receive bequests or gifts
of incorporation on the by-laws, the for such purposes. (Sec 113)
board of trustees of incorporated b) Religious societies. - Any religious
schools, colleges, or other institutions of society or religious order, or any
learning shall, as soon as i organized, so diocese, synod, or district organization
classify themselves that the term of of any religious denomination, sector
office of one-fifth (1/5) of their number church, unless forbidden by the
shall expire every year. Trustees constitution, rules, regulations, or
thereafter elected to fill vacancies, discipline of the religious denomination,
occurring before the expiration of a sect or church of which it is a part, or by
particular term, shall hold office only for competent authority, may, upon written
the unexpired period. Trustees elected consent and/or by an affirmative vote at
thereafter to fill vacancies caused by a meeting called for the purpose of at
expiration of term shall hold office for least two-thirds (2/3) of its membership,
in five (5) years. A majority of the incorporate for the administration of its
trustees shall constitute a quorum for the temporalities or for the management of
transaction of business. The powers and its affairs, properties and estate by filing
authority of trustees shall be defined in with the Securities and Exchange
the by-laws. Commission, articles of incorporation
 For institutions organized as stock verified by the affidavit of the presiding
corporations, the number and term of elder, secretary, or clerk or other
directors shall be governed by the member of such religious society or
provisions on stock corporations religious order, or diocese, synod, or
district organization of the religious
RELIGIOUS CORPORATIONS denomination, sect or church. (Sec 116)
 Religious corporations may be DISSOLUTION
incorporated by one or more persons.
Such corporations may be classified Methods of dissolution (Sec 117)
into: (Sec 109) a) Voluntary dissolution where no creditors
a) Corporations sole - as trustee, the are affected (Sec 118)
affairs, property and temporalities of any 1. Majority vote of the board of
religious denomination, sector church, a directors or trustees,
corporation sole may be formed by the 2. Affirmative vote of the stockholders
chief archbishop, bishop, priest, owning at least two-thirds (2/3) of
minister, rabbi or other presiding elder the outstanding capital stock or
of such religious denomination, sector members
church. (Sec 110) 3. Publication of the notice of time,
1. From and after the filing with the place and object of the meeting for
Securities and Exchange three (3) consecutive weeks in a
Commission of the said articles of newspaper published in the place
incorporation, such chief where the principal office of said
archbishop, bishop, priest, minister, corporation is located; and if no
rabbi or presiding elder shall newspaper is published in such
become a corporation sole. place, then in a newspaper of

Page 55 of 103 BL.2401


general circulation in the filed; and is no such objection is

Philippines, after sending such sufficient, and the material
notice to each stockholder or allegations of the petition are true, it
member either by registered mail or shali render judgment dissolving the
by personal delivery at least thirty corporation.
(30) days prior to said meeting. c) Dissolution by shortening corporate
4. A copy of the resolution authorizing term (Sec 120)
the dissolution shall be certified by a 1. Amendment of articles of
majority of the board of directors or incorporation to shorten the
trustees and countersigned by the corporate term
secretary of the corporation. 2. Submission to the SEC
5. The Securities and Exchange 3. Approval by the SEC
Commission shall thereupon issue d) Involuntarily (Sec 121)
the certificate of dissolution. 1. Verified complaint
b) Voluntary dissolution where creditors 2. After proper notice and hearing on
are affected (Sec 119) the grounds provided by existing
1. Petition signed by a majority of its laws, rules and regulations can be
board of directors or trustees or sued
other officers having the
management of its affairs for Foreign Corporation
dissolution shall be filed with the
 One formed, organized or existing under
any laws other than those of the
2. Affirmative vote of the stockholders
Philippines and whose laws allow
representing at least two-thirds (2/3)
Filipino citizens and corporations to do
of the outstanding capital stock or
business in its own country or state. It
shall have the right to transact business
3. SEC shall issue an order reciting the
in the Philippines after it shall have
purpose of the petition, fix a date on
obtained a license to transact business
or before which objections thereto
and a certificate of authority from the
may be filed by any person, which
appropriate government agency. (Sec
date shall not be less than thirty (30)
days nor more than sixty (60) days
 A resident agent may be either an
after the entry of the order.
individual (must be of good moral
4. Copy of the order shall be published
character and of sound financial
at least once a week for three (3)
standing) residing in the Philippines or a
consecutive weeks in a newspaper
domestic corporation lawfully
of general circulation published in
transacting business in the Philippines.
the municipality or city where the
(Sec 127)
principal office of the corporation is
situated or if no such newspaper,  Any foreign corporation lawfully doing
posted for three (3) consecutive business in the Philippines shall be
weeks in three (3) public places in bound by all laws, rules and regulations
such municipality or city. applicable to domestic corporations of
5. Upon five (5) day's notice, given the same class, except such only as
after the date on which the right to provide for the creation, formation,
file objections as fixed in the order organization or dissolution of
has expired, the Commission shall corporations or those which fix the
proceed to hear the petition and try relations, liabilities, responsibilities, or
any issue made by the objections duties of stockholders, members, or

Page 56 of 103 BL.2401


officers of corporations to each other or licensed to do business in the

to the corporation. (Sec 129) Philippines, or
 No foreign corporation transacting 9. Any other ground as would render it
business in the Philippines without a unfit to transact business in the
license, or its successors or assigns, Philippines.
shall be permitted to maintain or
intervene in any action, suit or The Securities Regulation Code
proceeding in any court or R.A. 8799
administrative agency of the Philippines;
but such corporation may be sued or RA 8799 or The Securities Regulation Code is
proceeded against before Philippine considered among the "Blue Sky Law" as it aims
courts or administrative tribunals on any to protect the public against the imposition of
valid cause of action recognized under unsubstantial schemes and the securities based
Philippine laws. (Sec 133) thereon. As a "Blue Sky Law", the given law
 Grounds for the revocation of license indicates the evil against which it is directed,
1. Failure to file its annual report or namely, speculative schemes which have no
pay any fees as required; more basis than a few feet of the blue sky
2. Failure to appoint and maintain a (People v. Fernandez, GR No. 45655. June 15.
resident agent in the Philippines 1938).
3. Failure, after change of its resident
Securities - are shares, participation or interests
agent or of his address, to submit to
in a corporation or in a commercial enterprise or
the Securities and Exchange
protit-making venture and evidenced by a
Commission a statement of such
certificate, contract, instruments, whether
written or electronic in character. It includes:
4. Failure to submit to the Securities
and Exchange Commission an a) Shares of stocks, bonds, debentures,
authenticated copy of any notes evidences of indebtedness, asset-
amendment to its articles of backed securities;
incorporation or by-laws or of any b) Investment contracts, certificates of
articles of merger or consolidation interest or participation in a profit
within the time prescribed sharing agreement, certifies of deposit
5. A misrepresentation of any material for a future subscription;
matter in any application report, c) Fractional undivided interests in oil, gas
affidavit or other document or other mineral rights:
submitted by such corporation d) Derivatives like option and warrants;
6. Failure to pay any and all taxes, e) Certificates of assignments, certificates
imposts, assessmentnts or penalties, of participation, trust certificates, voting
if any, lawfully due to the Philippine trust certificates or similar instruments
Government or any of its agencies f) Proprietary or nonproprietary
or political subdivisions; membership certificates in corporations,
7. Transacting business in the and
Philippines outside of the purpose or g) Other instruments as may in the future
purposes for which such corporation be determined by the Commission. (Sec
is authorized under its license; 3.1)
8. Transacting business in the
Philippines as agent of or acting for Tender Offers
and in behalf of any foreign
corporation or entity not duly a) Any person or group of persons acting
in concert who intends to acquire at least
15% of any class of any equity security
Page 57 of 103 BL.2401

of a listed corporation of any class of the securities that are subject of the
any equity security of a corporation with tender offers shall be taken up us nearly
assets of at least fifty million pesos as may be pro data, disregarding
(P50,000,000.00) and having two fractions, according to the number of
hundred (200) or more stockholders at securities deposited to each depositor.
least one hundred shares each or who The provision of this subject shall also
intends to acquire at least thirty percent apply to securities deposited within ten
*(30%) of such equity over a period of (10) days after notice of increase in the
twelve months(12) shall make a tender consideration offered to security
offer to stockholders by filling with the holders, as described in paragraph (e) of
Commission a declaration to that effect this subsection, is first published or sent
and furnish the issuer, a statement or given to security holders.
containing such of the information e) Where any person varies the terms of a
required in Section 17 of this Code as tender offer or request or invitation for
the Commission may prescribe. Such tenders before the expiration thereof by
person or group of persons shall publish increasing the consideration offered to
all request or invitations or tender offer holders of such securities, such person
or requesting such tender offers shall pay the increased consideration to
subsequent to the initial solicitation or each security holder whose securities are
request shall contain such information as taken up and paid for whether or not
the Commission may prescribe, and such securities have been taken up by
shall be filed with the Commission and such person before the variation of the
sent to the issuer not alter than the time tender offer or request or invitation.
copies of such materials are first  It shall be unlawful for any person to
published or sent or given to security make any untrue statement of a material
holders. fact or omit to state any material fact
necessary in order to make the
*now 35% under Rule 19, IRR 2015 of tender statements made in the light of the
offer. circumstances under which they are
b) Any solicitation or recommendation to made, not misleading, or to engaged to
the holders of such a security to accept any fraudulent, deceptive or
or reject a tender offer or request or manipulative acts or practices, in
invitation for tenders shall be made in connection with any tender offer or
accordance with such rules and request or invitation for tenders, or any
regulations as may be prescribe. solicitation for any security holders in
c) Securities deposited pursuant to a tender opposition to or in favor of any o such
offer or request or invitation for tenders favor of any such offer, request, or
may be withdrawn by or on behalf of the invitation. The Ovi Commission shall,
depositor at any time throughout the for the purposes of this subsection,
period that tender offer remains open define and prescribe means reasonably
and if the securities deposited have not designed to prevent, such acts and
been previously accepted for payment, practices as are fraudulent, deceptive
and at any time after Sixty (60) days and manipulative.
from the date of the original tender offer Tender Offer Rule
to request or invitation, except as the
Commission may otherwise prescribe. Tender Offer
d) Where the securities offered exceed that
which person or group of persons is Tender offer is a publicly announced intention
bound or willing to take up and pay for by a person acting alone or in concert with other

Page 58 of 103 BL.2401


persons to acquire equity securities of a public 2. Securities tendered may be withdrawn

company. (Cemco Holdings, Inc. v. National by the offer or within 60 days from date
Life Insurance Co. of the Philippines, Inc., of original offer: (Sec. 19.1(c), SRC)
supra) 3. Securities shall be distributed pro rata in
case there are more persons bound or
Public Company willing to take up the offered securities;
Any corporation with a class of equity securities (Sec. 19.1(d), SRC)
listed on an Exchange or with assets in excess of 4. In case there is an increase in the
P50million AND having 200 or more holders, at consideration for securities tendered
least 200 of which are holding at least one 100 before the expiration of the offer, the
shares of a class of its equity securities. (SRC other holders of the securities who were
Rule 3 (1) (M)) already paid up shall also be paid with
the additional consideration thereof.
Tender Offer Rule (Sec. 19.1(e). SRC)
Any person, or group of persons acting in Unlawful Acts in Relation to Tender Offer
concert, who intend to:
1. Make any untrue statement of a material
1. Acquire at least 15%; or fact making the statement misleading
2. Acquire at least 35% over a period of 12 2. Omit to state any material fact making
months: the statement misleading
3. Engage in any fraudulent, deceptive, or
of any class of securities of:
manipulative acts or practices (Sec.
1. A listed corporation, or 19.2, SRC)
2. A corporation with assets of at least P50
million and having 200 or more Question:
stockholders with at least 100 shares Are indirect acquisitions covered by the
each: mandatory tender offer rule?
are obliged to make a tender offer to ALL Answer:
stockholders by:
Yes. The legislative intent of the mandatory
1. Filing with SEC a declaration to that tender offer rule is to regulate activities relating
effect: to acquisition of control of the listed company
2. Furnishing the Issuer of a statement and for the purpose of protecting the minority
containing the required information stockholders of a listed corporation. Whatever
prescribed by the SEC. including may be the method by which control of a public
additional materials: company is obtained, either through the direct
3. Publishing all requests or invitations for purchase of its stocks or through an indirect
tender. or materials making a tender means, mandatory tender offer applies. The
offer or requesting or inviting letters of bottomline of the law is to give the shareholder
such security. (Sec. 19.1(a), SRC) of the listed company the opportunity to decide
whether or not to sell in connection with a
Other rules on mandatory tender offer transfer of control. (Cemco Holdings, Inc. v.
1. Solicitation recommendation, National Life Insurance Co. of the Philippines,
acceptance and rejection related to the Inc. supra)
securities tendered shall be governed by Insider's Duty to Disclose When Trading
the SEC and PSE rules: (Sec. 19.1(b), (Insider trading)

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It shall be unlawful for an insider to sell or buy a an issuer or a security that is not
security of the issuer, while in possession of generally available to the public; or
material information with respect to the issuer or e) a person who learns such information by
the security that is not generally available to the a communication from any forgoing
public, unless: insiders. (Sec 3.8)
a) The insider proves that the information Information is "material nonpublic" if:
was not gained from such relationship;
or a) It has not been generally disclosed to the
b) If the other party selling to or buying public and would likely affect the
from the insider (or his agent) is market price of the security after being
identified, the insider proves: disseminated to the public and the lapse
I. that he disclosed the information to of a reasonable time for the market to
the other party, or absorb the information; or
II. that he had reason to believe that the b) would be considered by a reasonable
other party otherwise is also in person important under the
possession of the information. circumstances in determining his course
of action whether to buy, sell or hold a
A purchase or sale of a security of the issuer security.
made by an insider, or such insider's spouse or  It shall be unlawful for any insider
relatives by affinity or consanguinity within the to communicate material nonpublic
second degree, legitimate or common-law, shall information about the issuer or the
be presumed to have been effected while in security to any person who, by
possession of material nonpublic information if virtue of the communication,
transacted after such information came into becomes an insider as defined in
existence but prior to dissemination of such Subsection 3.8, where the insider
information to the public and the lapse of a communicating the information
reasonable time for market to absorb such knows or has reason to believe that
information: Provided, however, That this such person will likely buy or sell a
presumption shall be rebutted upon a showing security of the issuer whole in
by the purchaser or seller that he was aware of possession of such information.
the material nonpublic information at the time of c) It shall be unlawful where a tender offer
the purchase or sale. has commenced or is about to
commence for:
Insider defined i. Any person (other than the tender
Insider means offeror) who is in possession of
material nonpublic information
a) the issuer; relating to such tender offer, to buy
b) a director or officer (or any person or sell the securities of the issuer
performing similar functions) of, or a that are sought or to be sought by
person controlling the issuer. such tender offer if such person
c) a person whose relationship or former knows or has reason to believe that
relationship to the issuer gives or gave the information is nonpublic and has
him access to material information about been acquired directly or indirectly
the issuer or the security that is not from the tender offeror, those acting
generally available to the public. on its behalf, the issuer of the
d) A government employee, director, or securities sought or to be sought by
officer of an exchange, clearing agency such tender offer, or any insider of
and/or self-regulatory organization who such issuer; and
has access to material information about
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ii. Any tender offeror, those acting on 7. Other types of prohibited conduct and/or
its behalf, the issuer of the securities manipulative practices which include,
sought or to be sought by such among others, the creation of temporary
tender offer, and any insider of such funds for the purpose of engaging in
issuer to communicate material other manipulative practices.
nonpublic information relating to
the tender offer to any other person Philippine Cooperative Code of 2008
where such communication is likely Republic Act No. 9520
to result in a violation of Subsection
27.4 (a)(1). General concept and principle
d) For purposes of this subsection the term
"securities of the issuer sought or to be Cooperative defined:
sought by such tender offer" shall A cooperative is an autonomous and duly
include any securities convertible or registered association of persons, with a
exchangeable into such securities or any common bond of interest, who have voluntarily
options or rights in any of the foregoing joined together to achieve their social, economic,
securities. and cultural needs and aspirations by making
equitable contributions to the capital required,
Examples of prohibited conduct:
patronizing their products and services and
1. Engaging in a series of transactions in accepting a fair share of the risks and benefits of
securities that are reported publicly to the undertaking in accordance with universally
give the impression of activity or price accepted cooperative principles
movement in a security (e.g. painting the
Cooperative Principles (Art. 5, R.A. 9520)
2. Buying and selling securities at the close Every cooperative shall conduct its affairs in
of the market in an effort to alter the accordance with Filipino culture, good values
closing price of the security (marking and experience and the universally accepted
the close); principles of cooperation which include, but are
3. Engaging in buying activity at not limited to, the following:
increasingly higher prices and then
selling securities in the market at the 1. Voluntary and Open Membership -
higher prices (hype and dump) or vice Cooperatives are voluntary
versa (i.e. selling activity at lower prices organizations, open to all persons able to
and then buying at such lower prices); use their services and willing to accept
4. Engaging, in transactions in which there the responsibilities of membership,
is no change in beneficial ownership of without gender, social, racial, cultural,
a security (wash sales). political or religious discrimination.
5. Taking advantage of a shortage of 2. Democrative Member Control -
securities in the market by controlling Cooperatives are democratic
the demand side and exploiting market organizations that are controlled by their
congestion during such shortages in a members who actively participate in
way as to create artificial prices setting their policies and making
(squeezing the float); decisions. Men and women serving as
6. Disseminating false or misleading elected representatives, directors or
market information through media, officers are accountable to the
including the internet, or any other membership. In primary cooperatives,
means to move the price of a security in members have equal voting rights of
a direction that is favorable to a position one-member, one-vote. Cooperatives at
held or a transaction, and
Page 61 of 103 BL.2401

other levels are organized in the same A cooperative may be organized and registered
democratic manner. for any or all of the following purposes:
3. Member Economic Participation -
Members contribute equitably to, and 1. To encourage thrift and savings
democratically control, the capital of mobilization among the members;
their cooperatives. At least part of that 2. To generate funds and extend credit to
capital is the common property of the the members for productive and
cooperative. They shall receive limited provident purposes;
compensation or limited interest, if any. 3. To encourage among members
on capital subscribed and paid as a systematic production and marketing;
condition of membership. Members 4. To provide goods and services and other
allocate surpluses for any or all of the requirements to the members:
following purposes: developing the 5. To develop expertise and skills among
cooperative by setting up reserves. part its members;
of which should at least be indivisible: 6. To acquire lands and provide housing
benefitting members in proportion to benefits for the members;
their patronage of the cooperative's 7. To insure against losses of the members;
business and supporting other activities 8. To promote and advance the economic,
approved by the membership. social and educational status of the
4. Autonomy and independence. members;
Cooperatives are autonomous, self-help 9. To establish, own, lease or operate
organizations controlled by their cooperative banks, cooperative
members. If they enter into agreements wholesale and retail complexes,
with other organizations, including insurance and agricultural/industrial
government of raise capital from processing enterprises, and public
external sources, they shall do so on markets,
terms that ensure democratic control of 10. To coordinate and facilitate the activities
their members and maintain their of cooperatives,
cooperative autonomy. 11. To advocate for the cause of the
5. Education, Training and Information - cooperative movements;
Cooperatives shall provide education 12. To ensure the viability of cooperatives
and training for their members. elected through the utilization of new
and appointed representatives, technologies,
managers, and employees, so that they 13. To encourage and promote self-help or
can contribute effectively and efficiently self-employment as an engine for
to the development of their cooperatives. economic growth and poverty
6. Cooperation Among Cooperatives - alleviation, and
Cooperatives serve their members most 14. To undertake any and all other activities
effectively and strengthen the for the effective and efficient
cooperative movement by working implementation of the provisions of this
together through local, national. regional Code. (Art. 6, R.A. 9520)
and international structures. Objectives of a Cooperative (Art. 7, R.A. 9520)
7. Concern for Community - Cooperatives
work for the sustainable development of The primary objective of every cooperative is to
their communities through policies help improve the quality of life of its members.
approved by their members.
Goal of cooperative
Organization and Registration
The cooperative shall aim to:
Purposes of Cooperatives (Art. 6, R.A. 9520)
Page 62 of 103 BL.2401

a) Provide goods and services to its Membership Education Seminar

members to enable them to attain (PMES).
increased income, savings, investments,
productivity. and purchasing power, and Multipurpose Cooperative
promote among themselves equitable One which combines two (2) or more of the
distribution of net surplus through business activities of different types of
maximum utilization of economies of cooperatives. (Art. 23, f, R.A. 9520)
scale, cost-sharing and risk sharing:
b) Provide optimum social and economic a) Newly organized primary cooperative
benefits to its members: may be registered as multipurpose
c) Teach them efficient ways of doing cooperative only after compliance with
things in a cooperative the minimum requirements for
d) Propagate cooperative practices and new multipurpose cooperatives set by the
ideas in business and management; Cooperative Development Authority
e) Allow the lower income and less (CDA).
privileged groups to increase their b) Single-purpose cooperative may
ownership in the wealth of the nation, transform into a multipurpose or may
and create subsidiaries only after at least
f) Cooperate with the government, other IWO (2) years of operations. (Art. 10)
cooperatives and people-oriented
organizations to further the attainment Requirement for registration of cooperative
of any of the foregoing objectives. (Art.
Every group of individuals or cooperatives
intending to form a cooperative under this Code
Characteristics of cooperatives shall submit to the Authority Four (4) copies
each of the following:
1. Limited liability (Sec 12)
2. Limited life - A cooperative shall exist 1. Articles of cooperation which shall be
for a period not exceeding fifty (50) signed by each of the organizers and
years from the date of registration unless acknowledged by them if natural
sooner dissolve or unless said period is persons, and by the chairpersons or
extended. (Sec 13) secretaries, if juridical persons, before a
3. It has juridical personality - acquires notary public. (Art. 14)
juridical personality from the date the 2. A sworn statement of the treasurer
Authority issues a certificate of elected by the subscribers showing that
registration under its official seal. (Art. at least twenty-five per centum (25%) of
16) the authorized share capital has been
4. Created by law subscribed and at least twenty-five per
centum (25%) of the total subscription
Numbers and qualification of organizer of has been paid: Provided, that in no case
primary cooperative shall the paid-up share capital be less
than Fifteen thousand pesos
a) Fifteen (15) or more natural persons (P15,000.00).
b) Filipino citizens, 3. By laws. (Art. 15)
c) Legal age 4. Bonds of the accountable officers. (Art.
d) Having a common bond of interest 56)
e) Actually residing or working in the 5. General statement describing the
intended area of operation. structure which shall include
f) That a prospective member of a primary bookkeeper and purposes of the
cooperative must have completed a Pre- proposed cooperative. (Art. 11)

Page 63 of 103 BL.2401


6. Economic survey, indicating therein the d) The procedure to be followed in cases of

area of operation, the size of termination of membership;
membership, and other pertinent data in e) The conditions under which the transfer
a format provided by the Authority. of a share or interest of the members
(Art.11) shall be permitied;
7. Certificate of premember education f) The rules and procedures on the agenda,
8. Code of registration fee time, place and manner of calling,
convening, conducting meetings,
Content of the Article of cooperation quorum requirements, voting systems,
The articles of cooperation shall set forth: and other matters relative to the business
affairs of the general assembly, board of
1. Name of the cooperative which shall directors, and committees;
include the word cooperative; g) The general conduct of the affairs of the
2. Purpose or purposes and scope of cooperative, including the powers and
business for which the cooperative is to duties of the general assembly, the board
be registered; of directors, committees and the
3. Term of existence of the cooperative; officers, and their qualifications and
4. Area of operation and the postal disqualifications;
addresses of its principal office. Every h) The manner in which the capital, may be
cooperative shall have an official postal raised and the purposes for which it can
address to which all notices and be utilized;
communications shall be sent. Such i) The mode of custody and of investment
address and every change thereof shall of net surplus;
be registered with the Authority. (Art. j) The accounting and auditing systems;
51), k) The manner of loaning and borrowing
5. Names, nationality, and the postal including the limitations thereof;
addresses registrants. l) The method of distribution of net
6. Common bond of membership; surplus;
7. List of names of the directors who shall m) The manner of adopting, amending,
manage the cooperative; and repealing, and abrogating bylaws;
8. Amount of its share capital, the names n) A conciliation or mediation mechanism
and residences of its contributors and a for the amicable settlement of disputes
statement of whether the cooperative is among members, directors, officers and
primary, secondary or tertiary. (Sec 14) committee members of the cooperative;
Content of the by-laws o) Other matters incident to the purposes
and activities of the cooperative. (Art.
The bylaws shall be filed at the same time as the
articles of cooperation which shall provide:
o Fine on unpaid subscribed share
a) The qualifications for admission to capital that is fair and reasonable
membership and the payment to be under the circumstances. (Art.77)
made or interest to be acquired as a o The determination of net surplus
condition for the exercise of the right of (Art. 85)
b) The rights and liabilities of membership; Term of cooperative
c) The circumstances under which
1. Term - Period not exceeding fifty (50)
membership is acquired, maintained and
years from the date of registration unless
sooner dissolve or unless said period is
Page 64 of 103 BL.2401

2. Extension - May be extended for periods generates a common pool of funds in

not exceeding fifty (50) years in any order to provide financial assistance to
single instance by an amendment of the its members for productive and
articles of cooperation, provident purposes;
3. Limitation on extension - No extension b) Consumers Cooperative is one of the
can be made earlier than five (5) years primary purpose of which is to procure
prior to the original or subsequent expiry and distribute commodities to members
date/dates unless there are justifiable and non-members;
reasons for an earlier extension as may c) Producers Cooperative is one that
be determined by the Authority. (Art. undertakes joint production whether
13, R.A.9520) agricultural or industrial. It is formed
and operated by its members to
Commencement of juridical personality undertake the production and processing
A cooperative formed and organized under this of raw materials or goods produced by
Code acquires juridical personality from the date its members into finished or processed
the Authority issues a. certificate of registration products for sale by the cooperative to
under its official seal. (Art. 16) A certificate of its members and non-members. Any end
registration issued by the Authority under its product or its derivative arising from the
official seal shall be conclusive evidence that the raw materials produced by its members,
cooperative therein mentioned is duly registered sold in the name and for the account of
unless it is proved that the registration thereof the cooperative, shall be deemed a
has been cancelled. (Art. 17) product of the cooperative and its
Period to approve application for registration d) Marketing Cooperative is one which
engages in the supply of production
All applications for registration shall be finally inputs to members and markets their
disposed of by the Authority within a period of products;
sixty (60) days from the filing thereof, otherwise e) Service Cooperative is one which
the application is deemed approved, unless the engages in medical and dental care,
cause of the delay is attributable to the applicant. hospitalization, transportation,
(Art. 16) insurance, housing, labor, electric light
Denial of application for registration by the and power, communication, professional
CDA and other services;
f) Multipurpose Cooperative is one which
An appeal shall lie with the Office of the combines two (2) or more of the
President within ninety (90) days from receipt of business activities of these different
notice of such denial. That failure of the Office types of cooperatives;
of the President to act on the appeal within g) Advocacy Cooperative is a primary
ninety (90) days from the filing thereof shall cooperative which promotes and
mean approval of said application. (Art. 16) advocates cooperativism among its
members and the public through
Types and Categories of Cooperative socially-oriented projects, education and
Types of Cooperatives training, research and communication,
and other similar activities to reach out
Cooperatives may fall under any of the to its intended beneficiaries:
following types: h) Agrarian Reform Cooperative is one
organized by marginal farmers majority
a) Credit Cooperative is one that promotes
of which are agrarian reformanc e for
and undertakes savings and lending
the purpose of developing an
services among its members. It
Page 65 of 103 BL.2401

appropriate system of land tenure, land r) Transport Cooperative is one which

development, land consolidation of land includes land and sea in transportation,
management in areas covered by limited to small vessels, as defined or To
agrarian reform: classified under the Philippine maritime
i) Cooperative Bank is one organized for laws, organized under the provisions of
the primary purpose of providing a wide this Code;
range of financial services to s) Water Service Cooperative is one
cooperatives and their members; organized to own; operate and manage
j) Dairy Cooperative is one whose waters systems for the provision and
members are engaged in the production distribution of potable water for its
or fresh milk which may be processed members and their households;
and/or marketed as dairy products; t) Workers Cooperative is one organized
k) Education Cooperative is one organized by workers, including the self-
for the primary purpose of owning and employed, who are at same time the
operating licensed educational members and owners of the enterprise.
institutions notwithstanding the Its principal purpose is to provide
provisions of Republic Act No. 9155, employment and business opportunities
otherwise known as the Governance of to its members and manage it in
Basic Education Act of 2001; accordance with cooperative principles;
l) Electric Cooperative is one organized and
for the primary purposed of undertaking u) Other types of cooperative as may be
power generations, utilizing renewable determined by the Authority. (Art. 23)
energy sources, including hybrid
systems, acquisition and operation of Categories of Cooperative
subtransmission or distribution to its Cooperatives shall be categorized according to
household members; membership and territorial considerations as
m) Financial Service Cooperative is one follows:
organized for the primary purpose of
engaging in savings and credit services a) In terms of membership:
and other financial services; i. Primary - The members of which
n) Fishermen Cooperative is one organized are natural persons;
by marginalized fishermen in localities ii. Secondary. The members of which
whose products are marketed either as are primaries, and
fresh or processed products; iii. Tertiary - The members of which
o) Health Services Cooperative is one are secondary cooperatives, and
organized for the primary purpose of b) In terms of territory
providing medical, dental and other
health services; Cooperatives shall be categorized according to
p) Housing Cooperative is one organized to areas of operations which may or may not
assist or provide access to housing for coincide with the political subdivisions of the
the benefit of its regular members who country. (Art. 23)
yoactively participate in the savings
Merger and Consolidation of Cooperatives
program for housing. It is co-owned and
controlled by its members; 1. Two (2) or more cooperatives may
q) Insurance Cooperative is one engaged merge into a single cooperative which
in the business of insuring life and shall either be one of the constituent
poverty of cooperatives and their cooperatives or the consolidated
members; cooperative.

Page 66 of 103 BL.2401


2. No merger or consolidation shall be the rights of creditors nor any lien upon
valid unless approved by a three-fourths the property of any such constituent
(3/4) vote of all the members with cooperatives shall be impaired by such
voting rights, present and constituting a merger or consolidation. (Art. 22)
quorum of each of the constituent
cooperatives at separate general Functions of a Federation of Cooperatives
assembly meetings. The dissenting A federation of cooperatives shall undertake the
members shall have the right to exercise following functions:
their right to withdraw their membership
pursuant to Article 30. a) To carry on any cooperative enterprise
3. The Authority shall issue the guidelines authorized under Article 6 that
governing the procedure of merger or complements augments, or supplements
consolidation of cooperatives. In any but does not conflict, complete with, nor
case, the merger or consolidation shall supplant the business or economic
be effective upon the issuance of the activities of its members:
certificate of merger or consolidation by b) To carry on, encourage, and assist
the Authority. (Art. 21) educational and advisory work relating
to its member cooperatives,
Effects of Merger and Consolidation. c) To render services designed to
The merger or consolidation of cooperatives encourage simplicity, efficiency, and
shall have the following effects: economy in the conduct of the business
of its member cooperatives and to
1. The constituent cooperatives shall facilitate the implementation of their
become a single cooperative which, in bookkeeping, accounting, and other
case of merger, shall be the surviving systems and procedures;
cooperative, and, in case of d) To print, publish, and circulate any
consolidation, shall be the consolidated newspaper or other publication in the
cooperative; interest of its member cooperatives and
2. The separate existence of the constituent enterprises;
cooperatives shall cease, except that of e) To coordinate and facilitate the activities
the surviving or the consolidated of its member cooperatives:
cooperative; f) To enter into joint ventures with national
3. The surviving or the consolidated or international cooperatives of other
cooperative shall possess all the assets, countries in the manufacture and sale of
rights, privileges, immunities and products and/or services in the
franchises of each of the constituent Philippines and abroad and
cooperatives; and g) To perform such other functions as may
4. The surviving or the consolidated be necessary to attain its objectives.
cooperative shall be responsible for all
the liabilities and obligation of each of A federation of cooperatives may be registered
the constituent cooperatives in the same by carrying out the formalities for registration of
manner as if such surviving or a cooperative Registered cooperatives may
consolidated cooperative had itself organize a federation according to the type of
incurred such liabilities or obligations. business activity engaged in by the cooperatives.
Any claim, action or proceeding pending (Art. 24)
by or against any such constituent Cooperative Unions
cooperatives may be prosecuted by or
against the surviving or consolidated Registered cooperatives and federations at the
cooperative, as the case may be. Neither appropriate levels may organize or join

Page 67 of 103 BL.2401


cooperative unions to represent ihe interest and 1. Regular member - one who has
wellare of all types of cooperatives at the complied with all the membership
provincial, city, regional, and national levels. requirements and entitled to all the
Cooperative unions may have the following rights and privileges of membership
purposes: Considered as regular member
a) Associate who meets the minimum
a) To represent its member organizations: requirements of regular membership
b) To acquire, analyze, and disseminate, b) Continues to patronize the
economic, statistical and other cooperative for two (2) years.
information relating to its members and c) Signifies his/her intention to remain
to all types of cooperatives within its a member.
area of operation; 2. Associate member . One who has no
c) To sponsor studies in the economic, right to vote nor be voted upon and shall
legal, financial, social and other phases be entitled only to such rights and
of cooperation, and publish the results privileges as the bylaws may provide.
d) To promote the knowledge of Distinction between Regular and associate
cooperative principles and practices; membership
e) To develop the cooperative movement
in their respective jurisdictions; Regular Associate
f) To advise the appropriate authorities on
Complied all Not complied all
all questions relating to cooperatives;
membership membership
g) To raise funds through membership fees,
requirement requirement
dues and contributions, donations, and
subsidies from local and foreign sources Has the right to vote No right to vote
whether private or government; and
h) To do and perform such other non- Entitled to all the Entitled only to such
business activities as may be necessary rights and privileges of rights and privileges as
to attain the foregoing objectives. membership. the bylaws may
Cooperative unions may assist the provide.
national and local governments in the
latter's development activities in their
respective jurisdictions. (Art. 25) Laboratory Cooperative
General Assembly A cooperative organized by minors shall be
considered laboratory cooperative and must be
Mean the full membership of the cooperative affiliated with a register cooperative. A
duly assembled for the purpose of exercising all laboratory cooperative shall be governo special
the rights and performing all the obligations guidelines to be promulgated by the Authority.
pertaining to cooperatives, as provided by this (Art. 26)
Code, its articles of cooperation and bylaws:
Provided. That for cooperatives with numerous Application for membership
and dispersed membership, the general assembly
may be composed of delegates elected by each An applicant for membership shall be deemed a
sector, chapter or district of the cooperative in member after approval of his membership by the
accordance with the rules and regulations of the board of directors and shall exercise the rights of
Cooperative Development Authority (Art. 5) member after having made such payments to the
cooperative in respect to membership or
Kinds of Membership acquired interest in the cooperative as may be
prescribed in the bylaws. (Art. 28)

Page 68 of 103 BL.2401


Remedy in case of denial of membership determined by the board of

In case membership is refused or denied by the b. When a member has continuously
board of directors, an appeal may be made to the failed to comply with his
general assembly and the latter's decision shall obligations;
be final. For this purpose, the general assembly c. When a member has acted in
may opt to create an appeal and grievance violation of the bylaws and the rules
committee, the members of which shall serve for of the cooperative; and
a period of one (1) year and shall decide appeals d. For any act or omission injurious or
on membership application within thirty (30) prejudicial to the interest or the
Gays upon receipt thereof. If the committee fails welfare of the cooperative.
to decide within she prescribed period, the
appeal is deemed approved in favor of the A member whose membership the board of
applicant. (Art. 28) directors may wish to terminate shall be
informed of such intended action in writing and
Termination of Membership
shall be given an opportunity to be heard before
1. A member of a cooperative may, for any the said board makes its decision. The decision
valid reason, withdraw his membership of the board shall be in writing and shall be
from the cooperative by giving a sixty communicated in person or by registered mail to
(60) day notice to the board of directors. said member and shall be appealable within
Subject to the bylaws of the cooperative, thirty (30 ) days from receipt thereof to the
the withdrawing member shall be general assembly whose decision shall be final.
entitled to a refund of his share capital The general assembly may create an appeal and
contribution and all other interests in the grievance committee whose members shall serve
cooperative: Provided, that such fund for a period of one (1) year and shall decide
shall not be made if upon such payment appeals on membership termination. The
the value of the assets of the cooperative committee is given thirty (30) days from receipt
would be less than the aggregate amount thereof to decide on the appeal. Failure to decide
of its debts and liabilities exclusive of within the prescribed period, the appeal is
his share capital contribution: deemed approved in favor of the member.
2. The death or insanity of a member in a
Pending a decision by the general assembly, the
primary cooperative, and the insolvency
membership remains in force. ( Art.30)
or dissolution of a member in a
secondary or tertiary cooperative may be Administration
considered valid grounds for termination
of membership: Provided, that in case of Composition of the General Assembly
death or insanity of an agrarian reform The general assembly shall be composed of such
beneficiary member of a cooperative, members who are entitled to vote under the
the next-of-kin may assume the duties articles of cooperation and bylaws of the
and responsibilities of the original cooperative. (ART. 32)
3. Membership in the cooperative may be Powers of the General Assembly
terminated by a vote of the majority of
all the members of the board of directors The general assembly shall be the highest
for any of the following causes: policy-making body of the cooperative and shall
a. When a member has not patronized exercise such powers as are stated in this Code,
any of the services of the in the articles of cooperation and in bylaws of
cooperative for an unreasonable the cooperative. The general assembly shall have
period of time as may be previously the following exclusive powers which cannot be
Page 69 of 103 BL.2401

(1) To determine and approve amendments to members of the cooperative who are entitled to
the articles of cooperation and bylaws; vote, and for good cause shown, shall issue an
order to the petitioners directing them to call a
(2) To elect or appoint the members of the board meeting of the general assembly by giving
of directors, and to remove them for cause. proper notice aa required in this
However, electric cooperatives, the election of
the members of the board shall be held in Code or in the bylaws;
accordance with its bylaws or election guideline
of such electric cooperative. • In the case of a newly approved cooperative, a
special general assembly shall be called, as far
(3) To approve developmental plans of the as practicable, within ninety (90) days from such
cooperative. (Art. 33) approval;
•Subject to such other provisions of this Code • The authority may call a special meeting of the
and only for purposes of prompt and intelligent cooperative for the purpose of reporting to the
decision-making, the general assembly may be a members the result of any examination or other
three-fourths (3/4) vote of all its members with investigation of the cooperative affairs; and
voting rights, present and constituting a quorum,
delegate some of its powers to a smaller body of • Notice of any meeting may be waived,
the cooperative. These powers shall be expressly or impliedly, by any member. (Art.34)
enumerated under the bylaws of the cooperative. Quorum (Art.35)
Meetings of general assembly 1. Quorum of General assembly
1. Regular meeting 1. Ordinary Cooperative - least twenty-five per
a. Held annually on a date fixed in the bylaws, or centum (25%) of all the members entitled to
if not so fixed, on any dated within (90) days vote. (Art. 35)
after the close of each fiscal year. 2. Cooperative Bank
b. That notice of regular meetings shall be sent a. General assembly meetings, whether special
in writing, by posting or publication, or through or regular- one half plus one of the number of
other electronic means to all members of record. voting shares of all the members in good
2. Special meeting standing. The voting rights of the members shall
be proportionate to the number of their paid-up
a. May be called at any time by a majority vote shares.
of the board of directors or as provided for in the
bylaws. b. Board of directors meeting, whether special or
regular - one-half plus one of all the members of
b. A notice in writing shall be sent one (1) week the board of directors. Each director shall only
prior to the meeting to all members who are have one vote.
entitled to vote, However a special meeting shall
be called by the board of directors after c. For amendments of articles of cooperation and
compliance with the required notice within from bylaws shall be three-fourths (3/4) vote of all the
at least ten per centum members with voting rights, present and
constituting a quorum. All other voting
(10%) of the total members who are entitled to requirements shall be as prescribed by the BSP.
vote to transact specific business covered by the
call. 3. Electric cooperatives - The quorum, unless
otherwise provided in the bylaws, shall consist
If the board fails to call a regular or a special of five per centum (5%) of all the members
meeting within the given period, the Authority , entitled to vote. (Art. 35)
upon petition of ten per centum (10%) of all the
Page 70 of 103 BL.2401

2. Quorum of directors assembly some of its (3/4) vote of all

powers to a smaller body of its members with
A majority of the members of the Board shall the cooperative (Art.33) voting rights,
constitute quorum or the conduct of business, present and
unless the bylaws provided otherwise. ( Art. 40) constituting a
Voting System quorum.

1. Primary cooperative - Each member of a Self-dealing director, Ratified by three-

primary cooperative shall have only one (1) officer, committee fourths (3/4) vote
vote. members (Art 47) of all members
with voting rights,
2. Secondary or tertiary cooperative - In the case
present and
of members of secondary or tertiary
constituting a
cooperatives, they shall have one (1) basic vote
and as many incentive votes as provided for in
the bylaws but not exceed five (5) votes. Ratification of disloyalty of Ratified by a
director (Art. 48) three-fourths (3/4)
The votes cast by the delegates shall be deemed vote of all the
as votes cast by the members thereof. However, members with
the bylaws of a cooperative other than a primary voting rights,
may provide for voting by proxy. Voting by present and
proxy means allowing a delegate of a constituting a
cooperative to represent or vote in behalf of quorum.
another delegate of the same cooperative (Art. Removal of elective officer Three fourths
36) (Art. 50) (3/4) votes of the
regular members
Summary of voting requirement present and
Action Vote required constituting a
Amendment of Articles of Approved by two- Voluntary Dissolution Majority vote of
Cooperation and Bylaws thirds (2/3) of all Where no Creditors are the board of
(Art. 18) the members with Affected (Art. 64) directors, and by a
voting rights resolution duly
Division of Cooperatives Approved by a adopted by the
(Art. 20) vote of three- affirmative vote
fourths (3/4) of all of at least three-
the members with fourths (3/4) of all
voting rights, the members with
present and voting rights,
constituting a present and
quorum. constituting a
Merger and Consolidation Approved by a quorum.
of Cooperatives three-fourths (3/4) Voluntary Dissolution Majority of its
vote of all the Where Creditors Are board of directors
members with Affected (Art. 65) or other officers
voting rights, managing its
present and affairs, verified
constituting a by its chairperson
quorum. or board secretary
Delegation by general Three-fourths or one of its
Page 71 of 103 BL.2401

directors and that Composition and terms of the Board of

its dissolution was directors
resolved upon by
the affirmative Composed of not less than five (5) nor more
vote of at least than fifteen (15) members elected by the general
three-fourths (3/4) assembly for a term of two (2) years and shall
of all the hold office until their successors are duly elected
members with and qualified, or until duly removed for caused.
voting rights, (Art. 37)
present and
constitutinf a
quorum. Meetings
Termination of membership Majority of all the
General Directors
(Art. 30) members of the
Assembly meeting
board od directors
Regular Annually, on a at least once a
Calling of special meeting Majority vote of
meeting date fixed in month ( Art.
of the general assembly the board of
the bylaws, or 39)
(Art. 34) directors or as
if not so
provided for in
fixed,on any
the bylaws
dated within
Calling of special meetings Chairperson or a
ninety (90)
of the board of directors majority of the
days after the
(Art.40) members of the
close of each
fiscal year.
Filing of vacancy in the Majority of the (Art. 34)
Board of Director on the remaining
Notice of Notice shall be Any form of
grounds other than directors, if still
Regular sent in writing, notice
expiration of term (Art. 41) constituting a
meeting by posting or allowed.
Delegation of powers to Majority vote of through other
Executive Committee (Art. all the members electronic
43) of board of means to all
directors members of
Granting of compensation Majority vote of record.
to director the members with Special At any time by At any time
voting rights meeting a majority vote upon the call
Placing elected officer Majority of the of the board of of the
under preventive board of directors directors or as chairperson or
suspension provided for in a majority of
the bylaws. the members
Board of Directors of the board.
Notice of notice in That written
Mean that body entrusted with the management special writing shall be notices of the
of the affairs of the cooperative under its articles meeting sent one (1) meeting
of cooperation and bylaws. (Ar. 5) They shall be week prior to specifying the
responsible for the strategic planning, the meeting to agenda of the
directionsetting and policy-formulation activities all members special
of the cooperatives. (Art. 38) who are meeting shall
entitled to vote be given to all
Page 72 of 103 BL.2401

members of expiration of term and remaining directors

the board at the remaining directors constitute quorum.
least one (1) no longer constitute
week before quorum
the said
Proxy Proxy voting Directors
allowed cannot attend •. A director so elected to fill a vacancy shall
or vote by serve only the unexpired term of his predecessor
proxy. in office
Threefold duties of Director, officers and
Qualification of directors members

1. Any member of a cooperative with the right to 1. Who willfully and knowingly vote for or
vote assent to patently unlawful acts (Duty of
• The cooperative may, by resolution of its
board of directors, admit as directors, or 2.Who are guilty of gross negligence or bad faith
committee member one appointed by any in directing the affairs of the cooperative (Duty
financing institution from which the cooperative of diligence)
received financial assistance solely to provide 3. Acquire any personal or pecuniary interest in
technical knowledge not available within its conflict with their duty as such directors,
membership. Such director or committee officers or committee member (Duty of loyalty)
member not be a member of the cooperative and (Art. 45)
shall have no powers, rights, nor responsibilities
except to provided technical assistance as Liabilities for violation of the threefold duties
required by the cooperative.
Jointly and severally for all damages or profits
2. Possesses all the qualifications provided in the resulting there from to the cooperative,
laws or bylaws members, and other persons.

3. Possesses none of the disqualifications •When a director, officer or committee member

provided in the laws or bylaws. attempts to acquire or acquires, in violation of
his duty, any interest or equity adverse to the
•Any person engaged in a business similar to cooperative in respect to any matter which has
that of the cooperative or who in any way has a been reposed in him in confidence, he shall, as a
conflict of interest with it, is disqualified from trustee for the cooperative, be liable for damages
election as a director of said cooperative. and shall be accountable for double the profits
•The members of the board of directors shall which otherwise would have accrued to the
not hold any other position directly involved in cooperative. (Art. 45)
the day to day operation and management of the Compensation
cooperative. (Art. 39)
Directors Officers and all other
Filling of Vacancy in the Board of Directors member of employee
By the general By the Remaining the
assembly in a regular board Committee
or special meeting Not entitled to May be fixed 1.As fixed in
a. Expiration of term Other than expiration receive any in the the bylaws.
b. Other than of termand the compensation bylaws.
except for 2.If none, as
Page 73 of 103 BL.2401

reasonable per determined (1) That the presence of such director in the
diems. by the board board meeting wherein contract was approved
Exception of directors. was not necessary to constitute a quorum for
1. When such meeting:
provided in the
bylaws fixing (2) That the vote of such director was not
their necessary for the approval of the contract:
compensation. (3) That the contract is fair and reasonable
2.Granted by circumstances and
majority vote of
the members (4) That in the case of an officer or committee
with voting member the contract with the officer or
rights at a committee member has been previously
regular or authorized by the general assembly or by the
special general 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 such contract may be
called for the
ratified by a three-fourths (3/4) vote of all the
members with voting rights, present and
That no
constituting a quorum in a meeting called for the
purpose: Provided that full disclosure of the
adverse interest of the directors involved is made
other than per
at such meeting, and that the contract is fair and
diems shall be
reasonable under the circumstances. (Art. 47)
paid during the
first year of Disloyalty of a Director
existence of any
cooperative. A director who, by virtue of his office, acquires
(Art. 46) for himself an opportunity which should belong
to the cooperative shall be liable for damages
and must account for double the profits that
otherwise would have accrued to the cooperative
by refunding the same, unless his act has been
When directors and officers not entitled to ratified by a three-fourths (3/4) vote of all the
per diem members with voting rights, present and
constituting a quorum. This provision shall be
1. In the preceding calendar year, the
applicable, notwithstanding the fact that the
cooperative reported a netloss
director used his own funds in the venture. (Art.
2. Had a dividend rate less than the official 48)
inflation rate for the same year. (Art. 46)
Illegal Use of Confidential Information
Dealings of Directors, Officers, or Committee
(1) A director or officer, or an associate of a
director or officer, who, for his benefit or
A contract entered into by the cooperative with advantage or that of an associate, makes use of
one (1) or more of its directors, officers, and confidential information that, if generally
committee members is voidable, at the option of known, might reasonably be expected to
the cooperative, unless all the following adversely affect the operation and viability of
conditions are present. the cooperative, shall be held:

Page 74 of 103 BL.2401


(a) Liable to compensate the cooperative for the 3. A copy of the articles of cooperation and
direct losses suffered by the cooperative as a bylaws of the cooperative;
result of the illegal use of information, and
4.A register of members;
(b) Accountable to the cooperative for any direct
benefit or advantage received or yet to be 5. The books of the minutes of the meetings of
received by him or his associate, as a result of assembly, board of directors and committee.
the transaction. 6. Share books, where applicable;
(2) The cooperative shall take the necessary 7. Financial statement; and
steps to enforce the liabilities described in
subsection. (Art. 49) 8. Such other documents as may be prescribed
by laws or the bylaws. (Art. 52)
Removal of elective official
Responsibilities of the accountant or the
An elective officer may be removed by three bookkeeper
fourths (3/4) votes of the regular members
present and constituting a quorum, in a regular 1. He is responsible for the maintenance of the
or special general assembly meeting called for cooperative in accordance with generally
the purpose: The officer concerned shall be accepted accounting practices.
given an opportunity to be heard at said
2. He is responsible for the production of the
assembly. (Art. 50)
same at of audit or inspection. (Art. 52)
Procedure for removal of elective official
• All complaints for the removal of any elected
Responsibilities of the audit committee
officer shall be filed with the board of directors.
1. He is responsible for the continuous and
•Such officer shall be given the opportunity to
periodic review of the books and records of
be heard.
account to ensure that these are in accordance
•Majority of the board of directors may place the with generally accepted accounting practices.
officer concerned under preventive suspension
2. He shall be responsible for the production of
pending the resolution of the investigation
the same at the time of audit or inspection. (Art.
•Upon finding of a prima facie evidence of guilt, 52)
the board shall present its recommendation for
Records of account
removal to the general assembly.
Each cooperative shall maintain records of
Responsibilities, Rights and Privileges of
accounts such that the true and correct condition
and the results of the operation of the
Books to be kept Open cooperative may be ascertained there from at
any time. The financial statements, audited
Every cooperative shall have the following according to generally accepted auditing
documents ready and accessible to its members standards, principles and practices, shall be
and representatives of the Authority for published annually and shall be kept posted in a
inspection during reasonable office hours at its conspicuous place in the principal office of the
official address: cooperative. (Art. 52)
1. A copy of this Code and all other laws Preservation of book
pertaining to cooperatives;
Subject to NIRC and other laws, a cooperative
2. A copy of the regulations of the Authority; may dispose by way of burning or other method

Page 75 of 103 BL.2401


of complete destruction any document, record or evidence of the following particulars entered
book pertaining to its financial and non financial therein:
operations which are already more than five
(5)years l0lold except those relating to (1) The date on which the name of any person
transactions which are the subject of civil, was entered in such register or list of members;
criminal and administrative proceedings. An and
inventory of the audited documents. records and (2) The date on which any such person ceased to
books to be disposed of shall be drawn up and be a member ( Art. 54)
certified to by the board Secretary and the
chairman of the audit committee and presented Probative Value of Certified copies of Entries
to the board of directors which may thereupon
(1) A copy of any entry in any book, register or
approve the disposition of said records. (Art. 52)
list regularly kept in the course of business in the
Reports possession of cooperative shall, if duly certified
in accordance with the rules of evidence, be
(1) Every cooperative shall draw up regular admissible as evidence of the existence of entry
reports of its program of activities, including and prima facie evidence of the matters and
those in pursuance of their socio-civic transactions therein recorded.
undertakings, showing their progress and
achievements at the end of every fiscal year. The (2) No person or a cooperative is possession of
reports shall be made accessible to its members, the books of such cooperative shall, in any legal
and copies thereof shall be furnished to all its proceedings to which the cooperative is not a
members or record. These reports shall be filed party, be compelled to produce any of the books
with the Authority within one hundred twenty of the cooperative, the contents of which can be
(120) days from the end of the calendar year. proved and the matters, transactions and
The form and contents of the reports shall be as accounts therein recorded, unless by order of a
prescribed by the rules of the Authority. Failure competent court (Art 55)
to file the required reports shall subject the
Bonding of Accountable Officers
accountable officer/s to fines and penalties as
may be prescribed by the Authority, and shall be Every director, officer, and employee handling
a ground for the revocation of authority of the funds, securities or property on behalf of any
cooperative to operate as such. The fiscal year of cooperative shall be covered by a surety bond to
every cooperative shall be the calendar year be issued for a duly registered insurance or
except as may be otherwise provided in the bonding company for the faithful performance
bylaws. of their respective duties and obligations. The
board of directors shall determine the adequacy
(2) If a cooperative fails to make, publish and
of such bonds.
file the reports required herein, or fails to
include therein any matter required by the Code, Upon the filing of the application for registration
the Authority shall, within fifteen (15) days from of a cooperative. the bonds of the accountable
the expiration of the prescribed period, send officers shall be required by the Authority. Such
such cooperative a written notice, stating its bonds shall be renewed manually and the
non-compliance and the commensurate fines and Authority shall accordingly be informed of such
penalties that will be imposed such time that the renewal (Art. 56)
cooperative has complied with there quirements.
(Art. 53) Preference of Claims

Register of Members as PrimaFacie Evidence (1)Notwithstanding the provisions of existing

laws, rules and regulations to the contrary, but
Any register or list of members shares kept by subject to the prior claim of the Authority, any
any registered cooperative shall be prima facie debt due to the cooperative from the member
Page 76 of 103 BL.2401

shall constitute a first lien upon any raw owned or controlled corporations who have
materials, production, inputs, and products under their employer a member of a cooperative
produced: or any land, building, facilities, and have agreed to carry out the terms of the
equipments, goods or services acquired and instrument for wage deduction. (Art.58)
held, by such member through the proceeds of
the loan or credit granted by the cooperative to Primary Lien
him for as long as the same is not fully paid. Notwithstanding the provision of any law with
(2) No property or interest on property which is the contrary, a cooperative shall have primary
subject to a lien under paragraph (1) shall be lien upon the capital, deposits or interest of a
sold nor conveyed to third parties without the member for any debt due to the cooperative from
prior permission of the cooperative. The hen such a member. (Art. 59)
upon the property or interest shall continue to Tax Treatment of Cooperative.
exit even after the sale or conveyance thereof
until such lien has been duly extinguished. 1. Transacting business with members only

(3) Notwithstanding the provisions of any law to Cooperatives which do not transact any business
the contrary any sale or conveyance made in with non-members or the general public shall
contravention of paragraph (2) hereof shall be not be subject to any taxes and fees imposed
void. (Art. 57) under the internal revenue laws and other tax
laws. (Art. 60)
Instrument for Salary or Wage Deduction
2.Transacting business with both member and
(1) A member of a cooperative may execute an non-members
instrument in favor of the cooperative
authorizing his employer to deduct from his/her a. Cooperatives transacting business with both
salary or wages, commutation of leave credits members and non-members shall not be
and any other monetary benefits payable to him subjected to tax on their transactions with
by the employer and remit such amount as members. (Art. 61)
maybe specified in satisfaction of a debt or other
The transactions of members with the
demand due from the member to the cooperative
cooperative shall not be subject to any taxes and
(2) Upon the execution of such instrument and fees, including but not limited to final taxes on
as may be required by the cooperative contained members' deposits and documentary tax.
in a written request, the employer shall make the
b. Cooperatives dealing with non members shall
deduction in accordance with the agreement and
enjoy the following tax exemptions: (ART.61)
deduction in accordance with the agreement and
remit forthwith the amount so deducted within (1) Cooperatives with accumulated reserves and
ten (10) days after the end of the payroll month undivided net savings of not more than Ten
to the cooperative. The employer shall make the million pesos (P10,000,000.00) shall be exempt
deduction for as long as such debt or other from all national, city, provincial, municipal or
demand remains unpaid by the employee. barangay taxes of whatever name and nature.
Such cooperatives shall be exempt from customs
The responsibilities of the employer as stated in
duties, advance sales or compensating taxes on
paragraphs (1) and (2) of this article shall be
their importation of machineries, equipment and
mandatory. (Art. 58)
spare parts used by them and which are not
Definition of employer for purpose of wage available locally a certified by the department of
deduction trade and industry (DTI). All tax free
importations shall not be sold nor the beneficial
Employer shall include all private firms and the ownership thereof be transferred to any person
national and local governments and government- until after five (5) years. otherwise, the
Page 77 of 103 BL.2401

cooperative and the transferee or assignee shall (3)  All cooperatives regardless of the amount of
be solidarily liable to pay twice the amount of accumulated reserves and undivided net saving
the imposed tax and/or duties. shall be exempt from payment of local taxes and
taxes on transactions with banks and insurance
(2) Cooperatives with accumulated reserves and companies: Provided, That all sales or services
divided net savings of more than Ten million rendered for non-members shall be subject to the
pesos (P10,000,000.00) shall fee the following applicable percentage taxes sales made by
faxes at the full rate: producers, marketing or service cooperatives:
(a) Income Tax - On the amount allocated for Provided further. That nothing in this article
interest on capitals: Provided, That the same tax shall preclude the examination of the books of
is not consequently imposed on interest accounts or other accounting records of the
individually received by members: Provided cooperative by duly authorized internal revenue
further, that cooperatives regardless officers for internal revenue tax purposes only,
classification, are exempt income tax from the after previous authorization by the Authority.
date of registration with the Authority; (4) In areas where there are no available
(b) Value-Added Tax-On transactions with non notaries public, the judge, exercising his ex
members: Provided, however, That cooperatives officio capacity as notary public, shall render
duly registered with the Authority are exempt service, free of charge, to any person or group of
from the payment of value-added tax: subject to persons requiring the administration of oath or
Section 109. sub-sections L. M and N of the acknowledgment of articles of cooperation
Republic Act No. 9337, the National Internal and instruments of loan from cooperatives not
Revenue Code, as amended: Provided. That the exceeding Five Hundred Thousand Pesos
exempt transaction under Section 109 (L) shall (P500,000,00)
include sales made by cooperatives duly (5) Any register of deeds shall accept for
registered with the Authority organized and registration, free of charge. any instrument
operated by its member to undertake the relative to a loan made under this Code which
production and processing of raw materials or of does not exceed Two Hundred Fifty Thousand
goods produced by its members into finished or Pesos (P250,000.00) or the deeds of title of any
process products for sale by the cooperative to property acquired by the cooperative or any
its members and non-members: Provided. paper or document drawn in connection with any
further. That any processed product or its action brought by the cooperative or with any
derivative arising from the raw materials court judgment rendered in its favor or any
produced by its members, sold in the name and instrument relative to a bond of any accountable
for the account of the cooperative: Provided , officer of a cooperative for the faithful
finally, That at least twenty-five per centum performance of his duties and obligations.
(25%) of the net income of the cooperatives is
returned to the members in the form of interest (6) Cooperatives shall be exempt from the
and/or patronage refunds: payment of all court and sheriff’s fees payable to
the Philippine Government for and in connection
(c) All other taxes unless otherwise provided with all actions brought under this Code, or
herein: and where such action is brought by the Authority
(d) Donations to charitable research and before the court, to enforce the payment of
educational institutions and reinvestment to obligations contracted in favor of the
socioeconomic projects within the area of cooperative.
operation of the cooperative may be tax (7) All cooperatives shall be exempt from
deductible. putting up a bond for bringing an appeal against
the decision of an inferior court or for seeking to
set aside any third party claim: Provided, That a
Page 78 of 103 BL.2401

certification of the Authority showing that the shall be granted to cooperatives by the
net assets or the cooperative are in excess of the appropriate government agencies;
amount of the bond required by the court in
similar cases shall be accepted by the court as a (6) Preferential and equitable treatment in the
sufficient bond. allocation or control of bottomries of
commercial shipping vessels in connection with
(8) Any security issued by cooperatives shall be the shipment of goods and products of
exempt from the provisions of the Securities Act cooperatives;
provided such security shall not be speculative.
(7) Cooperatives and their federations, such as
Privileges of Cooperatives farm and fishery producers and suppliers, market
vendors and such other cooperatives, which have
Cooperatives registered under this Code, for their primary purpose the production and/or
notwithstanding the provisions of any law to the the marketing of products from agriculture,
contrary, be also accorded the following fisheries and small entrepreneurial industries and
privileges: federations thereof, shall have preferential rights
(1) Cooperatives shall enjoy the privilege of in the management of public markets and/or
depositing their sealed cash boxes or containers, lease of public marker facilities, stalls or spaces:
documents or any valuable papers in the safes of Provided, That these rights shall only be utilized
the municipal or city treasurers and other exclusively by cooperatives: Provided, further,
government offices free of charge, and the That no cooperative forming a joint venture,
custodian of such articles shall issue a receipt partnership or any other similar arrangement
acknowledging the articles received duly with a non-cooperative entity can utilize these
witnessed by another person; rights;

(2) Cooperatives organized among government (8) Cooperatives engaged in credit services
employees, notwithstanding any law or and/or federations shall be entitled to loans
regulation to the contrary, shall enjoy the free credit lines, rediscounting of their loan notes,
use of any available space in their agency and other eligible papers with the Development
whether owned or rented by the Government; Bank of the Philippines, the Land Bank of the
Philippines and other financial institutions
(3) Cooperatives rendering special types of except the Bangko Sentral ng Pilipinas (BSP);
services and facilities such as cold storage, ice
plant, electricity. transportation, and similar The Philippine Deposit Insurance Corporation
services and facilities shall secure a franchise (PDIC) and other government agencies,
therefore, and such cooperatives shall open their government-owned and controlled corporations
membership to all persons qualified in their and government financial institutions shall
areas of operation; provide technical assistance to registered
national federations and unions of cooperatives
(4) In areas where appropriate cooperatives which have significant engagement in savings
exist, the preferential right to supply government and credit operations in order for these
institutions and agencies rice, corn and other federations and unions to establish and/or
grains, fish and other marine products, meat, strengthen their own autonomous cooperative
eggs, milk, vegetables, tobacco and other deposit insurance systems;
agricultural commodities produced by their
members shall be granted to the cooperatives (9) A public transport service cooperative may
concerned; be entitled to financing support for the
acquisition and/or maintenance of land and sea
(5) Preferential treatment in the allocation of transport equipment, facilities and parts through
fertilizers, including seeds and other agricultural the program of the government financial
inputs and implements, and in rice distribution institutions. It shall have the preferential right to
Page 79 of 103 BL.2401

the management and operation of public 1. Voluntary Dissolution where no Creditors are
terminals and ports whether land or sea transport Affected.(Art. 64)
where the cooperative operates and on securing
a franchise for active or potential routes for the 2. Voluntary Dissolution Where Creditors Are
public transport; Affected. (Art.65)

(10) Cooperatives transacting business with the 3. Involuntary Dissolution (Art. 66)
Government of the Philippines or any of its 4. Dissolution by Order of the Authority. (Art.
political subdivisions or any of its agencies or 67)
instrumentalities, including government owned
and controlled corporations shall be exempt 5. Dissolution by Failure to Organize and
from prequalification bidding requirements Operate. (Art. 68)
notwithstanding the provisions of Republic Act
Voluntary Dissolution Where no Creditors
No.9184. otherwise known as the Government
are Affected
Procurement Act;
1. No creditors are affected
(11) Cooperative shall enjoy the privilege of
being represented by the provincial or city fiscal If the dissolution of a cooperative does not
or the Office of the Solicitor General, free of prejudice the rights of any creditor having a
charge, except when the adverse party is the claim against it
Republic of the Philippines;
2. The required vote has been complied with
(12)Cooperatives organized by faculty members
and employees of educational institutions shall •The dissolution may be affected by a majority
have the preferential right in the management of vote of the board of directors, and by a
the canteen and other services related to the resolution duly adopted by the affirmative vote
operation of the educational institution where of at least three-fourths (3/4) of all the members
they are employed: Provided, That such services with voting rights present and constituting a
are operated within the premises of the said quorum at a meeting to be held upon call of the
educational institution. directors.

(13) The appropriate housing agencies and •A copy of the resolution authorizing the
government financial institutions shall create a dissolution shall be certified to by a majority of
special window for financing housing projects the board of directors and countersigned by the
undertaken by cooperatives, with interest rates board secretary.
and terms equal to, or better than those given for 3. Notice of meeting
socialized housing projects. This financing shall
be in the form of blanket loans or long-term •That the notice of time, place and object of
wholesale loans to qualified cooperatives, the meeting shall be published for three (3)
without need for individual processing. consecutive weeks in a newspaper published in
the place where the principal office of said
The Authority, in consultation with the cooperative is located, or if no newspaper is
appropriate government agencies and concerned published in such place, in a newspaper of
cooperative sector, shall issue rules and general circulation in the Philippines.
regulations on all matters concerning housing
cooperatives. (Art. 62) •That the notice of such meeting is sent to
each member of record either by registered mail
Dissolution of Cooperatives or by personal delivery at least thirty (30) days
Dissolution prior to said meeting.

Page 80 of 103 BL.2401


4. The Authority shall thereupon issue the (3) The number of members; and
certificate of dissolution. (Art. 64)
(4) The nature and extend of the interests of the
Voluntary Dissolution Where Creditors Are members of the cooperative. (Art. 65)
Involuntary Dissolution
Where the dissolution of a cooperative may
prejudice the rights of any creditor, the petition A cooperative may be dissolved by order of a
for dissolution shall be filed with the Authority. competent court after due hearing on the
The petition shall be signed by a majority of its grounds of:
board of directors or other officers managing its (1) Violation of any law, regulation or
affairs, verified by its chairperson or board provisions of its bylaws; or
secretary or one of its directors and shall set
forth all claims and demands against it and that (2) Insolvency. (Art. 66)
its dissolution was resolved upon by the
Grounds for suspension or revocation of
affirmative vote of at least three fourths (3/4) of
certificate of registration
all the members with voting rights, present and
constituting a quorum at a meeting called for (1) Having obtained its registration by fraud;
that purpose.
(2) Existing for an illegal purpose;
If the petition is sufficient in form and
substance, the Authority shall issue an order (3) Willful violation, despite notice by the
reciting the purpose of the petition and shall fix Authority of the provisions of this Code or its
a date which shall not be less than thirty (30) nor bylaws
more than sixty (60) days after the entry of the (4) Willful failure to operate on a cooperative
order. Before such date, a copy of the order shall basis: and
be published at least once a week for three(3)
consecutive weeks in a newspaper of general (5) Failure to meet the required minimum
circulation published in the municipality or city number of members in the cooperative. (Art. 67)
where the principal office of the cooperative is
situated or in the absence of such local Dissolution by Failure to Organize and
newspaper, in a newspaper of general circulation Operate
in the Philippines, and a copy shall likewise be If a cooperative has not commenced business
posted for three (3) consecutive weeks in three and its operation within two (2) years after the
(3) public places in the municipality or city issuance of its certificate of registration or has
where the cooperative's office is located. not carried on its business for two (2)
Upon expiry of the five (5) day notice to file consecutive years, the Authority shall send a
objections, the Authority shall proceed to hear formal notice to the said cooperative to show
the petition and try any issue raised in the cause as to its failure to operate. Failure of the
objection filed; and if the objection is sufficient cooperative to promptly provide justifiable cause
and the material allegations of the petition are for its failure to operate shall warrant the
proven, it shall issue an order to dissolve the Authority to delete its name from the roster of
cooperative and direct the disposition of its registered cooperatives and shall be deemed
assets in accordance with existing rules and dissolved. (Art. 68)
regulations. Liquidation of a Cooperative
The order of dissolution shall set forth therein: Every cooperative whose charter expires by its
(1) The assets and liabilities of the cooperative; own limitation or whose existence is terminated
by voluntary dissolution or through an
(2) The claim of any creditor; appropriate judicial proceeding shall
Page 81 of 103 BL.2401

nevertheless continue to exist for three (3) years shall instead form part of the donated capital or
after the time it is dissolved: not to continue the fund of the cooperative.
business for which it was established but for the
purpose of prosecuting and defending suits by or Upon dissolution, such donated capital shall be
against it; settlement and closure of its affairs: subject to escheat.
disposition, conveyance and distribution of its Limitation on Share Capital Holdings.
properties and assets.
No member of primary cooperative other than
At any time during the said three (3) years, the cooperative itself shall own or hold more than
cooperative is authorized and empowered to ten per centum (10%) of the share capital of the
convey all of its properties to trustees for the cooperative.
benefit of its members, creditors and other
persons in interest. From and after any such Where a member of cooperative dies, his heir
conveyance. all interests which the cooperative shall be entitled to the shares of the decedent:
had in the properties are terminated. Provided, That the total shareholding of the heir
does not exceed ten per centum (10%) of the
Upon the winding up of the cooperative affairs, sharecapital of the cooperative; Provided,
any asset distributable to any creditor, Further, that the heir qualify and is admitted as
shareholder or member who is unknown or members of the cooperative: Provided finally,
cannot be found shall be given to the federation That where the heir fails to qualify as a member
or union to which the cooperative is affiliated of where his total shareholding exceeds ten per
with. centum (10%) of the share capital, the share or
A cooperative shall only distribute its assets or shares excess will revert to the cooperative upon
properties upon lawful dissolution and after payment to the heir of the value of such shares.
payment of all its debts and liabilities, except in (Art. 73)
the case of decrease of share capital of the
cooperative and as otherwise allowed by this
Code. Assignment of Share Capital Contribution or
Capital, Property and Funds
No member shall transfer his shares or interest
Capital Sources in the cooperative or any part thereof unless,
Cooperatives may derive their capital from any (1) He has held such share capital contribution
or all of the following sources: or interest for not less than one (1) year.
(1) Member's share capital 2) The assignment is made to the cooperative or
(2) Loans and barrowings including deposits; to a member of the cooperative or to a person
who falls within the field of the membership of
(3) Revolving capital which consists of the the cooperative; and
deferred payment of patronage refunds, or
interest on share capital; and (3) The board of directors has approved such
assignment (Art.74)
(4) Subsidies, donations, legacies, grants, aids
and such other assistance from any local or Capital Build-Up
foreign institution whether public or private: The by-laws of every cooperative shall be
Provided, That capital coming from such provided for a reasonable and realistic member
subsides, donations, legacies, grants, aids and capital build-up program to allow the continuing
other assistance shall not be divided into growth of the members' investment in their
individual share capital holdings at any time but cooperative as their economic conditions
continue to improve.(Art. 75)
Page 82 of 103 BL.2401

Shares defined conducted by an external auditor who satisfies

all the following qualifications:
The term "share" refers to a unit of capital in a
primary cooperative the par value of which may (1) He is independent of the cooperative or any
be fixed to any figure not more than One of its subsidiary that he is auditing, and
thousand pesos (P1,000.00). The share of capital
of a cooperative is the money paid or required to (2) He is a member in good standing of the
be paid for the operations of the cooperative. Philippine Institute of Certified Public
The method for the issuance of share certificates Accountants (PICPA) and is accredited by both
shall prescribed in its bylaws. (Art.76) the Board and Accountancy and the Authority.

Investment of Capital. The social audit shall be conducted by an

independent social auditor accredited by the
A cooperative may invest its capital in any of the Authority.
Performance and social audit reports which
(a) In shares or debentures or securities of any contain the findings and recommendations of the
other cooperative; auditor shall be submitted to the board of
(b) In any reputable bank in the locality, or any
cooperative; The Authority, in consultation with the
cooperative sector, shall promulgate the rules
(c) In securities issued or guaranteed by the and standards for the social audit of
Government; cooperatives. (Art. 80)
(d) in real state primarily for the use of the Audit Report
cooperative or its members; or
The auditor shall submit to the board of
(e) In any other manner authorized in the directors and to the audit committee the financial
bylaws. (Art 78) audit report which shall be in accordance with
Revolving Capital the generally accepted auditing standards for
cooperatives as jointly promulgated by the
The general assembly of any cooperative may Philippine Institute of Certified Public
authorize the board of directors to raise a Accountants (PICPA) and the Authority.
revolving capital to strengthen its capital
structure by deferring the payment of patronage Thereafter, the board of directors shall present
refunds and interest on share capital or by the the complete audit report to the general
authorized deduction of a percentage from the assembly in its next meeting. (Art. 81) The
proceeds of products sold or services rendered, auditor is not liable to any person in an action
or per unit of product or services handled. The for defamation based on any act, done, or any
board of director's shall issue revolving capital statement made by him in good faith in
certificates with serialnumber, name, amount, connection with any matter he is authorized or
and rate of interest to be paid and shall distinctly required to do pursuant to this Code. (Art. 82)
set forth the time of retirement of such Right to Examine records
certificates and the amounts to be returned. (Art.
79) A member shall have the right to examine the
records required to be kept by the cooperative
Annual Audit under Article 52 of this Code during reasonable
Cooperatives registered under this Code shall be hours on business days and he may demand, in
subject to an annual financial, performance and writing for a copy of excerpts from said records
social audit. The financial audit shall be without charge except the cost of production.
(Art. 83)
Page 83 of 103 BL.2401

Remedies of members for refusal of officer to same is distributed as prescribed herein. (Art.
examine and copy excerpts from records of 85)
Every cooperative shall determine its net surplus
1. Action for damages member for damages at the close of every fiscal year and at such other
times as may be prescribed by the bylaws.
2. Criminal case punishable under Article 140
of this Code.(penalty of imprisonment of not Order of Distribution The net surplus of every
less than one (1) year nor more than five (5) cooperative shall be distributed as follows:
years or a fine of not more than Fifty thousand
pesos (P50,000.00) or both at the discretion of (1) An amount for the reserve fund which shall
the court) be at least ten per centum (10%) of net surplus:
Provided, That, in the first five (5) years of
That if such refusal is pursuant to a resolution or
operation after registration, this amount shall not
order of the board of directors, the liability under
be less than fifty per centum (50%) of the net
this article shall be imposed upon the directors
who voted for such refusal.
Defenses available to officer for refusing (a) The reserve fund shall be used for the
members to inspect cooperative records stability of the cooperative and to meet net
losses in its operations. The general assembly
1. That the member demanding to examine and may decrease the amount allocated to the reserve
copy excerpts from the cooperative records has fund when the reserve fund already exceeds the
improperly used any information secured share capital Any sum recovered on items
through any prior examination of the records of previously charged to the
such cooperative
2. That the member was not acting in good faith reserve fund shall be credited to such fund.
or for a legitimate purpose in making his
demand. (Art. 83) (b) The reserve fund shall not be utilized for
investment other than those allowed in this
Safety of Records Code. Such sum of the reserve fund in excess of
Every cooperative shall, at its principal office, the share capital may be used ar any time for any
keep and carefully preserve the records required project that would expand the operations of the
by this Code to be prepared and maintained. It cooperative upon the resolution of the general
shall take all necessary precaution to prevent its assembly.
loss, destruction or falsification. (Art. 84)
(c) Upon the dissolution of the cooperative, the
Net Surplus reserve fund shall not be distributed among the
members. The general assembly may resolve:
Any provision of law to the contrary
notwithstanding, the net surplus shall not be
construed as profit but as an excess of payments i. To establish a usufructuary trust fund
made by the members for the loans borrowed, or for the benefit of any federation or union to
the goods and services availed by them from the which the cooperative is affiliated: and
cooperative or the difference of the rightful
amount due to the members for their products ii. To donate, contribute, or otherwise
sold or services rendered to the cooperative dispose of the amount for the benefit of the
including other inflows of assets resulting from community where the cooperative operates. If
its other operating activities and which shall be the members cannot decide upon the disposal of
deemed to have been returned to them if the the reserve fund, the same shall go to the

Page 84 of 103 BL.2401


federation or union to which the cooperative is 4) An optional fund, a land and building, and
affiliated. any other necessary fund the total of which shall
not exceed seven per centum (7%).

(2) An amount for the education and training

fund, shall not be more than ten per centum 5) The remaining net surplus shall be made
(10%) of the net surpius. The bylaws may available to the members in the form of interest
provide that certain fees or a portion thereot be on share capital not to exceed the normal rate of
credited to such fund. The fund shall provide for return our investments and patronage refunds:
the training, development and similar other Provided, that any amount remaining after the
cooperative activities geared towards the growth allowable interest and the patronage refund have
of the cooperative movement: been deducted shall be credited to the reserve
(a) Half of the amounts transferred to the
education and training fund annually under this The sum allocated for patronage refunds shall be
subsection shall be spent by the cooperative for made available the same rate to all patrons of the
education and training purposes, while the other cooperative in proportion to heir individual
half may be remitted to a union or federation patronage: Provided, That:
chosen by the cooperative or of which it is a
member. The said union or federation shall a) In the case of a member patron with
submit to the Authority and to its contributing paid-up share capital contribution, his
cooperatives the following schedules: proportionate amount of patronage
refund shall be paid to him unless he
i. List of cooperatives which have remitted their agrees to credit the amount to his
respective Cooperative Education and Training account as additional share capital
Funds (CETF): Business consultancy assistance contribution;
to include the nature and cost, and Other training b) In the case of a member patron with
activities undertaken specifying therein the unpaid share capital contribution, his
nature, participants and cost of each activity. proportionate amount of patronage
refund shall be credited to his account
(b) Upon the dissolution of the cooperative, the until his account until his share capital
unexpended balance of the education and contribution has been fully paid;
training fund appertaining to the cooperative c) In the case of a non-member patron, his
shall be credited to the cooperative education proportionate amount of patronage
and training fund of the chosen union or refund shall be set aside in a general
federation. fund for such patrons and shall be
allocated to individual non-member
patrons only upon request and
presentation of evidence of the amount
3) An amount for the community development of his patronage. The amount so
fund, which shall not be less than three per allocated shall be credited to such patron
centum (3%) of the net surplus. The community toward payment of the minimum capital
development fund shall be used for projects or contribution for membership. When a
activities that will benefit the community where sum equal to this amount has
the cooperative operates. accumulated at any time within a period
specified in the bylaws, such patron
shall be deemed and become a member
of the cooperative if he so agrees or
Page 85 of 103 BL.2401

requests and complies with the I. The sale of a generator by

provisions of the bylaws for admission Roland to Juan Torres who was
to membership: and not aware that Roland had no
d) If within any period of time specified in authority. Juan Torres has paid
the bylaws, any subscriber who has not for the generator which is due
fully paid his subscribed share capital or for delivery.
any non-member patron who has II. The purchase of a car by
accumulated the sum necessary for Edmond from Lexus Motors
membership but who does not request whose owner was not aware of
nor agree to become a member or fails Edmonds lack of authority. The
to comply with the provisions of the car and the price are due for
bylaws for admission to membership, delivery and payment,
the amount so accumulated or credited respectively. Based on the
to their account together with any part of foregoing, the partnership is
the general fund for nonmember patrons bound by:
shall be credited to the reserve fund or to
the education and training fund of the a) Transaction I only.
cooperative, at the option of the b) Transaction II only.
cooperative. (Art. 86) c) Both Transactions I and II
d) Neither of Transaction nor II.

BL. Drill 1 - Partnership

3. A and B are partners engaged in the real
1. Which of the following statements about
estate business A learned that C was
a contract of partnership having a capital
interested in buying a certain parcel of
of P3,000 or more in cash or personal
land owned by the partnership, even for
property is true?
a higher price. Without informing B, A
was able to make B sell to him (A) his
a) It must be in writing even a private one (E's) share in the partnership. Then A
to be valid. sola the land at a big profit.
b) It should appear in a public instrument
which must be recorded with the S.E.C.
a) A is liable to B for the latter's share
c) It need not be in writing to be valid.
in the profit.
d) It should appear in a public instrument
b) C is liable to B for the latter's share
even if not recorded with the S.E.C.
in the profit.
c) The partnership is dissolved when A
became the sole owner.
d) The sale of the land to C is void
2. GREAT Company, a partnership since it was without the knowledge
engaged in the distribution of of B.
generators, is composed of George,
Roland, Edmond, Albert and Troy. 4. General partners shall have no right to
George is the managing partner. During perform the following acts without the
the month of April, the following written consent or ratification by all the
transactions were entered into by the limited partners, except:
following partners in behalf of the
partnership without any authority:
a) Admit a person as a general partner.

Page 86 of 103 BL.2401


b) Admit a person as a limited partner, c) To share in the profits and surplus

unless the right to do so is given in assets of the firm.
the certificate. d) All of the above.
c) Continue the business with
partnership property of the death, 7. X, Y, and Z are partners where X was
retirement, insanity, civil appointed manager with authority to
interdiction or insolvency of a collect. D is indebted to XYZ
general partner, unless the right to partnership in the amount of P100,000
do so is gives in the certificate. which is already due and demandable
d) To have the partnership books kept and is also indebted to X personally and
at the principal place of business of likewise due and demandable in the
the partnership, and at a reasonable amount of P50,000. X collected from D
hour to inspect and copy any of P45,000. Which of these is not a correct
them statement?

5. All partners are liable solidarity with the a) If X gave a receipt in his own name,
partnership for the purpose of making he is bound to give XYZ partnership
good the loss a proportionate which is P30,000.
b) If X gave a receipt in the name of
a) Where one partner acting with the partnership he has to give the
scope of his apparent authority P45,000 to XYZ partnership
receives money or property or a c) If X's credit to D carries an interest
third person and misapplies it. of 18% and XYZ partnership's
b) Where the partnership in the course credit to D has an interest of 14%
of its business receives money or only, when X collects from D
property of a third person and the P15,000 and gives a receipt in his
same is misappropriated by any own name he also has to share the
partner while it is in the custody of collection with the partnership in
the partnership proportion.
c) Where by any wrongful act or d) None of the above.
omission of any partner acting in the
ordinary course on the business of 8. A, B, C partnership has a partnership
the partnership or with the consent credit against X in the amount of
of his copartners loss or injury is P300,000. In the course of conducting
caused to any person who is not a the business 7 of the partnership. A, B,
partner in the partnership and C agreed equally to divide the credit
d) All of the above of P300,000 among themselves. A and B
were able to collect from X P100,000
6. Partner shall have the right: each, but c was not able to collect
because X has already become
a) To ask that the books of the insolvent. In this case:
partnership be kept at the principal
place of business of the firm, and at a) A and B should share their
any reasonable hour have access to collection with C.
and inspect and copy any or them. b) A and B should return to the
b) To demand true and full information partnership capital what they have
of all things affecting the collected
partnership. c) A and B cannot be compelled to
share their collection with C nor
Page 87 of 103 BL.2401

return it to the partnership capital down into P100,000.00 cash and

because the agreement to divide computers worth P400,000.00,
was made after the partnership was contributed by both general and
dissolved and therefore, there is no limited partners. The agreement was
more element of · mutuality or subscribed and sworn to by all the
reciprocity existing among the partners before a notary public but
partners. not recorded with the Securities and
d) Correct answer not indicated Exchange Commission. Based on
the foregoing:

a. Each partnership has a separate

9. A partnership formed for the exercise of juridical personality.
a profession which is duly registered is b. I and II have separate juridical
an example of: personality.
c. II and III have separate juridical
a) Universal partnership of profits. personality
b) Universal partnership of all present d. None of the partnerships has a
property. separate juridical personality
c) Particular partnership. 11. In A, B and c partnership, A was
d) Partnership by estoppel. appointed sole manager of its n tailoring
business. A as such manager can
execute all acts of administration despite
the operation of b and C. Which of the
10. The following partnership contracts 17 following acts cannot be done by A
were presented to you for / evaluation: alone?

I. A partnership engaged in the sale of a. To buy textile materials for use of the
office supplies with a capital of tailoring on credit.
P100,000.00 broken down into: b. To buy much needed Singer sewing
cash, P30,000.00, office supplies for machines for cash
sale, P50,000; and office equipment, c. To pay for the salaries of the employees.
P10.000.00; Land, P10,000. The d. To transfer the location of the tailoring
agreement is in a private instrument. form the university belt to Makati
II. A partnership engaged in the lease Avenue.
of office spaces with a capital of e. None of the above.
P700,000.00 broken down into:
land, P100,000.00; building, 12. Alexis and Bote entered into a universal
P500,000.00; cash, P80,000.00; and partnership of all present property. No
office equipment, P20,000.00. The stipulation was made regarding other
agreement is in a public instrument properties. Subsequently, Alexis
attached to which is the inventory of received a parcel of land by inheritance
the land and the building signed by from his father; and another parcel of
the partners. The agreement is not land from "The Best Ito University" as
recorded with the Securities and remuneration for Alexis work as
Exchange Commission. professor therein.
III. A partnership is engaged in the
trading of computers whose name is a. The two parcel of land and their fruits
"Lament Enterprises, Ltd." It has a are to be enjoyed by the partnership
total capital of P500,000.00 broken because the contract entered is a
Page 88 of 103 BL.2401

universal partnership of all present d. If C still has money, but refuses to make
property. the contribution he can be compelled to
b. The two parcel of land and their fruits sell his interest in the partnership to the
will not be enjoyed by the partnership other partners.
because there is no stipulation regarding
future properties or their fruits. 15. Paul and Joven entered into a universal
c. The partnership is entitled only to the partnership or profits Subsequently, Paul
fruits but not to the two parcel of land. won 1" prize in the lotto. Will the
d. The partnership is entitled to use the two money belong to the partnership?
parcel of land as usufructuary and also
entitled to the fruits produced by the a. Yes, because it is considered profit
property. acquired by the partner.
b. No, because it is not acquired by
industry or work
c. Yes, because all profit acquired
13. These persons cannot enter into a become part of common fund.
universal partnership contract: d. No, because the profit was acquired
only after the constitution of the
a. husband and wife partnership.
b. persons guilty of adultery and
concubinage 16. Which of the following right cannot be
c. persons who commit adultery in exercise by an assignee of interest:
consideration thereof
d. public officials by reason of their office a. To get whatever profits the assignor
e. all of them partner would have obtained
b. To avail himself of the usual
14. A, B, C and D are partners where A, B, remedies in case of fraud in the
and C contributed P1,000,000 each and management.
D his services. The partnership is D c. To demand information, accounting
engaged in the manufacture and export and inspection of the partnership
of garments. Due to a very strong books
typhoon, the entire roofing of the factory d. The right to participate in the
was blown by the strong winds and if management
not repaired Immediately 1. would
aggravate the damage. A, B, C and D a. All of the abovec. B, C and D
agreed on an additional contribution of b. Only c d. C
P200,000 each in order to save the and D e
business from imminent loss. Which of 17. A, B and C are partners in an import and
these is the correct statement? export business where customers
desiring to place an order are required to
a. D is duty bound to contribute 20% more make a deposit of 30% to the
of his time to the business of the partnership. T, a regular customer
partnership. deposited P300,000 to partner. A who,
b. If A no longer has money, he can be instead of turning over the money to
complied to sell his interest in the ABC partnership, misappropriated it for
partnership to the other partners, his own use. In this case:
c. B can question the decision because he
did not vote for the additional
Page 89 of 103 BL.2401

a. I should sue alone A the became indebted to X in the amount of

misappropriating partner for the amount P1.800,000.
of P300,000.
b. I can sue A or B or C the partnership of a. X can only hold liable A, B, and C as
ABC solidarity for the amount of the capitalist partners;
P300,000 b. X must first exhaust the partnership
c. T can only sue partners A, B and C asset of P800,000 and then hold A, B
jointly for P300,000. and C jointly for the balance of
d. Correct remedy not indicated. P1,000,000
c. X must first exhaust the partnership
18. The following statements pertain either assets amounting to P800,000 and then
to a partner appointed Tanager in the hold A, B, C and D solidarily liable for
articles of partnership or through a the balance of P1,000,000;
document after the formation of the d. X must first exhaust the partnership
partnership assets amounting to P800,000 and then
hold liable jointly A, B, C and D from
I. He may be removed as manager only for the balance of P1,000,000 - but after the
a just or lawful cause by the vote cf the industrial partner pays X P250,000 he
partners owning the controlling interest. can ask reimbursement from A, B, and
II. He may be removed as manager with or C so that in the end D as an industrial
without just or lawful cause by the vote partner will not be liable for losses
of the partner owing the controlling among themselves.
III. He may perform all acts of administrator
despite the opposition of his partners
provided he is in good faith. Drill 2 - Partnership
IV. He may perform all acts of
administration in good faith but 1. A, B, C and D were partners. A assigned
opposing partners may resort to his his interest in the partnership to his son
removal if he persists. S. S now wanted to join in the
management of the enterprise. B, C and
Based on the foregoing: D refused. is the partnership necessarily
a. I and III pertain to a partner appointed as
manager in the 0 articles of partnership a. The partnership is dissolved because of
b. I and III pertain to a partner appointed as the conveyance by A
manager through a document after the b. The mere assignment did not dissolve
formation of the partnership the firm. This is SO even if B, C and D
c. II and III pertain to a partner appointed did not allow S to participate in the
through a document after the formation firm's business conduct.
of the partnership. c. The partnership is not dissolve provided
d. I and IV pertain to a partner appointed B, C and D WI! allow S to join the
as manager in the articles of partnership management of the enterprise.
d. The conveyance of interest by A
automatically dissolved the partnership
19. A, B. C and D are partners where D is
an industrial partner and A, B and C
respectively contributed P400,000, 2. The certificate shall be cancelled when:
P200,000 and P200,000. ABCD & Co.

Page 90 of 103 BL.2401


a. There is change in the name of the partnership as business organization

partnership should they choose?
b. Additional limited partner is admitted
c. All limited partner cease to be such. a. General partnership
d. There is a false or erroneous statement b. Limited partnership
in the certificate. c. No partnership organization is available
d. Limited
3. A substituted limited partner is:
7. Wilma, Olga and Wynona agreed to
a. a person admitted as a partner by the form a limited partnership with Wilma
other partners. and Olga as general partners
b. a buyer of right of the deceased partner contributing P50,000.00 each, and
c. An assignee admitted to all the rights of Wynona as limited partner contributing
a limited partner P100,000.00. The partnership which is
d. All of the above. to engage in the trading of garments was
named WOW Garments Co. Limited" as
4. In a limited partnership, the creditor of a indicated in the certificate signed and
limited partner may charge the interest sworn to by the partners before a notary
of the indebted limited partner. the public. However, the certificate was not
interest so charged may be redeemed filed with the Securities and Exchange
with: Commission In the meantime, the
partners already begun operating the
a. Partnership property business and transacting with third
b. Separate property of any general partner persons.
c. Both partnership property and separate
property of the general partner a. The partnership entered into by the
cumulatively Wilma, Olga and Wynona is void.
d. Both partnership property and separate b. The partnership will be considered a
property of the general partner generally partnership. Accordingly, all
alternatively partners will be liable with their separate
property after the exhaustion of
5. In three of the following instances, the partnership assets.
certificate of a limited partnership may c. The partnership will be considered a
be amended. Which is the exception? limited partnership as indicated in its
name. Only Wilma and Olga will be
a. Change in the character of the business liable with their separate property after
b. There is a false or erroneous statement the exhaustion of partnership assets.
in the certificate. d. Wilma, Olga and Wynona will be
c. Death of a general partner considered separate as sole proprietors
d. A person is substituted as a limited with each one having a capita equivalent
partner. to their respective contributions.

6. A, B and C wish to go into the business

together to bottle mineral water. Each
contributed P50,000, but wanted to limit 8. As regards a limited partner, which
his liability to the extent of his statement is correct?
contribution, and his name to appear in
the partnership name. Which form of a. He cannot be allowed to transact
business directly with the partnership of
Page 91 of 103 BL.2401

which he is a member as this would a. He cannot be allowed to transact

result into conflict of interest business directly with the partnership of
b. He is automatically the agent of the which he is a member as this would
partnership with general authority to result into conflict of interest;
bind the partnership to contracts with b. He is automatically the agent of the
third persons; partnership with general authority to
c. He can only contribute money and bind the partnership to contracts with
property but not services; third persons;
d. He has no liability to partnership c. He can only contribute money and
creditors even if he takes part in the property but not services;
management of the partnership. d. He has no liability to partnership
creditors even if he takes part in the
9. Unless otherwise provided in a general management of the partnership.
partnership agreement which of the
following statements is correct when a 12. A partnership is automatically dissolved,
partner dies? except:
10. B and C formed a limited partnership,
with A as a general T) partner, while B a. By the death of any partner
and C as limited partners, with the b. By the insolvency of any partner or of
following contributions: the partnership
c. By the civil interdiction of any partner
1. A contribute a specific parcel of d. By the Insanity of any partner
2. B to contribute P10,000, the first
P5,000 upon formation, and the last
25,000, 10 days after formation. 13. Allan, Beth and Chris are partners with
3. C contributed a specific car as was capital contribution of 15.000, P10.000
stated in the article of partnership, und P5,000, respectively. Supposed on
when in fact it was not contributed dissolution, the assets of their
partnership amount to oni 246.000 and it
If the partnership was dispossessed of owed Delia the amount of P50.000.
the land contributed by A after delivery Chris owes Polly on his personal
to the partnership by the real owner, the account P6.000. The partners have no
effect will be: separate personal property except Chris
whose separate property amounts to
a. A is considered a debtor of the P7.000. Which is correct?
b. A is considered a trustee of the land for a. Delia and Polly shall divide Chris
and in behalf of the partnership separate property equally
c. The partnership will dissolved b. Delia and Polly shall divide Chris
d. A is to answer for warranty against property pro-rata.
eviction. c. Delia shall be preferred as regards
Chris separate property
d. Polly shall be preferred as regards
Chris separate property
11. As regards a limited partner, which
statement is correct? 14. Without the written consent or
ratification of the specific act by all the
limited partners, a general partner or all
Page 92 of 103 BL.2401

of the 20 general partners have no will cause the automatic dissolution of

authority to: the partnership?

a. Do any act in contravention of the a. The business of the partnership can only
certificate be carried on at a loss.
b. Do any act that would make it b. A partner is shown to be of unsound
impossible to carry on the ordinary mind
business of the partnership. c. A partner has been guilty of such
c. Confess a judgment against the conduct as tends to affect prejudicially
partnership. the carrying on of the business.
d. All of the above. d. A partner is civilly interdicted.

15. A, B and C, capitalist partners, each -

contributed P30,000, P20.000 and
P10,000 respectively; and D, the 18. Which of the following is not a requisite
industrial partner contributed his prescribed by low in order that a
services. Suppose X, a customer, is the partnership may be held liable to a third
creditor of the firm to the amount of party for the acts of one of its partners?
P180,000 How can X recover the
P180,000? a. The partner binds the partnership by
acquiescence for obligations he may
a. X must sue the firm and get P60.000 have contracted in good faith.
from all the partners including D, the b. The partner must have the authority to
industrial partner. X can still recover the bind the partnership
balance of P120,000 from the four c. The contract must be in the partnership
partners jointly. name or for its account.
b. X can recover from the firm P60.000. X d. The partner must act on behalf of the
can still recover the balance of P120,000 partnership
from the capitalist partners only.
c. X can recover from the firm P60.000. X
can still recover the balance of P120.000
from any of the partners solidarity 19. Three of the following enumerations are
d. X can recover from the firm P60.000 rights of a general partner in a limited
and consider the balance of P120,000 as partnership that are also enjoyed by a
a loss. limbed partner. Which among them does
a limited partner not enjoy?
16. A partner whose liability for partnership
debts is limited to his capital a. To have the books of the partnership
contribution is called: kept at the principal place of business of
the partnership, and a reasonable hour to
a. General partner inspect and copy any of them,
b. Limited partner b. To have on demand true and full
c. General limited partner information of all things affecting the
d. Secret partner partnership and a formal account
partnership affairs whenever
17. A decree by the court is necessary to circumstances render just and
dissolve a general partnership based on reasonable;
three of the following grounds. Which c. To have dissolution and winding up by
none will not require such decree but decree of court
Page 93 of 103 BL.2401

d. To have all the rights and be subject to a. Admit a person as a general partner.
all restrictions and liabilities of a partner b. Admit a person as a limited partner,
in a partners without limited partners. unless the right to do so is given in the
20. On application by or for partner the c. Continue the business with partnership
court shall declare dissolution whenever: property on the death, retirement,
insanity, civil interdiction or insolvency
a. A partner becomes in any other way of a general partner, unless the right to
incapable performing his part of the do so is given in the certificate.
partnership contract. d. To have the partnership books kept at
b. A partner has been guilty of such the principal place of business of the
conduct as it tends affect prejudicially partnership, and at a reasonable hour to
the carrying on of the business, inspect and copy any of them.
c. A partner willfully or persistently
commits a breach one partnership 24. As a general rule, a partner cannot ask
agreement that it is not reasonably for a formal accounting of the affairs of
practicable to carry on the business in the partnership during its existence and
partnership with him. before it is dissolved, except:
d. All of the above
a. When he is wrongfully excluded from
21. A substituted limited partner is: the partnership business
b. When the right exists under the terms of
a. a person admitted as a partner by the any agreement
other partners. c. Whenever other circumstances render it
b. a buyer of right of the deceased partner. just and reasonable
c. An assignee admitted to all the rights of d. All of the above
a limited partner.
d. All of the above. DRILL 1 - CORP

22. In a limited partnership where there are 1. B is the owner of 75% of the shares in
4 partners: Bentong Corporation On one occasion,
Bentong Corporation, as represented by
a. All the partners must be limited as the President and General Manager,
partners. entered into a contract K involving a
b. The number of limited partners must be townhouse. For failure of Bentong
equal to the number of general partner, Corporation to build the townhouse, K
that is, 2:2. filed a case recession and damages
c. The number of limited partners must be against B and Bentong Corporation,
greater than the number of general Which is correct?
partners, that is, 3:1.
d. It is enough that there is one limited a. The action filed against will not
partner; the rest may all be general prosper Bentong Corporation has a
partners. separate and personality from the
former and that when B entered a
23. General partners shall have no right to contract with K, he was only acting
perform the following acts without the in peria company.
written consent or ratification by all the b. The action filed against Bentong
limited partners, except: Corporation will be because this
pertain to the company and the
Page 94 of 103 BL.2401

company alone should be held liable d. The election of Y as the new treasurer is
unless B or C acted in bad faith not valid: the approval of the contract
c. The action filed against Bentong with X Construction Supplies is valid.
Corporation and B prospers because
the latter owns a majority of the
shares in former and as such B is
personally liable for all the 4. In 2012, Corporation "A" passed a board
transactions entered into by the resolution removing X from his position
corporation. as manager of said corporation. The bv
d. a and b only laws of "A corporation provides that the
officers are president, general-manager,
2. X is a director in T Corp. who was treasure general-manager, treasurer and
elected to a l-year term on Feb. 1, 2010. secretary. Upon complaint filed with the
On April 11, 2010, X resigned and was SEC, it held that the general manager
replaced by R, who assumed as director could be removed by mere resolution of
on May 17, 2010. On Nov, 21, 2010, R the board On motion for reconsideration,
died. S was then elected in his place. X alleged that he could be removed by
Until which time should S serve as the affirmative vote of the stockholder
director? (2011 Bar) representing 2/3 of the outstanding
capital stock. I contention legally
a. April 11, 2011 C. May 17, tenable.
a. No, the vote required is majority of the
b. Feb. 1, 2011 d. Nov, 21, board and 2/3 OCS consenting
2011 b. Yes, the voting requirement is only 2/3
of the outstanding capital stock
3. In the meeting of the board of directors c. No, the required vote is MBD consented
of Grand Corporation, a construction by MOCS.
company held on March 31, 2009, d. No, the voting requirement is only
directors A, B, C, D and E were present majority of the Board of Directors.
among the 9 directors. The meeting had
for its agenda the following: 5. Corporation X has a statement of capital
stock in its articles of incorporation but
I. The appointment of a new treasurer. it was stated in the same articles that
II. The approval of the contract for the dividends are not supposed to be
purchase of cement worth P50,000.00 declared, that is, there is no distribution
from X Construction Supplies Co When of retained earnings. Corporation X is:
the voting took place, directors A, B, C
and D voted for the election of Y as the a. Stock corporation
new treasurer; and directors A, B and C b. Corporation by estoppels
voted for the approval of the contract c. Non stock corporation
with X Construction Supplies. d. Corporation by prescription

a. Both corporate acts are valid. 6. The Articles of Incorporation must be

b. Both corporate acts are not valid accompanied by a Treasurer's Affidavit
c. The election of Y as the new treasurer is certifying under oath, among others, that
valid; the approval of the contract with the total subscription paid is: (2011 Bar)
X Construction Supplies is not valid
a. 100 less than P25,000.00.
Page 95 of 103 BL.2401

b. not more than P5,000.00 9. The Corporation Code sanctions a

c. not less than P5,000.00 contract between two or more
d. not more than P25,000.00 corporations which have interlocking
directors, provided there is no fraud that
7. The rule is that no stock dividend shall attends it and it is fair and reasonable
be issued without the approval of under the circumstances. The interest of
stockholders representing at least 2/3 of an interlocking director in one
the outstanding Capital stock at a regular corporation may be either substantial or
or special meeting called for the nominal. It is nominal if his interest:
purpose. As to other forms of dividends: (2011 Bar)
(2011 Bar)
a. does not exceed 25% of the outstanding
a. a mere majority of the entire Board of capital stock.
Directors applies. b. exceeds 25% of the outstanding capital
b. a mere majority of the quorum of the stock.
Board of Directors applies. c. exceeds 20% of the outstanding capital
c. a mere majority of the votes of stock,
stockholders representing the d. does not exceed 20% of the outstanding
outstanding capital stock applies. capital stock.
d. the same rule of 2/3 votes applies.
10. In case of disagreement between the
8. The Board of Directors of XYZ Corp. corporation and a withdrawing
unanimously passed a resolution stockholder who exercises his appraisal
approving the taking of steps that in right regarding the fair value of his
reality amounted to willful tax evasion. shares, a three-member group shall by
On discovering this, the government majority vote resolve the issue with
filed tax evasion charges against all the finality. May the wife of the
company's members of the board of withdrawing stockholder be named to
directors. The directors invoked the the three member group? (2011 Bar)
defense that they have no personal
liability, being mere directors of a a. No, the wife of the withdrawing
fictional being. Are they correct? (2011 shareholder is not a disinterested person.
Bar) b. Yes, since she could best protect her
husband's shareholdings.
a. No, since as a rule only natural persons c. Yes, since the rules do not discriminate
like the members of the board of against wives.
directors can commit corporate crimes. d. No, since the stockholder himself should
b. Yes, since it is the corporation that did sit in the three member group.
not pay the tax and it has a personality
distinct from its directors. 11. The corporate term of a stock
c. Yes, since the directors officially and corporation is that which is stated in its
collectively performed acts that are Articles or incorporation, it may be
imputable only to the corporation. extended or shortened by an amendment
d. No, since the law makes directors of the of the Articles when approved by
corporation soldarily liable for gross majority of its Board of Directors and:
negligence and bad faith in the discharge (2011 Bar)
of their duties.
a. approved and ratified by at least 2/3
of all stockholders h
Page 96 of 103 BL.2401

b. approved by at least 2/3 of the a. No, since the By-Laws cannot deny a
stockholders representing the shareholder his right of pre-emption.
outstanding capital stock. b. Yes, but the denial of his pre-emptive
c. ratified by at least 2/3 of all right extends only to 500 shares.
stockholders. c. Yes, since the denial of the right under
d. ratified by at least 2/3 of the the By-laws is 18. binding on T.
stockholders representing the d. No, since pre-emptive rights are
outstanding capital stock. governed by the articles of
12. X Corp. operates a call center that
received orders for pizzas on behalf of Y 14. X Corp., whose business purpose is to
Corp. which operates a chain of pizza manufacture and sell vehicles, invested
restaurants. The two companies have the its funds in Y Corp., an investment firm,
same set of corporate officers. After 2 through a resolution of its Board of
years, X Corp. dismissed its ca! agents Directors. The investment grew
for no apparent reason. The agents filed tremendously on account of Y Corp.'s
a collective suit for illegal dismissal excellent business judgment. But a
against both X Corp. and Y Corte based minority stockholder in X Corp. assalls
on the doctrine of piercing the veil of the investment as ultra vires. Is he right
corporate fiction. The latter set up the and, if so, what is the status of the
defense that the agents are in the employ investment? (2011 Bar)
of X Corp. which is a separate juridical
entity. Is this defense appropriate? a. Yes, it is an ultra vires act of the
corporation itself but voidable only,
a. No, since the doctrine would apply, the subject to stockholders' ratification,
two companies having the same set of b. Yes, it is an ultra vires act of its Board
corporate officers. of Directors and thus void.
b. No, the real employer is Y Corp., the c. Yes, it is an uitra vires act of its Board
pizza company, with X Corp. serving as of Directors but voidable only, subject
an arm for receiving its outside orders to stockholders' ratification.
for pizzas. d. Yes, it is an ultra vires act of the
c. Yes, it is not shown that one company corporation itself and, consequently,
completely dominates the finances, void.
policies, and business practicesmof the
other 15. The rule is that the valuation of the
d. Yes, since the two companies perform shares of a stockholder who exercises
two distinct businesses his appraisal rights is determined as of
the day prior to the date on which the
13. ABC Corp. increased its capital stocks vote was taken. This is true - (2011 Bar)
from Php10 Million to Php15 Million
and, in the process, issued 1,000 new a. regardless of any depreciation or
snares divided into Common Shares "B" appreciation in the share's fair value.
and Common Shares "C." T, a b. regardless of any appreciation in the
stockholder owning 500 shares, insists share's fair value.
on buying the newly issued shares c. regardless of any depreciation in the
through a right of pre-emption. The share's fair value
company claims, however, that its By- d. only if there is no appreciation or
laws deny T any right of preemption. Is depreciation in the share's fair value.
the corporation correct? (2011 Bar)
Page 97 of 103 BL.2401

16. T Corp. has a corporate term of 20 years At that time, "Summit Corporation" had
under its Articles of To corporation or assets of P30,000.00.
from June 1, 1980 to June 1, 2000. On
June 1991 it amended its Articles of a. "Summit Corporation" is liable only up
Incorporation to extend its hy 15 vears to P30,000.00, its remaining assets,
from June 1, 1980 to June 1, 2015. The since it is different from A, B, C, D and
SEC approved this amendment. On June E who are not liable in their individual
1, 2011, however, T Corp decided to capacities.
shorten its term by 1 year or until June b. X can go after the separate assets of A,
1, 2014. Born the 1991 and 2011 B, C, D, and E after exhausting the
amendments were approved by majority assets of "Summit Corporation.
vote of its Board of Directors and c. A, B, C, D and E can move for the
ratified in a special Stockhołders dismissal of the court action because
representing at least 2/3 of its "Summit Corporation" has no
outstanding capitai stock. The SEC, personality of its own.
however, disapproved the 01 d. X cannot allege the lack of juridical
amendment on the ground that it cannot personality on the part of "Summit
be made earlier that 5 years prior to the Corporation because he is stopped from
expiration date of the corporate term, doing so
which is June 1, 2014. Is this SEC
disapproval correct? (2011 Bar) 18. Mrs. Baby owns a substantial portion of
the outstanding capital of X corporation.
a. No, since the 5-year rule on amendment Is the mere ownership of substantial S
of corporate term applies only to portion alone of the outstanding capital
extension, not to shortening, of term in a corporation justify the application of
b. Yes, any amendment affecting corporate doctrine of piercing the veil of corporate
term cannot be made earlier than 5 years entity?
prior to the corporation expiration date.
c. No. since a corporation can in fact have a. No. Mere ownership by a single
a corporate life of 50 years. stockholder or by any corporation of all
d. Yes, the amendment to shorten or substantially all of the capital stock of
corporate term cannot be made earlier the corporation does not justify the
than 5 years prior to the corporation's application of the doctrine of piercing
expiration date. the veil of corporate entity. There must
be other circumstances that must be
17. A, B, C, D and distributed calling cards present.
identifying themselves as directors of b. No. It requires that the stockholders
Summit Corporation, to several must own at least more than 50% of the
individuals during a business outstanding capital stock to justify the
conference. In reality, however, nc such application of piercing the veil of
corporation is registered with the corporate entity.
Securities and Exchange Commission. c. Yes. A substantial ownership of the
X, who received a calling card granted outstanding capital stock alone is
credit amounting to P50.000.00 to sufficient for the application of piercing
"Summit Corporation" believing that the veil of corporate entity.
such a corporation really existed. When d. Yes. Piercing the veil of corporate entity
the supposed corporation was unable to applies whenever there is parent
pay, X brought a court action against it. subsidiary relationship which means that
the parent own at least more than 50%
Page 98 of 103 BL.2401

of the outstanding capital stock of the b. May enter into a written agreement
subsidiary. making the partners among themselves
c. May, for any reason, withdraw from the
LAW -Drill 2 - Corporation corporation and compel it to purchase
their shares at their fair value, which
1. Stock which has been issued by a shall not be less than their or issued
corporation, has fully paid up when in value, provided the corporation has
fact it is not, because it has been issued sufficient assets to cover its debts and
as bonus or otherwise, without any liabilities exclusive of capital stock
consideration at all, or for less than par, d. All of the above
or for property, labor or services at an
overvaluation. 5. The right given to the stockholders to
dissent and demand payment of the fair
a. Watered stock c. Treasury value of their shares is called:
a. Right of proxy c. Pre-emptive
b. Over issued stock d. Redeemable right
stock b. Appraisal right d. Stock right

2. A corporate stockholder sold his share to 6. The right of dissenting stockholders to

another but the sale has not been demand payment of the value of their
recorded in the books of the corporation. share shall cease:
The sale is:
a. When the demand for payment is
a. The sale is void because it was not withdraw with the consent of the
registered in the corporate book corporation
b. The sale is perfectly valid as between b. When the proposed corporate action is
the buyer and the seller. abandonador rescinded by the
c. The sale is void because the corporation corporation
has no consent in the sale of share of c. When the proposed corporate action is
stock. approved by the SEC where such
d. The sale is valid only if the same be approval is necessary
registered in the corporate book d. All of the above

3. A non stock corporation: 7. The business of this corporation can be

managed by the stockholders
a. May not engage in business for profit
b. One where the capital is not divided into a. Close c. leemosy
c. No part of the income must be b. Open d. stockholders
distributed as dividends
d. All of the above 8. Voluntary dissolution of a corporation
caused by
4. Stockholders of the close corporation
a. Voluntary dissolution where no creditors
a. Are given absolute right of pre-emption are affected
in the issuance of all kinds of shares b. Voluntary dissolution where creditors
including the shares of treasury shares are affected

Page 99 of 103 BL.2401


c. Amendments of the Articles of b. All of its issued shares exclusive of

Incorporation the shortening of treasury shares shall be held of record
corporate tem by not more than 20 stockholders
d. All of the above c. All shares are subject to one or more
restriction on transfer of shares
9. A corporation commences existence d. All of the above
from the the certificate of incorporation,
which one is the 13. One who has agreed to take stock from
the corporation on the original issue of
a. Close corporation such stock is called
b. widely-held corporation
c. Religious corporum a. Incorporators c. Promoters
d. Non-stock corporation b. Members d. Subscribers
e. Educational corporation
14. EFG Foundation, Inc., a non-profit
10. Dissenting stockholders are given organization, scheduled an election for
appraisal its six-member Board of Trustees. X, Y
and Z, who are minority members of the
a. In case any amendments to the has the foundation, wish to exercise cumulative
effect of changing or restricting or of voting in order to protect their interest,
authorizing olders or class of shares although the Foundation's Articles and
preference in any respect superior By-laws are silent on the matter. As to
outstanding shares of any class, Shares each of the three, what is the maximum
of any class, or of extending or number of votes that he/she can cast?
shortening the terms of corporate (2011 Bar)
b. in case of sale, lease, exchange, transfer a. 6 c. 12
more other disposition of all or b. 9 d. 3
substantially corporate assets
c. In case of merger and consolidation 15. In elections for the Board of Trustees of
d. All of the above non-stock corporations, members may
cast as many votes as there are trustees
11. A written instrument signed by the to be elected but may not cast more than
proper officers or corporation, stating or one vote for one candidate. This is true -
acknowledging that the person named (2011 Bar)
therein is the holder of a designated
number of shares of its Stock: a. unless set aside by the members in
plenary session.
a. Certificate of stock b. in every case even if the Board of
b. Certificate of incorporation Trustees resolves Otherwise.
c. Share of stock c. unless otherwise provided in the Articles
d. Dividend of Incorporation or in the By laws,
d. in every case even if the majority of the
12. A close corporation: members decide otherwise during the

a. Shall not list shares in any stock 16. Voluntary dissolution of a corporation is
exchange nor offer its shares to the caused by:

Page 100 of 103 BL.2401


a. Voluntary dissolution where no creditors obtained a license for the purpose from
are affected SEC.
b. Voluntary dissolution where creditors c. If found to be engaged in business
are affected without any license they are not
c. Amendments of the Articles of permitted to sue in any court or
Incorporation resulting in the shortening administrative agency of the Philippines
of corporate term but may be sued.
d. All of the above d. All of the above

17. It is one brought by one or more of the 21. The by-laws of a corporation may create
stockholder or members in the name and an executive committee, composed of
on behalf of the corporation to redress not less than 3 members of the board of
wrongs committed against it or to directors to be appointed by the board
protector vindicate corporate rights, The executive committee may act, by
whenever the officials of the corporation majority vote of all its members on such
refuse to sue, or are the ones to be sued specific matters within the competence
or hold control of the corporation. of the board, as may be delegated to it in
the bylaws or on majority vote of the
a. Mandamus board, EXCEPT:
b. Quo warianto
c. Derivative suit a. Approval of any action for which
d. Individual suit shareholders' approval is also required.
b. Amendment or repeal of by laws or
18. The power to examine into the affairs of adoption of new by laws.
a corporation in order to supervise, c. Filling of vacancies in the Board,
direct, and control its management is d. All of the above
22. On May 1, 2013, S subscribed to 1,000
a. Visitorial power of the state shares of stock of Sigma Corporation at
b. Visitorial power of stockholders the par value of P10.00 per share
c. Visitorial power of directors Pursuant to the policy of the corporation
d. Visitorial power of employees which requires a down payment of 60%
of the subscription price, s paid
19. All of the close corporation's issued P6,000.00 upon the execution of the
shares shall be held or record by not subscription contract. The balance of the
more than subscription must be paid after 30 days,
which in the case of s, is May 31, 2013.
a. 10 persons c. 20 persons
b. 15 persons d. None of the a. Upon the execution of the subscription
above contract. S may demand the issuance to
him of a stock certificate covering 600
20. Foreign corporation shares.
b. S is already qualified to vote although
a. Are organized under the laws of he has not paid his subscription in full.
countries other than the Philippines. c. If S fails to pay the balance of his
b. Are not permitted to transact business in subscription on May 31, 2013, his shares
the Philippines until after they have will become delinquent on June 1, 2013,
d. In case of delinquency, only 400 shares
will be considered delinquent.
Page 101 of 103 BL.2401

23. These statements pertaining to the right I. Subscriptions to 100 shares of stock at
of a stockholder to inspect the books and P100.00 par value per share by Mr
records of a corporation were presented II. Purchase of 30 shares of stock from the
to you for evaluation: corporation's treasury shares by Mr. BB
at a total price of P300.00.
I. The right may be delegated to an agent. III. Purchase of 100 shares of stock by Mr.
II. The right may be denied if in the past, CC at a total price of P1,200.00, from
the stockholder improperly used the Mr. DD, another stockholder. Which of
information which he obtained from the the above transactions are enforceable
books and records of another although they are not in writing?
corporation of which he is also a
stockholder a. I and II. C. I and III.
b. II and III d. I only
a. Both statements are true.
b. Both statement are false 27. Involuntary dissolution of the
c. Statement I is true, Statement II is false corporation is caused by:
d. Statement I is false, Statement II is true
a. An expiration or the period for which it
24. A corporation the sole purpose of which was lawfully formed
is to invest its capital in a specific b. Judicial decree of forfeiture or by order
property and afterwards consume that or the SEC
property or extract its value at a point is c. Legislative enactment
called d. All of the above

a. Quasi corporation 28. What is the voting proportion required

b. Open corporation for the voluntary dissolution of the
c. Wasting asset corporation corporation?
d. Eleemosynary corporation
a. Majority votes of the board of directors
25. What is the voting proportion required and 2/3 votes of the outstanding capital
for me dissolution of the corporation? stock
b. Majority votes of the board of directors
a. Majority votes of the board of directors and majority vote of the outstanding
and 2/3 votes or the outstanding capital capital stock
stock. c. Majority vote of the board of directors
b. Majority votes of the board of directors and 2/3 vote of the stockholders
and majority vote of the outstanding d. Majority vote of the board of directors
capital stock and majority vote of the stockholders
c. Majority vote of the board of directors
and 2/3 vote of the stockholders 29. A written promise to pay the money
d. Majority vote of the board of directors loaned, but ordinarily-it has no specific
and majority vote of the stockholders fund or property as security for the
payment is called
26. The following are transactions
pertaining to shares of stock of a certain a. Mortgage bond c. Equipment bond
corporation: b. Collateral trust bond d. Debenture

Page 102 of 103 BL.2401


30. May organize as a close corporation

a. Mining companies c. Both of (a)

and (b)
b. Oil companies d. None of (a)
and (b)

31. Delinquent stocks are:

a. Entitled to vote in stockholders' meeting

b. Entitled to inspect the books of the
c. Entitled to dividends
d. None of the above

Page 103 of 103 BL.2401