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3. The sharing of gross returns does not partnership, they become subject to
of itself establish a partnership, liabilities of partners (doctrine of
whether or not the persons sharing estoppel).Whether or not the parties call
them have a joint or common right or their relationship or believe it to be a
interest in any property from which the partnership is immaterial. Thus, with the
returns are derived. exception of partnership by estoppel, a
partnership cannot exist as to third persons
4. The receipt by a person of a share of if no contract of partnership has been
the profits of a business is prima entered into between the parties
facie evidence that he is a partner in the themselves.
business, but no such inference shall be
drawn if such profits were received in Co-ownership or co-possession
payment: There is co-ownership whenever the
ownership of an undivided thing or right
a. As a debt by installments or belongs to different persons.
otherwise.
Clear intent to derive profits from
b. As wages of an employee or rent to operation of business
a landlord. Co-ownership does not of itself establish
the existence of a partnership, although it is
c. As an annuity to a widow or one of its essential elements. This is true
representative of a deceased even if profits are derived from the joint
partner. ownership. The profits must be derived
from the operation of business by
d. As interest on a loan, though the the members of the association and
amount of payment vary with the not merely from property ownership. The
profits of the business. law does not imply a partnership between
co-owners because of the fact that they
e. As the consideration for the sale of develop or operate a common property,
a goodwill of a business or other since they may rightfully do this by virtue of
property by installments or their respective titles. There must be a clear
otherwise. intent to form a partnership.
Art. 1773. A contract of partnership is void, Since partnership has juridical personality of
whenever immovable property is its own, it may acquire immovable property
contributed thereto, if an inventory of said in its own name. Title so acquired can
property is not made, signed by the parties, be conveyed only in the partnership name.
and attached to the public instrument.
Partnership with contribution of immovable Art. 1775. Associations and societies, whose
property articles are kept secret among the
members, and wherein any one of the
Where immovable property contributed, members may contract in his own name
failure to comply w/ the following with third persons, shall have no juridical
requisites will render the partnership personality, and shall be governed by the
contract void: provisions relating to co-ownership. Secret
1. The contract must be in a public partnerships without juridical personality
instrument;
2. An inventory of the property Partnership relation is created only by the
contributed must be made, signed by voluntary agreement of the partners. It is
the parties, and attached to the public essential that the partners are fully
instrument. Art. 1773 is intended informed not only of the agreement but of
primarily to protect 3rd persons. W/ all matters affecting the partnership. Secret
regard to 3rdpersons, a de facto partnerships are not by nature
partnership or partnership by estoppel partnerships. Secret partnerships shall be
may exist. There is nothing to prevent governed by the provisions relating to co-
the court from considering the ownership.
partnership agreement an ordinary
contract from which the parties’ rights Importance of giving publicity to articles
and obligations to each other may be of partnership
inferred and enforced. It is essential that the arts of partnership be
given publicity for the protection not only of
When inventory is not required the members themselves but also 3rd
An inventory is required only whenever persons from fraud and deceit. A member
immovable property is contributed. If not who transacts business for the secret
contributed or if personal property, no partnership in his own name becomes
inventory required. personally bound to 3rd persons unaware of
the existence of such association.
Importance of making inventory of real Partnership liability may still
property in a p a r t n e r s h i p result, however, in cases of estoppel.
An inventory is very important in
a partnership to how much is due from each Art. 1776. As to its object, a partnership is
partner to complete his share in the either universal or particular. As regards the
common fund and how much is due to each liability of the partners, a partnership may
of them in case of liquidation. The be general or limited. Classifications of
execution of a public instrument of partnership
partnership would be useless if there is no
As to extent of its subject matter not avowed or made known to the public by
1. Universal partnership. (Art. 1777) any of the partners.
a. Universal partnership of all present Open or notorious partnership: one whose
property. (Art. 1778) existence is avowed or made known to the
b. Universal partnership of profits. public by the members of the firm.
(Art. 1780)
2. Particular partnership. (Art. 1783) As to purpose
Commercial or trading partnership: one
As to liability of the partners formed or the transaction of business.
General partnership: one consisting of
general partners who are liable pro rata and Professional or non-trading partnership:
subsidiary and sometimes solidarily w/ their one formed for the exercise of a profession.
separate property for partnership debts.
Kinds of partners
Limited partnership: one formed by two or Under the Civil Code
more persons having as members one or 1. Capitalist partner: one who contributes
more general partners and one or more money or property to the common
limited partners, the latter not being fund.
personally liable for the obligations of the 2. Industrial partner: one who contributes
partnership. only his industry or personal service.
3. General partner: one whose liability to
As to duration 3rd persons extends to his separate
Partnership at will: one in w/c no time is property.
specified and is not formed for a particular 4. Limited partner: one whose liability to
undertaking or venture and w/c may be 3rd persons is limited to his capital
terminated at any time by mutual contribution.
agreement of the partners, or by the will of 5. Managing partner: one who manages
any one partner alone; or one for a fixed the entity.
term or particular undertaking w/c is 6. Liquidating partner: one who takes
continued after the end of the term or charge of the winding up of partnership
undertaking w/o express agreement. affairs upon dissolution.
Partnership with a fixed term: one w/c the 7. Partner by estoppel: one who is not
term for w/c the partnership is to exist is really a partner but is liable as a partner
fixed or agreed upon or one formed for for the protection of innocent 3rd
a particular undertaking. persons. He is one represented as being
a partner but who is not so between
As to the legality of its existence the partners themselves.
De jure partnership: one w/c has complied 8. Continuing partner: one who continues
w/ all the legal requirements for the business of a partnership after it
its establishment. has been dissolved by reason of the
De facto partnership: one w/c has failed to admission of a new partner, or the
comply w/ all the legal requirements for its retirement, death or expulsion of one
establishment. or more partners.
9. Surviving partner: one who remains
As to representation to others after a partnership has been dissolved
Ordinary or real partnership: one w/c by the death of any partner.
actually exists among the partners and also 10. Subpartner: one who, not being
as to 3rd persons. a member of the partnership, contracts
Ostensible partnership or partnership or w/ a partner w/reference to the latter’s
partnership by estoppel: one w/c in reality share in the partnership.
is not a partnership, but is considered a
partnership only in relation to those who, Other classifications
by their conduct or admission, are 1. Ostensible partner: one who takes
precluded to deny or disprove its existence. active part and known to the public as a
partner.
As to publicity 2. Secret partner: one who takes active
Secret partnership: one wherein the part in the business but is not known to
existence of certain persons as partners is be a partner by outside parties nor held
out as a partner by the other partners. Property w/c belonged to each of them at
He is an actual partner. the time of the constitution of the
3. Silent partner: one who does not take partnership;
any active part in the business although Profits w/c they may acquire from the
he may be known to be a partner. property contributed.
4. Dormant partner: one who does not
take active part in the business and is Contribution of future property
not known or held out as a partner. He General rule: future properties cannot be
would be both a silent and a secret contributed. The very essence of the
partner. contract of partnership that the properties
5. Original partner: one who is a member contributed be included in the partnership
of the partnership from the time of its requires the contribution of things
organization. determinate. The position of a partner is
6. Incoming partner: a person lately, or like that of a donor, and donations
about to be, taken into an existing cannot comprehend future property. Thus,
partnership as a member. property subsequently acquired by
7. Retiring partner: one withdrawn from 1.inheritance; 2. Legacy; or 3. Donation
the partnership; a withdrawing partner. cannot be included by stipulation except
Art. 1777. A universal partnership may the fruits thereof. Hence, any stipulation
refer to all the present property or to including property so acquired is void.
all the profits. Profits from other sources (not from
properties contributed) will become
Art. 1778. A partnership of all present common property only is there’s a
property is that in which the partners stipulation.
contribute all the property which actually
belongs to them to a common fund, with Art. 1780. A universal partnership of profits
the intention of dividing the same among comprises all that the partners may acquire
themselves, as well as all the profits they by their industry or work during
may acquire therewith. the existence of the partnership. Movable
or immovable property which each of the
Art. 1779. In a universal partnership of all partners may possess at the time of the
present property, the property which celebration of the contract shall continue to
belongs to each of the partners at the time pertain exclusively to each, only the
of the constitution of the partnership usufruct passing to the partnership.
becomes the common property of all the
partners, as well as all the profits which Universal partnership of profits explained
they may acquire there with. A stipulation A universal partnership of profits is one w/c
for the common enjoyment of any other comprises all that the partners may acquire
profits may also be made; but the property by their industry or work during the
which the partners may acquire existence of the partnership and the
subsequently by inheritance, legacy or usufruct of movable or immovable property
donation cannot be included in such w/c each of the partners may possess at the
stipulation, except the fruits thereof. time of the celebration of the contract.
Art. 1782. Persons who are prohibited from Business of partnership need not be
giving each other any donation or continuing in nature
advantage cannot enter into a universal The carrying on of a business of a
partnership. Limitations upon the right to continuing nature is not essential to
form a partnership constitute a partnership. An agreement to
undertake a particular piece of work or a
Persons who are prohibited by law to give single transaction or a limited number of
donations cannot enter into a universal transactions and immediately divide the
partnership for the reason that each of the resulting profits would seemt o fall w/in the
partners virtually makes a donation. To meaning of the term “partnership” as used
allow it would be permitting them to do in the law.
indirectly what the law expressly prohibits.
A partnership formed in violation of this Rule under American law
article is null and void. Consequently, no The above is not true under the Uniform
legal personality is acquired. A husband and Partnership Act w/c does not include joint
wife, however, may enter into a particular ventures w/c exists for a single transaction
partnership or be members thereof. or a limited number of transactions.
Relevant provisions:
Joint venture
Art. 87: Donations between spouses during While a joint venture is not a formal
marriage void, except moderate gifts on partnership in the legal or technical sense,
occasion of family rejoicing. Also applies both are governed, subject to certain
to those living together as husband and qualifications, practically by the same rules
wife w/o valid marriage. or principles of partnership. This is logical
Art. 739: The following donations are void: since in a joint venture, like in
Those made between persons who are a partnership, there is a community of
guilty of adultery or concubinage at the interest in the business and a mutual right
time of the donation (no need for of control and an agreement to share jointly
conviction; preponderance of evidence only in profits and losses.
required);
Those made between persons found guilty Corporation as a partner
of the same criminal offense, While under the Philippine Civil Code, a
inconsideration thereof; joint venture is a form of partnership w/ a
c.)Those made to a public officer or his wife, legal personality separate and distinct from
descendants and ascendants, by reason of the parties composing it, and should thus
his office. be governed by the law of partnership,
the Supreme Court has recognized the
distinction between these two business
forms, and has held that although a have contributed it up to actual delivery
corporation cannot enter into a partnership without necessity of any demand;
contract, it may, however, engage in a joint 4. Shall preserve said properties with the
venture if the nature of the venture is diligence of a good father of a family
authorized by its charter. pending their delivery to the
partnership;
Art. 1784. A partnership begins from the 5. And shall indemnify the partnership for
moment of the execution of the contract, any damage caused it by the retention
unless it is otherwise stipulated. (1679) of said properties or by the delay in
their contribution.
Art. 1785. When a contract for a fixed term
or particular undertaking is continued after Art. 1787. When the capital or part thereof
the termination of such term or particular which a partner is bound to contribute
undertaking without any express consists of goods, their appraisal must be
agreement, the rights and duties of the made in the manner prescribed in the
partners remains the same as they were at contract of partnership, and in the absence
such termination, so far as is consistent of stipulation, it shall be made by experts
with a partnership at will. chosen by the partners, and according to
current prices, the subsequent changes
A continuation of the business by the thereof being for the account of the
partners or such of them as habitually acted partnership.
therein during the term, without any
settlement or liquidation of the partnership Art. 1788. A partner who has undertaken to
affairs, is prima facie evidence of a contribute a sum of money and fails to do
continuation of the partnership. so becomes a debtor for the interest and
damages from the time he should have
Partnership at will is one in which no term complied with his obligation.
of existence has been fixed and which may
be terminated at the will of any partners. The same rule applies to any amount he
may have taken from the partnership
Art. 1786. Every partner is a debtor of the coffers, and his liability shall begin from the
partnership for whatever he may have time he converted the amount to is own
promised to contribute thereto. use.
He shall also be bound for warranty in case Liability of partner for estafa
of eviction with regard to specific and Failure to return the money taken, there is
determinate things which he may have the element of fraudulent appropriation of
contributed to the partnership, in the same the money delivered to a partner with
cases and in the same manner as the specific instructions for the use of the
vendor is bound with respect to the vendee. partnership, then estafa is committed under
He shall also be liable for the fruits thereof the Revised Penal Code.
from the time they should have been
delivered, without the need of any demand. Art. 1789. An industrial partner cannot
engage in any business for himself, UNLESS
Obligations of partners to contribute: the partnership expressly permits him to do
1. Shall deliver at the beginning of the so; and if he should do so, the capitalist
partnership or, if a different date has partners may either exclude him from the
been agreed upon, at the stipulated firm or avail themselves of the benefits
time the properties he agreed to which he may have obtained in violation of
contribute; this provision, with a right to damages in
2. Shall answer for eviction, in case the either case.
partnership is deprived of the
ownership of any specific property he Industrial partner is one who contributes
contributed; his industry or labor in the partnership.
3. Shall answer to the partnership for the
fruits of the properties whose delivery Industrial partner barred from engaging in
he delayed from the date he should business
To prevent any conflict of interest between compensate them with the profits and
the industrial and the partnership, and to benefits which he may have earned for the
insure faithful compliance by said partner partnership by his industry. However, the
with his prestation. courts may equitably lessen this
responsibility if through the partner’s
Art. 1790. Unless there is a stipulation to extraordinary efforts in other activities of
the contrary, the partners shall contribute the partnership, unusual profits have been
equal shares to the capital of the realized.
partnership.
Partner liable for damages caused the
Art. 1791. If there is no agreement to the partnership
contrary, in case of an imminent loss of the Art. 1794 follows the general rule of
business of the partnership, any partner contracts that where a person is at fault in
who refuses to contribute an additional the fulfillment of his obligations he shall be
share to the capital, except an industrial liable for the payment of damages. The
partner, to save the venture, shall be partner’s fault, however, must be
obliged to sell his interest to the other determined in accordance with the
partners. circumstances of person, time and place.
Art. 1793. A partner who has received, in Risk of Specific and determinate things
whole or in part, his share of a partnership The risk of specific and determinate things
credit, when the other partners have not which are not fungible, like a boat, only the
collected theirs, shall be obliged, if the use of which is contributed, shall be borne
debtor should thereafter become insolvent, by the partner as the ownership thereof is
to bring to the partnership capital what he not transferred to the partnership. This
received even though he may have given follows the general rule that the thing
receipt for his share only. perished with the owner.
Each one may separately perform acts 1. All partners shall be considered agents
of administration and whatever any one of them may do
1. If one or more of the managing partners alone shall bind the partnership without
shall oppose the acts of the others, prejudice to the provision of article
then the decision of the majority of the 1801
managing partners shall prevail. Right
to oppose can be exercise only by those 2. None of the partners may, without the
entrusted with mgt. consent of others, make any important
2. In case of tie, matter shall be decided by alteration in the immovable property of
the vote of the partners owning the the partnership, even if it may be useful
controlling interest. to the partnership, but if there ids
refusal of the consent by the other
REQUISITES FOR APPLICATION OF RULE partners is manifestly prejudicial to the
1. Two or more partners have been interest of the partnership, the court’s
appointed as managers; intervention may be sought.
2. There is no specification of their
Rules when manner of the management not become a member of the partnership,
that has not agreed upon all partners even if the other partners know about the
considered as managers and agents agreement. Not being a member of
All partners shall have equal rights in the the partnership, he does not acquire the
mgmt. and conduct of partnership affairs. rights of a partner nor is he liable for its
All of them shall considered mgrs. and debts.
agents and whatever any one of them may
do alone shall bind the partnership. If there Reason for the rule
is timely opposition, however, the matter Partnership is based on mutual trust and
shall decided by majority vote. In case confidence among the partners. Inclusion of
of tie, vote of partners representing new partner would be a modification of the
controlling interest. original contract of partnership requiring
unanimous consent of all the partners.
Unanimous consent required for Prohibition applies even if person
alteration of immovable property associated is already a partner.
The consent need not be express. It may
presume from the fact of knowledge of the Art. 1805. The partnership books shall be
alteration without interposing any kept, subject to any agreement between
objection. Prohibition only applies the partners, at the principal place of the
to immovable property because of the business of the partnership, and every
greater importance of this kind of property, partner shall at any reasonable hour have
and the alteration thereof must be access to and may inspect and copy any of
important. This would be an act of strict them.
dominion. If refusal to give consent is
manifestly prejudicial to the interest of Keeping of partnership books
the partnership, court intervention maybe Partner with duty to keep partnership
sought. Consent may presume from silence books
(lack of opposition despite knowledge).If The duty to keep true and correct books
alteration is necessary for preservation of showing the firm’s accounts, such books
the property, consent of the other partners being at all times open to inspection of all
not required. members of the firm, primarily rests on the
managing or active partner. It is presume
Art. 1804. Every partner may associate that the partners have knowledge of the
another person with him in his share, but contents of the partnership books and that
the associates shall not admitted into the said books state accurately the state
partnership without the consent of all other of accounts, but errors can corrected.
partners, even of the partner having an
associate should be a manager of Rights with the respect to partnership
subpartnership nature books
Books should kept at the principal place of
The partnership formed between a business as each partner has the right to
member of a partnership and a third free access to them and to inspect or copy
Person for a division of the profits coming any of them at any reasonable time, even
to him from the partnership enterprise is after dissolution. Inspection rights not
termed subpartnership. absolute can restrained from using info
It is a partnership within a partnership and for other than partnership purpose.
is distinct and separate from the main or
principal partnership. Access to partnership books
Rights can exercise at any reasonable hour.
Right of the person associated with the This means reasonable hours on business
partnership’s share days throughout the year and not merely
Subpartnership agreements do not during some arbitrary period of a few days
affect the composition, existence, or chosen by the managing partners.
operations of the firm. The subpartners are
partners interest, Art. 1806. Partners shall render on demand
true and full information of all things
However, in the absence of the mutual affecting the partnership to any partner or
assent of all the parties, a subpartner does the legal representative of any deceased
partner or of any partner under legal i.e. the winding up of partnership affairs
disability. Duty to render information, there is completed.
must be no concealment between partners
in all matters affecting the partnership. Duty to account for secret and similar
Information must use only for partnership profits
purpose. Not just on demand but partner The duty of a partner to account as a
also has duty of voluntary disclosure. fiduciary operates to prevent from making a
However, duty to render info does notarise secret profit out of the operation of the
with respect to matters appearing partnership and from carrying on the
in partnership books since each partner has business for his private advantage or
the right to inspect those. Good faith not a business in competition w/ the firm
only requires that a partner should not w/o consent of other partners. Violation
make a false statement but also that he may be ground for dissolution.
should abstain from any false concealment.
Duty to account for earnings accruing even
Art. 1807. Every partner must account the after termination of partnership
partnership for any benefit, and hold as If a partner uses info obtained by him from
trustee for it any profits derived from him the partnership for his own account w/o the
without the consent of the partners from consent of the other partners, he is liable to
any transaction connected with the account for any benefit he might obtain.
formation, conduct, or liquidation of the
partnership or from any use by him of his Duty to make full disclosure of information
property. belonging to partnership
A partner is also subject to the fiduciary
The relation between the partners duty of undivided loyalty and complete
is essentially fiduciary involving trust and disclosure of info of all things affecting the
confidence, each partner considered in law, partnership. By Information is meant
as he is, in fact, the confidential agent of information, which can be used for the
the others. The duties of a partner are purposes of the partnership. Info cannot
analogous to those of a trustee. use for a partner’s private gain – even if
after termination.
Duty to act for common benefit
Cannot use and apply exclusively to own Duty not to acquire interest or right
individual benefit partnership assets or adverse to partnership
results of knowledge and info gained in If partner does, he holds it in trust for the
character of partner. Managing partners benefit of the partnership and must account
particularly owe a fiduciary duty to inactive to the firm for the profits of the transaction,
partners. unless it appears that the others consented
Duty begins during the formation Art. 1808. The Capitalist partners cannot
of partnership engage for their own account in any
Principle of good faith applies not only operation, which is of the kind of business
during partnership but during the in which the partnership is engaged, unless
negotiations leading to the formation of the there is a stipulation to the contrary. Any
partnership. Also, a person who agreed w/ capitalist partner violating this prohibition
another to form a partnership has the shall bring to the common funds any profit
obligation to account for commissions and accruing to him from his transactions, and
discounts received in acquiring property for shall personally bear all the losses.
the future partnership.
Prohibition against partner engaging the
Duty continues even after the dissolution business
of the partnership Prohibition relative – Prohibition against
Duty of partner to act w/ utmost good faith capitalist partner to engage in business is
towards his co-partners continues relative, unlike the industrial partner who is
throughout the entire life of the partnership absolutely prohibited from engaging in any
even after dissolution for whatever reason business for himself. Capitalist partner is
or whatever means, until the relationship is only prohibited from engaging for his own
terminated, account in any operation which is the same
as or similar to the business in which the
partnership is engaged and which is Art. 1810. The property rights of a partner
competitive w/ said business are:
VIOLATION – Obligation to bring to 1. His rights in specific partnership
common fund any profits derived and in property;
case of losses, he shall bear them alone.
Partners, however, by stipulation may 2. His interest in the partnership;
permit it. The law permits him to carry on a
business not connected or competing with 3. His right to participate in the
that of the partnership. Law is silent on management, extent of property rights
whether he can engage in same line of of a partner.
business for the account of another.
Prohibition still applies because of fiduciary Principal Rights
position imposing duties of utmost good 1. Rights in specific partner property;
faith. He may not carry on any other 2. Interest in partnership;
business in rivalry w/ the partnership. 3. Right to participate in management.
2. If the right exists under the terms of any Partnership property and partnership
agreement; capital distinguished
Art. 1821. Notice to any partner of any Art. 1823. The partnership is bound to
matter relating to partnership affairs, and make good the loss:
the knowledge of the partner acting in the
particular matter, acquired while a partner 1. Where one partner acting within the
or then present to his mind, and the scope of his apparent authority receives
knowledge of any other partner who money or property of a third person
reasonably could and should have and misapplies it.
communicated it to the acting partner,
operate as notice to or knowledge of the
2. Where the partnership in the course of and if he has made such representation or
its business receives money or property consented to its being made in a public
of a third person and the money or manner he is liable to such person, whether
property so received is misapplied by the representation has or has not been
any partner while it is in the custody of made or communicated to such person so
the partnership. giving credit by or with the knowledge of
the apparent partner making the
Partnership bound by partner’s breach of representation or consenting to its being
trust made:
The partnership is liable for the conversion
(misappropriation) of money or property 1. When a partnership liability results, he
entrusted to the partnership by a third is liable as though he were an actual
person. The effect under Article 1824 is the member of the partnership.
same whether by the partnership and
subsequently misappropriated by a partner. 2. When no partnership liability results, he
is liable pro rata with the other persons,
Art. 1824. All partners are liable solidarily if any, so consenting to the contract or
with the partnership for everything representation as to incur liability,
chargeable to the partnership under otherwise separately.
Articles 1822 and 1823.
When a person has been thus represented
Law imposes solidary liability to be a partner in an existing partnership, or
The law imposes solidary liability upon the with one or more persons not actual
partners and the partnership in cases of partners, he is an agent of the persons
torts and acts of conversion by a partner as consenting to such representation to bind
provided in Art. 1824. It may be stated that them to the same extent and in the same
the liability of a partner for a debt of the manner as though he were a partner in fact,
partnership depends upon whether the with respect to persons who rely upon the
debts is contractual or it arises from tort or representation. When all the members of
conversion. If it arises from contract, the the existing partnership consent to the
liability is subsidiary and pro rata; if it arises representation, a partnership act or
from tort or conversion, the liability is obligation results; but in all other cases it is
solidary. the joint act or obligation of the person
acting and the persons consenting to the
Business partners solidarily liable representation.
Arts. 1711 and 1712 of the New Civil Code
and Sec. 2 of the Workmen’s Compensation Estoppel – A preclusion, in law, which
Act reasonably indicate that in prevents a man from alleging or denying a
compensation cases, the liability of business fact, in consequence of his own previous
partners should be merely joint and not act, allegation, or denial of a contrary tenor.
solidary, and one of them happens to be
insolvent, the amount awarded to the Person bound by his representation
dependents of the deceased employee A person who hold himself out as a partner
would only be partially satisfied, which is in a business, or consents to his being so
evidently contrary to the intent and held out, is liable on contracts made with
purpose of the law to give full protection to third persons who deal with the persons
the employee. carrying on the business on the faith of the
representation. He is stopped to deny the
Art. 1825. When a person, by words spoken apparent agency.
or written or by conduct, represents
himself, or consents to another Art. 1826. A person admitted as a partner
representing him to anyone, as a partner in into an existing partnership is liable for all
an existing partnership or with one or more the obligations of the partnership arising
persons not actual partners, he is liable to before his admission as though he had been
any such persons to whom such a partner when such obligations were
representation has been made, who has, on incurred, except that this liability shall be
the faith of such representation, given satisfied only out of partnership property,
credit to the actual or apparent partnership, unless there is a stipulation to the contrary.
Incoming partner liable for existing b. By the express will of any partner,
obligations who must act in good faith, when
A newly admitted partner is liable for no definite term or particular is
obligations of the partnership at the time of specified.
his admission. The obligation of the
incoming partner shall be satisfied only out c. By the express will of all the
of partnership property. This is not a harsh partners who have not assigned
rule because the incoming partner their interests or suffered them to
“partakes of the benefit of the partnership be charged for their separate debts,
property, and an established business. He either before or after the
has every means of obtaining full termination of any specified term or
knowledge of protecting himself, because particular undertaking.
he may insist on the liquidation or
settlement of existing partnership debts. On
d. By the expulsion of any partner
the other hand, the creditors have no
from the business bona fide in
means of protecting themselves.
accordance with such a power
conferred by the agreement
Art. 1827. The creditors of the partnership
between the partners
shall be preferred to those of each partner
as regards the partnership property.
2. In contravention of the agreement
Without prejudice to this right, the private
between the partners, where the
creditors of each partner may ask the
circumstances do not permit a
attachment and public sale of the share of
dissolution under any other provision of
the latter in the partnership assets.
this article, by the express will of any
partner at any time.
Art. 1828. The dissolution of a partnership
is the change in the relation of the partners
3. By any event which makes it unlawful
caused by any partner ceasing to be
for the business of the partnership to
associated in the carrying on as
be carried on or for the members to
distinguished from the winding up of the
carry it on in partnership.
business.
Art. 1829. On dissolution the partnership is 4. When a specific thing which a partner
not terminated, but continues until the had promised to contribute to the
winding up of partnership affairs is partnership, perishes before the
completed. delivery; in any case by the loss of the
thing, when the partner who
“Dissolution,” “Winding up,” and contributed it having reserved the
“Termination” explained ownership thereof, has only transferred
Dissolution, winding up, and termination to the partnership the use or enjoyment
should not be confused because they are of the same; but the partnership shall
distinct terms in law. Dissolution not be dissolved by the loss of the thing
“designates the point in time when the when it occurs after the partnership has
partners cease to carry on the business acquired the ownership thereof.
together: termination is the point in time
when all partnership affairs are wound up; 5. By the death of any partner.
winding up is the process of settling
partnership affairs after dissolution.” 6. By the insolvency of any partner or of
the partnership.
Art. 1830. Dissolution is caused:
7. By the civil interdiction of any partner.
1. Without violation of the agreement
between the partners: 8. By decree of court under the following
article.
a. By the termination of the definite
term or particular undertaking Causes of dissolution in general
specified in the agreement. Generally, a partnership may be dissolved
by causes: (1) without violation of the
agreement between the partners; or (2) in agreement, or otherwise so conducts
contravention of the agreement. Other himself in matters relating to the
specific causes are; (3) an event which partnership business that it is not
makes the business of the partnership reasonably practicable to carry on the
unlawful; (4) loss of a specific thing which a business in partnership with him.
partner had promised to contribute to the
partnership; (5) the death of a partner; (6) 5. The business of the partnership can
the insolvency of any partner or of the only be carried on at a loss.
partnership itself; (7) civil interdiction of
any partner; and lastly (8) by judicial 6. Other circumstances render a
decree. dissolution equitable.
2. A partner becomes in any other way 2. With respect to persons not partners,
incapable of performing his part of the as declared in article 1834.
partnership contract.
General Rule
3. A partner has been guilty of such If the cause of dissolution is not by act,
conduct as tends to affect prejudicially death, or insolvency of a partner, the
the carrying on of the business. authority ceases immediately.
Exception
4. A partner willfully or persistently For the purposes of winding-up partnership
commits a breach of the partnership affairs.
place if more than one) at which
Art. 1833. Where the dissolution is caused the partnership business was
by the act, death or insolvency of a partner, regularly carried on.
each partner is liable to his co-partners for
his share of any liability created by any The liability of a partner under the first
partner acting for the partnership as if the paragraph, No. 2, shall be satisfied out of
partnership had not been dissolved unless: partnership assets alone when such partner
had been prior to dissolution:
1. The dissolution being by act of any
partner, the partner acting for the 1. Unknown as a partner to the person
partnership had knowledge of the with whom the contract is made.
dissolution.
2. So far unknown and inactive in
2. The dissolution being by the death or partnership affairs that the business
insolvency of a partner, the partner reputation of the partnership could not
acting for the partnership had be said to have been in any degree due
knowledge or notice of the death or to his connection with it.
insolvency.
The partnership is in no case bound by any
General Rule act of a partner after dissolution:
If the cause of dissolution is the death, act,
or insolvency of a partner, authority of a 1. Where the partnership is dissolved
partner to bind ceases upon the knowledge because it is unlawful to carry on the
of the dissolution. business, unless the act is appropriate
for winding up partnership affairs.
If dissolution is caused by act of one of
parties, co-partners are also liable to 2. Where the partner has become
contribute towards a liability as if no insolvent.
dissolution has happened, provided that
there is no notice or the partner does not 3. Where the partner has no authority to
have knowledge of the dissolution. wind up partnership affairs; except by a
transaction with one who —
Art. 1834. After dissolution, a partner can
bind the partnership, except as provided in a. Had extended credit to the
the third paragraph of this article: partnership prior to dissolution and
had no knowledge or notice of his
1. By any act appropriate for winding up want of authority.
partnership affairs or completing
transactions unfinished at dissolution. b. Had not extended credit to the
partnership prior to dissolution,
2. By any transaction which would bind and, having no knowledge or notice
the partnership if dissolution had not of his want of authority, the fact of
taken place, provided the other party to his want of authority has not been
the transaction: advertised in the manner provided
for advertising the fact of
a. Had extended credit to the dissolution in the first paragraph,
partnership prior to dissolution and No. 2 (b).
had no knowledge or notice of the
dissolution. Nothing in this article shall affect the
liability under article 1825 of any person
b. Though he had not so extended who after dissolution represents himself or
credit, had nevertheless known of consents to another representing him as a
the partnership prior to dissolution, partner in a partnership engaged in carrying
and, having no knowledge or notice on business.
of dissolution, the fact of
dissolution had not been advertised General Rule
in a newspaper of general Dissolution terminates the authority of the
circulation in the place (or in each partners to bind partnership.
Exceptions assignee, upon cause shown, may obtain
Any act appropriate for winding-up winding up by the court.
partnership affairs or completing
transactions unfinished at dissolution Who may wind up Partnership Affairs?
Partner designated in the agreement.
If third persons that transacted had no In absence of agreement, the part that did
actual knowledge of the dissolution. no wrongfully dissolved the partnership.
*Persons extending credit prior to
dissolution are entitled to notice of If all partners died, the legal representative
dissolution. If they had no notice or of the last surviving partner provided that
knowledge of dissolution, they may hold the partner is not insolvent.
the retired partner for obligations made by
continuing partners after dissolution. Winding up of a dissolved partnership may
be done
Art. 1835. The dissolution of the Extrajudicially by the partners themselves.
partnership does not of itself discharge the Judicially under the control of a competent
existing liability of any partner. court.
*Managing partner or winding-up partner
A partner is discharged from any existing has the right to sell firm property even after
liability upon dissolution of the partnership the life of the partnership has expired.
by an agreement to that effect between
himself, the partnership creditor and the Art. 1837. When dissolution is caused in any
person or partnership continuing the way, except in contravention of the
business; and such agreement may be partnership agreement, each partner, as
inferred from the course of dealing against his co-partners and all persons
between the creditor having knowledge of claiming through them in respect of their
the dissolution and the person or interests in the partnership, unless
partnership continuing the business. otherwise agreed, may have the
partnership property applied to discharge
The individual property of a deceased its liabilities, and the surplus applied to pay
partner shall be liable for all obligations of in cash the net amount owing to the
the partnership incurred while he was a respective partners. But if dissolution is
partner, but subject to the prior payment of caused by expulsion of a partner, bona fide
his separate debts. under the partnership agreement and if the
expelled partner is discharged from all
General Rule partnership liabilities, either by payment or
Dissolution of a partnership does not itself agreement under the second paragraph of
discharge the existing liability of any article 1835, he shall receive in cash only
partner. the net amount due him from the
Exception partnership.
A partner can be discharged from any
existing liability upon dissolution of the When dissolution is caused in contravention
partnership provided that there is an of the partnership agreement the rights of
agreement between the partnership the partners shall be as follows:
creditor and the person or partners
continuing the business. 1. Each partner who has not caused
*Individual properties of the deceased dissolution wrongfully shall have:
partner shall be liable to all obligations of
the partnership made while he was a a. All the rights specified in the first
partner. paragraph of this article.
Art. 1836. Unless otherwise agreed, the b. The right, as against each partner
partners who have not wrongfully dissolved who has caused the dissolution
the partnership or the legal representative wrongfully, to damages breach of
of the last surviving partner, not insolvent, the agreement.
has the right to wind up the partnership
affairs, provided, however, that any 2. The partners who have not caused the
partner, his legal representative or his dissolution wrongfully, if they all desire
to continue the business in the same
name either by themselves or jointly If the partnership was dissolved in
with others, may do so, during the contravention of the agreement
agreed term for the partnership and for 1. The remaining partners have the right
that purpose may possess the to sell partnership property to pay the
partnership property, provided they partnership’s liabilities and the surplus
secure the payment by bond approved is distributed to the remaining partners
by the court, or pay any partner who as well.
has caused the dissolution wrongfully, 2. As against the guilty partner for the
the value of his interest in the dissolution of the partnership, the
partnership at the dissolution, less any remaining partners have the right to
damages recoverable under the second recover damages for breach.
paragraph, No. 1 (b) of this article, and 3. The remaining partners may also
in like manner indemnify him against all continue the business up to end of the
present or future partnership liabilities. stipulated term of the partnership.
3. A partner who has caused the Art. 1838. Where a partnership contract is
dissolution wrongfully shall have: rescinded on the ground of the fraud or
misrepresentation of one of the parties
a. If the business is not continued thereto, the party entitled to rescind is,
under the provisions of the second without prejudice to any other right,
paragraph, No. 2, all the rights of a entitled:
partner under the first paragraph,
subject to liability for damages in 1. To a lien on, or right of retention of, the
the second paragraph, No. 1 (b), of surplus of the partnership property
this article. after satisfying the partnership
liabilities to third persons for any sum
b. If the business is continued under of money paid by him for the purchase
the second paragraph, No. 2, of this of an interest in the partnership and for
article, the right as against his co- any capital or advances contributed by
partners and all claiming through him.
them in respect of their interests in
the partnership, to have the value 2. To stand, after all liabilities to third
of his interest in the partnership, persons have been satisfied, in the
less any damage caused to his co- place of the creditors of the partnership
partners by the dissolution, for any payments made by him in
ascertained and paid to him in cash, respect of the partnership liabilities.
or the payment secured by a bond
approved by the court, and to be 3. To be indemnified by the person guilty
released from all existing liabilities of the fraud or making the
of the partnership; but in representation against all debts and
ascertaining the value of the liabilities of the partnership.
partner's interest the value of the
good-will of the business shall not Right of partner to rescind contract of
be considered. partnership
If one is induced by fraud or
Rights of partners upon dissolution misrepresentation to become a partner, the
1. Dissolution is caused without violation contract is voidable. If the contract is
of the agreement. annulled, the injured party is entitled to
2. In contravention of the agreement. restitution. Here, the fraud or
misrepresentation vitiates consent.
If partnership is dissolved without However, until the partnership contract is
violation of the agreement annulled by a proper action in court, the
1. All partners may have the property sold partnership relations exist and
for payment of partnership liabilities. the defrauded partner is liable for all
2. If there is surplus, after paying the obligations to third persons.
liabilities of the firm, it shall be given in 1. Right of injured partner where
cash to the partners. partnership contract rescinded
2. Right of retention of partnership 7. The individual property of a deceased
property partner shall be liable for the
3. Right to be subrogated in place of contributions specified in No. 4.
creditors of partnership
4. Right to be indemnified by the guilty 8. When partnership property and the
partner against all liabilities of the individual properties of the partners are
partnership. in possession of a court for distribution,
partnership creditors shall have priority
Art. 1839. In settling accounts between the on partnership property and separate
partners after dissolution, the following creditors on individual property, saving
rules shall be observed, subject to any the rights of lien or secured creditors.
agreement to the contrary:
9. Where a partner has become insolvent
1. The assets of the partnership are: or his estate is insolvent, the claims
against his separate property shall rank
a. The partnership property. in the following order:
3. When any partner retires or dies and The use by the person or partnership
the business of the dissolved continuing the business of the partnership
partnership is continued as set forth in name, or the name of a deceased partner as
Nos. 1 and 2 of this article, with the part thereof, shall not of itself make the
consent of the retired partners or the individual property of the deceased partner
representative of the deceased liable for any debts contracted by such
partner, but without any assignment of person or partnership.
his right in partnership property.
Dissolution of a partnership by change of
4. When all the partners or their members
representatives assign their rights in Causes
partnership property to one or more 1. New partner is admitted
third persons who promise to pay the 2. Partner retires
debts and who continue the business 3. Partner dies
of the dissolved partnership. 4. Partner withdraws
5. Partner is expelled from partnership
5. When any partner wrongfully causes a 6. Other partners assign their rights
dissolution and the remaining partners to sole remaining partner
continue the business under the 7. All the partners assign their rights in
provisions of article 1837, second partnership property to third persons.
paragraph, No. 2, either alone or with *Any change in membership dissolves a
others, and without liquidation of the partnership and creates a new one
partnership affairs. *When a business of a dissolved
partnership is continued by former or
without new partners, the old creditors are person or partnership continuing the
creditors of the person or partnership that business, at the date of dissolution, in the
is continuing the business. absence of any agreement to the contrary.
Art. 1841. When any partner retires or dies, Right to demand an accounting of
and the business is continued under any of partnership affairs must be directed
the conditions set forth in the preceding against
article, or in article 1837, second paragraph, 1. Winding-up partners
No. 2, without any settlement of accounts 2. Surviving partners
as between him or his estate and the 3. The person the partnership continuing
person or partnership continuing the the business
business, unless otherwise agreed, he or his
legal representative as against such person Art. 1843. A limited partnership is one
or partnership may have the value of his formed by two or more persons under the
interest at the date of dissolution provisions of the following article, having as
ascertained, and shall receive as an ordinary members one or more general partners and
creditor an amount equal to the value of his one or more limited partners. The limited
interest in the dissolved partnership with partners as such shall not be bound by the
interest, or, at his option or at the option of obligations of the partnership.
his legal representative, in lieu of interest,
the profits attributable to the use of his General partner Limited partner
right in the property of the dissolved Personally liable for Liability extends
partnership; Provided, That the creditors of partnership only to his capital
the dissolved partnership as against the obligations contribution.
separate creditors, or the representative of Have equal right in No share in
the retired or deceased partner, shall have management of management of
priority on any claim arising under this partnership partnership.
article, as provided article 1840, third May contribute May contribute
paragraph. money, property or money and property
industry
Rights of retiring of properties of Proper party to Not proper party to
deceased, partner when business proceedings proceedings
continued Interest cannot be Interest is assignable
To have the value of the interest of assigned to make with assignee
the retiring partner or deceased partner in new partner acquiring all rights of
the partnership determined as of the date the limited partner
of dissolution. His name may Name not included
appear in the firm in firm name
To receive thereafter, as an ordinary name
creditor, an amount equal to the value of Prohibited from No prohibition
his share in the dissolved partnership with engaging in a
interest, or, at his option, in place of business like
interest, the profits attributable to the use partnership’s
of his right. His retirement, His retirement,
insolvency and insolvency and
General Rule death dissolves the death does not
When partner retires from the partnership, partnership dissolve the
he is entitled to the payment of what may partnership
be due to him after liquidation.
Exception Characteristics of limited partnership
No liquidation needed when there is 1. Must be formed in accordance with the
settlement as to what retiring partner shall requirements of the law.
receive. 2. There must be one or more general
partners who control the management
Art. 1842. The right to an account of his of the business.
interest shall accrue to any partner, or his 3. There must be one or more limited
legal representative as against the winding partners contributing to the capital and
up partners or the surviving partners or the
sharing in the profits but have nothing l. The right, if given, of one or more of
to do with the management. the limited partners to priority over
4. Obligations of the partnership must be other limited partners, as to
paid out of common fund and in the contributions or as to
separate properties of the general compensation by way of income,
partners. and the nature of such priority.
Art. 1844. Two or more persons desiring to m. The right, if given, of the remaining
form a limited partnership shall: general partner or partners to
continue the business on the death,
1. Sign and swear to a certificate, which retirement, civil interdiction,
shall state — insanity or insolvency of a general
partner.
a. The name of the partnership,
adding thereto the word "Limited". n. The right, if given, of a limited
partner to demand and receive
b. The character of the business. property other than cash in return
for his contribution.
c. The location of the principal place
of business. 2. File for record the certificate in the
Office of the Securities and Exchange
d. The name and place of residence of Commission.
each member, general and limited
partners being respectively A limited partnership is formed if there has
designated. been substantial compliance in good faith
with the foregoing requirements.
e. The term for which the partnership
is to exist. Qualifications of limited partnership
f. The amount of cash and a 1. The partners must sign and swear to a
description of and the agreed value certificate of limited partnership
of the other property contributed 2. Must file for record the certificate in
by each limited partner. the office of the Securities and
Exchange Commission
g. The additional contributions, if any,
to be made by each limited partner Art. 1845. The contributions of a limited
and the times at which or events on partner may be cash or property, but not
the happening of which they shall services.
be made.
Limited partners can only contribute money
h. The time, if agreed upon, when the and property and cannot contribute
contribution of each limited partner services to the partnership to protect
is to be returned. persons dealing with the firms with frauds.
i. The share of the profits or the other Art. 1846. The surname of a limited partner
compensation by way of income shall not appear in the partnership name
which each limited partner shall unless:
receive by reason of his
contribution. 1. It is also the surname of a general
partner.
j. The right, if given, of a limited
partner to substitute an assignee as 2. Prior to the time when the limited
contributor in his place, and the partner became such, the business has
terms and conditions of the been carried on under a name in which
substitution. his surname appeared.
k. The right, if given, of the partners to A limited partner whose surname appears
admit additional limited partners. in a partnership name contrary to the
provisions of the first paragraph is liable as
a general partner to partnership creditors A limited partner is excluded from any
who extend credit to the partnership active voice in the control of the affairs of
without actual knowledge that he is not a the firm.
general partner. Limited partner cannot perform acts of
administration
Limited partner’s surname is not included Limited partners may not perform any act
in the firm name provided these of administration with respect to the
circumstances interests of the partnership, not even in the
1. If the surname of general partner is the capacity of agents of the managing
same with limited partner’s partners.
2. If the limited partner’s surname was ART. 1849. After the formation of a limited
included and was carried on the new partnership, additional limited partners may
partnership be admitted upon filling an amendment to
*If the limited partner’s surname was the original certificate in accordance with
included in the firm name, he is liable as a the requirements of Article 1865.
general partner.
The writing to amend a certificate
Art. 1847. If the certificate contains a false 1. Shall conform to the requirements of
statement, one who suffers loss by reliance Article 1844 as far as necessary to set
on such statement may hold liable any forth clearly the change in the
party to the certificate who knew the certificate which it is desired to make.
statement to be false: 2. Be signed and sworn to by all members,
and an amendment substituting a
1. At the time he signed the certificate. limited partner.
ART. 1850. A general partner shall all have
2. Subsequently, but within a sufficient the rights and powers and be subject to all
time before the statement was relied the restrictions and liabilities of a partner in
upon to enable him to cancel or amend a partnership without limited partners.
the certificate, or to file a petition for its However, without the written consent or
cancellation or amendment as provided ratification of the specific act by all the
in article 1865. limited partners, a general partner or all of
the general partners have no authority to:
Liability for false statement in certificate
Under this provision, any partner to 1. Do any act in contravention of the
the certificate containing a false statement certificate.
is liable provided the following requisites 2. Do any act which would make it
are present: impossible to carry on the ordinary
1. He knew the statement to be false at business of the partnership.
the time he signed the certificate,
or subsequently, but having sufficient 3. Confess a judgement against the
time to cancel or amend it or file a partnership.
petition for its cancellation or
amendment, he failed to do so. 4. Possess partnership property, or assign
2. The person seeking to enforce liability their rights in specific partnership
has relied upon the false statement in property, for other than a partnership
transacting business with the purpose.
partnership.
3. The person suffered loss as a result of 5. Admit a person as a general partner.
reliance upon such false statement.
6. Admit a person as a limited partner,
ART. 1848. A limited partner shall become unless the right so to do is given in the
liable as a general partner unless, in certificate.
addition to the exercise of his rights and
powers as a limited partner, he takes part in 7. Continue the business with partnership
the control of the business. property on the death, retirement,
Limited partner has no control in business insanity, civil interdiction or insolvency
of a general partner, unless the right so
to do is given in the certificate.
3. Non-participation in the management
Powers of general partner in limited of the business.
partnership
The general partner shall have all the right ART. 1853. A person may be a general
and powers and be subject to all the partner and a limited partner in the same
restrictions and liabilities of a partner in a partnership at the same time, provided that
partnership without limited partners.
this fact shall be stated in the certificate
ART. 1851. A limited partner shall have the provided for in Article 1844.
same rights as a general partner to:
A person who is a general, and also at the
1. Have the partnership books kept at the same time a limited partner, shall have all
principal place of business of the the rights and powers and be subject to all
partnership, and at a reasonable hour restrictions of a general partner; except
to inspect and copy any of them.
that, in respect to his contribution, shall
2. Have on demand true and full have the rights against the other members
information of all things affecting the which he would have had if he were not
partnership, and a formal account of also a general partner.
partnership affairs whenever
circumstances render it just and ART. 1854. A limited partner also may loan
reasonable. money to and transact other business with
the partnership and unless he is also a
3. Have dissolution and winding up by general partner, receive on account of
decree of court. resulting claims against the partnership,
with general creditors, a pro rata share of
A limited partner shall have the right to the assets. No limited partner shall in
receive a share of the profit or other respect to any such claim:
compensation by way of income and to the
return of his contribution as provided in 1. Receive or hold as collateral security
Articles 1856 and 1857. any partnership property.
ART. 1857. A limited partner shall not Conditions of a limited partner entitled to
receive from a general partner or out of return of his contribution
partnership property any part of his 1. All liabilities of the partnership have
contributions until: been paid or there are assets sufficient
to pay partnership liabilities.
1. All liabilities of the partnership, except 2. The consent of all the partners is
liabilities to general partners and to obtained.
limited partners on account of their 3. The certificate is cancelled or so
contributions, have been paid or there amended as to set forth the withdrawal
remains property of the partnership or reduction of the contribution.
sufficient to pay them.
When limited partner may demand return
2. The consent of all members is had, 1. The partnership is dissolved
unless the return of the contribution 2. The date specified for its return has
may be rightfully demanded under the arrived
provisions of the second paragraph. 3. If no term is specified, after six months’
notice in writing to all other partners.
3. The certificate is cancelled or so
amended as to set forth the withdrawal Limited partner to receive cash
or reduction. It will be noted that the limited partner has
a right to demand and receive cash only in
Subject to the provisions of the first return for his contribution even when he
paragraph, a limited partner may rightfully contributed property.
demand the return of his contribution:
ART. 1858. A limited partner is liable to the
1. On the dissolution of a partnership. partnership:
2. When the date specified in the 1. For the difference between his
certificate for its return has arrived. contribution as actually made and that
stated in the certificate as having been
3. After he has given six months’ notice in made.
writing to all other members, if no time
is specified in the certificate, either for 2. For any unpaid contribution which he
agreed in the certificate to make in the
future at the time and on the return of his contribution, to which his
conditions stated in the certificate. assignor would otherwise be entitled.
A limited partner holds a trustee for the An assignee shall have the right to become
partnership: a substituted partner if all the members
1. Specific property stated in the consent thereto or if the assignor, being
certificate as contributed by him, but thereunto empowered by the certificate,
which was not contributed or which has gives the assignee that right.
been wrongfully returned.
An assignee becomes a substituted limited
2. Money or other property wrongfully partner when the certificate is
paid or conveyed to him on account of appropriately amended in accordance with
his contribution. Article 1865.
The liabilities of a limited partners as set The substituted limited partner has all the
forth in this article can be waived or rights and powers, and is subject to all the
compromised only by the consent of all restrictions and liabilities of his assignor,
members; but a waiver or compromise shall except those liabilities of which he was
not affect the right of a creditor of a ignorant at the time he became a limited
partnership who extended credit or whose partner and which could not be ascertained
claim arose after the filling and before a for the certificate.
cancellation or amendment of the
certificate, to enforce such liabilities. The substitution of the assignee as a limited
partner does not release the assignor from
When a contributor has rightfully received liability to the partnership, under article
the return in whole or in part of the capital 1847 and 1858.
of his contribution, he is nevertheless liable
to the partnership for any sum, not in Limited partner’s interest assignable
excess of such return with interest, A limited partner’s interest in the
necessary to discharge its liabilities to all
partnership is assignable. The assignee,
creditors who extended credit or whose
claims arose before such return. however, of a limited partner’s interest
does not necessarily become a substituted
Limited partner liable to partnership for limited partner.
sum returned
A limited partner whose contribution has ART. 1860. The retirement, death,
been rightfully returned is still liable to the insolvency, insanity or civil interdiction of a
partnership for an amount not in excess of general partner dissolves the partnership,
the sum returned plus interest as may be unless the business is continued by the
necessary to pay the claims of persons who remaining general partners:
extended credit or whose claims arose
before the return. 1. Under a right so to do stated in the
certificate.
ART. 1859. A limited partner’s interest is
assignable. 2. With the consent of all members.
A substitute limited partner is a person It must be observed that the death, etc., of
admitted to all the rights of a limited a general partner dissolves the partnership
partner who has died or has assigned his while the death of a limited partner does
interest in a partnership. not cause the dissolution of the firm, unless
there is only one limited partner.
An assignee, who does not become a
substituted limited partner, has no right to ART. 1861. On the death of a limited
require any information or account of the partner his executor or administrator shall
partnership transactions or to inspect the have all the rights of a limited partner for
partnership books; he is only entitled to the purpose of settling his estate, and such
receive the share of the profits or other power as the deceased had to constitute his
compensation by way of income, or the assignee a substituted limited partner.
contribution respectively, in proportion to
The estate of a deceased limited partner the respective amounts of such claims.
shall be liable for all his liabilities as a
limited partner. Art. 1864. The certificate shall be cancelled
when the partnership is dissolved or all
ART. 1862. On due application to a court of limited partners cease to be such.
competent jurisdiction by any creditor of a A certificate shall be amended when:
limited partner, the court may charge the
interest of the indebted limited partner 1. There is a change in the name of the
with payment of the unsatisfied amount of partnership or in the amount or
such claim, and may appoint a receiver, and character of the contribution of any
make all other orders, directions, and limited partner.
inquiries which the circumstances of the
case may require. 2. A person is substituted as a limited
partner.
The interest may be redeemed with the
separate property of any general partner, 3. An additional limited partner is
but may not be redeemed with partnership admitted.
property.
4. A person is admitted as a general
The remedies conferred by the first partner.
paragraph shall not be deemed exclusive of
others which may exist. 5. A general partner retires, dies, becomes
insolvent or insane, or is sentenced to
ART. 1863. In settling accounts after civil interdiction and the business is
dissolution the liabilities of the partnership continued under article 1860.
shall be entitled to payment in the following
order: 6. There is a change in the character of the
1. Those to creditors, in the order of business of the partnership.
priority as provided by law, except
those to limited partners on account of 7. There is a false or erroneous statement
their contributions, and to general in the certificate.
partners.
8. There is a change in the time as stated
2. Those to limited partners in respect to in the certificate for the dissolution of
their share of the profits and other the partnership or for the return of a
compensation by way of income on contribution.
their contributions.
9. A time is fixed for the dissolution of the
3. Those to limited partners in respect to partnership, or the return of a
the capital of their contributions. contribution, no time having been
specified in the certificate.
4. Those to general partners other than
for capital and profits. 10. The members desire to make a change
in any other statement in the certificate
5. Those to general partners in respect to in order that it shall accurately
profits. represent the agreement among them.
Sec. 9. Treasury shares. - Treasury shares Sec. 12. Minimum capital stock required of
are shares of stock which have been issued stock corporations. – Stock corporations
and fully paid for, but subsequently incorporated under this Code shall not be
reacquired by the issuing corporation by required to have any minimum authorized
purchase, redemption, donation or through capital stock except as otherwise
some other lawful means. Such shares may specifically provided for by special law, and
again be disposed of for a reasonable price subject to the provisions of the following
fixed by the board of directors. (n) section.
10. Such other matters are not inconsistent 3. Principal office of the Corporation.
with law and which the incorporators The principal office of the corporation must
may deem necessary and convenient. be within the Philippines. It is where the
books of the corporation are kept and its
The Securities and Exchange Commission officers usually and ordinarily meet for the
shall not accept the articles of incorporation purpose of managing the affairs and
of any stock corporation unless transactions of the business of the
accompanied by a sworn statement of the corporation.
Treasurer elected by the subscriber
showing that at least 25% of the authorized 4. Terms of Existence of the Corporation.
capital stock of the corporation has been The corporation shall exist for a period not
subscribed, and at least 25% of the total exceeding fifty (50) years from the date of
subscription has been fully paid to him in incorporation unless sooner dissolved or
actual cash and/or in property the fair unless said period is extended.
valuation of which are equal to at least 25%
of the said subscription , such paid up 5. Names, Nationalities and residences of
capital being not less than five-thousand incorporators.
pesos (P5,000). The names, nationalities and residences of
the incorporators must be stated in the
Sec.15. Forms of Articles of Incorporation. articles of the corporation for the purpose
– Unless otherwise prescribed by special of complying with legal requirement that
law, articles of incorporation of all domestic majority of the incorporators must be
corporations shall supply substantially the residents of the Philippines and complying
following requirements in the form as with the statutory requirement on share
provided for by the SEC: ownership and in other instances where
Filipino Citizens are required.
1. The name of the corporation.
6. Number of directors and trustees.
The number of the director and trustees Property as subscription payment –
must not be less than five (5) nor more than Generally, all forms of tangible properties
fifteen (15). are acceptable for purposes of payment to
subscription provided that the three test of
7. Names, nationalities and residences of paid-up capital determination are complied
directors. with, i.e., ownership, existence and
A majority of the directors or trustees of all valuable, subject to certain restrictions as
corporation organized under this Code must may be imposed by law.
be a residents citizens of the Philippines.
SEC adopted the policy that
8. Amount of authorized capital stock. discourages the inclusion of intangible
A stock corporation must state the “amount assets as goodwill, lease-hold rights, or
of its authorized capital stock in lawful timber concession rights, payment of such
money of the Philippines, the number of properties Motor vehicle, real estate
shares into which it is divided, and in case properties and navigable vessels in payment
the shares are par value shares, the par of pre-incorporation subscription, increases
value of each, the names, nationalities, and of capital stock or in exchange for additional
residences of the original subscribers, and issuance of shares are allowed only by the
the amount subscribed and paid by each on SEC provided that:
his subscription, and if some or all the 1. There has been a proof of valid
shares are without par value, such fact must transfer;
be stated”. 2. All taxes due from the properties
has been paid; and
9. Non-stock Corporation. 3. Such properties have been
The Corporation Code requires the articles reasonably valued.
of the non-stock corporation to states: the
amount of its capital, the names, Papers to accompany articles with SEC
nationalities and residences of its The SEC requires the following papers to be
contributors and the amount contributed submitted to it with the articles of
by each. A non-stock corporation may have incorporation:
capital but it has no authorized capital 1. A verification slip executed by the
stock. Chief of the Record Section states
that the proposed name of the
10. Inclusion of other matters. corporation has been verified and
The articles of incorporation “may include found to be distinct/ not similar to
other matters that is not inconsistent with the names of already existing
law and which the incorporators may deem corporation or those pending
necessary and convenient”. registration.
2. Written undertaking to change
Sworn Statement of the Treasurer corporate name in case there is a
The Securities and Exchange Commission person, firm or entity with a prior
shall not accept the articles of incorporation right to the use of said name or one
of any stock corporation unless similar to it.
accompanied by a sworn statement of the 3. Sworn statement of assets and
Treasurer elected by the subscribers liabilities, duly executed under oath
showing that at least: by the corporate treasurer together
with the amount P50.00 to defray
1. 25% of the authorized capital stock has publication expenses.
been subscribed. 4. Bank certificate of deposit, issued
under oath by the bank manager or
2. 25% of the subscription has been fully any authorized bank officer, that
paid in actual cash or property. there is a deposit of the stated
amount representing the paid-up
3. The paid-up capital being not less than capital of the corporation either in
P5,000.00. the name of the treasurer in trust
for the corporation or in the name
SEC Policy of the corporation itself.
5. Written authority to verify bank Law reserves the rights to modify the
deposit signed by the corporate charter
treasurer empowering the SEC and The constitution and the Corporation Code
/or the Central bank to check and reserved the right to amend the charter of a
inspect the existence of the bank private corporation. The constitution
deposit of the corporate paid-up provides that “no franchise or right be
capital. granted except under the condition that it
6. Taxpayer account number of the shall be subject to amendment, alteration,
incorporators pursuant to Executive or repeal by the National Assembly when
order No. 213. public interest so requires.
7. Registration Data Sheet, a
statement in statistical data form, Amendment of Articles of Incorporation
signed by an authorized The articles of incorporation may be
representative of the corporation amended for legitimate purposes that refer
regarding important information to any matter stated in the articles of
about the corporate seal, incorporation. It may refer to:
corporate name, principal office, 1. Change of corporate name;
capital structure, their subscription 2. Extension of term of corporation;
and TAN (SEC Bulletin, Oct. 1982). 3. Change in classes or series of shares;
4. Change in rights, privileges or
Sec. 16. Amendment of Articles of restrictions in share ownership;
Incorporation. – Unless otherwise 5. Increase or decrease in the number of
prescribed by this Code or by special law, directors; and
and for legitimate purposes, any provision 6. Change in purpose or purposes and
or matter stated in the articles of other necessary changes.
incorporation may be amended by a
majority vote of the board of directors or Vote or recent assent required in
trustees and the vote or written assent of amendment of the articles of incorporation
the stockholders representing at least two- shall be as follows:
thirds (2/3) of the outstanding capital stock, Stock Corporation – A majority vote of the
without prejudice to the appraisal rights of directors or trustees and the vote or written
dissenting stockholders in accordance with assent of the stockholders representing at
the provision of this Code, or the vote or least two- thirds (2/3) of the outstanding
written assent of two-thirds (2/3) of the capital stock. Under section 81 of the Code,
members if it be a non-stock corporation. a dissenting stockholder may exercise his
appraisal right if he is against the
The original and amended articles amendment to be made and demand
altogether shall contain all provision payment of the fair value of his shares.
required by law to be set out in the articles
of incorporation. Such articles, as amended Non-stock Corporation – A majority vote of
shall be indicated by underscoring the board of directors and the vote or written
change or changes made, and the copy assent of 2/3 of the members.
thereof duly certified under oath by the
corporate secretary and the majority of the The amendments to the articles of
directors or trustees stating the fact that incorporation shall take effect upon its
said amendments have been duly approved approval by the Securities and Exchange
by the required vote of the stockholders or Commission or from the filing with the said
members, shall be submitted to the Commission if not acted upon within six
Securities and Exchange Commission. months from the date of filing for a cause
not attributable to the corporation.
The amendment shall take effect upon its
approval by the Securities and Exchange Sec. 17. Grounds when articles of
Commission or from the date of filing with incorporation or amendment may be
the said Commission if not acted upon rejected or disapproved. – The Securities
within six (6) months from the date of filing and Exchange Commission may reject the
for a cause not attributable to the articles of incorporation or disapproved any
corporation. amendment thereto if the same is not in
compliance with the requirements of this
Code: Provided, That the Commission shall by which the corporation can be identified
give the incorporators a reasonable time and distinguished from other corporation,
within which to correct or modify the firms or entities.
objectionable portions of the articles or
amendment. The following are grounds for Change of corporate name
such amendment or disapproval: A corporation may change its name by
merely amending its charter in the manner
1. That the articles of incorporation or any prescribed by law. The change of name of
amendment thereto is not substantially the corporation does not result in
in accordance with the form prescribed dissolution. The changing of the name of a
herein. corporation is no more the creation of a
corporation than the changing of the name
2. That the purpose or purposes of the of a natural person.
corporation are patently
unconstitutional, illegal, immoral, or Restriction in use in certain names of
contrary to government rules and words
regulation. There are special laws prohibiting the use of
certain names and/or words. Thus, under
3. That the Treasurer’s Affidavit the General Banking Act, no person or
concerning the amount of capital stock entity not conducting the business of
subscribed and/or paid is false. commercial banking shall use the words
“bank”, “banking”, “banker”, “building and
4. That the required percentage of loan association”, “trust corporation”, etc.
ownership of the capital stock to be or words of similar import. The word
owned by citizens of the Philippines has “National” under Act 2612 may not be use
not been complied with as required by by those doing business as bankers,
existing laws of the constitution. brokers, or savings institutions. “United
Nations” both in its full and abbreviated
No articles of incorporation or amendment forms, for commercial and business
to articles of incorporation of banks, purposes. There are other names or words
banking and quasi-banking institutions, which pursuant to other special laws may
building and loan association, trust not be used.
companies, public utilities, educational
institution, and other corporations Sec. 19. Commencement of Corporate
governed by special laws shall be accepted Existence. – A private corporation formed
or approved by the Commission unless or organized under this Code commences to
accompanied by a favourable have corporate existence and juridical
recommendation of the appropriate personality and is deemed incorporated
government agency to the effect that such from the date the Securities and Exchange
articles or amendment is in accordance with Commission issues a certificate of
law. incorporation under its official seal; and
thereupon the incorporators,
Sec. 18. Corporate name. – No corporate stockholders/members, and their
name may be allowed by the Securities and successors shall constitute a body politic
Exchange Commission if the proposed name and corporate under the name stated in the
is identical or deceptively or confusingly articles of incorporation for the period of
similar to that of any existing corporation or time mentioned therein, unless said period
to any other name already protected by law is extended or the corporation is sooner
or its patently deceptive, confusing or dissolved in accordance with law.
contrary to existing laws. When the change
in a corporate name is approved, the Sec. 20. De Facto corporation. – The due
commission shall issue an amended incorporation any corporation claiming in
certificate of incorporation under the good faith to be a corporation under this
amended name. Code, and its right to exercise corporate
powers, shall not be inquired into
Necessity of Corporate name collaterally in any private suit to which such
It is necessary that a corporation should corporation may be a party. Such inquiry
have a name because that is the only way
may be made by the Solicitor General in a of a contrary tenor. The object of the
quo warranto proceeding. principle of estoppel is to prevent injustice
to an otherwise innocent person.
De facto corporation – generally refer to
organizations exercising corporate power Sec. 22. Effect of non-use of corporate
under colour of a more or less legally charter and continuous in operation of a
constituted corporation. corporation. – If a corporation does not
formally organize and commence the
Elements of De facto corporation transaction of its business or the
1. Existence of a valid law under which a construction of its works within two (2)
corporation can be organized. years from the date of its incorporation, its
2. An attempt in good faith to incorporate. corporate powers cease and the
3. Actual exercise of incorporate powers. corporation shall be deemed dissolved.
However, if a corporation has commenced
Quo warranto – an inquiry made into the the transaction of its business but
right of a corporation to conduct business. subsequently becomes continuously
inoperative for a period of at least five (5)
Illustration years, the same shall be ground for the
Seven competent individual organized a suspension or revocation of its corporate
corporation by filing the articles of franchise or certificate of incorporation.
incorporation and securing a certificate of
incorporation with the SEC. However, the This provision shall not apply if the failure
addresses of two of the original subscribers to organize, commence the transactions of
were omitted in the articles of its businesses or the construction of its
incorporation. In suit filed by X, a creditor, works, or to continuously operate is due to
against the corporation he alleged that the causes beyond the control of the
corporation has no valid existence and corporation as may be determined by the
sought to hold the seven incorporators (also Securities and Exchange Commission.
directors) liable personally on the
obligation. X’s allegation that the Organization
corporation had no valid existence would The idea of organization in reference to
constitute a collateral (side) attack in a corporations means executive structure,
private suit. Only the Solicitor General as election of officers, providing for
government lawyer may raise the question subscription and payment of capital,
by quo warranto proceeding. (Literally by adoption of by-laws, and other steps
“what right”). necessary to endow the legal entity with
capacity to transact business for which it
Sec. 21. Corporation by estoppel. – All was created.
persons who assume to act as a corporation
knowing it to be without authority to do so The Grant of corporate existence, conferred
shall be liable as general partners for all by the issuance of certificate of
debts, liabilities and damages incurred or incorporation, is subject to two subsequent
arising as a result thereof: Provided, conditions, to wit:
however, That when any such ostensible 1. The corporation must “formally
corporation is sued on any transaction organize”.
entered by it as a corporation or on any tort 2. The corporation must actually begin the
committed by it as such, it shall not be “transaction of its business”.
allowed to use as a defense its lack of
corporate personality. Failure to comply with either or both of
these conditions within two (2) years from
One who assumes an obligation to an the date of its incorporation, its corporate
ostensible corporation as such cannot resist power cease and the corporation must be
performance thereof on the ground that deemed dissolved.
there was in fact no corporation.
Sec. 23. The board of directors or trustees.
Estoppel – It is preclusion, which prevent a – Unless otherwise provided in this Code,
man from denying a fact in consequences of the corporate powers of all corporation
his own previous act, allegations, or denial formed under this Code shall be exercised ,
all business conducted and all property of 3. Domestic air carrier, the directing head
such corporations controlled and held by or 2/3 of the board of directors and
the board of directors or trustees to be other managing officers shall be citizens
elected from among the holders of stock, of the Philippines.
or where there is no stock, from among 4. Registered investments companies, the
the members of the corporation, who shall directors thereof must be Filipino
hold office for one (1) year and until their citizen.
successors are elected and qualified. 5. Private development banks, all the
members of the board of directors shall
Every director must own at least one (1) be citizen of the Philippines.
share of the capital stock of the corporation 6. In case of financing corporation, at least
of which he is a director, which share shall 2/3 of all members of the board of
stand in his name on the books of the directors shall be citizen of the
corporation. Any director who ceases to be Philippines.
the owner of at least one (1) share of the
capital stock of the corporation of which he Sec. 24. Election of directors or trustees. –
is the director shall thereby cease to be a At all elections of directors or trustees,
director. Trustees of non-stock corporations there must be present, either in person or
must be members thereof. A majority of the by representative authorized to act by
directors or trustees of all corporations written proxy, the owners of the majority of
organized under this Code must be the outstanding capital stock, or if there be
residents of the Philippines. no capital stock, a majority of the members
entitled to vote. The election must be by
Qualifications of directors ballot if requested by any voting
1. He must own at least one (1) share of stockholder or member. In stock
the capital stock of the corporation in corporations, every stockholder entitled to
his name. vote shall have the right to vote in person
2. Majority of the directors must be a or by proxy the number of shares of stock
resident citizen of the Philippines. standing, at the time fixed in the by-laws, in
3. A director must not have been his own name on the stock books of the
convicted by final judgement of an corporation, or where the by-laws are
offense punishable by imprisonment silent, at the time of the election; and said
exceeding six (6) years or a violation of shareholder may vote such number of
the provisions of the Corporation Code shares for as many persons as there are
committed within five (5) years prior to directors to be elected or he may cumulate
the date of election or appointment. said shares and give one candidate as many
votes as the number of directors to be
The directors, once elected, become the elected multiplied by the number of his
representatives of the corporation itself, shares shall equal, or he may distribute
not its stockholders. The directors of a non- them on the same principle among as many
stock corporation are required to be candidate as he shall see fit; Provided, That
members thereof and like stock the total number of votes cast by him shall
corporations “majority of the directors and not exceed the numbers of shares owned
trustees of all corporations organized under by him as shown in the books of the
the Corporation Code must be residents corporation multiplied by the whole
citizen of the Philippines”. There are some number of directors to be elected:
special corporation not organized with the Provided, however, that no delinquent
Corporation Code where directors are stocks shall be voted. Unless otherwise
required to be citizens of the Philippines. provided in the articles of incorporation, or
They are as follows: in the by- laws, members of corporation
1. Bank and banking institution, at least which have no capital stock may cast as
2/3 of the members of the board of many votes as there are trustees to be
directors shall be citizen of the elected but may not cast more than one
Philippines. vote for one candidate. Candidates
2. Rural banks, every member of the receiving the highest number of votes shall
board of directors shall be citizens of be declared elected. Any meeting of the
the Philippines. stockholders or members called for an
election may adjourn from day to day or
from time to
time but not sine die or definitely if, for any Sec. 25. Corporate officers, quorum. –
reason, no election is held, or if there are Immediately after their election, the
not present or represented by proxy, at the directors of a corporation must formally
meeting, the owners of the majority of the organized by the election of a president,
outstanding capital stock, or if there be no who shall be a director, a treasurer who
capital stock, a majority of the members may or may not be a director, a secretary
entitled to vote. who shall be a resident citizen of the
Philippines, and such other officers as may
Methods of voting be provided for in the by-laws. Any two (2)
The voting methods which may be resorted or more positions may be held concurrently
to by a voting stockholder are as follows: by the same person, except that no one
1. Straight voting. shall act as president and secretary or as
2. Cumulative voting for one candidate. president and treasurer at the same time.
3. Cumulative voting by distribution.
The directors or trustees and officers to be
Example of Straight Voting elected shall perform the duties enjoined
A owns 100 shares of stock in X corporation. on them by law and by the by-laws of the
During the meeting for the purpose of corporation. Unless the articles of
electing five directors, he may cast his vote incorporation or the by-laws provide form a
by giving each of the five candidates 100 greater majority, a majority of the number
votes, hence, he distribute equally his vote of directors or trustees as fixed in the
without preference or discrimination. articles of incorporation shall constitute a
quorum for the transaction of corporate
Example of Cumulative voting for one business, and every decision of at least a
candidate majority of the directors or trustees present
In the preceding illustration, if A owns 100 at a meeting at which there is a quorum
voting shares and there are five directors to shall be valid as a corporate act , except for
be elected, A is entitled to 500 votes which the election of the officers which shall
he may “cumulate” by giving it to candidate require the vote of a majority of all the
Z alone. members of the board.
Example of Cumulative voting by Qualification of corporate officer
distribution 1. President. He must be a director.
As in the same example above, if A owns 2. Treasurer. He may or may not be a
100 voting shares, and there are five director.
directors to be elected, A is entitled to 500 3. Secretary. He must be a resident and
votes which he may distribute to candidate citizen of the Philippines
Y and Z giving the former 300 and the latter 4. Other officers provided for in the by-
200 provided that the total number of laws.
votes cast by him does not exceed 500
votes. Three levels of corporate control
1. The board of director which is
Voting of sequestered shares of stock responsible for the corporate policies
It has been held that the “Presidential and the general management of the
Commission on Good Government may business affairs of the corporation.
properly exercise the prerogative to vote 2. The officers, who in theory execute the
sequestered stock of corporation, granted policies lay down by the board , but in
to it by the President of the Philippines xxx practice often have wide latitude in
pending the outcome of proceeding to determining the course of business
determine the ownership of sequestered operations.
shares of stock. xxx Substitution of 3. Stockholders who like amendments of
directors is not be done without reason or the articles of incorporation.
rhyme, and undertaken only when essential
to prevent disappearance or wastage of Teleconferencing of Board Members
corporate property, and always under such In the Philippines, teleconferencing and
circumstance as assure that replacements videoconferencing of members of board of
are truly processed of competence, directors of private corporation is a reality,
experience and probity. in light of the Republic Act No. 8792.The
Securities and Exchange Commission issued
SEC Memorandum Circular No. 15, on has authority to act in his stead, and to
November 30, 2001, providing the perform the duties of the office.
guidelines to be complied with related to
such conferences. Thus, the court agrees Secretary
with the RTC that persons in the Philippines A secretary must be a resident citizen of the
may have a teleconference with a group of Philippines. It is generally its duty to make
persons in South Korea relating to business and keep corporate records; to make
transactions or corporate governance. proper entries of the votes, resolution and
proceedings of the shareholders and
Directors and officers distinguished directors in the management of the
The officers of a corporation, unlike the corporation, and of all other matters
directors, are true agent of the corporation. required to be entered in the records. The
Each officer may bind the corporation by his secretary is the ministerial officer who
individual acts within the actual or apparent cannot bind the corporation unless he is
scope of authority. On the other hand, a authorized to do so.
director has no authority to act for the
corporation. Treasurer
The treasurer of the corporation “may or
Authority of corporate officers may not be a director”. He is the proper
The corporation transact its business officer and the only proper officer in the
through its officers or agents. An officer’s absence of express provision to the
power as an agent of the corporation must contrary, to receive and keep the money of
be sought from the statute, charter, and the the corporation and to disburse them as he
by-laws or in a delegation of authority to may be authorized.
such officers, from the acts of board of
directors, formally expressed or implied Other officers
from a habit or custom of doing business. The by-laws of the corporation may
provide for such other officers and agent as
Chairman of the Board may be necessary and convenient
A chairman of the board of directors must considering the nature and needs of the
himself director be a director of the business. Their compensation is provided
corporation. His duty as presiding officer is for by the by-laws and the board of
not an executive one. It has been suggested directors in a suitable manner.
that he well be given advisory duties in
determining executive salaries, bonus plans Quorum – signifies the number of persons
and pensions, determining dividend policy, belonging to a corporation required to
selecting auditors, and dealing questions transact business.
with labor and company policy.
Section 25 of the Corporation Code
President requires more people than a simple
The president must be a director of the majority to form a quorum. If no such
corporation. The powers of the president of defining number is determined, a quorum is
a corporation are vested in him by law or a simple majority.
the by-laws; otherwise, he has no power
over the corporate property and business Directors cannot vote by proxy
than has any other director. However, he The directors cannot vote by proxy but
may be given actual authority to make must personally present, and act by
particular contracts, or to execute themselves.
conveyances, borrow money, execute
mortgages, and do other acts, by the Sec. 26. Report of election of directors,
charter, the by-laws, resolutions of trustees and officers. – Within thirty (30)
directors or their informal acquiescence. days after the election of the officers,
trustees and directors of the corporation,
Vice- President the secretary, or any other officer of the
In the absence of the president, or if the corporation shall submit to the Securities
office of the president becomes vacant, as a and Exchange Commission, the names,
rule, the vice president elected and nationalities and residences of the
appointed by the shareholders or directors directors, trustees and officers elected.
Should a director, trustee or officer die, for the purpose, and in either case, after
resign or in any manner cease to hold office, previous notice to stockholders or members
his heirs in case of his death, the secretary of the corporation of the intention to
or any other officer of the corporation, or propose such removal at the meeting. A
the director, trustee or officer himself, shall special meeting of the stockholders or
immediately report such fact to the members of the corporation for the
Securities and Exchange Commission. purpose of removal of directors or trustees,
or any of them, must be called by the
Sec. 27. Disqualification of directors, secretary on order of the president or on
trustees or officers. – No person convicted the written demand of the stockholders
by final judgement of an offense punishable representing or holding at least a majority
by imprisonment for a period exceeding six of the outstanding capital stock, or, if it be a
(6) years, or a violation of this Code, non-stock corporation, on the written
committed within five (5) years prior to the demand of a majority of the members
date of his election or appointment, shall entitled to vote. Should the secretary failed
qualify as a director, trustee or officer of to refuse to call the special meeting upon
any corporation. such demand, or fail or refuse to give the
notice, or if there is no secretary, the call
Sec. 27 of the Corporation Code is an for the meeting may be addressed directly
additional safeguard that only upright and to the stockholders or members of any by
honest individuals be entrusted with any stockholder or member of the
management of the corporate affairs. corporation signing the demand. Notice of
the time and place of such meeting, as well
A director of a cooperative who is as the intention to propose such removal,
subsequently elected as member of the must be given by publication or by written
Sangguniang Panglungsod (City Council) notice as prescribed in this Code. The
becomes automatically disqualified from vacancy resulting from removal pursuant to
continuing as such director by virtue of the this section may be filled by election at the
clear mandate of PD No. 269 providing that same meeting without further notice, or at
except for “barrio captains and councillors” any regular or at any special meeting called
elective officials are ineligible to become for the purpose after giving notice as
officers and/or directors of any cooperative. prescribed in this Code. Removal may be
with or without cause: Provided, That
The SEC ruled that firms engage in wholly or removal without cause may not be used to
partially nationalized activities, aliens are deprived minority stockholders or members
banned from being appointed to of the right of representation to which they
management position such as president, may be entitled under Section 24 of this
vice-president, treasurer, auditor, secretary, Code.
etc. of said companies. However, they can
be elected directors in preparation to their Directors or trustee may be removed even
allowable participation or share in the without cause
capital of such activities, in accordance with The legislative policy is that the
the Commonwealth Act No. 108, as shareholders shall be the ultimate masters,
amended by PD 715, otherwise known as not the directors. The shareholders should
the Anti- Dummy Law. be clothed with the power of judging the
competency and fitness of the directors and
Sec. 28. Removal of director or trustees. – of choosing a board that will carry out of
Any director or trustee of the corporation their business policy.
may be removed from office by a vote of
the stockholders holding or representing at Directors representing minority may not be
least two- thirds (2/3) of the outstanding removed without cause. The power to
capital stock, or if the corporation be a non- removed director or trustee even without
stock corporation , by a vote of at least two- cause given to shareholders or members
thirds (2/3) of the members entitled to may not be used to deprived minority
vote: Provided, That such removal shall take shareholders or members of the right of
place either at a regular meeting of the representation to which they may be
corporation or at the special meeting called entitled under Section 24 of the Corporation
Code. Cumulative voting of
directors in a stock corporation is majority of the outstanding capital stock at
mandatory and cannot be dispensed with in a regular or special stockholders’ meeting.
the by-laws. Being a statutory right, the In no case shall the total yearly
stockholders cannot be deprived of the use compensation of directors, as such
of cumulative voting. directors, exceed ten percent (10%) of the
net income before income tax of the
May the result of the duly held election of corporation during the preceding year.
directors be altered by mere agreement of
the directors? Sec. 31. Liability of directors, trustees or
The Securities and Exchange Commission officers. – Directors or trustees who willfully
ruled that: “An agreement by which and knowingly vote for or assent to patently
director is reposed in any body except unlawful acts of the corporation or who are
majority of stockholders is in violation of guilty of gross negligence or bad faith in
‘public policy’ and ‘enforceable’ ”. directing the affairs of the corporation or
acquire any personal or pecuniary interest
The Securities and Exchange Commission in conflict with their duty as such directors,
has jurisdiction or authority to “hear and or trustees shall be liable jointly and
decide cases” involving controversies in the severally for all damages resulting
election or appointments of directors, therefrom suffered by the corporation, its
trustees, officers or managers of such stockholders or members and other
corporations, partnerships or associations. persons.
Controversy concerning removal of
directors or trustees may also be heard by When a director, trustee or officer attempts
the SEC. to acquire or acquires, in violation of his
duty, any interest adverse to the
Sec. 29. Vacancies in the office of director corporation in respect of any matter which
or trustee. – Any vacancy occurring in the has been reposed in him in confidence, as
board of directors or trustees other than by to which equity imposes a disability upon
removal by the stockholders or members or him to deal in his own behalf, he shall be
by expiration of term, may be filled by the liable as a trustee for the corporation and
vote of at least a majority of the remaining must account for the profits which
directors or trustees, if still constituting a otherwise would have accrued to the
quorum; otherwise, said vacancies must be corporation.
filled by the stockholders in a regular or
special meeting called for that purpose. A Directors are trustees
director or trustee so elected to fill the It is well-stated rule in corporate law that
vacancy shall be elected only for the directors of corporations are trustees and
unexpired term of his predecessor in office. are required to act in the utmost good faith.
Sec. 39. Power to deny pre-emptive right. – A sale or other disposition shall be
All stockholders of a stock corporation shall deemed to cover substantially all the
enjoy pre-emptive right to subscribe to all corporate property and assets if thereby
issues or disposition of shares of any class, the corporation would be rendered
in proportion to their respective incapable of continuing the business or
shareholdings, unless such right is denied accomplishing the purpose for which it was
by the articles of incorporation or an incorporated.
amendment thereto: Provided, That such
pre-emptive right shall not extend to shares After such authorization or
to be issued in compliance with laws approval by the stockholders or members,
requiring stock offerings or minimum stock the board of directors or trustees may,
ownership by the public; or to shares to be nevertheless, in its discretion, abandon
issued in good faith with the approval of the such sale, lease, exchange, mortgage,
stockholders representing two-thirds (2/3) pledge or other disposition of property and
of the outstanding capital stock, in assets, subject to the rights of third parties
exchange for property needed for corporate under any contract relating thereto,
purposes or in payment of a previously without further action or approval by the
contracted debt. stockholders or members.
members in the case of non-stock
Nothing in this section is intended corporations, at a stockholders’ or
to restrict the power of any corporation, members’ meeting duly called for the
without the authorization by the purpose. Written notice of the proposed
stockholders or members, to sell, lease, investment and the time and place of the
exchange, mortgage, pledge or otherwise meeting shall be addressed to each
dispose of any of its property and assets if stockholder or member at his place of
the same is necessary in the usual and residence as shown on the books of the
regular course of business of said corporation and deposited to the addressee
corporation or if the proceeds of the sale or in the post office with postage prepaid, or
other disposition of such property and served personally; Provided, That any
assets be appropriated for the conduct of dissenting stockholder shall have appraisal
its remaining business. right as provided in this Code: Provided,
however, That were the investment by the
In non-stock corporations, where corporation is reasonably necessary to
there are no members with voting rights, accomplish its primary purpose as stated in
the vote of at least a majority of the the articles of incorporation, the approval
trustees in office will be sufficient of the stockholders or members shall not be
authorization for the corporation to enter necessary.
into any transaction authorized by this
section. Sec. 43. Power to declare dividends. – The
board of directors of a stock corporation
Sec. 41. Power to acquire own shares. – A may declare dividends out of the
stock corporation shall have the power to unrestricted retained earnings which shall
purchase or acquire its own shares for a be payable in cash, in property, or in stock
legitimate corporate purpose or purposes, to all stockholders on the basis of
including but not limited to the following outstanding stock held by them: Provided,
cases: Provided, That the corporation has That any cash dividends due on delinquent
unrestricted retained earnings in its books stock shall first be applied to the unpaid
to cover the shares to be purchased or balance on the subscription plus costs and
acquired: expenses, while stock dividends shall be
withheld from the delinquent stockholder
1. To eliminate fractional shares arising until his unpaid subscription is fully paid:
out of stock dividends. Provided, further, That no stock dividend
shall be issued without the approval of
2. To collect or compromise an stockholders representing not less than
indebtedness to the corporation, arising two-thirds (2/3) of the outstanding capital
out of unpaid subscription, in a stock at a regular or special meeting duly
delinquency sale, and to purchase called for the purposes.
delinquent shares sold during said sale.
Stock corporation are prohibited from
3. To pay dissenting or withdrawing retaining surplus profits in excess of one
stockholders entitled to payment for hundred percent (100%) of their paid-in
their shares under the provisions of this capital stock, except: (1) when justified
Code. approved by the Board of Directors; or (2)
when the corporation is prohibited under
Sec. 42. Power to invest corporate funds in any loan agreement with any financial
another corporation or business or for any institution or creditor, whether local or
other purpose. – Subject to the provisions foreign, from declaring dividends without
of this code, a private corporation may its/his consent, and such consent has not
invest its funds in any other corporation or yet been secured; or (3) when it can be
business or for any purpose other than the clearly shown that such retention is
primary purpose for which it was organized necessary under special circumstance
when approved by a majority of the board obtaining in the corporation, such as when
of directors or trustees and ratified by the there is a need for special reserve for
stockholders representing at least two- probable contingencies.
thirds (2/3) of the outstanding capital stock,
or by at least two-thirds (2/3) of the Concept of dividends
A dividend is a corporate profit set aside,
declared and ordered by the directors to be Scrip dividend
paid to the stockholders on demand or at a Scrip dividend is a writing or a certificate
fixed time. issued to a stockholder entitling him to the
payment of money or the like at some
Dividends distinguished from profits future time inasmuch as the company, at
“Dividends” means the profits or that the time the scrip dividends are declared,
portion of the profits of the corporation has profits not in cash.
which its board of directors, by proper
resolution, sets apart for rotable Liquidating dividend
distribution among the stockholders. It is Liquidating dividend involves the
distinguished from “profits” for the profits distribution of assets by a corporation to its
in the hands of a corporation do not stockholders upon dissolution.
become dividends until they have been set
apart, or at least declared, as dividends and Sec. 44. Power to enter into a
transferred to the separate property of the management contract. – No corporation
individual stockholders. shall conclude a management contract with
another corporation unless such contract
Surplus profits – Surplus or net profits of a shall have been approved by the Board of
corporation is the difference between the Directors and by stockholders owning at
total present value of its assets, after least the majority of the outstanding capital
deducting losses and liabilities, and the stock, or by at least majority of the
amount of its capital stock. (11 Fletcher, members in the case of a non-stock
Sec. 5335) corporation, of both the managing and the
managed corporation, at a meeting duly
Basis of dividend declaration called for the purpose: Provided, That (a)
The board of directors of a stock where a stockholder or stockholders
corporation may declare dividends on the representing the same interest of both the
basis of outstanding stock held by the managing and the managed corporations
stockholders. The basis therefore is the own and control more than one-third (1/3)
stockholder’s total subscription and not on of the total outstanding capital stock
the amount paid by him on the entitled to vote of the managing
subscription. This is for the reason that his corporation; or (b) where the majority of
entire subscription represents his holding in the members of the Board of Directors of
the corporation for which he pays interests the managing corporation also constitute a
on any unpaid portion. (SEC Opinion, Dec. majority of the members of the Board of
17, 1973) Directors of the managed corporation, then
the management contract must be
Classes of dividends approved by the stockholders of the
Dividends which a corporation may declare managed corporation owning of at least
and distribute to its stockholders may be two-thirds (2/3) of the total outstanding
classified into: cash dividend, stock capital stock entitled to vote, or by at least
dividend, property dividend, scrip dividend, two-thirds (2/3) of the members in case of a
and liquidating dividend. non-stock corporation. No management
contract shall be entered into for a period
Cash dividend longer than five years for any one term.
Cash dividend is one payable in money.
The provisions of the next preceding
Stock dividend paragraph shall apply to any contract
Stock dividend is a dividend payable in stock whereby a corporation undertakes to
instead of cash or property. manage or operate all or substantially all of
the business of the other corporation,
Property dividend whether such contracts are called service
The directors in their discretion may contracts, operating agreements or
authorize distributions in bonds or in otherwise: Provided, however, That such
property, such as warehouse receipts for service contracts or operating agreements
whiskey or shares of stock of a subsidiary which relate to the exploration,
corporation. development, exploitation or utilization of
natural resources may be entered into for deprive either the corporation or the other
such periods as may be provided by the part of money or property acquired under
pertinent laws or regulations.
the contract. On the other hand, the great
Concept of management contract weight of authority is to consider executor
A management contract is an agreement contracts as unenforceable.
under which the board of directors of a
corporation delegates the powers of Ultra vires contracts accepted doctrines
management to another person or 1. If the contract is fully executed on both
corporation for a period of time provided sides, the contract is effective and the
for in the agreement.
courts will not interfere to deprive
Effects of Management contracts either part of what has been acquired
Contracts by which the board of directors under it.
delegates the power of supervision and 2. If the contract is executor on both sides,
management to another person or as a rule either party can maintain an
corporation for a specified period are action for its non-performance.
invalid if they involve a surrender by the
3. Where the contract is executor on side
board of its power and duty of supervision
only, and has been fully performed on
and control.
the other, the courts differ as whether
Management prerogatives an action will lie on the contract against
An owner of a business enterprise is given the party who has received benefits of
considerable margin in managing his performance under it. Majority of the
business because it is deemed important to courts hold that the party who has
society as a whole that he should succeed.
received benefits from the performance
Sec. 45. Ultra vires acts of corporations. – is stopped” to set up that the contract
No corporation under this Code shall us ultra vires to defeat an action on the
possess or exercise any corporate powers contract. There is, however, a rule
except those conferred by this Code or by which is widely recognized by the
its articles of incorporation and except such courts that ultra vires. “Should not be
as are necessary or incidental to the allowed to prevail, when involved for or
exercise of the powers so conferred. against the corporation, where it will
defeat the ends of justice or work a
Intra vires – The acts of a corporation within legal wrong.
its express or implied powers.
Ultra vires – The acts of a corporation Acts which are ultra vires are voidable but
outside its express or implied powers. may be ratified. In order that such ultra
vires may be ratified it must be shown that
It denotes some act or transaction on the 1. The act was consummated or executed.
part of a corporation which, although not 2. No creditors are prejudiced or they
unlawful or contrary to public policy of have given their consent thereto.
executed by an individual, is yet beyond the 3. The right of the public or the state are
legitimate powers of the corporation as not involved.
they are defined by the statute under which 4. All of the stockholders consent thereto.
it is formed, or which are applicable to it, or
by its charter or incorporation papers. A corporation, like an individual, may ratify
and thereby render binding upon it the
Admittedly, if the contract is executed on originally authorized acts of its officers or
both sides neither party can maintain an other agents. This is true because the
action to set aside the transaction or to questioned investment is neither contrary
recover what has been parted with. The to law, morals, public order or public policy.
courts will not interfere in such a case to It is a corporate transaction or contract
which is within the corporate powers but
which is defective from a purported failure the appropriate government agency to the
to observe in its execution the requirement effect that such by-laws or amendments are
of the law that the investment must be in accordance with law.
authorized by the affirmative vote of the
stockholders holding 2/3 of the voting Necessity of by-laws
The corporation must adopt the code of by-
power.
laws for its internal government.
Sec. 46. by-laws Adoption. – Every Corporation has inherent power to adopt
corporation formed under this code, must, by-laws
within one month after receipt of official One of its legal incidents and is usually
notice of the issuance of its certificate of expressly granted by law of the charter
incorporation by the Securities and subject to such limitations as may be
Exchange Commission, adopt a new code of contained in the statute or the charter,
by-laws for its government not inconsistent subject to such limitations as may be
with this code. For the adoption of by-laws contained in the statute or charter, and the
by the corporation the affirmative vote of general requirements of validity. If a
the stockholders representing at least a corporation fails to file its by-laws within
majority of the outstanding capital stock, or the period required by law its certificate of
of at least a majority of the outstanding incorporation may be suspended or even
capital stock, or of at least a majority of the revoked.
members, in the case of non-stick
corporations, shall be necessary. The by- Section 46 allows the adoption and filing of
laws shall be signed by the stockholders or the by-laws before incorporation provided
members voting for them and shall be kept the same is approved by all the
in the principal office of the corporation, incorporators and submitted to the
subject to the inspection of the Securities and Exchange Commission
stockholders or members during office together with the articles of incorporation.
hours; and a copy thereof, duly certified to
by a majority of the directors or trustees By-laws cannot provide for unreasonable
and countersigned by the secretary of the restriction
corporation, shall be filed with the Restriction upon the traffic in stock must
Securities and Exchange Commission which have their source in legislative enactment,
shall be attached to the original articles of as the corporation itself cannot create such
incorporation. impediments. By-laws are created for
protection and not for restriction.
Notwithstanding the provisions of the
preceding paragraph, by-laws may be Elements of valid by-laws
adopted and filed prior to incorporation; in 1. Must not be inconsistent with the
such case, such by-laws shall be approved general law and the Corporation Code.
and signed by all the incorporators and 2. Must not be inconsistent with public
submitted to the Securities and Exchange policy.
Commission, together with the articles of 3. Must be general in application and not
incorporation. directed against particular individuals.
4. Must not be inconsistent with the
In all cases, by-laws shall be effective only articles of incorporation.
upon the issuance by the Securities and 5. Must not impair obligations and
Exchange Commission of a certification that contracts.
the by-laws are not inconsistent with the 6. Must not be in restraint of trade.
Code. 7. Must not restrict religious freedom.
8. The penalties for violation of the by- Amender or new by-laws shall only be
laws. effective upon the issuance by the SEC of a
certification that the same are not
9. In the case of stick corporations, the inconsistent with this code.
manner of issuing stock certificates.
The authority to make or adopt the original
10. Such other matter as may be necessary by-laws of a corporation cannot be given to
for the proper or convenient the board of directors or trustees. The
stockholders of a stock corporation or the Notice of any meeting may be waived,
members of the non-stick corporation expressly or impliedly, by any stockholder
adopt or make the original by-laws. or member.
Sec. 53. Regular of special meetings of A person who appears on the books of a
directors or trustees. – The meetings shall corporation or otherwise as the absolute
be held monthly, unless the by-laws provide owner of stock clearly has the right to
otherwise. vote, although in face he may hold it as
trustee.
Special meetings of the board of directors
or trustees may be held at any time upon Executor and administrator has the right, to
the call of the president or as provided in vote shares belonging to the estate of his
the by-laws decedent, and it can make no difference
that the share stand on the books of the
Meetings of directors or trustees of corporation in the name of the decedent.
corporations may be held anywhere in or
outside of the Philippines, unless the by- Sec. 56. Voting in case of joint ownership
laws provide otherwise. Notice of regular or of stock. – In case of share of stock owned
special meetings stating the date, time and jointly by 2 or more persons, in order to
place of the meeting must be sent to every vote the same, the consent of all the co-
director or trustee at least 1 day prior to the owners shall be necessary, unless there is a
scheduled meeting, unless otherwise written proxy, signed by all the co-owners.
provided in the by-laws. A director or Authorizing one or some of them or any
trustee may waive this requirement, either other person to vote such share or shares:
expressly or impliedly. provided, that when the shares are owned
in an capacity by the holders therof, any of a voting trust specifically required as a
one of the joint owner can vote said shares condition in a loan agreement, said voting
or appoint a proxy therfor. trust may be for a period exceeding 5 years
but shall automatically expire upon full
If share are owned by 2 or more persons payment of the loan. A voting trust
jointly, the right to vote is in them jointly, agreement must be in writing and
and , in order that the shares may be voted, notarized, and shall specify the terms and
they must agree upon the vote. This rule of conditions thereof. A certified copy of such
joint action applies to shares held by several agreement shall be filed with the
executors or trustees, in the absence of corporation and with the SEC: otherwise,
provision for a majority vote if the said agreement is ineffective and
fiduciaries disagree. unenforceable. The certificate or of stock
covered by the voting trust agreement shall
Sec. 57. Voting right for treasury share. – be cancelled and new one shall be issued in
Treasury shares shall have no voting right as the name of the trustee or trustees stating
long as such stock remains in the treasury. that they are issued pursuant to said
agreement. In the books of the corporation,
Treasury shares have no voting rights. it shall be noted that the transfer in the
name of the trustee or trustees is made
Sec. 58. Proxies. – Stockholders and pursuant to said voting trust agreement.
members may vote in person or by proxy in
all meetings of stock holders or members. The Trustee or trustees shall be execute and
Proxies shall be in writing, signed by the deliver to the transferors voting trust
stock holder or member and filed before certificates, which shall be transferable in
the scheduled meeting with the corporate the same manner and with the same effect
secretary. Unless otherwise provided in the as certificates of stock.
proxy, it shall be valid only for the meeting
for which it is intended. No proxy shall be The voting trust agreement filed with the
valid and effective for a period longer than corporation shall be subject to examination
five years at any one time. by any stockholder of the corporation in the
same manner as any other corporate book
Proxy – In corporate law, is a person who or record: Provided, That both the
votes for and this represents the transferor and the trustee or trustees may
stockholders or members. exercise the right of inspection of all
corporate books and records in accordance
Voting by proxy with the provisions of this code.
Ordinarily the right to vote shall be
exercised by the stockholders themselves or Any other stock holder may transfer his
by their duly authorized representatives. shares to the same trustee or trustees upon
Proxy to be valid must be: the terms and conditions stated in the
1. In writing, signed by the stockholder or voting trust agreement, and there upon
member giving it. shall be bound by all the provisions of said
2. Filed with the corporate agreement.
secretary before the scheduled
meeting. No voting trust agreement shall be entered
3. It is valid only for the meeting for which into for the purpose of circumventing the
it is intended unless otherwise law against monopolies and illegal
stipulated. combinations in restraint of trade or used
4. Even if the proxy is a continuing one it for purposes of fraud.
shall not be longer than 5 year at any
one time. Unless expressly renewed, all rights granted
in a voting trust agreement shall
Sec 59. Voting trusts. – One or more automatically expire at the end of the
stockholders of a stock corporation may be agreed period, and the voting trust
create a voting trust for the purpose of certificates as well as the certificates of
conferring upon a trustee or trustees the stick in the name of the trustee or trustees
right to vote and other rights pertaining to shall thereby be deemed cancelled and new
the share for a period not exceeding 5 years
at any one time: Provided, that in the case
certificates of stock shall be reissued in the No person can become a stockholder in a
name of the transferors. corporation by virtue of a subscription for
stock unless there is a valid contract
The voting trustee or trustees may vote by between him and the corporation. When a
proxy unless the agreement provides contract of subscription for stock in a
otherswise. corporation is binding it is a contract
between the subscriber or subscribers and
Concept of voting trusts the corporation, and its formation and
A voting trust is an agreement by which validity are governed by the same principles
stockholders surrender their voting power substantially as any other contract except in
and place it irrevocably in the hands of so far as such principles may be rendered
others for a definite period of time. In inapplicable by particular charter or
exchange for the certificates of stock the statutory provisions. No express promise to
trustee delivers to the stockholder voting pay is necessary to make the subscriber
trust certificates. liable.
SEC Rules requiring filing of documents. The Stockholder’s rights to financial statements
SEC requires all corporations whose and reports
securities are listed in any stock exchange 1. Balance sheet as of the end of the last
or with permits to sell shares to the public taxable year.
or with twenty or more stockholders shall 2. A profit and loss statement for said
hereafter submit to this Commission within taxable year.
thirty (30) days after approval of the 3. The board of directors or trustees shall
corporate action, certified true copies of present “a financial report” to
the following documents evidencing the stockholders or members.
same, to wit:
a. Minute of meetings SEC REPORTORIAL REQUIREMENTS
1. Calling for payment of unpaid Period Requirements
subscriptions Within 30 days from a) Set up books of
2. Increasing or decreasing the capital registration of accounts duly
stock articles onaf registered with the
3. Changing the nomenclature of incorporation BIR wherein receipts
shares of stock or certificates of and disbursements
indebtedness made are
4. Authorizing the borrowing of immediately
material sums of money recorded.
b. Other documents, such as:
b) Set up and
register with the SEC stockholder
its stock and Address
transfer book. Nationality
No. of shares
c) File its by-laws subscribed
with the Amt. subscribed
Commission. by each
Within 15 days from Submit a statement Shall be made for
end of 3 months of sources and inspection.
from registration application of funds Within 5 days Submit list of
certified by an before the date of stockholders/memb
independent CPA. annual meeting ers entitled to vote
a) Within 105 days i) If paid-up capital > as of a date prior to
after the end of its P50,000, file a copy the meeting.
fiscal year of BS and P&L
statement. The SEC must be notified of any:
1. Change or transfer of address.
ii) If paid-up capital 2. Any investment of corporate funds in
< P50,000, same as any of the secondary purposes of the
(i) and certified corporation by filing a copy of the
under oath by the resolution approved by 2/3 of the
Treasurer or any subscribed capital stock entitled to vote
responsible officer. authorizing the BoD to invest in any of
b) Within 45 days Certified under oath the secondary purposes.
by the Treasurer or
any responsible Sec. 76. Plan of merger or consolidation. –
officer. Two or more corporations may merge into a
Within 30 days from Submit: single corporation which shall be one
the date of annual 1) General constituent corporations or may
meeting information sheet consolidate into a new single corporation
for the fiscal year. which shall be consolidated corporation.
Sec.93. Place of meetings. – The by-laws 1. All liabilities and obligations of the
may provide that the members of a non- corporation shall be paid, satisfied and
stock corporation may hold their regular or discharged, or adequate provision shall
special meetings at any place even outside be made therefore.
the place where the principal office of the
corporation is located: Provided, That 2. Assets held by the corporation upon a
proper notice is sent to all members condition requiring return, transfer or
indicating the date, time and place of the conveyance, and which condition
meeting: and Provided, further, That the occurs by reason of the dissolution,
place of meeting shall be within the shall be returned, transferred or
Philippines. conveyed in accordance with such
requirements.
Supporting papers required to be
submitted to the Securities and Exchange 3. Assets received and held by the
Commission: corporation subject to limitations
1. LETTER OF UNDERTAKING addressed to permitting their use only for charitable,
the Commission signed by at least a religious, benevolent, educational or
majority of the incorporators or by a similar purposes, but not held upon a
duly authorized representative, to the condition requiring return, transfer or
effect that the association will change conveyance by reason of the
its corporate name in the event another dissolution, shall be transferred or
person, firm or entity has acquired a conveyed to one or more corporations,
prior right to use the same name or societies or organizations engaged in
similar to it. (3 copies) activities in the Philippines substantially
2. MODUS OPERANDI or a detailed similar to those of the dissolving
explanation as to how the association corporation according to a plan of
shall carry out its objectives signed by distribution adopted pursuant to this
atleast a majority of the incorporators Chapter.
or by a duly authorized representative.
(3 Copies) 4. Assets other than those mentioned in
3. RESOLUTION of the Board signed by the preceding paragraphs, if any, shall
atleast a majority of the Directors or be distributed in accordance with the
certified under oath by the Secretary in provisions of the articles of
the following tenor to wit: (3 Copies) incorporation or the by-laws, to the
extent that the articles of incorporation
or the by-laws, determine the shall be held of record by not more
distributive rights of members, or any than a specified number of persons, not
class or classes of members, or provide exceeding twenty (20).
for distribution.
2. All the issued stock of all classes shall be
5. In any other case, assets may be subject to one or more specified
distributed to such persons, societies, restrictions on transfer permitted by
organizations or corporations, whether this Title.
or not organized for profit, as may be
specified in a plan of distribution 3. The corporation shall not list in any
adopted pursuant to this Chapter. stock exchange or make any public
offering of any of its stock of any class.
Sec. 95. Plan of distribution of assets. – A Notwithstanding the foregoing, a
plan providing for the distribution of assets, corporation shall not be deemed a close
not inconsistent with the provisions of this corporation when at least two-thirds
Title, may be adopted by a non-stock (2/3) of its voting stock or voting rights
corporation in the process of dissolution in is owned or controlled by another
the following manner: corporation which is not a close
corporation within the meaning of this
The board of trustees shall, by majority Code.
vote, adopt a resolution recommending a
plan of distribution and directing the Any corporation may be incorporated as a
submission thereof to a vote at a regular or close corporation, except mining or oil
special meeting of members having voting companies, stock exchanges, banks,
rights. Written notice setting forth the insurance companies, public utilities,
proposed plan of distribution or a summary educational institutions and corporations
thereof and the date, time and place of declared to be vested with public interest in
such meeting shall be given to each accordance with the provisions of this Code.
member entitled to vote, within the time The provisions of this Title shall primarily
and in the manner provided in this Code for govern close corporations: Provided, That
the giving of notice of meetings to the provisions of other Titles of this Code
members. Such plan of distribution shall be shall apply suppletorily except insofar as
adopted upon approval of at least two- this Title otherwise provides.
thirds (2/3) of the members having voting
rights present or represented by proxy at Sec. 97. Articles of incorporation. – The
such meeting. articles of incorporation of a close
corporation may provide:
Distribution of assets of non-stock
corporations to the members on dissolution 1. For a classification of shares or rights
is not forbidden, unless it holds its assets and the qualifications for owning or
upon some trust, public or private, in which holding the same and restrictions on
case the claims of the state, the their transfers as may be stated therein,
beneficiaries, or of the founder and his subject to the provisions of the
successors may have to be considered. following section.
A non-stock (non-profit) corporation may
not ordinarily organize as a stock 2. For a classification of directors into one
corporation, authorized to issue shares of or more classes, each of whom may be
stock, but may issue membership voted for and elected solely by a
certificates which do not entitle to the particular class of stock.
holder to dividends.
3. For a greater quorum or voting
Sec. 96. Definition and applicability of requirements in meetings of
Title. – A close corporation, within the stockholders or directors than those
meaning of this Code, is one whose articles provided in this Code.
of incorporation provide that:
The articles of incorporation of a close
1. All the corporation's issued stock of all corporation may provide that the business
classes, exclusive of treasury shares, of the corporation shall be managed by the
stockholders of the corporation rather than identity and personality of each shareholder
by a board of directors. So long as this are important to his associates, so that
provision continues in effect: although they may consider their business
as corporation in their dealings with third
1. No meeting of stockholders need be persons, among themselves the
called to elect directors. stockholders act and feel as partners.”
2. Unless the context clearly requires Entities which may not be organized as
otherwise, the stockholders of the close corporations
corporation shall be deemed to be Mining or oil companies
directors for the purpose of applying Stock exchanges
the provisions of this Code. Banks
Insurance companies
3. The stockholders of the corporation Public utilities
shall be subject to all liabilities of
Educational institutions
directors.
Corporations declared to be vested
with public interest
The articles of incorporation may likewise
provide that all officers or employees or
Stockholders authorized to manage close
that specified officers or employees shall be
corporations
elected or appointed by the stockholders,
As a rule, management of stock corporation
instead of by the board of directors.
is normally given to board of directors or
trustees. However, the Corporation Code
Requisites of Close Corporation
provides: “The articles of incorporation of a
Within the meaning of a close corporation
close corporation may provide that the
under the Corporation Code the following
business of the corporation shall be
are its attributes:
managed by the stockholders of the
1. Its stockholders are limited not
corporation rather than by a board of
exceeding 20 persons.
directors.” Also, “The articles of
2. Its shares of stock are subject to one or
incorporation may likewise provide that all
more restrictions on transfer.
officers or employees or that specified
3. Its shares of stock are not listed in any
officers or employees shall be elected or
stock exchange.
appointed by the stockholders, instead of by
the board of directors.”
Salient Feature of Close Corporations
1. It has only a few stockholders, who if
Sec. 98. Validity of restrictions on transfer
not related by blood or marriage, know
of shares. – Restrictions on the right to
each other well and are aware of each
transfer shares must appear in the articles
other’s business skills.
of incorporation and in the by-laws as well
2. All or more of them are active in the
as in the certificate of stock; otherwise, the
corporate business, either as directors,
same shall not be binding on any purchaser
officers or as key men in management.
thereof in good faith. Said restrictions shall
3. The stocks of the corporation are not
not be more onerous than granting the
listed on the exchange nor is there
existing stockholders or the corporation the
trading in them outside the stock
option to purchase the shares of the
market.
transferring stockholder with such
*It would seem that base on these
reasonable terms, conditions or period
features many corporations in the
stated therein. If upon the expiration of said
Philippines would be close
period, the existing stockholders or the
corporations.
corporation fails to exercise the option to
purchase, the transferring stockholder may
Reasons for formation of close
sell his shares to any third person.
corporations
“The existence of close corporations can be
Sec. 99. Effects of issuance or transfer of
attributed to the desire of intimate groups
stock in breach of qualifying conditions. –
of business associates to obtain the
1. If stock of a close corporation is issued
advantages of a corporate organization, like
or transferred to any person who is not
that of limited liability. However, the
entitled under any provision of the
articles of incorporation to be a holder 6. The term "transfer", as used in this
of record of its stock, and if the section, is not limited to a transfer for
certificate for such stock conspicuously value.
shows the qualifications of the persons
entitled to be holders of record thereof, 7. The provisions of this section shall not
such person is conclusively presumed to impair any right which the transferee
have notice of the fact of his ineligibility may have to rescind the transfer or to
to be a stockholder. recover under any applicable warranty,
express or implied.
2. If the articles of incorporation of a
close corporation states the number of Restrictions on transfer of shares of stock
persons, not exceeding twenty (20), The corporation may provide in its articles
who are entitled to be holders of record of incorporation, in its by-laws as well as in
of its stock, and if the certificate for the certificate of stock restrictions on the
such stock conspicuously states such right of stockholders to transfer their shares
number, and if the issuance or transfer of stocks. If not so provided as aforesaid the
of stock to any person would cause the same “shall not be binding on any
stock to be held by more than such purchaser thereof in good faith.” Charter
number of persons, the person to restrictions on the transfer of shares are
whom such stock is issued or binding on all who become shareholders, as
transferred is conclusively presumed to they become parties to the charter contract
have notice of this fact. and take their shares subject to it.
Considerable latitude allowed
3. If a stock certificate of any close incorporators and shareholders
corporation conspicuously shows a in imposing transfer
restriction on transfer of stock of the restrictions in the articles of incorporation
corporation, the transferee of the stock and they will not usually be declared
is conclusively presumed to have notice against public policy unless palpably
of the fact that he has acquired stock in unreasonable under the circumstances.
violation of the restriction, if such
acquisition violates the restriction. “Stock in the corporation is not merely
property. It also creates a personal relation
4. Whenever any person to whom stock of analogous otherwise than technically to a
a close corporation has been issued or partnership. There seems to be no greater
transferred has, or is conclusively objection to retaining the right of choosing
presumed under this section to have, one’s associates in a corporation than in a
notice either (a) that he is a person not firm.”
eligible to be a holder of stock of the
corporation, or (b) that transfer of stock Reasons for restriction on shares of stock
to him would cause the stock of the In a close corporation, the identity of the
corporation to be held by more than other stockholders is important to each; the
the number of persons permitted by its incorporators have confidence in one
articles of incorporation to hold stock of another which they may not have in an
the corporation, or (c) that the transfer outsider. Furthermore, the incorporators
of stock is in violation of a restriction on may feel that the success of the enterprise
transfer of stock, the corporation may, depends upon the retention of the
at its option, refuse to register the personnel who formed it, or they may be
transfer of stock in the name of the manufacturing under secret processes
transferee. which they do not want outsiders to learn.
In the family corporation it is often the
5. The provisions of subsection (4) shall desire of he father to pass the corporation
not applicable if the transfer of stock, to his son without interference from other
though contrary to subsections (1), (2) outside the family. Any one of these factors
of (3), has been consented to by all the may induce the incorporators to attempt to
stockholders of the close corporation, restrict the transfer of stock.
or if the close corporation has amended
its articles of incorporation in Effect of the transfer of stock in breach of
accordance with this Title. qualifying conditions
Unless “consented to by all the operation of the business and affairs of
stockholders or if the close corporation has a close corporation, the stockholders
amended its articles of incorporation,” a shall be held to strict fiduciary duties to
transfer of shares of stock in breach of each other and among themselves. Said
qualifying conditions would justify the stockholders shall be personally liable
corporation through the corporate for corporate torts unless the
secretary to refuse to register the transfer corporation has obtained reasonably
of stock. Such transfer need not be for adequate liability insurance.
value, hence it may be the result of a
donation. Effect of the Stockholders’ agreement
before and after formation of corporation
Sec. 100. Agreements by stockholders. – Stockholders’ agreements before and after
1. Agreements by and among stockholders formation and organization of the
executed before the formation and corporation survive incorporation and shall
organization of a close corporation, be valid and binding for as long as they are
signed by all stockholders, shall survive not inconsistent with the articles of
the incorporation of such corporation incorporation. Agreements made prior to
and shall continue to be valid and incorporation require fairly literal
binding between and among such performance. There must be an actual
stockholders, if such be their intent, to contractual relation. Given such relation,
the extent that such agreements are the pre-incorporators are promoters and
not inconsistent with the articles of may arrange agreements to form and
incorporation, irrespective of where the manage the corporation.
provisions of such agreements are
contained, except those required by Sec. 101. When board meeting is
this Title to be embodied in said articles unnecessary or improperly held. – Unless
of incorporation. the by-laws provide otherwise, any action
by the directors of a close corporation
2. An agreement between two or more without a meeting shall nevertheless be
stockholders, if in writing and signed by deemed valid if:
the parties thereto, may provide that in
exercising any voting rights, the shares 1. Before or after such action is taken,
held by them shall be voted as therein written consent thereto is signed by all
provided, or as they may agree, or as the directors.
determined in accordance with a
procedure agreed upon by them. 2. All the stockholders have actual or
3. No provision in any written agreement implied knowledge of the action and
signed by the stockholders, relating to make no prompt objection thereto in
any phase of the corporate affairs, shall writing.
be invalidated as between the parties
on the ground that its effect is to make 3. The directors are accustomed to take
them partners among themselves. informal action with the express or
implied acquiescence of all the
4. A written agreement among some or all stockholders.
of the stockholders in a close
corporation shall not be invalidated on 4. All the directors have express or implied
the ground that it so relates to the knowledge of the action in question and
conduct of the business and affairs of none of them makes prompt objection
the corporation as to restrict or thereto in writing.
interfere with the discretion or powers
of the board of directors: Provided, If a director's meeting is held without
That such agreement shall impose on proper call or notice, an action taken
the stockholders who are parties therein within the corporate powers is
thereto the liabilities for managerial deemed ratified by a director who failed to
acts imposed by this Code on directors. attend, unless he promptly files his written
objection with the secretary of the
5. To the extent that the stockholders are corporation after having knowledge
actively engaged in the management or thereof.
Sec. 102. Pre-emptive right in close unnecessary or even if improperly held
corporations. - The pre-emptive right of would be valid. The by-laws, however, may
stockholders in close corporations shall provided otherwise or a stockholder may
extend to all stock to be issued, including file his written objection in writing after
reissuance of treasury shares, whether for having knowledge of the action taken by
money, property or personal services, or in the directors.
payment of corporate debts, unless the
articles of incorporation provide otherwise. Pre-emptive right in close corporations;
Issuance of new Stock
Exceptions in Section 39, not applicable A stockholder in a close corporation has a
It is submitted that in a close corporation, right to purchase his pro rata share of the
the exceptions provided in Sec 39 are not new stock. If the pre-emptive right is
applicable. The first exception mentioned violated he can sue the corporation for
therein regarding the shares issued in damages, enjoin the stock issue, obtain an
compliance with laws requiring stock order permitting him to subscribe, or obtain
offerings or minimum stock ownership by cancellation of the issue. But even where
the public cannot by its very nature refer to the stockholder’s pre-emptive right is
a close corporation. The pre-emptive right preserved. The right may be inadequate as
of shareholders in close corporation is thus a protective devise for the stockholder in a
broadened to include all issues without any close corporation because the lack of a
exception, unless of course, restricted by market for his stock leaves him with the
the articles of incorporation and printed in alternatives of investing more capital or
the stock certificates. It may be mentioned having the value of his stock diluted.
however, that any prior waiver of pre-
emptive right must be expressly provided Sec. 104. Deadlocks. - Notwithstanding any
for in the articles of incorporation and not contrary provision in the articles of
in an ordinary agreement executed by the incorporation or by-laws or agreement of
parties. This rule however, would not stockholders of a close corporation, if the
militate against the unanimous agreement directors or stockholders are so divided
of all the stockholders. respecting the management of the
corporation's business and affairs that the
Sec. 103. Amendment of articles of votes required for any corporate action
incorporation. – Any amendment to the cannot be obtained, with the consequence
articles of incorporation which seeks to that the business and affairs of the
delete or remove any provision required by corporation can no longer be conducted to
this Title to be contained in the articles of the advantage of the stockholders
incorporation or to reduce a quorum or generally, the Securities and Exchange
voting requirement stated in said articles of Commission, upon written petition by any
incorporation shall not be valid or effective stockholder, shall have the power to
unless approved by the affirmative vote of arbitrate the dispute. In the exercise of such
at least two-thirds (2/3) of the outstanding power, the Commission shall have authority
capital stock, whether with or without to make such order as it deems appropriate,
voting rights, or of such greater proportion including an order:
of shares as may be specifically provided in
the articles of incorporation for amending, 1. Canceling or altering any provision
deleting or removing any of the aforesaid contained in the articles of
provisions, at a meeting duly called for the incorporation, by-laws, or any
purpose. stockholder's agreement.
Rule and Exceptions when board meeting 2. Canceling, altering or enjoining any
unnecessary resolution or act of the corporation or
General Rule: the directors of a corporation its board of directors, stockholders, or
cannot act individually or separately in officers.
order to bind the corporation. They must
act as a board at a meeting duly called for 3. Directing or prohibiting any act of the
the purpose. corporation or its board of directors,
Exception: Section 101. It enumerates the stockholders, officers, or other persons
instances when a board at a meeting is party to the action.
4. Requiring the purchase at their fair provided either for directorial disputes or
value of shares of any stockholder, for stockholder disputes. Although there
either by the corporation regardless of are some disadvantages of arbitration
the availability of unrestricted retained proceedings, nevertheless, the advantages
earnings in its books, or by the other of arbitration, in saving both money and
stockholders. hard feelings, would seem to outweigh the
disadvantages in most cases.
5. Appointing a provisional director.
Provisional director and SEC supervised
6. Dissolving the corporation. management
In accordance with Section 104, the SEC
7. Granting such other relief as the may in case of deadlocks in the close
circumstances may warrant. corporation appoint a provisional director.
“A provisional director shall be an impartial
A provisional director shall be an impartial person who is neither a stock-holder nor a
person who is neither a stockholder nor a creditor of the corporation and whose other
creditor of the corporation or of any qualifications, may be determined by the
subsidiary or affiliate of the corporation, SEC.”
and whose further qualifications, if any,
may be determined by the Commission. A Under Section 2 (Pres Decree No. 1653), the
provisional director is not a receiver of the SEC has the power “to create and appoint a
corporation and does not have the title and management committee, board, or body to
powers of a custodian or receiver. A undertake the management of
provisional director shall have all the rights corporations, partnership or other
and powers of a duly elected director of the associations in appropriate cases wherein
corporation, including the right to notice of there is imminent danger or dissipation,
and to vote at meetings of directors, until loss or wastage or destruction of assets or
such time as he shall be removed by order other properties or paralization of business
of the Commission or by all the operations of such corporations or entities
stockholders. His compensation shall be prejudicial to the interest of the minority,
determined by agreement between him party-litigants or the general public.”
and the corporation subject to approval of
the Commission, which may fix his Sec. 105. Withdrawal of stockholder or
compensation in the absence of agreement dissolution of corporation. – In addition
or in the event of disagreement between and without prejudice to other rights and
the provisional director and the remedies available to a stockholder under
corporation. this Title, any stockholder of a close
corporation may, for any reason, compel
Deadlock – Deadlock signifies a standstill in the said corporation to purchase his shares
the management of the corporate affairs at their fair value, which shall not be less
resulting from the evenly divide action of than their par or issued value, when the
directors or stockholders in a close corporation has sufficient assets in its books
corporation. to cover its debts and liabilities exclusive of
capital stock: Provided, That any
In the event of deadlocks SEC may stockholder of a close corporation may, by
arbitrate written petition to the Securities and
In the event of a deadlock in a close Exchange Commission, compel the
corporation, the SEC has the power to dissolution of such corporation whenever
arbitrate the deadlock “upon written any of acts of the directors, officers or those
petition of any stockholder.” In close in control of the corporation is illegal, or
corporations that are subject to a checks fraudulent, or dishonest, or oppressive or
and balances system because of control unfairly prejudicial to the corporation or
devices there are bound to be deadlocks, any stockholder, or whenever corporate
and some steps must be taken to cope with assets are being misapplied or wasted.
them. Many of the problems that arise can
be settled by arbitration, Arbitration (the • Appraisal rights in regular corporations
determination of a matter of difference can be opted by the dissenting stockholder
between contending parties) may be only in cases where the fundamental
change in the corporate structure or or other institutions of learning shall, as
operations is involved, whereas a soon as organized, so classify themselves
stockholder of a close corporation may, for that the term of office of one-fifth (1/5) of
any reason, compel the said coporation to their number shall expire every year.
purchase his shares at their par value, when Trustees thereafter elected to fill vacancies,
the corporation has sufficient assets in its occurring before the expiration of a
books to cover his debts and liabilities particular term, shall hold office only for the
exclusive of capital stock. ( In Appraisal unexpired period. Trustees elected
right, fair value of shares is given but in thereafter to fill vacancies caused by
Withdrawal Right, the fair value cannot be expiration of term shall hold office for five
less than the par or issued value of the (5) years. A majority of the trustees shall
shares; In Appraisal right, there must be constitute a quorum for the transaction of
present unrestricted retained earnings in business. The powers and authority of
the books of the corporation) trustees shall be defined in the by-laws.
EDUCATIONAL CORPORATIONS
For Educational corporations, where the
trustees should be divided into multiples of
five. So you should have five, ten or fifteen
trustees if they are organized as non-stock
corporation. And unless otherwise provided
in the articles of incorporation or by-laws,
the terms of the trustees should be five
years, and every year only one fifth (1/5) is
elected, again to provide for continuity in
policies. But you can provide that they will
be all elected instead for a term of one
year, everybody has to be elected.
How formed?
Sec. 111. Articles of incorporation. – In
order to become a corporation sole, the
chief archbishop, bishop, priest, minister,
rabbi or presiding elder of any religious
denomination, sect or church must file with
the Securities and Exchange Commission
articles of incorporation setting forth the
following:
4. The names and addresses of the 4. That the religious society or religious
persons who are to supervise the order, or diocese, synod, or district
winding up of the affairs of the organization desires to incorporate for
corporation. the administration of its affairs,
properties and estate.
Upon approval of such declaration of
dissolution by the Securities and Exchange 5. The place where the principal office of
Commission, the corporation shall cease to the corporation is to be established and
carry on its operations except for the located, which place must be within the
purpose of winding up its affairs. Philippines.
ivil tribunals, then a church member who is expelled from the membership by the church authorities, or a priest or minister who is by them
5, Nov.28, 2004 to Ferrer and Ferrer Law Office re term of existence of religious corporation.
corporation sole or a corporation aggregate. As such, the law intends
dissolve the that religious entity.
juridical organizations
For may exist perp
dissolution to be effective “[t]he
requirements mandated by the
Corporation Code should have been
strictly complied with.” Vesagas v. Court
of Appeals, 371 SCRA 509, 516 (2002).
A corporation cannot extend its life by
amendment of its articles of
incorporation effected during the three-
year statutory period for liquidation
when its original term of existence had
DISSOLUTION already expired, as the same would
Dissolution of a corporation is the constitute new business. Alhambra
extinguishment of the franchise of a Cigar & Cigarette Manufacturing
corporation and termination of its Company, Inc. v. SEC, 24 SCRA 269
corporate existence. (1968).
When the period of corporate life
Modes of Dissolution: expires, the corporation ceases to be a
1. Voluntary Dissolution body corporate for the purpose of
2. Involuntary Dissolution continuing the business for which it was
3. Shortening of term organized. PNB v. Court of First Instance
4. Expiration of term (JRS at 311) of Rizal, Pasig, Br. XXI, 209 SCRA 294
5. Failure to organize and commence (1992).
business within two years from the date
of issuance of certificate of
incorporation
6. Legislative Dissolution (CLV’s CLR at
936)
Effects of Dissolution:
1. Transfer of Legal title to corporate
property.
2. The corporation ceases as a body
corporate to continue the business for
which it was established.
3. Continuation of a body corporation (the
corporation continues as a body
corporate for 3 years for purposes of
winding up or liquidation).
4. After the expiration of the 3 year
winding up period, the corporation
ceases to exist for all purposes. (JRS at
314).
Republic Act No. 5455. Regulates the entry Presidential Decree No. 151 allows citizens
of foreign investments whenever foreign of the Philippines or corporations which
equity participation exceeds 30 percent of have acquired lands of the public domain or
the capital stock. which or any other law, to enter into service
contracts for financial, technical,
Under Republic Act no. 5455 “doing management or other forms of assistance
business includes”: with any foreign person or entity whenever
a. Soliciting orders, purchases, service and wherever such contracts are vital to
contracts, opening offices whether achieve sound and more expeditious
called liaison offices or branches. exploration, development, exploitation or
b. Appointing representatives or utilization of such lands owned, held or
distributors who are domiciled in the controlled by such citizens or corporations.
Philippines or who in any calendar year
stay in the Philippines for a period or Section 127. Who may be a resident agent.
periods totalling one hundred eighty – A resident agent may be either an
days or more. individual residing in the Philippines or a
c. Participating in the management, domestic corporation lawfully transacting
supervision, or control of any domestic business in the Philippines: Provided, That
business firm, entity, or corporation in in the case of an individual, he must be of
the Philippines. good moral character and of sound financial
d. Any other act or acts that imply a standing.
continuity of commercial dealings or
arrangements, and contemplates to Section 128. Resident agent; service of
that extent the performance of acts or process. – The Securities and Exchange
works, or the exercise of some of the Commission shall require as a condition
function normally incident to, and in precedent to the issuance of the license to
progressive prosecution of, commercial transact business in the Philippines by any
gain or of the purpose and object of the foreign corporation that such corporation
business organization. file with the Securities and Exchange
Commission a written power of attorney
The Board of Investments requires license designating some person who must be a
not only of corporations organized abroad resident of the Philippines, on whom any
but also of domestic corporations, if more summons and other legal processes may be
than 40% of its voting shares are owned served in all actions or other legal
and held by aliens or more than 30% of its proceedings against such corporation, and
total capitalization is in the hands of aliens. consenting that service upon such resident
agent shall be admitted and held as valid as
Guidelines for issuance of certificate of if served upon the duly authorized officers
authority to do business under BOI (Rep. of the foreign corporation at its home
Act No.5455) office. Any such foreign corporation shall
likewise execute and file with the Securities Section 129. Law applicable. – Any foreign
and Exchange Commission an agreement or corporation lawfully doing business in the
stipulation, executed by the proper Philippines shall be bound by all laws, rules
authorities of said corporation, in form and and regulations applicable to domestic
substance as follows: corporations of the same class, except such
only as provide for the creation, formation,
“The (name of foreign corporation) does organization or dissolution of corporations
hereby stipulate and agree, in consideration or those which fix the relations, liabilities,
of its being granted by the Securities and responsibilities, or duties of stockholders,
Exchange Commission a license to transact members, or officers of corporations to
business in the Philippines, that if at any each other or to the corporation.
time said corporation shall cease to transact
business in the Philippines, or shall be Licensed foreign corporations lawfully doing
without any resident agent in the business in the Philippines shall be subject
Philippines on whom any summons or other to our laws just like domestic corporations
legal processes may be served, then in any of the same class.
action or proceeding arising out of any
business or transaction which occurred in Philippine laws will not apply when it refers
the Philippines, service of any summons or to the creation, formation, organization or
other legal process may be made upon the dissolution of corporations or such as fux
Securities and Exchange Commission and the relations, liabilities, responsibilities, or
that such service shall have the same force duties of stockholders, members, or officers
and effect as if made upon the duly- of corporations to each other or to the
authorized officers of the corporation at its corporation.
home office.”
Section 130. Amendments to articles of
Whenever such service of summons or incorporation or by-laws of foreign
other process shall be made upon the corporations. – Whenever the articles of
Securities and Exchange Commission, the incorporation or by-laws of a foreign
Commission shall, within ten (10) days corporation authorized to transact business
thereafter, transmit by mail a copy of such in the Philippines are amended, such
summons or other legal process to the foreign corporation shall, within sixty (60)
corporation at its home or principal office. days after the amendment becomes
The sending of such copy by the effective, file with the Securities and
Commission shall be necessary part of and Exchange Commission, and in the proper
shall complete such service. All expenses cases with the appropriate government
incurred by the Commission for such service agency, a duly authenticated copy of the
shall be paid in advance by the party at articles of incorporation or by-laws, as
whose instance the service is made. amended, indicating clearly in capital letters
In case of a change of address of the or by underscoring the change or changes
resident agent, it shall be his or its duty to made, duly certified by the authorized
immediately notify in writing the Securities official or officials of the country or state of
and Exchange Commission of the new incorporation. The filing thereof shall not of
address. itself enlarge or alter the purpose or
purposes for which such corporation is
The SEC shall require as a condition authorized to transact business in the
precedent to the issuance of the license to Philippines.
transact business in the Philippines by any
foreign corporation that such corporation Section 131. Amended license. – A foreign
file with the SEC, a written power of corporation authorized to transact business
attorney designating some person who in the Philippines shall obtain an amended
must be a resident of the Philippines, on license in the event it changes its corporate
whom any summons and other legal name, or desires to pursue in the
processes may be served in all actions or Philippines other or additional purposes, by
other legal proceedings against such submitting an application therefor to the
corporation. Securities and Exchange Commission,
favorably endorsed by the appropriate
government agency in the proper cases.
Section 132. Merger or consolidation Section 133. Doing business without a
involving a foreign corporation licensed in license. – No foreign corporation
the Philippines. – One or more foreign transacting business in the Philippines
corporations authorized to transact without a license, or its successors or
business in the Philippines may merge or assigns, shall be permitted to maintain or
consolidate with any domestic corporation intervene in any action, suit or proceeding
or corporations if such is permitted under in any court or administrative agency of the
Philippine laws and by the law of its Philippines; but such corporation may be
incorporation: Provided, That the sued or proceeded against before Philippine
requirements on merger or consolidation as courts or administrative tribunals on any
provided in this Code are followed. valid cause of action recognized under
Philippine laws.
Whenever a foreign corporation authorized
to transact business in the Philippines shall Unlicensed foreign corporations doing
be a party to a merger or consolidation in business in the Philippine do not have the
its home country or state as permitted by capacity to sue before the local court is
the law of its incorporation, such foreign well-established.
corporation shall, within sixty (60) days
after such merger or consolidation becomes A foreign corporation which is not licensed
effective, file with the Securities and to transact business therein can maintain an
Exchange Commission, and in proper cases action in the courts of the Philippines for
with the appropriate government agency, a the purpose of protecting its reputation,
copy of the articles of merger or corporate name and goodwill.
consolidation duly authenticated by the
proper official or officials of the country or A foreign corporation doing business in the
state under the laws of which merger or Philippines without a license may maintain
consolidation was effected: Provided, suit in the Philippines against a domestic
however, That if the absorbed corporation corporation or person who is party
is the foreign corporation doing business in to a contract as the domestic corporation or
the Philippines, the latter shall at the same person is deemed estopped from
time file a petition for withdrawal of it challenging the personality of the foreign
license in accordance with this Title. corporation.
Section 132 covers two legal situations: Section 134. Revocation of license. –
1. The merger of a licensed Without prejudice to other grounds
foreign corporation with a provided by special laws, the license of a
domestic corporation. foreign corporation to transact business in
Must be accomplished by the Philippines may be revoked or
complying with the provisions suspended by the Securities and Exchange
of the Corporation Code. Commission upon any of the following
2. The merger of a licensed foreign grounds:
corporation with another corporation in
its country of origin which is not doing 1. Failure to file its annual report or pay
business in the Philippines. any fees as required by this Code.
If the licensed foreign corporation is
absorbed by merger or 2. Failure to appoint and maintain a
consolidation, it must withdraw its resident agent in the Philippines as
license to do business in the required by this Title.
Philippines.
Nevertheless, if the foreign 3. Failure, after change of its resident
absorbing corporation desire to agent or of his address, to submit to the
continue the business of the Securities and Exchange Commission a
absorbed corporation in the statement of such change as required
Philippines, it has to file an by this Title.
application for a license to do
business pursuant to the 4. Failure to submit to the Securities and
requirements of Philippines law on Exchange Commission an authenticated
the matter. copy of any amendment to its articles of
incorporation or by-laws or of any 1. All claims which have accrued in the
articles of merger or consolidation Philippines have been paid,
within the time prescribed by this Title. compromised or settled.
6. Failure to pay any and all taxes, 3. The petition for withdrawal of license
imposts, assessments or penalties, if has been published once a week for
any, lawfully due to the Philippine three (3) consecutive weeks in a
Government or any of its agencies or newspaper of general circulation in the
political subdivisions. Philippines.