REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS …

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS RFBT2-Partnership and Corporation

LECTURE NOTES

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PARTNERSHIP PARTNERSHIP

By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession. (1767).

Note: Since a partnership is a contract, all agreement between the parties has the force of law between the contracting parties (1159) provided it is not contrary to law, moral, good custom, public order and public policy. (1306) Distinction between partnership and Co- ownership

1. Creation

2. Juridical personality 3. Purpose 4. Duration 5. Disposal of interest 6. Power to act with third person

7. Effect of death Distinction between Partnership and conjugal partnership of gain

1. Parties 2. Laws which govern 3. Juridical personality

4. Commencement 5. Purpose 6. Distribution of profits 7. Management 8. Disposition of shares

Distinction between partnership and voluntary association

1. Juridical personality 2. Purpose 3. Contribution of members 4. Liability of members

Characteristics

1. Consensual 2. Nominate 3. Bilateral 4. Onerous 5. Commutative 6. Principal 7. Preparatory

A partnership may be constituted in any form, except

where immovable property or real rights are contributed thereto, in which case a public

instrument shall be necessary. (1771) A contract of partnership is void, whenever immovable

property is contributed thereto, if an inventory of said

property is not made, signed by the parties, and attached to the public instrument. (1773)

Every contract of partnership having a capital of three thousand pesos or more, in money or property, shall appear in a public instrument, which must be recorded in the Office of the Securities and Exchange

Commission. Failure to comply with the requirements of the

preceding paragraph shall not affect the liability of the partnership and the members thereof to third persons. (1772)

Requisites

1. Valid Contract

The partnership has a judicial personality separate and distinct from that of each of the partners, even in case of failure to comply with the requirements of article

1772, first paragraph (1768). However, Associations and societies, whose articles are kept secret among the members, and wherein any one of the members may contract in his own name with third persons, shall have no juridical personality. (1775) A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated. (1784)

2. Lawful object or purpose (1770). Any event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership caused for automatic dissolution of the partnership. (1830) EFFECTS OF UNLAWFUL PARTNERSHIP

1. The contract is void ab initio and the partnership

never existed in the eyes of the law 2. The profits shall be confiscated in favor of the

government 3. The instruments or tools and proceeds of the crime

shall also be forfeited in favor of the government

4. The contributions of the partners shall not be confiscated unless they fall under no. 3

3. Contribution of money, property or industry to a

common fund.

Obligations with respect to contribution to

partnership capital

1. Partners must contribute equal shares to the capital of the partnership unless there is stipulation to contrary. (Art 1790).

2. Partners (capitalist) must contribute additional

capital In case of imminent loss to the business of the partnership and there is no stipulation otherwise; refusal to do so shall create an obligation on his part to sell his interest to the other partners. (Art. 1791)

Requisites:

a. There is an imminent loss of the business of the partnership

b. The majority of the capitalist partners are of the

opinion that an additional contribution to the common fund would save the business

c. The capitalist partner refuses deliberately to contribute (not due to financial inability)

d. There is no agreement to the contrary RISK OF LOSS OF THINGS CONTRIBUTED

Contributed property Loss to be borne by

Partnership Partner

Specific and determinate

things which are not fungible

where only the use is contributed

√

Specific and determinate

things the ownership of which

is transferred to the

partnership

√

Fungible things (consumable) √

Cannot be kept without deteriorating

√

Things contributed to be sold √

Things brought and appraised in the inventory (limited to value appraised)

√

If one of the Partners refused to give contribution,


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the other partner may compel him to deliver (Specific performance) what he has promised.

The partnership is dissolved when a specific thing which a partner had promised to contribute to the partnership, perishes before the delivery. (1830,4)

4. Intent to divide the profit among the partners. (1767). RULES FOR DISTRIBUTION OF PROFITS AND LOSSES

DISTRIBUTION OF

PROFITS

DISTRIBUTION OF

LOSSES

With

agreement

According to

agreement

According to

agreement

Without

agreement

1. Share of capitalist partner is in proportion to his capital

contribution 2. Share of

industrial partner

is not fixed - as may be just and equitable under the circumstances

1. If sharing of profits is stipulated - apply to sharing

of losses 2. If no profit

sharing

stipulated - losses shall be borne according to capital contribution

3. Purely industrial

partner not liable for losses

Distribution of profit and losses: (1797) a. Profit or losses shall be distributed in conformity

with the agreement;

b. If only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same proportion. Note that industrial

partner is not liable for the loss unless there is express stipulation to the contrary.

c. In the absence of stipulation, the share of each

partner in the profits and losses shall be in proportion to what he may have contributed, but the industrial partner shall not be liable for the losses.

d. As for the profits, the industrial partner shall receive such share as may be just and equitable under the circumstances. If besides his services he

has contributed capital, he shall also receive a share in the profits in proportion to his capital.

Designation of profit and losses 1. The designation of losses and profits cannot be

intrusted to one of the partners. 2. If the partners have agreed to intrust to a third person

the designation of the share of each one in the profits

and losses, such designation may be impugned only when it is manifestly inequitable. In no case may a partner who has begun to execute the decision of the third person, or who has not impugned the same within a period of three months from the time he had

knowledge thereof, complain of such decision. (1798) Nota Bene: All partners, including industrial ones, shall be liable pro rata with all their property and after all the partnership assets have been exhausted, for the contracts which may be entered into in the name and for

the account of the partnership, under its signature and by a person authorized to act for the partnership. However, any partner may enter into a separate obligation to perform a partnership contract. (1816) Any stipulation exempting any partner against the liability shall be void as far as 3rd

person is concerned. But the stipulation is valid among the partners. (1817)

5. Established for the common benefit or interest of the

partners. (1770) Hence, A stipulation which excludes one or more partners from any share in the profits or

losses is void. (1799). Note: Only the agreement as to profit and loss is void not the partnership itself. In such case, as if there is no agreement as to profit and loss and the profit and loss are distributed in accordance with capital contribution.

Test to determine whether partnership exists:

1. Persons who are not partners as to each other are not partners as to third persons; except estoppels (1825).

2. Co-ownership or co-possession does not of itself establish a partnership, whether such-co-owners or co-possessors do or do not share any profits made by the use of the property;

3. The sharing of gross returns does not of itself establish

a partnership, whether or not the persons sharing them

have a joint or common right or interest in any property from which the returns are derived;

4. The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if

such profits were received in payment: (DRAWInG) a. Debt by installments or otherwise; b. As Rent to a landlord or c. As an Annuity to a widow or representative of a

deceased partner; d. Wages of an employee e. As Interest on a loan, though the amount of

payment vary with the profits of the business; f. As the consideration for the sale of a Goodwill of a

business or other property by installments or otherwise.

Reason: It s not merely the sharing of profits, but rather

the sharing of them as a co-owner of the business that

makes one a partner. Hence, the test is “Does the recipient of profit received it as co-owner/proprietor of the business”, if the answer is in affirmative a partnership exists. Classifications of Partnership

As to liability of partners 1. General partnership - consists of general partners who

are liable pro rata and subsidiarily and sometimes solidarily with their separate property for partnership debts

2. Limited partnership - one formed by 2 or more persons having as members one or more general partners and

one or more limited partners, the latter not being personally liable for the obligations of the partnership

As to duration 1. Partnership at will - one in which no time is specified

and is not formed for a particular undertaking or venture which may be terminated anytime by mutual agreement

2. Partnership with a fixed term or particular undertaking - the term for which the partnership is to exist is fixed or agreed upon or one formed for a particular undertaking

As to extent of its subject matter 1. Universal partnership is either

a. Universal partnership of all present property - the property which belongs to each of the partners at the time of the constitution of the partnership, becomes the common property of all the partners, as well as all the profits which they may acquire therewith.(1779) A stipulation for the common enjoyment of any other profits may also be made

(There must be a stipulation. e.g. salary that may


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be earn by the partner); but the property which the partners may acquire subsequently by inheritance,

legacy, or donation cannot be included in such stipulation, except the fruits thereof. Articles of universal partnership, entered into without specification of its nature, only constitute a

universal partnership of profits. (1781) b. Universal partnership of all profits - all that the

partners may acquire by their industry or work during the existence of the partnership. Movable or immovable property which each of the partners may possess at the time of the celebration of the contract shall continue to pertain exclusively to

each, only the usufruct passing to the partnership. (1780)

Note: Persons who are prohibited from giving each other any donation or advantage cannot enter into universal partnership The following cannot enter in a universal partnership:

a. Between those who were guilty of adultery or

concubinage; b. Between those persons found guilty of the same

criminal offense (adultery or concubinage), in consideration thereof;

c. Between a person and Public officer or his wife,

descedants and ascendants, by reason of his office. (739)

2. Particular partnership – object determinate things, their use or fruits, or specific undertaking, or the exercise of a profession or vocation (1783)

As to representation to others 1. Ordinary or real partnership - one which actually exists

among the partners and also as to 3rd persons 2. Ostensible or partnership by estoppel - one which in

reality is not a partnership but is considered a partnership only in relation to those who, by their conduct or omission, are precluded to deny or disprove its existence

As to legality of existence

1. De jure partnership – comply all requirement of the law 2. De facto partnership – do not comply all requirement of

the law As to publicity 1. Secret partnership - one wherein the existence of

certain persons as partners is not avowed or made

known to the public by any of the partners 2. Open or notorious partnership - one whose existence is

avowed or made known to the public by the members of the firm

As to purpose 1. Commercial or trading partnership - one formed for the

transaction of business

2. Professional or non trading partnership - one formed for the exercise of a profession

Kinds of partners

1. Capitalist partner – One who contribute money or property

2. Industrial partner – One contribute industry. He is not

liable for loss as between the partners but liable pro rata as to 3rd person.

3. Capitalist-industrial partner – One who contribute money, property or industry.

4. General partner – liable to the extent of his separate property

5. Limited partner – liable only to the extent of his capital contribution. Not allowed to contribute industry.

6. Silent partner – do not participate in the management. 7. Continuing Partner - one who continues the business of

a partnership after it has been dissolved by reason of the admission of a new partner, retirement, death or expulsion of one of the partners

8. Surviving Partner - one who remains after a partnership has been dissolved by death of any partner

9. Subpartner - one who is not a member of the partnership who contracts with a partner with reference to the latter's share in the partnership

10. Secret partner – not known by third person

11. Dormant partner – silent and secret 12. Ostensible partner – participate in the management

and known by third person 13. Partners by estoppels or nominal partner – not really

partners but only as a result of misrepresentation to 3rd person

14. Managing partner – one manage the partnership

15. Liquidating partner – one who wind-up the affair of the partnership

16. Retiring partner – one who retire in the partnership 17. Incoming partner – One who is admitted to the

partnership RELATIONS CREATED BY A CONTRACT OF

PARTNERSHIP

1. Relations among the partners themselves 2. Relations of the partners with the partnership 3. Relations of the partnership with 3rd persons with

whom it contracts 4. Relations of the partners with such 3rd persons

OBLIGATIONS OF PARTNERS A partnership begins from the moment of the execution

of the contract, unless it is otherwise stipulated. (1784) When a partnership for a fixed term or particular

undertaking is continued after the termination of such term or particular undertaking without any express

agreement, the rights and duties of the partners remain the same as they were at such termination, so far as is consistent with a partnership at will. A continuation of the business by the partners or such of them as habitually acted therein during the term, without any settlement or liquidation of the partnership

affairs, is prima facie evidence of a continuation of the

partnership. (1785) Obligations with respect to contribution of property: 1. To contribute at the beginning of the partnership or

at the stipulated time the money, property or industry which he may have promised to contribute

2. To answer for eviction in case the partnership is deprived of the determinate property contributed

3. To answer to the partnership for the fruits of the property the contribution of which he delayed, from the date they should have been contributed up to the time of actual delivery

4. To preserve said property with the diligence of a

good father of a family pending delivery to partnership

5. To indemnify partnership for any damage caused to it by the retention of the same or by the delay in its

contribution

Every partner is a debtor of the partnership for

whatever he may have promised to contribute thereto. He shall also be bound for warranty in case of eviction with regard to specific and determinate things which he may have contributed to the partnership, in the same cases and in the same manner as the vendor is bound with respect to the vendee. He shall also be liable for

the fruits thereof from the time they should have been delivered, without the need of any demand. (1786)

Effect of Failure to contribute property promised: 1. Partners becomes ipso jure a debtor of the

partnership even in the absence of any demand


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2. Remedy of the other partner is not rescission but specific performance with damages from defaulting

partner

Obligations with respect to contribution of money and money converted to personal use 1. To contribute on the date fixed the amount he has

undertaken to contribute to the partnership

2. To reimburse any amount he may have taken from the partnership coffers and converted to his own use

3. To pay for the agreed or legal interest, if he fails to pay his contribution on time or in case he takes any amount from the common fund and converts it to his own use

4. To indemnify the partnership for the damages caused to it by delay in the contribution or conversion of any sum for his personal benefits

A partner who has undertaken to contribute a sum of

money and fails to do so becomes a debtor for the

interest and damages from the time he should have complied with his obligation. (1788) The same rule applies to any amount he may have taken from the partnership coffers, and his liability shall begin from the time he converted the amount to his own use.

Unless there is a stipulation to the contrary, the

partners shall contribute equal shares to the capital of the partnership. (1790)

Art. 1791 - If there is no agreement to the contrary, in case of an imminent loss of the business of the partnership, any partner who refuses to contribute an additional share to the capital, except an industrial partner, to save the venture, shall he obliged to sell

his interest to the other partners. Art. 1792 - If a partner authorized to manage collects a

demandable sum which was owed to him in his own name, from a person who owed the partnership

another sum also demandable, the sum thus collected shall be applied to the two credits in proportion to their

amounts, even though he may have given a receipt for his own credit only; but should he have given it for the account of the partnership credit, the amount shall be fully applied to the latter. The provisions of this article are understood to be without prejudice to the right granted to the other debtor by article 1252 (Application for payment), but

only if the personal credit of the partner should be more onerous to him. Obligation of managing partners who collects debt from person who also owed the partnership 1. Apply sum collected to 2 credits in proportion to

their amounts

2. If he received it for the account of partnership, the whole sum shall be applied to partnership credit

Requisites: 1. The partner who collects is authorized to manage

and actually manages the partnership 2. The person owed him and the partnership

3. The partner issues a receipt in his own name only. 4. The claim of the partnership and the partner are

both due and demandable. Art. 1793 - A partner who has received, in whole or in

part, his share of a partnership credit, when the other partners have not collected theirs, shall be obliged, if the debtor should thereafter become insolvent, to bring

to the partnership capital what he received even though he may have given receipt for his share only. Obligation of partner who receives share of partnership credit

1. Obliged to bring to the partnership capital what he has received even though he may have given

receipt for his share only Requisites: a. A partner has received in whole or in part, his

share of the partnership credit

b. The other partners have not collected their shares c. The partnership debtor has become insolvent

Every partner is responsible to the partnership for damages suffered by it through his fault, and he cannot compensate them with the profits and benefits which he may have earned for the partnership by his

industry. However, the courts may equitably lessen this responsibility if through the partner's extraordinary efforts in other activities of the partnership, unusual profits have been realized. (1794)

The risk of specific and determinate things, which are not fungible, contributed to the partnership so that only their use and fruits may be for the common benefit,

shall be borne by the partner who owns them.

If the things contribute are fungible, or cannot be kept without deteriorating, or if they were contributed to be sold, the risk shall be borne by the partnership. In the absence of stipulation, the risk of the things brought and appraised in the inventory, shall also be borne by

the partnership, and in such case the claim shall be limited to the value at which they were appraised. (1795)

The partnership shall be responsible to every partner for the amounts he may have disbursed on behalf of the partnership and for the corresponding interest, from the time the expense are made; it shall also

answer to each partner for the obligations he may have contracted in good faith in the interest of the partnership business, and for risks in consequence of its Management. (1796)

Every partner may associate another person with him in his share, but the associate shall not be admitted

into the partnership without the consent of all the other

partners, even if the partner having an associate should be a manager. (1804)

The partnership books shall be kept, subject to any agreement between the partners, at the principal place of business of the partnership, and every partner shall at any reasonable hour have access to and may inspect

and copy any of them. (1805) Partners shall render on demand true and full

information of all things affecting the partnership to any partner or the legal representative of any deceased partner or of any partner under legal disability. (1806)

Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by

him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property. (1807)

Any partner shall have the right to a formal account as to partnership affairs: (1809) a. If he is wrongfully excluded from the partnership

business or possession of its property by his co-partners;

b. If the right exists under the terms of any agreement;

c. When any partner must account to the partnership fro profit derived by him without the consent of

other partners (1807); d. Whenever other circumstances render it just and

reasonable. MANAGEMENT OF THE PARTNERSHIP RIGHTS AND OBLIGATIONS WITH RESPECT TO

MANAGEMENT


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Partner is

appointed

manager in the

articles of

partnership

Power of managing

partner is

irrevocable without

just/lawful cause;

Revocable only

when in bad faith

Vote of partners

representing

controlling

interest

necessary to

revoke power

Partner is

appointed

manager after

constitution of

partnership

Power is revocable

any time for any

cause

2 or more

persons

entrusted with

management of

partnership

without

specification of

duties/stipulation

that each shall

not act w/o the

other's consent

Each may execute

all acts of

administration

In case of

opposition,

decision of

majority shall

prevail; In case

of tie, decision

of partners

owning

controlling

interest shall

prevail

Stipulated that

none of the

managing

partners shall act

w/o the consent

of others

Concurrence of all

necessary for the

validity of acts

Absence or

disability of any

one cannot be

alleged unless

there is

imminent

danger of grave

or irreparable

injury to

partnership

Manner of

management not

agreed upon

1. All partners are agents of the partnership

2. Unanimous consent required for alteration of immovable property

If refusal of

partner is

manifestly

prejudicial to

interest of

partnership,

court's

intervention

may be sought

The partner who has been appointed manager in the

articles of partnership may execute all acts of administration despite the opposition of his partners,

unless he should act in bad faith; and his power is

irrevocable without just or lawful cause. The vote of the partners representing the controlling interest shall be necessary for such revocation of power. A power granted after the partnership has been constituted may be revoked at any time. (1800)

If two or more partners have been intrusted with the management of the partnership without specification of their respective duties, or without a stipulation that one of them shall not act without the consent of all the others, each one may separately execute all acts of administration, but if any of them should oppose the acts of the others, the decision of the majority shall

prevail. In case of a tie, the matter shall be decided by the partners owning the controlling interest. (1801)

In case it should have been stipulated that none of the managing partners shall act without the consent of the

others, the concurrence of all shall be necessary for the validity of the acts, and the absence or disability of any

one of them cannot be alleged, unless there is imminent danger of grave or irreparable injury to the partnership. (1802)

When the manner of management has not been agreed

upon, the following rules shall be observed: (1803) a. All the partners shall be considered agents and

whatever any one of them may do alone shall bind the partnership, without prejudice to the provisions of article 1801.

b. None of the partners may, without the consent of the others, make any important alteration in the

immovable property of the partnership, even if it may be useful to the partnership. But if the refusal of consent by the other partners is manifestly prejudicial to the interest of the partnership, the court's intervention may be sought.

General Rule:

When the manner of management has not been agreed

upon, all the partners shall be considered agents and whatever any one of them may do alone shall bind the partnership, without prejudice to the provisions of article 1801. However, none of the partners may, without the consent of the others, make any important alteration in the

immovable property of the partnership, even if it may be useful to the partnership. But if the refusal of consent by the other partners is manifestly prejudicial to the interest of the partnership, the court's intervention may be sought. (1803) An act of a partner which is not apparently for the carrying on of business of the partnership in the usual way does not

bind the partnership unless authorized by the other partners. Except when authorized by the other partners or unless they have abandoned the business, one or more but less than all the partners have no authority to (GARCI CA) 1. Assign the partnership property in trust for

creditors or on the assignee's promise to pay the

debts of the partnership; 2. Dispose of the goodwill of the business; 3. Do any other act which would make it impossible

to carry on the ordinary business of a partnership; 4. Confess a judgment; 5. Enter into a compromise concerning a partnership

claim or liability; 6. Submit a partnership claim or liability to arbitration; 7. Renounce a claim of the partnership. No act of a partner in contravention of a restriction on authority shall bind the partnership to persons having knowledge of the restriction. (1818)

Appointment of managing partner 1. Appointment in the article of incorporation (1800)

a. Execute all act of administration despite opposition

of his partners except he acted in bad faith.

b. His power is irrevocable without just or lawful

cause.

c. Partners representing controlling interest shall be

necessary for revocation of power.

2. Other appointment

a. Revocable at any time, with or without just or

lawful cause.

Two or more partners have been intrusted with the

management

Art. 1801 Article 1802

Without specification of their respective duties

Without a stipulation that one

of them shall not act without

There is stipulated that

none of the managing


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the consent of all the others partners shall act without the consent of the others

Rule: a. Each one may separately

execute all acts of administration.

b. But if any of them should oppose the acts of the others, the decision of the majority shall prevail.

c. In case of a tie, the

matter shall be decided by the partners owning the controlling interest.

Rule: a. The concurrence of all

shall be necessary for the validity of the acts.

b. The absence or disability of any one of them cannot be alleged, unless there

is imminent danger of grave or irreparable injury to the partnership.

Prohibition against engaging in business

Capitalist partner (1808) Industrial partner (1789)

Cannot engage in same kind of business in which the partnership is engaged except if there is stipulation

Industrial partner cannot engage in business for himself (any business) except if there is stipulation

Reason: To avoid conflict of interest

Reason: Industrial partners must devote his entire industry to the partnership

Violation

1. Bring to the common funds any profits accruing to him from his transactions

2. Shall personally bear all the losses

Violation:

1. Exclude him from the firm

2. Avail themselves of the benefits which he may have obtained

3. Damages, in either case.

Note: It is believed that industrial partners are

also entitled to the remedy granted since they are equally prejudiced

Property Rights of a Partner (1810) The property rights of a partner are: 1. His rights in specific partnership property

A partner is co-owner with his partners of specific

partnership property. (1811) Equal right with his partners to possess specific

partnership property for partnership purposes but not for any other purpose without the consent of his partners.

Not assignable except in connection with the assignment of rights of all the partners in the same

property Not subject to attachment or execution, except on

a claim against the partnership. But partnership property can be attached for partnership debt.

Not subject to legal support 2. His interest in the partnership - A partner's interest in

the partnership is his share of the profits and surplus.

(1812) A conveyance by a partner of his whole interest in

the partnership does not of itself dissolve the partnership, or, as against the other partners in the absence of agreement.

Right of the assignee: Entitles the assignee to

receive in accordance with his contract the profits to which the assigning partner would otherwise be entitled. Assignee has no right: a. To interfere in the management or administration

of the partnership business or affairs; b. To require any information or account of

partnership transactions, c. To inspect the partnership books; In case of fraud in the management of the

partnership, the assignee may avail himself of the

usual remedies. In case of a dissolution of the partnership, the

assignee is entitled to receive his assignor's interest and may require an account from the date only of the last account agreed to by all the partners. (1813)

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

Right of partner’s creditor (1814) Without prejudice to the preferred rights of partnership creditors, on due application to a competent court by any judgment creditor of a partner, the court may charge the interest of the debtor partner with payment of the unsatisfied amount of such judgment debt with interest

thereon; and may then or later appoint a receiver of his

share of the profits, and of any other money due or to fall due to him in respect of the partnership, and make all other orders, directions, accounts and inquiries which the debtor partner might have made, or which the circumstances of the case may require.

The interest charged may be redeemed at any time before foreclosure, or in case of a sale being directed by the court, may be purchased without thereby causing a dissolution: 1. With separate property, by any one or more of the

partners; or 2. With partnership property, by any one or more of

the partners with the consent of all the partners

whose interests are not so charged or sold. Rule on conveyance of real property (by any partner or all partners)

Conveye

d by

Title of

real

property

Exec

uted

in the name

of

Passing of title/Right

of the partnership

Any partner

Partnership

Partnership

Title passes to the buyer but the Partnership may

recover Exception: 1. Conveyance was in

the usual way of business, except when the buyer has knowledge of the

partner lack of authority.

2. Real property was transferred to 3rd person in good faith.

Any

partner

Partners

hip

Partne

r

Passes the equitable

interest of the partnership provided the conveyance was in the usual way of business.

By

partners whose name title stands

One or

more but not all partner (no right of partners

hip disclose)

One

or more but not all partners

Title passes to the buyer

but the Partnership may recover Exception: 1. Conveyance was in

the usual way of business, except

when the buyer has knowledge of the partner lack of authority.

2. Real property was transferred to 3rd


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person in good faith

Partner One or

more or all the

partners, or in a third person in trust for the partners

hip

Partne

rship/partne

r own name

Passes the equitable

interest of the partnership, provided

the act is one within the authority of the partner. (usual way of business)

All partner

All partner

All partners

Passes all their rights in such property

Obligation of the partners with regards to third person An admission or representation made by any partner

concerning partnership affairs within the scope of his

authority is evidence against the partnership. (1820) Notice to any partner of any matter relating to

partnership affairs, and the knowledge of the partner acting in the particular matter, acquired while a partner or then present to his mind, and the knowledge of any other partner who reasonably could and should have communicated it to the acting partner, operate as notice to or knowledge of the partnership. (1821)

Exception: In case of fraud on the partnership, committed by or with the consent of that partner.

All partners and the partnership are solidary liability for everything chargeable to the partnership. (1824) a. Any wrongful act or omission of any partner acting

in the ordinary course of the business of the partnership or with the authority of co-

partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable

therefor to the same extent as the partner so acting or omitting to act. (1822)

b. Where one partner acting within the scope of his apparent authority receives money or property of a

third person and misapplies it; (1823, 1) c. Where the partnership in the course of its business

receives money or property of a third person and the money or property so received is misapplied by any partner while it is in the custody of the partnership. (1823,2)

Partnership by estoppels When a person represents himself or consent to another to another representing him to anyone (he is an agent of the persons consenting to such representation) as a partner in an existing partnership, he is liable to a. Any such persons to whom such representation has

been made. b. The representation was made in a public manner,

he is liable to such person, whether the representation has or has not been made or communicated to such person.

Partnership liability result 1. When all the members of the existing

partnership consent to the representation. 2. Liable as though he were an actual member of the

partnership No partnership liability result

1. He is liable pro rata with the other persons, if any, so consenting to the contract or representation as to incur liability, otherwise separately.

Liabilities in estoppel

All partners consented to

representation

Partnership is liable

No existing partnership & all those represented consented; Not all partners of existing

partnership consents to representation

Person who represented himself & all those who made representation

liable pro-rata/jointly

No existing partnership & not all represented consented; None of partners in existing partnership consented

Person who represented himself liable & those who made/consented to representation separately liable

A person admitted as a partner into an existing

partnership is liable for all the obligations of the partnership arising before his admission as though he had been a partner when such obligations were

incurred, except that this liability shall be satisfied only out of partnership property, unless there is a stipulation to the contrary. (1826)

The creditors of the partnership shall be preferred to those of each partner as regards the partnership property. Without prejudice to this right, the private creditors of each partner may ask the attachment and

public sale of the share of the latter in the partnership assets. (1827)

DISSSOLUTION Dissolution is change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the

business. (1828) On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed. (1829)

Automatic dissolution

(1830)

Judicial dissolution

(1831)

1. Without violation of the agreement between the partners: a. By the termination of

the definite term or

particular undertaking specified in the agreement;

b. By the express will of any partner, who must act in good faith, when

no definite term or particular is specified;

c. By the express will of all the partners who have not assigned their interests or

suffered them to be

charged for their separate debts, either before or after the termination of any specified term or particular undertaking;

d. By the expulsion of

any partner from the business bona fide in accordance with such a power conferred by the agreement between the partners

2. In contravention of the agreement between the partners, where the

1. A partner has been declared insane in any judicial proceeding or is shown to be of

unsound mind; 2. A partner becomes

incapable of performing his part of the partnership contract;

3. A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business;

4. A partner willfully or

persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to

the partnership business that it is not reasonably practicable to carry on the business in partnership with

him; 5. The business of the

partnership can


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circumstances do not permit a dissolution under

any other provision of this article, by the express will of any partner at any time;

3. Any event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership

4. When a specific thing

which a partner had promised to contribute to the partnership, perishes before the delivery; in any case by the loss of the thing, when the partner

who contributed it having reserved the ownership thereof, has only

transferred to the partnership the use or enjoyment of the same; but the partnership shall

not be dissolved by the loss of the thing when it occurs after the partnership has acquired the ownership thereof;

5. Death of any partner; 6. Insolvency of any partner

or of the partnership; 7. Civil interdiction of any

partner;

only be carried on at a loss;

6. Other circumstances render a dissolution

equitable. On the application of the purchaser of a partner's interest under article 1813 or 1814: 1. After the

termination of the

specified term or particular undertaking;

2. At any time if the partnership was a partnership at will

when the interest was assigned or when the charging

order was issued.

Effect of dissolution

General Rule: Dissolution terminates all authority of any partner to act for the partnership: (1832)

Exception: 1. By any act appropriate for winding up partnership

affairs or completing transactions unfinished at dissolution;

2. By any transaction which would bind the partnership if

dissolution had not taken place, provided the other party to the transaction: a. Had extended credit to the partnership prior to

dissolution and had no knowledge or notice of the dissolution; or

b. Though he had not so extended credit, had nevertheless known of the partnership prior to

dissolution, and, having no knowledge or notice of dissolution, the fact of dissolution had not been advertised in a newspaper of general circulation in the place (or in each place if more than one) at which the partnership business was regularly carried on.

Liability of a partner shall be satisfied out of partnership assets alone when such partner had been prior to dissolution 1. Unknown as a partner to the person with whom the

contract is made; and 2. So far unknown and inactive in partnership affairs

that the business reputation of the partnership

could not be said to have been in any degree due to his connection with it.

1. With respect to the partners,

a. When the dissolution is not by the act, insolvency or death of a partner; or

b. When the dissolution is by such act, insolvency or death of a partner, each partner is liable to his co-partners for his share of any liability created by any

partner acting for the partnership as if the partnership had not been dissolved unless: (1833)

1. The dissolution being by act of any partner, the partner acting for the partnership had knowledge of the dissolution; or

2. The dissolution being by the death or

insolvency of a partner, the partner acting for the partnership had knowledge or notice of the death or insolvency.

2. With respect to persons not partners, the partnership is in no case bound by any act of a partner after dissolution: a. Where the partnership is dissolved because it is

unlawful to carry on the business, unless the act is appropriate for winding up partnership affairs; or

b. Where the partner has become insolvent; or c. Where the partner has no authority to wind up

partnership affairs; except by a transaction with one who - 1. Had extended credit to the partnership prior to

dissolution and had no knowledge or notice of

his want of authority; or 2. Had not extended credit to the partnership

prior to dissolution, and, having no knowledge or notice of his want of authority, the fact of his want of authority has not been advertised in

the manner provided for advertising the fact of dissolution.

The dissolution of the partnership does not of itself discharge the existing liability of any partner (1835) Exception: A partner is discharged from any existing liability upon

dissolution of the partnership by an agreement to that effect between himself, the partnership creditor and the person or partnership continuing the business; and such agreement may be inferred from the course of dealing between the creditor having knowledge of the dissolution and the person or partnership continuing

the business.

The individual property of a deceased partner shall be liable for all obligations of the partnership incurred while he was a partner, but subject to the prior payment of his separate debts. (Ibid)

Where a partnership contract is rescinded on the ground of the fraud or misrepresentation of one of the

parties thereto, the party entitled to rescind is, without prejudice to any other right, entitled: (1838) 1. To a lien on, or right of retention of, the surplus of

the partnership property after satisfying the partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest in the partnership and for any capital or

advances contributed by him; 2. To stand, after all liabilities to third persons have

been satisfied, in the place of the creditors of the partnership for any payments made by him in

respect of the partnership liabilities; and 3. To be indemnified by the person guilty of the fraud

or making the representation against all debts and

liabilities of the partnership.

LIMITED PARTNERSHIP Members one or more general partners and one or more limited partners.

General Partner/partnership

Limited partner/partnership


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1. General partner is personally liable for the

partnership obligation

1. Limited partner’s liability extend only to

his capita contribution

2. When management has

not been agreed upon, all general partner have equal right in the management of the partnership.

2. Limited partner has

no share in the management of a limited partnership

3. General partner may

contribute money, property or industry

3. Limited partner must

contribute money or property but not industry

4. General partner is a proper party to

proceeding by or against a partnership

4. Limited partner is not a proper party to

proceedings by or against a partnership.

5. General partner may appear in the firm name

5. Limited partner name must not appear in the firm name

6. General partner cannot engage in a business which is of the kind of business in which the partnership is engage.

6. No prohibition in case of Limited partner

7. Retirement, death, insanity or insolvency of general partner dissolves the partnership

7. Do not the same effect, executor or administrator shall have all the rights of a limited partner for the purpose of setting his estate.

8. Can be constituted in whatever form

8. Must follow all the requirement of the law for limited partnership

9. Composed of all general partner

9. Composed of at least one general partner

and at least one limited partner

10. No need to include in the partnership name the

word “LTD”

10. Must include in the partnership name the

word “LIMITED” or “LTD”

11. When the interest of one of the general partner is charged, his interest

may be redeemed with separate property of one or more partners or; partnership property with the consent of all partners whose interest is not so charged or

sold. (1814)

11. When the interest of the limited partner is charged, the interest

may be redeemed with the separate property of any general partner, but may not be redeemed with partnership property. (1862)

General Rule: The limited partners as such shall not be bound by the obligations of the partnership.(1843)

Exception: The name of the partnership failed to add the word

”Limited” or “Ltd”. Failure to file the article of co-partnership to the SEC. The contributions of a limited partner may be cash or

property, but not services. (1845)

The surname of a limited partner appear in the partnership name unless: (1) It is also the surname of a general partner, or (2) Prior to the time when the limited partner became such, the business has been carried on under a name in which his surname appeared. (1846)

A limited partner takes part in the control of the

business. (1848)

Right of General partner Right of limited partner (Art. 1851)

1. The partnership books shall be kept, subject to any

agreement between the partners, at the principal place of business of the partnership, and every partner shall at any reasonable hour have

access to and may inspect and copy any of them. (1805)

2. Partners shall render on demand true and full information of all things affecting the partnership to any partner or the legal

representative of any deceased partner or of any partner under legal disability. (1806)

3. Any partner shall have the right to a formal account as to partnership affairs:

a. If he is wrongfully excluded from the partnership business or possession of its property by his co-partners;

b. If the right exists under

the terms of any agreement;

c. As provided by article 1807;

d. Whenever other circumstances render it just and reasonable.

A general partner shall have all the rights and powers and be subject to all the restrictions and liabilities of a partner in a partnership without limited partners. However, without the

written consent or ratification of the specific act by all the limited partners, a general partner or all of the general partners have no authority to: (1) Do any act in

contravention of the

certificate; (2) Do any act which would

make it impossible to carry on the ordinary business of the partnership;

(3) Confess a judgment

against the partnership; (4) Possess partnership

property, or assign their rights in specific partnership property, for other than a

partnership purpose; (5) Admit a person as a

general partner; (6) Admit a person as a

limited partner, unless the right so to do is

A limited partner shall

have the same rights as a general partner to: (1) Have the partnership books kept at the principal place of business of

the partnership, and at a reasonable hour to inspect and copy any of them; (2) Have on demand true and full

information of all things affecting the

partnership, and a formal account of partnership affairs whenever circumstances render

it just and reasonable; and (3) Have dissolution and winding up by decree of court. A limited partner shall

have the right to receive a share of the profits or other compensation by way of income, and to the return of his

contribution, (1851)

provided that after such payment is made, whether from property of the partnership or that of a general partner, the

partnership assets are in excess of all liabilities of the partnership except liabilities to limited partners on account of their contributions

and to general partners (1856).


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given in the certificate; (7) Continue the business

with partnership property on the death, retirement, insanity,

civil interdiction or insolvency of a general partner, unless the right so to do is given in the certificate. (1850)

A person may be a general partner and a limited partner in the same partnership at the same time, provided that this fact shall be stated in the certificate.

A person who is a general, and also at the same time a limited partner, shall have all the rights and powers and be subject to all the restrictions of a general

partner; except that, in respect to his contribution, he shall have the rights against the other members which he would have had if he were not also a general

partner. (1853) Allowable transaction of limited partner (not also

general partner) a. Loan money to the partnership

b. Transact other business with the partnership, c. Received a pro rata share of the assets with the

general creditors (if he is not also a general partner)

Prohibited transactions a. Receive or hold as collateral security and

partnership property, or

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

The receiving of collateral security, or payment,

conveyance, or release in violation of the foregoing prohibition is a fraud on the creditors of the

partnership. (Reason 3rd persons enjoy preferential rights insofar as a partnership assets are concerned) (1854)

A limited partner may receive from the partnership the share of the profits or the compensation by way of

income stipulated for in the certificate. (provided that Partnership assets > All outside liabilities) (1856)

Where there are several limited partners the members may agree that one or more of the limited partners shall have a priority over other limited partners as to the return of their contributions, as to their compensation by way of income, or as to any other

matter. If such an agreement is made it shall be stated in the certificate, and in the absence of such a statement all the limited partners shall stand upon equal footing. (1855)

Requisites for return of contribution of limited partner. (1857)

a. All liabilities of the partnership, except liabilities to general partners and to limited partners on account of their contributions, have been paid or there remains property of the partnership sufficient to pay them;

b. The consent of all members is had, unless the return of the contribution may be rightfully

demanded under the provisions of the second paragraph; and

c. The certificate is cancelled or so amended as to set forth the withdrawal or reduction.

Return of contribution of limited partner as a matter of right - Limited partner may rightfully demand the return of his contribution: (1857)

a. On the dissolution of a partnership; or b. Arrival of the date specified in the certificate for its

return;

c. After he has six months' notice in writing to all other members, if no time is specified in the

certificate, either for the return of the contribution or for the dissolution of the partnership.

Liability of limited partner to the partnership (1858) a. For the difference between his contribution as

actually made and that stated in the certificate as having been made, and

b. For any unpaid contribution which he agreed in the certificate to make in the future at the time and on the conditions stated in the certificate

Liability limited partner as trustee – A limited partner is considered as trustee for the partnership.

a. Specific property stated in the certificate as contributed by him, but which was not contributed or which has been wrongfully returned, and

b. Money or other property wrongfully paid or conveyed to him on account of his contribution.

Requisites for waiver or compromise

a. Consent of all members;

b. It does not affect the right of a creditor of a partnership who extended credit or whose claim arose after the filing and before a cancellation or amendment of the certificate, to enforce such liabilities.

A limited partner's interest is assignable. (1859)

An assignee, who does not become a substituted limited partner, has no right to require any information or account of the partnership transactions or to inspect the partnership books; he is only entitled to receive the share of the profits or other compensation by way of income, or the return of his contribution, to which his assignor would otherwise be entitled. (Right are similar

to those of a person to whom a partner conveyed his whole interest in the partnership)

A substituted limited partner - is a person admitted to all the rights of a limited partner who has died or has assigned his interest in a partnership

Requisites when assignee become substituted limited partner a. All the members consent thereto or if the assignor,

being thereunto empowered by the certificate, gives the assignee that right.

b. An assignee becomes a substituted limited partner when the certificate is appropriately amended in

accordance with article 1865. c. The certificate as amended must be registered in

the SEC.

The retirement, death, insolvency, insanity or civil interdiction of a general partner dissolves the partnership, unless the business is continued by the

remaining general partners: (1) Under a right so to do stated in the certificate, or

(2) With the consent of all members. (1860) On the death of a limited partner his executor or

administrator shall have all the rights of a limited partner for the purpose of setting his estate, and such

power as the deceased had to constitute his assignee a substituted limited partner.

The estate of a deceased limited partner shall be liable for all his liabilities as a limited partner. (1861)

Liabilities of the partnership shall rank in order of

payment

General partnership (1839)

Limited partnership (1863)

a. Those owing to creditors

other than partners; b. Those owing to partners

a. Those to creditors, in

the order of priority as provided by law, except


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other than for capital and profits;

c. Those owing to partners in respect of capital;

d. Those owing to partners

in respect of profits.

those to limited partners on account of their

contributions, and to general partners;

b. Those to limited

partners in respect to their share of the profits and other compensation by way of income on their contributions;

c. Those to limited partners in respect to

the capital of their contributions;

d. Those to general partners other than for capital and profits;

e. Those to general

partners in respect to profits;

f. Those to general

partners in respect to capital.

Note: In general partnership, the payment of capital is preferred than with respect to profits. In limited partnership, the payment of profit has preference over capital.

CORPORATION

Element of Corporation

1. It is an artificial being 2. Created by operation of law 3. Having the right of succession 4. The powers, attributes and properties expressly

authorized by law or incident to its existence.

Doctrine of separate juridical personality

Corporation has juridical personality separate and distinct from the stockholders composing the corporation. Piercing the veil of corporate entity When the veil of corporate fiction is used as a shield to perpetuate fraud, to defeat public convenience, justify

wrong or defend crime, this fiction shall be disregarded and the individuals composing it will be treated identically. Doctrine of limited capacity Corporation may exercise only powers expressly authorized by law or incident to its existence.

Theory of Corporation

1. Theory of concession – Exist by grant of the state (Philippine Setting)

2. Gennosenshaft theory – It exist because the parties

want it to exist Private Corporation can only be created by

corporation code (B.P. 68)

Under Art. XII, Sec 16 of the 1987 Constitution which

provides as follows:

“The Congress shall not, except by general law, provide for

the formation, organization, or regulation of private

corporations. Government-owned or controlled corporations

may be created or established by special charters in the

interest of the common good and subject to the test of

economic viability.”

Special law can create only

1. Public corporation 2. Government owned or controlled corporations

provided: a. In the interest of common goods

b. Subject to test of economic viability. Corporation not entitled to moral damages A corporation, being an artificial person and having

existence only in legal contemplation, has no feeling, no emotions, no senses; therefore, it cannot experience physical suffering, mental anguish, fright, serious anxiety, wounded feelings, etc. Distinction between partnership And Corporation 1. Manner of creation

2. Number of incorporators 3. Commencement of juridical personality 4. Powers 5. Management 6. Effect of mismanagement 7. Right of succession 8. Transferability of interest

9. Term of existence

10. Firm name 11. Dissolution 12. Laws which govern Classification of corporation

1. Stock corporation - Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held. (Sec 4, BP 68)

2. Non-stock corporation – All other corporations are non-stock corporations.

Other classification of Corporations 1. Number of persons

a. Corporation aggregate – more than one member b. Corporation sole – one member or corporator

2. Religious purpose or not

a. Ecclesiastical corporation - Religious

b. Lay corporation – other than religious purpose. (Either eleemosynary or civil)

3. Charitable or not a. Eleemosynary corporation - Charitable b. Civil corporation – Business of profit

4. Country of creation

a. Domestic corporation – incorporated under Philippine law

b. Foreign corporation – Incorporated under foreign law

5. Legal right to corporate existence a. De jure corporation – exist in fact and in law b. De facto corporation – exist in fact but not in law

6. Public or not a. Close corporation – limited to selected persons b. Open corporation – open to any person

7. Relation to other corporation

a. Parent corporation – Owner of more than 50% of another corporation

b. Subsidiary corporation – acquire of parent company

8. True or limited sense a. True corporation b. Quasi corporation

1. Corporation by prescription – exercise power for indefinite period without interference from sovereign power. (Roman Catholic Church)

2. Corporation by estoppels

9. Public or private purpose a. Public corporation b. Private corporation

10. Going public or not a. Going public – Decide to list its share in the stock

exchange


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b. Going private – Restrict the share to certain group Classes of shares

1. Par value share 2. No par value share

Limitation: a. Cannot be issued by the following corporation:

(BPI-TB) 1. Bank 2. Public utilities 3. Insurance company 4. Trust company 5. Building and loan association

b. Preferred shares not allowed

c. Cannot be issued for a consideration less than five peso (P5)

d. Deemed fully paid and non assessable e. Entire consideration received shall be treated as

capital and not available for dividend distribution. 3. Voting share

That there shall always be a class or series of

shares which have complete voting rights.

That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares.

4. Non voting share- shares without right to vote Non voting shares classified as such may still vote

under the following circumstances: a. Amendment of the articles of incorporation; b. Adoption and amendment of by-laws; c. Sale, lease, exchange, mortgage, pledge or other

disposition of all or substantially all of the corporate property;

d. Incurring, creating or increasing bonded

indebtedness; e. Increase or decrease of capital stock; f. Merger or consolidation g. Investment of corporate funds in another

corporation or business except where the investment by the corporation is reasonably

necessary to accomplish its primary purpose as

stated in the articles of incorporation h. Dissolution of the corporation.

5. Common stock – equal right. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share. (6)

6. Preferred stock – Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation.

7. Promotion stock – issued to promoter

8. Share in escrow – Subject to agreement where the stock is deposited to third and kept by the depositary until the condition contained in agreement happened.

9. Convertible stock – Convertible to other shares

10. Founder share – issued to founder or organizer having a right granted . (Sec 7)

11. Redeemable share (Sec 8)

a. Must be expressly so provided in the articles of incorporation

b. Purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings.

c. Terms and conditions must be stated in the articles

of incorporation and certificate of stock 12. Treasury stock – shares of stock which have been

issued and fully paid but subsequently reacquired by the issuing corporation by purchase, redemption, donation or other lawful means. (Sec 9)

Corporate term – 50 years may be extended for periods

not exceeding fifty (50) years in any single instance by an

amendment of the articles of incorporation. No extension can be made earlier than five (5) years prior to the original

or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension. (Sec 11) Contents of the articles of Incorporation (Sec 14)

All corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: 1. The name of the corporation;

2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are he secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature

as such;

3. The place where the principal office of the corporation is to be located, which must be within the Philippines;

4. The term for which the corporation is to exist; 5. The names, nationalities and residences of the

incorporators;

6. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15);

7. The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code;

8. If it be a stock corporation, the amount of its

authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if

some or all of the shares are without par value, such

fact must be stated; 9. If it be a non-stock corporation, the amount of its

capital, the names, nationalities and residences of the contributors and the amount contributed by each; and

10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and

convenient. Minimum Capital requirement General Rule: No minimum authorized capital stock (Sec 12) Exception: 1. Sec 13

25% of the authorized capital stock must be subscribed.

25% of the total subscription be paid. In no case the paid up capital be less than P5,000

2. Special Law Percentage of Filipino ownership (Nationalize Corporation)

1. 100% Filipino a. Mass media except recording b. Retail trade corporation c. Private security agencies d. Small scale mining e. Utilization of natural resources

f. Cockpits g. Manufacture, repair, stockpiling and/or distribution

of nuclear weapon 2. 80% Filipino

a. Private radio communications network 3. 75%

a. Private recruitment, whether for local or overseas

employment


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b. Construction and repair of locally funded works c. Construction of defense related structures

d. Under the flag law 4. 70%

a. Pawnshop business 5. 60%

a. Corporation for exploration, development and utilization of natural resources – 60%

b. Realty companies and other corporations that own public lands

c. Public utilities corporations d. Educational Institution e. Banking corporation

f. Rural bank g. Culture, production milling, processing, trading

except retail of rice and corn and by products. h. Coastwise shipping i. Sauna and steam bath bathhouse, massage clinics

and similar activities j. Adjustment companies

6. 40%

a. Financing companies b. Investment house

Corporate Name not allowed (Sec 18) 1. Identical

2. Deceptive 3. Confusingly similar to that existing corporation 4. Any name already protected by law 5. Patently deceptive, confusing or contrary to existing

laws. Note: When approved – Commission issue amended certificate of incorporation under amended name.

Commencement of corporate existence – Issuance of certificate of incorporation. (Sec 19) De Facto corporation(Sec 20) 1. Valid law

2. Bonafide intent to incorporate under such valid law

3. Actual exercise in good faith of such corporate power. i.e. Majority of incorporators are not resident of the

Philippines; defect in form; acknowledged before a person without authority.

Only direct proceeding of quo warranto is allowed. Collateral attack not allowed.

Instituted by solicitor general Corporation by estoppels (Sec 21) liable as general partner for all debts, liabilities and

damages. Effects on non-use of corporate charter and continuous

inoperation of a corporation (Sec. 22)

Distinction between corporators and incorporators

Corporators (Sec 5) Incorporators (Sec 10)

Limited depending on the

available authorized capital

stock.

Limit only to not less than

five but not more than 15.

Not signatories in the

article of incorporation.

Originally formed and

signatories of the article of

incorporation

They cease to be

corporators when they are

no longer a holder of

shares of stock.

Remain as incorporators

even no longer a holder of

shares of stock

Corporator

a. Stockholder or shareholder – Stock corporation

b. Member – non stock corporation

Number and Qualifications of Incorporators

1. Not less than 5 but not more than 15

2. Must be a natural person 3. All must be of legal age 4. Majority must be resident of the Philippines 5. Must be an owner or subscriber of at least one (1)

share of capital stock

Number and Qualifications of Director (Sec 23)

1. Not less than five but not more than 15 (Sec 14) 2. Owner of at least one share 3. The ownership (Legal not beneficial ownership, e.g.

pledgor, mortgagor) must be stand in the name of the director in the book of the corporation.

4. Majority must be residence of the Philippines 5. Not convicted by final judgment for an offense

punishable by imprisonment of more than 6 years 6. Do not commit a violation of the corporation code

within 5 years prior to the date of his election or appointment.

Qualification of Corporate officer (Sec 25)

1. President – Must be director 2. Secretary – Resident and citizen of the Philippines 3. Treasurer – May or may not be a director

Date of Incorporation

2 years

1. Not formally organize, and 2. Commence transaction of its

business

Deemed dissolve

5 years

Continuously inoperative

Ground for suspension or revocation of corporate franchise or certificate of incorporation

Not applicable if due to causes beyond the control of the corporation as determined by SEC


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Apply to all: a. Not convicted by final judgment for an offense

punishable by imprisonment of more than 6 years b. Do not commit a violation of the corporation code

within 5 years prior to the date of his election or appointment. (Sec 27)

Concurrent position of corporate officer (Sec 25) 1. President + secretary – Not allowed 2. President + treasurer – Not allowed 3. Secretary + treasure – Allowed By Laws

May provide for the qualification of the director a. At least 25 years of age b. Have some experience in business, finance or law c. Disqualify anyone who is competing with the

corporation As long as the qualification imposed are reasonable and not meant to unjustly or unfairly deprive the minority

of their rightful representation in the Board of

Directors, it is valid. Report of election Submit to the SEC within 30 days by the secretary or any other officer of the corporation the result of the election

containing the following: 1. Names 2. Nationalities 3. Residence of the director, trustee or officer elected. In case of:

a. Death – heir, secretary, or any officer, or director or trustee himself

b. Resign – secretary, or any officer, or director or trustee himself

c. Any manner cease to hold office - secretary, or any officer, or director or trustee himself report such fact to the SEC

Removal of directors or trustees (Sec. 28)

Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote. That such removal shall take

place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. Vacancies in the office of director (Sec 29)

1. Other than removal by the stockholders or members or expiration of term – Majority of the remaining directors or trustees if still constituting quorum.

2. Removal by stockholder or members or expiration of

term or increase in the number of director or other than (Removal, expiration or increase) but was referred by the BOD to the stockholders – Stockholder in a

regular or special meeting called for that purpose. (Sec 29)

Director or trustee elected - served only the unexpired term of his predecessor in office.

Compensation of director (Sec 30)

General rule: No compensation except for reasonable per diems Exception: Provided for in by laws

1. Vote of the stockholders representing at least a majority of the outstanding capital stock at regular or special meeting

2. Total yearly compensation shall not exceed 10% of the net income before income tax of the preceding

year. Liability of Corporate officers (Sec 31) Liability: Jointly and severally for all damages suffered by

the corporation, stockholders or members and other person when such director or trustee: 1. Knowingly vote for or assent to patently unlawful acts

of the corporation; 2. Guilty of gross negligence or bad faith in directing the

affairs of the corporation; 3. Acquire any personal or pecuniary interest in conflict

with their duty as director or trustee Liable as trustee for the corporation + account for the profit (otherwise accrued to the corporation) when the director, trustee or officer attempts to acquire/acquires in violation of his duty: 1. Any interest adverse to the corporation which has

reposed to him in confidence

2. Where equity imposes a disability upon him to deal in his own behalf

Self dealing director (Sec 32) Rule: A contract of the corporation with one or more of its

directors or trustees or officers is voidable, at the option of such corporation Exception: Valid when all the requisites are present 1. That the presence of such director or trustee in the

board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting;

2. That the vote of such director or trustee was nor necessary for the approval of the contract;

3. That the contract is fair and reasonable under the circumstances;

4. That in case of an officer, the contract has been previously authorized by the board of directors.

5. Full disclosure of the adverse interest of the directors

or trustees involved is made at such meeting. Absence of requisites 1 or 2 – Can be ratified by 2/3 of the outstanding capital stock or 2/3 of the members. Absence of requisite 3 – Cannot be ratified Interlocking director (Sec 33)

Rule: Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone.


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Disloyalty of a director (Sec 34) Where a director, by virtue of his office, acquires for

himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding

capital stock. This provision shall be applicable,

notwithstanding the fact that the director risked his own funds in the venture. Executive committee (Sec 35) 1. The by-laws of a corporation may create an executive

committee, composed of not less than three members of the board, to be appointed by the board.

2. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board.

Executive committees have no power to: a. Approval of any action for which shareholders' approval

is also required; b. The filing of vacancies in the board; c. The amendment or repeal of by-laws or the adoption of

new by-laws;

d. The amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable;

e. Distribution of cash dividends to the shareholders. Corporate powers and capacity (Sec 36) Every corporation incorporated under this Code has the power and capacity:

Express Power Stockhold

ers vote

1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for

the period of time stated in the articles of

incorporation and the certificate of incorporation;

3. To adopt and use a corporate seal;

No

No No

4. To amend its articles of incorporation in accordance with the provisions of this

Code; 5. To adopt by-laws, not contrary to law,

morals, or public policy, and to amend or

repeal the same in accordance with this Code;

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the

corporation if it be a non-stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of

other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject

to the limitations prescribed by law and the Constitution;

8. To enter into merger or consolidation with other corporations as provided in this

Code; 9. To make reasonable donations, including

those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or

candidate or for purposes of partisan political activity;

10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and

11. To exercise such other powers as may be

essential or necessary to carry out its

purpose or purposes as stated in the articles of incorporation. (Implied power)

Yes

Yes

No

Yes

Yes

No

No

No

Express power – (Par 1 -10) Implied power – Reasonably necessary to exercise the

express power to accomplish or carry out the purpose for which the corporation was formed. Incidental power – Indispensably necessary to carry out the purpose Note: Cororation can exercise only power conferred by corporation code or by its article of incorporation except such as are necessary or incidental to the exercise of the

powers so conferred (Intra vires act). Otherwise the act of the corporation is ultravires act (Sec 45) Power to extend or shorten corporate term (Sec 37) 1. Majority vote of the BOD + 2/3 of the outstanding

capital stock or 2/3 of the embers.

2. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally.

3. Extension of corporate term (sec 37) or shortening the

term of corporate existence (Sec 81), any dissenting stockholder may exercise his appraisal right.

Power to increase/decrease capital stock; Increase bond indebtedness (Sec 38)

1. Written notice of the proposed Increase/decrease of stock or increase in bonded indebtedness

2. State the time and place of the stockholders meeting

Director

Corporation 1 Corporation 2

Substantial Interest Nominal Interest

1. Presence of such director or trustee not necessary to constitute a quorum for such meeting;

2. Vote of such director or trustee was nor necessary for the approval of the contract;

3. Contract is fair and reasonable under the circumstances;

4. Full disclosure of the adverse interest of the directors or trustees involved is made at such meeting.


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3. Addressed to each stockholder at his place of residence as shown in the books of the corporation

4. Deposit in the post office or served personally 5. Approval of the SEC 6. Certificate in Duplicate signed by majority of the

directors and countersigned by the chairman and

secretary stating the following: a. Compliance with the requirement b. Amount of increase/decrease capital stock c. Names/nationalities/residence of the persons

subscribing, the amount of capital stock subscribe or # of no par shares subscribed. If stock dividend - allotted to each stockholder.

d. Bond incurred, created or increased e. Actual indebtedness on the day of the meeting f. Amount of stock represented at the meeting g. Vote authorizing the increase/decrease of stock

or increase in bond indebtedness. 7. Duplicate certificate – one kept in the office of the

corporation and one filed with the SEC

8. For increase in stock – sworn statement of the

treasure (lawfully at the time of filing) of the corporation showing 25% of such increased capital stock has been subscribed and 25% of amount subscribed has been paid.

9. Decrease in stock – Not approved if it effect

prejudice the right of corporate creditor (Trust fund doctrine)

10. Bond – Registered with the SEC 11. Non stock corporation – Majority of the board of

trustee + 2/3 of the member Types of Bond

1. Mortgage bonds – Bonds secured by mortgage on real properties.

2. Collateral trust bonds – Bonds secured by stocks and bonds of other corporation.

3. Debenture bonds – Bonds without collateral security. 4. Registered bonds – Requires the registration of the

name of the bondholders on the books of the

corporation. 5. Coupon or bearer bonds – are unregistered bonds in

the sense that the name of the bondholder is not recorded on the company books.

6. Convertible bonds – are those which give the holders thereof the right to convert their bondholdings into

share capital or other securities of the issuing company within a specified period of time.

7. Callable bonds – are bonds issued whereby another party promises to make payment if the borrowing company fails to do so.

8. Junk bonds – are high risk, high yield bonds issued by enterprises that are heavily indebted or otherwise in

weak financial condition. 9. Treasury bonds – are company’s own bonds originally

issued and reacquired but not cancelled. 10. Term bonds – are bonds with a single date of maturity.

11. Serial bonds – are those with a series of maturity dates.

Power to deny pre-emptive right (Sec 39) Rule: All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. Exception:

1. Denied in the articles of incorporation or an amendment thereto

2. Shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public;

3. Shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the

outstanding capital stock, in exchange for property

needed for corporate purposes or in payment of a previously contracted debt.

Sale or disposition of assets (Sec 40) Sale of all or substantially all including goodwill - if thereby the corporation would be rendered incapable of continuing

the business or accomplishing the purpose for which it was incorporated 1. Subject to existing laws on illegal combinations and

monopolies 2. Majority of the BOD or trustees + 2/3 of outstanding

capital stock (2/3 of the members) 3. Written notice of the proposed action and of the time

and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally.

4. Exercise of appraisal right 5. After approval of the stockholder – BOD may abandon

such sale subject to the right of 3rd person without

further approval by the stockholder or member. Note: No vote of stockholders is required 1. Sale of assets which is necessary in the usual and

regular course of business, or 2. If the proceeds of the sale or other disposition of such

property and assets be appropriated for the conduct of its remaining business.

Power to acquire own shares (Sec 41)

1. Legitimate corporate purpose or purposes, including but not limited to the following cases: a. To eliminate fractional shares arising out of stock

dividends b. To collect or compromise an indebtedness to the

corporation, arising out of unpaid subscription, in a

delinquency sale, and to purchase delinquent

shares sold during said sale; and c. To pay dissenting or withdrawing stockholders

entitled to payment for their shares under the provisions of this Code.

2. Corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired.

Investment of Fund in another corporation (Sec 42) Other than primary purpose 1. Majority of the board of directors or trustees and

ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or members stockholder's or member's meeting duly

called for the purpose. 2. Written notice of the proposed investment and the time

and place of the meeting shall be addressed to each stockholder or member at his place of residence as

shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally.

Investment of fund which is reasonably necessary to accomplishment its primary purpose as stated in the article of incorporation. 1. Approval of the stockholders or members shall not be

necessary

Power to declare dividend (Sec 43) Rule: BOD can declare only dividend out of the unrestricted retained earnings

Cash/property dividend

Stock dividend

Delinquent 1st applied to unpaid balance on

Withheld until his unpaid


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the subscription plus cost and

expense

subscription is fully paid

Approval of

the stockholder

Without approval

of stockholders.

2/3 of the

outstanding capital stock (Regular/special meeting)

Rule: Corporation prohibited to retain surplus profit

(unappropriated retained earnings) in excess of 100% of their paid in capital Exception: 1. Definite corporate expansion projects or programs

(appropriation for expansion project) 2. Prohibition under any loan agreement with any financial

institution or creditor without its/his consent, and such consent has not yet been secured; or (Appropriation for bond redemption)

3. Retention is necessary under special circumstances

obtaining in the corporation, such as when there is need for special reserve for probable contingencies. (Appropriation for contingency)

4. Addition: provided by law. (appropriation for treasury stock)

Power to enter into management contract (Sec. 44) No corporation shall conclude a management contract with another corporation (also apply to any contract whereby a corporation undertakes to manage or operate all or

substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise) unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of

the members in the case of a non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose:

Exception: Then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3)

of the members in the case of a non-stock corporation under the following: (1) Where a stockholder or stockholders representing the

same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or

(2) Where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation

General Rule: No management contract shall be entered

into for a period longer than five years for any one term.

Exception: That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations.

Ultra vires acts of corporations. No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. (Sec. 45)

Summary of vote

required for corporate

act

Major

ity of

BOD

Major

ity of

the

Stockhol

der

Maj 2/

Quor

um of

the

BOD

orit

y

3

Amendment of Article of

Incorporation (Sec 16)

√ √

Election of Directors or

trustees (Sec 24 & 29)

√

Removal of Director or

trustees (Sec 28)

√

Calling for special meeting

for removal of director or

trustee (Sec 28)

√

Filing of vacancy other than

removal or expiration of

term (Sec 29)

√

Compensation of directors

(Sec 30)

√

Self dealing director (Sec

32)

√

Interlocking director (Sec

33)

√

Disloyalty of a director (Sec

34)

√

Delegation of power to

executive committee (Sec

35)

√

Extension or shortening

of corporate term (Sec

37)

√ √

Increase or decrease

capital stock (Sec 38)

√ √

Incur, create or increase

bond indebtedness (Sec

38)

√ √

Denial of pre emptive

right (Sec 39)

√ √

Sale or disposition of all

or substantially all of

corporate property (Sec

40)

√ √

Investment of corporate

fund in another

corporation other than

for primary purpose (Sec

42)

√ √

Declaration of stock

dividend (Sec 43)

√ √

Management contract

(Sec 44)*

√ √

Adoption of by-laws after

incorporation (Sec 46)

√

Amendment of by-laws

(Sec 48)

√ √

Delegation of power to the

Board to amend the by-laws

(Sec 48)

√

To revoke the delegated

power given to the Board to

amend the by-laws (Sec

48)

√

Fixing the issuance price of

no par value share by the

√


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BOD when authorized by

the Article of Incorporation

(Sec 62)

Fixing the issuance price of

no par value share in the

absence of price fixed in the

articles of incorporation or

authority given to the BOD

to fixed the issuance price

(Sec 62)

√

Merger or consolidation

(Sec 77)

√ √

Adopt a plan of

distribution of assets of

a non stock corporation

√ √

Corporate dissolution

(Sec 118)

√ √

Adoption of by-laws prior to

incorporation (Sec 46)

Approved and signed by all

the incorporators

Nota Bene: Letter in bold letter are required to be

approved by both the BOD and stockholders or members. * However, in case (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority

of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock

entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. (Sec 44)

Director meeting Stockholder meeting

Proxy Proxy vote not allowed (Sec 25)

Proxy vote allowed

Date of meeting

Regular meeting – monthly unless the By law

provide otherwise. (Sec 53)

Special meeting – At anytime upon call of the president or

provided in the by laws. (Sec 53)

Regular and

special meeting required a notice of at least 1 day prior to scheduled

meeting unless the by law provide.

Notice can be waived express of implied.

Regular meeting – annually as

fixed by the by law if not (any date in April) + written notice 2 weeks prior to meeting.

Special meeting – at any time

deemed necessary + written notice 1 week prior to

meeting or stated in by law.

Place of meeting

Anywhere in or out side of the Philippines unless the by law provide otherwise. (Sec

53)

City or municipality where the principal office of the corporation is

located

(preferred at the principal

office of the corporation).

Improperly

held or called – valid if within the power or authority of the corporation

and provided all stockholders or members are present or duly

represented.

Quorum Majority of the

BOD/trustee as fixed in the article of incorporation unless the article

or by law provides a greater majority. (Sec 25)

Majority of the

outstanding capital stock or majority of the members.

(Sec 52)

Preside the

meeting

President shall preside unless the by law provide otherwise

Proper person to call meeting

1. Person designated in the by laws have authority to call stockholder’s or members meetings.

2. In the absence of such provision in the by laws, the

meeting may be called by a director or trustee or by officer entrusted with the management of the corporation.

3. When there is no person authorized to call a meeting,

the Secretaries and Exchange Commission, upon petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws. (Sec 50)

4. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a

majority of the members entitled to vote. (Sec 28) 5. Special meetings of the board of directors or trustees

may be held at any time upon the call of the president or as provided in the by-laws. (Sec 53)

Voting power 1. Pledgor/mortgagor – Right to vote is expressly given by

the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books. (Sec 55)

2. Executor/administrator/receiver and other legal representative appointed by the court without any written proxy. (Sec 56)

3. Treasury shares no right to vote as long as remain in

treasury. (Sec 57) 4. Proxies (Sec 58)

a. In writing b. Signed by stockholder or member c. Filed before the scheduled meeting with the

corporate secretary


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d. Valid only for the meeting which it is intended e. If provided a period, it has a limit for a period of 5

years. 5. Voting trusts

a. Must be in writing and notarized b. Specify the term and condition

c. Filed with the corporation and the SEC d. Period of agreement not to exceed 5 years except

voting trust specifically required as a condition in a loan agreement (automatically expire upon payment of the loan)

e. Certificate of stock covered by voting trust agreement shall be cancelled and a new one shall

be issued in the name of the trustee. f. The book of corporation shall noted the transfer g. Not valid if the purpose is circumventing the law

against monopolies and illegal combinations in restraint of trade or used for purposes of fraud.

h. Automatically expire at the end of the agreed period unless renewed.

May be voted by proxy unless the agreement prohibit it.

Adoption of by-laws (Sec. 46) Every corporation formed must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission,

adopt a code of by-laws for its government not inconsistent with the corporation Code. The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations

governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law. Amendments to by-laws (Sec. 48)

Whenever any amendment or new by-laws are adopted,

such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission the same to be attached to the original articles of incorporation

and original by-laws. The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code. Contents of by-laws (Sec 47) Subject to the provisions of the Constitution, this Code,

other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: 1. The time, place and manner of calling and conducting

regular or special meetings of the directors or trustees;

2. The time and manner of calling and conducting regular or special meetings of the stockholders or members;

3. The required quorum in meetings of stockholders or

members and the manner of voting therein; 4. The form for proxies of stockholders and members and

the manner of voting them; 5. The qualifications, duties and compensation of

directors or trustees, officers and employees; 6. The time for holding the annual election of directors of

trustees and the mode or manner of giving notice thereof;

7. The manner of election or appointment and the term of office of all officers other than directors or trustees;

8. The penalties for violation of the by-laws; 9. In the case of stock corporations, the manner of

issuing stock certificates; and

10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and

affairs.

Stock

corporation

Non stock corporation

Number of director

Not less than 5 but not more than 15

May be more than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws

Term of office of the director/ trustees

One (1) year until their successors are elected and qualified. (Sec 23)

Term of office of one-third (1/3) of their number shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the board of

trustees shall be held annually and trustees so elected shall have a term of three (3) years. (Sec 92)

Purpose For profit. Organized for charitable, religious, educational,

professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any

combination thereof. (Sec 88)

Voting Cumulative Non cumulative (entitled to 1 vote) unless authorized under the article of incorporation or by laws.

(Sec 89)

Manner of voting

Voting either in person or by

representative authorized to

act by written proxy (Sec 24)

Voting by mail or other similar means by members of non-stock corporations

may be authorized by the by-laws of non-stock

corporations. (Sec 89)

Distribution of

dividend

Authorized to distribute

dividends to stockholders

Not authorized to distribute dividends to its members,

trustees or officers. (Sec 87)

Transferability of interest

Transferrable Membership in a non-stock corporation and all rights arising therefrom are personal and non-

transferable, unless the articles of incorporation or the by-laws otherwise provide. (Sec 90)

Ownership

of director

At least owner

of one share of stock

Member of the corporation.

(Sec 92)

Stockholder/member Place of meeting

(Regular and special)

City or municipality where the principal place

office of the corporation is located, and if practicable in the principal place of the

corporation. (Sec 51) Metro manila is considered city or

Any place in the Philippines even outside the place where the principal office of the corporation is located.

(Sec 93)


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municipality.

STOCK AND STOCKHOLDERS Any contract for the acquisition of unissued stock in an

existing corporation or a corporation still to be formed shall be deemed a subscription notwithstanding the fact that the parties refer to it as a purchase or some other contract. (Sec 60) Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. (Sec. 72)

A subscription for shares of stock of a corporation still

to be formed (Sec 61) BEFORE submission of articles of incorporation to the SEC a. Irrevocable for a period of at least six (6) months

from the date of subscription Exception:

1. All of the other subscribers consent to the revocation,

2. The incorporation of said corporation fails to

materialize within said period or within a longer period as may be stipulated in the contract of subscription:

AFTER submission of articles of incorporation to the

SEC No pre-incorporation subscription may be revoked

Consideration for stocks - Stocks shall not be issued for a consideration less than the par or issued price thereof otherwise it is watered stock. (Sec 62) 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received

by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued;

3. Labor performed for or services actually rendered to the corporation;

4. Previously incurred indebtedness of the

corporation; 5. Amounts transferred from unrestricted retained

earnings to stated capital; and 6. Outstanding shares exchanged for stocks in the

event of reclassification or conversion. a. When consideration is other than actual cash, or

consists of intangible property such as patents

of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission.

b. Shares of stock shall not be issued in exchange for promissory notes or future service.

No par value share 1. Fixed in the article of incorporation 2. Board of directors pursuant to authority conferred

upon it by the articles of incorporation or the by-laws

3. Stockholders representing at least a majority of the

outstanding capital stock at a meeting duly called for the purpose.

Shares of stock so issued are personal property and

may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the

transfer. (Sec 63) No transfer, however, shall be valid, except as between

the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. (Ibid)

No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with

interest and expenses (in case of delinquent shares), if any is due, has been paid. (Sec 64)

Liability of directors for watered stocks (Sec 65) Any director or officer of a corporation shall be solidarily, liable with the stockholder concerned to the corporation and its creditors for the difference between

the fair value received at the time of issuance of the stock and the par or issued value of the same. a. Consenting to the issuance of stocks for a

consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value,

b. Having knowledge thereof, does not forthwith

express his objection in writing and file the same with the corporate secretary.

Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be

the legal rate. (Sec 66)

Right of stockholders to bring suits 1. Derivative suit – One brought by one or more

stockholders or members in the name and on behalf of the corporation to redress wrongs committed against it or to protect or vindicate

corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold control of the corporation.

2. Individual suit – Action brought by a stockholder against the corporation for direct violation of his contractual rights as such individual stockholders. Any recovery by the stockholder belongs to him.

3. Representative suit – When a wrong is committed against a group of stockholders, a stockholder may bring suit in behalf of himself and all other stockholders who are similarly situated.

Remedies for payment of stock subscription a. Extra judicial sale at public auction (Sec 67-69)

1. Payment of any unpaid subscription or any

percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board.

2. Failure to pay on such date shall render the entire balance due and payable and shall make

the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment.

3. If within thirty (30) days from the said date no payment is made, all stocks covered by said subscription shall thereupon become

delinquent and shall be subject to sale as, unless the board of directors orders otherwise.

4. Board resolution ordering the sale of delinquent stock and shall specifically state the amount

due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30)

days nor more than sixty (60) days from the date the stocks become delinquent.

5. Copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail

6. Published once a week for two (2) consecutive

weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located.

7. Delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of

advertisement and expenses of sale, for the


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smallest number of shares or fraction of a share.

8. Stock purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor.

9. Should there be no bidder at the public auction the corporation may bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. The shares acquired by the corporation shall be held as treasury shares.

b. Judicial Action - collecting by action in a court of

proper jurisdiction the amount due on any unpaid subscription, with accrued interest, costs and expenses. (Sec 70)

c. Collection from cash dividends and withholding of stock dividends - Any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and

expenses, while stock dividends shall be withheld

from the delinquent stockholder until his unpaid subscription is fully paid (Sec 43)

d. To deny delinquent shares the right to vote -No delinquent stock shall be voted for be entitled to vote or to representation at any stockholder's

meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder. (Sec 71)

No delinquent stock shall be voted for be entitled to vote or to representation at any stockholder's meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code, until and

unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of advertisement, if any. (Sec 71)

CORPORATE BOOKS AND RECORDS Every corporation shall keep and carefully preserve at

its principal office a record of all business transactions

and minutes of all meetings of stockholders or members, or of the board of directors or trustees (Sec 74) including stock and transfer book (Ibid)

The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder

or member of the corporation at reasonable hours on business days and he may demand, writing, for a copy of excerpts from said records or minutes, at his expense. (Ibid)

Liability of the officer or agent of the corporation for refusing any director, trustees, stockholder or member of the corporation to examine and copy excerpts from

its records or minutes a. Shall be liable to such director, trustee, stockholder

or member for damages, and in addition, shall be guilty of an offense which shall be punishable under

Section 144 of this Code: b. That if such refusal is made pursuant to a

resolution or order of the board of directors or

trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal:

Defenses under the code in refusing the person demanding to examine and copy excerpts from the corporation's records and minutes:

a. Improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation,

b. Was not acting in good faith or c. Not for a legitimate purpose in making his demand.

Stock and transfer book- in which must be kept a record of all stocks in the names of the stockholders

alphabetically arranged; the installments paid and

unpaid on all stock for which subscription has been made, and the date of payment of any installment; a

statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe.

Right to Financial Statement 1. Within ten (10) days from receipt of a written request

of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets

and liabilities and the result of its operations. 2. At the regular meeting of stockholders or members, the

board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified by an independent certified public

accountant.

3. However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation.

MERGER AND CONSOLIDATION Two or more corporations may merge into a single

corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation. (Sec 76)

The merger or consolidation shall have the following

effects: 1. The constituent corporations shall become a single

corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of

consolidation;

2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation;

3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and

liabilities of a corporation organized under this Code;

4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever

account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed

transferred to and vested in such surviving or consolidated corporation without further act or deed; and

5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim,

action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation. (Sec 80)


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Appraisal Right Any stockholder of a corporation shall have the right to

dissent and demand payment of the fair value of his shares in the following instances: (Sec 81) 1. In case any amendment to the articles of incorporation

has the effect of

a. Changing or restricting the rights of any stockholder or class of shares;

b. Authorizing preferences in any respect superior to those of outstanding shares of any class;

c. Extending or shortening the term of corporate existence;

2. Sale, lease, exchange, transfer, mortgage, pledge or

other disposition of all or substantially all of the corporate property and assets.

3. Merger or consolidation. 4. Investment of corporate funds in another corporation

or business or for any other purpose. (Sec 42)

Exercise of appraisal right (Sec 82)

a. Any stockholder who shall have voted against

the proposed corporate action b. Written demand on the corporation within thirty

(30) days after the date on which the vote was taken for payment of the fair value of his shares, failure to make the demand within such

period shall be deemed a waiver of the appraisal right.

c. Surrender of the certificate or certificates of stock representing his shares.

d. If within 60 days from the date the corporate action was approved by the stockholders, the withdrawing stockholder and the corporation

cannot agree on the fair value of the shares, the Fair value of the shares shall be determined and appraised by three (3) disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus chosen and the same shall be paid within 30 days after such awards.

e. The corporation has unrestricted retained earnings in its books to cover such payment.

f. Upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his shares to the corporation.

From the time of demand for payment of the fair value of a stockholder's shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, all rights accruing to such shares, including voting and dividend rights, shall be suspended, except the right of such stockholder to receive payment of the

fair value thereof: Provided, That if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored. (Sec 83)

No demand for payment may be withdrawn unless the corporation consents thereto. If, however, such demand for payment is withdrawn with the consent of the corporation, or if the proposed corporate action is abandoned or rescinded by the corporation or disapproved by the Securities and Exchange Commission where such approval is necessary, or if the Securities and Exchange Commission determines that such stockholder is not entitled to the appraisal right, then the right of said stockholder to be paid the fair value of his shares shall cease, his status as a stockholder shall thereupon be restored, and all dividend distributions which would have accrued on his shares shall be paid to him. (Sec 84)

The costs and expenses of appraisal shall be borne by the corporation, unless the fair value ascertained by the appraisers is approximately the same as the price which the corporation may have offered to pay the stockholder, in which case they shall be borne by the latter. (Sec 85)

NON-STOCK CORPORATIONS Is one where no part of its income is distributable as dividends to its members, trustees, or officers. Provided that any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance

of the purpose or purposes for which the corporation was organized. (Sec 87) It may be formed or organized for: 1. Charitable 2. Religious 3. Educational 4. Professional 5. Cultural 6. Fraternal 7. Literary 8. Scientific 9. Social 10. Civic service 11. Similar purposes like trade, industry, agricultural and like

chambers, or any combination thereof.

The right of the members of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote. (Sec 89)

Membership in a non-stock corporation and all rights arising therefrom are personal and non-transferable, unless the articles of incorporation or the by-laws otherwise provide. (Sec 90)

Unless otherwise provided in the articles of incorporation or the by-laws, the board of trustees of non-stock corporations, which may be more than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of office of one-third (1/3) of their number shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period. (Sec 92)

No person shall be elected as trustee unless he is a member of the corporation. (Ibid)

Unless otherwise provided in the articles of incorporation or

the by-laws, officers of a non-stock corporation may be directly elected by the members. (Ibid)

The by-laws may provide that the members of a non-stock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located: Provided, That proper notice is sent to all members indicating the date, time and place of the meeting: and Provided, further, That the place of meeting shall be within the Philippines. (Sec 93)

CLOSE CORPORATION All corporation’s issued shares are not owned by not more

than twenty (20) person Issued stock are subject to specified restriction on transfer Cannot be listed in any stock exchange or make any public

offering of any of its stock of any class. A corporation is not a close corporation when at least two-

thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation.

Cannot incorporate a. Mining or oil companies b. Stock exchanges c. Banks d. Insurance companies e. Public utilities f. Educational institutions g. Corporation vested with public interest

The articles of incorporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: 1. No meeting of stockholders need be called to elect directors; 2. Unless the context clearly requires otherwise, the

stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code; and

3. The stockholders of the corporation shall be subject to all liabilities of directors

The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors.


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SPECIAL CORPORATIONS EDUCATIONAL CORPORATIONS Trustees of educational institutions organized as non-stock

corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall be in multiples of five (5) (Sec 108)

Unless otherwise provided in the articles of incorporation on the by-laws, the board of trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five (5) years. A majority of the trustees shall constitute a quorum for the transaction of business. The powers and authority of trustees shall be defined in the by-laws.

For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock corporations

RELIGIOUS CORPORATIONS Religious corporations may be incorporated by one or more

persons. Such corporations may be classified into: (Sec 109) a. Corporations sole - as trustee, the affairs, property and

temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church. (Sec 110) 1. From and after the filing with the Securities and

Exchange Commission of the said articles of incorporation, such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall become a corporation sole.

2. Any corporation sole may purchase and hold real estate and personal property for its church, charitable, benevolent or educational purposes, and may receive bequests or gifts for such purposes. (Sec 113)

b. Religious societies. - Any religious society or religious order, or any diocese, synod, or district organization of any religious denomination, sect or church, unless forbidden by the constitution, rules, regulations, or discipline of the religious denomination, sect or church of which it is a part, or by competent authority, may, upon written consent and/or by an affirmative vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the administration of

its temporalities or for the management of its affairs, properties and estate by filing with the Securities and Exchange Commission, articles of incorporation verified by the affidavit of the presiding elder, secretary, or clerk or other member of such religious society or religious order, or diocese, synod, or district organization of the religious denomination, sect or church. (Sec 116)

DISSOLUTION Methods of dissolution (Sec 117)

a. Voluntary dissolution where no creditors are affected (Sec

118) 1. Majority vote of the board of directors or trustees, 2. Affirmative vote of the stockholders owning at least

two-thirds (2/3) of the outstanding capital stock or members

3. Publication of the notice of time, place and object of the meeting for three (3) consecutive weeks in a newspaper published in the place where the principal office of said corporation is located; and if no newspaper is published in such place, then in a newspaper of general circulation in the Philippines, after sending such notice to each stockholder or member either by registered mail or by personal delivery at least thirty (30) days prior to said meeting.

4. A copy of the resolution authorizing the dissolution shall be certified by a majority of the board of directors or trustees and countersigned by the secretary of the corporation.

5. The Securities and Exchange Commission shall thereupon issue the certificate of dissolution.

b. Voluntary dissolution where creditors are affected (Sec 119) 1. Petition signed by a majority of its board of directors

or trustees or other officers having the management of its affairs for dissolution shall be filed with the SEC

2. Affirmative vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or members.

3. SEC shall issue an order reciting the purpose of the petition, fix a date on or before which objections thereto may be filed by any person, which date shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order.

4. Copy of the order shall be published at least once a week for three (3) consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is situated or if no such newspaper, posted for three (3) consecutive weeks in three (3) public places in such municipality or city.

5. Upon five (5) day's notice, given after the date on which the right to file objections as fixed in the order has expired, the Commission shall proceed to hear the petition and try any issue made by the objections filed; and if no such objection is sufficient, and the material allegations of the petition are true, it shall render judgment dissolving the corporation.

c. Dissolution by shortening corporate term (Sec 120) 1. Amendment of articles of incorporation to shorten the

corporate term 2. Submission to the SEC 3. Approval by the SEC

d. Involuntarily (Sec 121) 1. Verified complaint 2. After proper notice and hearing on the grounds

provided by existing laws, rules and regulations

Foreign Corporation One formed, organized or existing under any laws other than

those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business and a certificate of authority from the appropriate government agency. (Sec 123)

A resident agent may be either an individual (must be of good moral character and of sound financial standing ) residing in the Philippines or a domestic corporation lawfully transacting business in the Philippines. (Sec 127)

Any foreign corporation lawfully doing business in the Philippines shall be bound by all laws, rules and regulations

applicable to domestic corporations of the same class, except such only as provide for the creation, formation, organization or dissolution of corporations or those which fix the relations, liabilities, responsibilities, or duties of stockholders, members, or officers of corporations to each other or to the corporation. (Sec 129)

No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws. (Sec 133)

Grounds for the revocation of license 1. Failure to file its annual report or pay any fees as

required; 2. Failure to appoint and maintain a resident agent in the

Philippines 3. Failure, after change of its resident agent or of his

address, to submit to the Securities and Exchange Commission a statement of such change.

4. Failure to submit to the Securities and Exchange Commission an authenticated copy of any amendment to its articles of incorporation or by-laws or of any articles of merger or consolidation within the time prescribed

5. A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation

6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine


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Government or any of its agencies or political subdivisions;

7. Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license;

8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines; or

9. Any other ground as would render it unfit to transact business in the Philippines.

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS …

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