Law on Partnership and Corporation by Hector De Leon

Law on Business Organizations Reviewer PARTNERSHIP Art. 1767. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves. Definition Partnership is a contract whereby two or more persons bind themselves to contribute money, property or industry to a common fund with the intention of dividing profits among themselves. Elements 1. Intention to form a contract of partnership 2. Participation in both profits and losses 3. Community of interests Basic Features 1. Voluntary agreement 2. Association for profit 3. Mutual contribution to a common fund 4. Lawful purpose or object 5. Mutual agency of partners 6. Articles must not be kept secret 7. Separate juridical personality Characteristics 1. Consensual – perfected by mere consent. 2. Bilateral – formed by two or more persons creating reciprocal rights and obligations. 3. Preparatory - entered into as a means to an end. 4. Nominate – has a special name or designation. 5. Onerous – contributions in the form of either money, property and/or industry must be made. 6. Commutative – the undertaking of each partner is considered as the equivalent of that of the others. 7. Principal – its existence or validity does not depend on some other contract. Principle of Delectus Personae (choice of persons) – a person has the right to select persons with whom he wants to be associated with in partnership. Art. 1768. The partnership has a juridical personality separate and distinct from that of each of the partners even in case of

failure to comply with the requirements of Article 1772, first paragraph. Partnership, a juridical person As an independent juridical person, a partnership may enter into contracts, acquire and possess property of all kinds in its name, as well as incur obligations and bring civil or criminal actions. Thus, a partnership may be declared insolvent even if the partners are not. It may enter into contracts and may sue and be sued in its firm name or by its duly authorized representative. It is sufficient that service of summons be served on any partner. Partners cannot be held liable for the obligations of the partnership unless it is shown that the legal fiction of a different juridical personality is being used for a fraudulent, unfair or illegal purpose. Effect of failure to comply with statutory requirements Under Art 1772 Partnership still acquires personality despite failure to comply with the requirements of execution of public instrument and registration of name in SEC. Under Arts 1773 and 1775 Partnership with immovable property contributed, if without requisite inventory, signed and attached to public instrument, shall not acquire any juridical personality because the contract itself is void. This is also true for secret associations or societies. To organize a partnership not an absolute right It is but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose. Art. 1769. In determining whether a partnership exists, these rules shall apply: 1. Except as provided by Article 1825, persons who are not partners as to each other are not partners as to third persons. 2. Co-ownership or co-possession does not of itself establish a partnership, whether such co-ownership or copossessors do or do not share any profits made by the use of the property.

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Law on Business Organizations Reviewer 3. The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. 4. The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment: a. As a debt by installments or otherwise. b. As wages of an employee or rent to a landlord. c. As an annuity to a representative of a partner.

widow or deceased

d. As interest on a loan, though the amount of payment vary with the profits of the business. e. As the consideration for the sale of a goodwill of a business or other property by installments or otherwise. In general, to establish the existence of a partnership, all of its essential features or characteristics must be shown as being present. In case of doubt, art.1769 shall apply. This article seeks to exclude from the category of partnership certain features enumerated herein which, by themselves, are not indicative of the existence of a partnership. Persons not partners as to each other Persons who are partners as between themselves are partners as to third persons. Generally, the converse is true: if they are not partners between themselves, they cannot be partners as to third persons. Partnership is a matter of intention, each partner giving his consent to become a partner. However, whether a partnership exists between the parties is a factual matter. Where parties declare they are not partners, this, as a rule, settles the question between them. But where a person misleads third persons into believing that they are partners in a non-existent

partnership, they become subject to liabilities of partners (doctrine of estoppel).Whether or not the parties call their relationship or believe it to be a partnership is immaterial. Thus, with the exception of partnership by estoppel, a partnership cannot exist as to third persons if no contract of partnership has been entered into between the parties themselves. Co-ownership or co-possession There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons. Clear intent to derive profits from operation of business Co-ownership does not of itself establish the existence of a partnership, although it is one of its essential elements. This is true even if profits are derived from the joint ownership. The profits must be derived from the operation of business by the members of the association and not merely from property ownership. The law does not imply a partnership between co-owners because of the fact that they develop or operate a common property, since they may rightfully do this by virtue of their respective titles. There must be a clear intent to form a partnership. Existence of fiduciary relationship Partners have a well-defined fiduciary relationship between them. Co-owners do not. Should there be dispute; the remedy of partners is an action for dissolution, termination and accounting. For co-owners it would be one, for instance, for nonperformance of contract. People can become co-owners without a contract but they cannot become partners without one. Persons living together without benefit of marriage Property acquired governed by rules on coownership. Sharing of gross returns not even presumptive evidence of partnership The mere sharing of gross returns alone does not even constitute prima facie evidence of partnership, since in a partnership, the partners share profits after satisfying all of the partnership’s liabilities.

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Law on Business Organizations Reviewer Reason for the rule Partner interested in both failures and successes; it is the chance of loss or gain that characterizes a business. Where the contract requires a given portion of gross returns to be paid over, the portion is paid over as commission, wages, rent, etc. Where there is evidence of mutual management Where there is further evidence of mutual management and control, partnership may result. Receipt of share in the profits strong presumptive evidence of partnership An agreement to share both profits and losses tends strongly to establish the existence of a partnership. It is not conclusive, however, just prima facie and may be rebutted by other circumstances. When no such inference will be drawn Under par. 4 of art. 1769, sharing of profits is not prima facie evidence of partnership in the cases enumerated under subsections (a) – (e). In these cases, the profits are not shared as partner but in some other respects or purpose. The basic test of partnership is whether the business is carried on in behalf of the person sought to be held liable. Sharing of profits as owner It is not merely the sharing of profits, but the sharing of them as co-owner of the business or undertaking that makes one partner. Test: Does the recipient have an equal voice as proprietor in the conduct and control of the business? Does he own a share of the profits as proprietor of the business producing them? One must have an interest with another in the profits of a business as profits. Burden of proof and presumption The burden of proving the existence of a partnership rests on the party having the affirmative of that issue. The existence of a partnership must be proved and will not be presumed. The law presumes that those acting as partners have entered into a contract of partnership. Where the law presumes the existence of partnership, the burden of proof is on the party denying its existence. When a partnership is shown to exist, the presumption is that it continues and the burden of proof is on the person

asserting its termination. One who alleges partnership cannot prove it merely by evidence of an agreement using the term “partner”. Non-use of the term, however, is entitled to weight. The question of whether a partnership exists is not always dependent upon the personal arrangement or understanding of the parties. Parties intending to do a thing which in law constitutes partnership are partners. Legal intention is the crux of partnership. Parties may call themselves partners but their contract may be adjudged something quite different. Conversely, parties may expressly state that theirs in not a partnership yet the law may determine otherwise on the basis of legal intent. However, courts will be influenced to some extent by what the parties call their contract. Tests and incidents of partnership In determining whether a partnership exists, it is important to distinguish between tests or indicia and incidents of partnership. Only those terms of a contract upon which the parties have reached an actual understanding, either expressly or impliedly, may afford a test by which to ascertain the legal nature of the contract. Some of the typical incidents of a partnership are: 1. The partners share in profits and losses. 2. They have equal rights in the mgt and conduct of the partnership business. 3. Every partner is an agent of the partnership, and entitled to bind the others by his acts. He may also be liable for the entire partnership obligations. 4. All partners are personally liable for the debts of the partnership with their separate property except that limited partners are not bound beyond the amount of their investment. 5. A fiduciary relation exists between the partners. 6. On dissolution, the partnership is not terminated, but continues until the winding up of partnership is completed. Such incidents may be modified by stipulation of the partners. Similarities between a partnership and a corporation 1. Both have juridical personality separate and distinct from that of the individuals composing it; 3

Law on Business Organizations Reviewer 2. Both can only act through its agents; 3. Both are organizations composed of an aggregate of individuals; 4. Both distribute profits to those who contribute capital to the business; 5. Both can only be organized where there is a law authorizing is organization; 6. Partnerships are taxable as corporations. Art. 1770. A partnership must have a lawful object or purpose, and must be established for the common benefit or interest of the partners. When an unlawful partnership is dissolved by a judicial decree, the profits shall be confiscated in favor of the State, without prejudice to the provisions of the Penal Code governing the confiscation of the instruments and effects of a crime. Object or purpose of partnership

Right to return of contribution where partnership is unlawful Partners must be reimbursed the amount of their respective contributions. The partner who limits himself to demanding only the amount contributed by him need not resort to the partnership contract on which to base his claim or action. Since the purpose for which the contribution was made has not come into existence, the manager or administrator must return it, and he who has paid his share is entitled to recover it.

The provision of the 1st paragraph reiterates 2 essential elements of a contract of partnership: 1. Legality of the object; and 2. Community of benefit or interest of the partners. The parties possess absolute freedom to choose the transaction or transactions they must engage in. The only limitation is that the object must be lawful and for the common benefit of the members. The illegality of the object will not be presumed; it must appear to be of the essence of the relationship.

Right to receive profits where partnership is unlawful Law does not permit action for obtaining earnings from an unlawful partnership because for that purpose, the partner will have to base his action upon the partnership contract, which is null and without legal existence by reason of its unlawful object; and it is self-evident that what does not exist cannot be a cause of action. Profits earned do not constitute or represent the partner’s contribution. He must base his claim on the contract which is void. It would be immoral and unjust for the law to permit a profit from an industry prohibited by it. T he courts will refuse to recognize its existence, and will not lend their aid to assist either of the parties thereto in an action against each other. Therefore, there cannot be no accounting demanded of a partner for the profits which may be in his hands, nor can recovery be had.

Effects of an unlawful partnership 1. The contract is void and the partnership never existed in the eyes of the law; 2. The profits shall be confiscated in favor of the government; 3. The instruments or tools and proceeds of the crime shall also be forfeited in favor of the government; 4. The contributions of the partners shall not be confiscated unless they fall under #3.

Effect of partial illegality of partnership business Where a part of the business is legal and part illegal, a n account of that which is legal may be had. Where, w/o the knowledge or participation of the partners, the firm’s profits in a lawful business has been increased by wrongful acts, the innocent partners are not precluded as against the guilty partners from recovering their share of the profits.

A partnership is dissolved by operation of law upon the happening of an event which makes it unlawful. A judicial decree is not necessary to dissolve an unlawful partnership. However, advisable that judicial decree be secured. 3rd persons who deal w/ partnership w/o knowledge of illegal purpose are protected.

Effect of subsequent illegality of partnership business Contract will not be nullified. Where the business for which the partnership is formed is legal when the partnership is entered into, but afterward becomes illegal, an accounting may be had as to the business transacted prior to such time.

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Law on Business Organizations Reviewer Community of interest between the partners for business purposes The salient features of an ordinary partnership are a community of interest in profits and losses, a community of interest in the capital employed, and a community of power in administration. This community of interest is the basis of the partnership relation. However, although every partnership is founded on a community of interest, e very community of interest does not necessarily constitute a partnership. Property used in the business may belong to one or more partners, so that there is no joint property, other than joint earnings. To state that partners are co-owners of a business is to state that they have the power if ultimate control. But partners may agree upon concentration of management, leaving some of their members entirely inactive or dormant. Only one of these features, profit-sharing, seems to be absolutely essential. But a mere sharing of profits of itself does not of necessity constitute a partnership. The court must consider all the essential elements in light of the facts of the particular case before deciding whether a partnership exists. Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary .Form of partnership contract General rule No special form required for validity or existence of the contract of partnership. Contract maybe made orally or in writing regardless of the value of the contributions. Where immovable property or real rights are contributed Execution of public instrument necessary for validity of contract of partnership. To affect 3rd persons, the transfer of real property to the partnership must be duly registered in the Registry of Property. When partnership agreement covered by the Statute of Frauds An agreement to enter in a partnership at a future time, which by its terms is not to be performed w/in a year from the making thereof is covered by the Statute of Frauds. Such agreement is unenforceable unless it

is in writing or at least evidenced by some note or memorandum. Partnership implied from conduct Binding effect Existence of partnership may be implied from the acts or conduct of the parties, as well as from other declarations, and such implied contract would be as binding as a written and express contract. Ascertainment of intention of parties In determining whether a particular transaction constitutes a partnership, as between the parties, the intention as disclosed by the entire transaction, and as gathered from the facts and from the language employed by the parties as well as their conduct, should be ascertained. Conflict between intention and terms of contract If the parties intend a general partnership, they are general partners although their purpose is to avoid the creation of such a relation. Art. 1772. Every contract of partnership having a capital of three thousand pesos or more, in money or property, shall appear in a public instrument, which must be recorded in the Office of the Securities and Exchange Commission. Failure to comply with the requirements of the preceding paragraph shall not affect the liability of the partnership and the members thereof to third persons. Registration of partnership Partnership with capital of P3, 000 or more Requirements: 1. The contract must appear in a public instrument; 2. It must be recorded or registered w/ the SEC. However, failure to comply w/ the above requirements does not prevent the formation of the partnership or affect its liability and that of the partners to 3rd persons. But any partner is granted the right bylaw to compel each other to execute the contract in a public instrument. Purpose of registration Registration is necessary as a condition for the issuance of licenses to engage in business and trade. In this way, the tax liabilities of big partnerships cannot be evaded and the public can determine more 5

Law on Business Organizations Reviewer accurately their membership and capital before dealing with them. When partnership considered registered The objective of the law is to make the recorded instrument open to all and to give notice thereof to interested parties. This objective is achieved from the date the partnership papers are presented to and left for record in the Commission. This is the effective date of registration. If the certificate of recording is issued on a subsequent date, its effectively retroacts to date of presentation. Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said property is not made, signed by the parties, and attached to the public instrument. Partnership with contribution of immovable property Where immovable property contributed, failure to comply w/ the following requisites will render the partnership contract void: 1. The contract must be in a public instrument; 2. An inventory of the property contributed must be made, signed by the parties, and attached to the public instrument. Art. 1773 is intended primarily to protect 3rd persons. W/ regard to 3rdpersons, a de facto partnership or partnership by estoppel may exist. There is nothing to prevent the court from considering the partnership agreement an ordinary contract from which the parties’ rights and obligations to each other may be inferred and enforced. When inventory is not required An inventory is required only whenever immovable property is contributed. If not contributed or if personal property, no inventory required. Importance of making inventory of real property in a p a r t n e r s h i p An inventory is very important in a partnership to how much is due from each partner to complete his share in the common fund and how much is due to each of them in case of liquidation. The execution of a public instrument of partnership would be useless if there is no

inventory of immovable property contributed because w/o its description and designation, the instrument cannot be subject to inscription in the Registry of Property, and the contribution cannot prejudice 3rd persons. Art. 1774. Any immovable property or an interest therein may be acquired in the partnership name. Title so acquired can be conveyed only in the partnership name. Acquisition or conveyance of property by partnership Since partnership has juridical personality of its own, it may acquire immovable property in its own name. Title so acquired can be conveyed only in the partnership name. Art. 1775. Associations and societies, whose articles are kept secret among the members, and wherein any one of the members may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions relating to co-ownership. Secret partnerships without juridical personality Partnership relation is created only by the voluntary agreement of the partners. It is essential that the partners are fully informed not only of the agreement but of all matters affecting the partnership. Secret partnerships are not by nature partnerships. Secret partnerships shall be governed by the provisions relating to coownership. Importance of giving publicity to articles of partnership It is essential that the arts of partnership be given publicity for the protection not only of the members themselves but also 3rd persons from fraud and deceit. A member who transacts business for the secret partnership in his own name becomes personally bound to 3rd persons unaware of the existence of such association. Partnership liability may still result, however, in cases of estoppel. Art. 1776. As to its object, a partnership is either universal or particular. As regards the liability of the partners, a partnership may be general or limited. Classifications of partnership

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Law on Business Organizations Reviewer As to extent of its subject matter 1. Universal partnership. (Art. 1777) a. Universal partnership of all present property. (Art. 1778) b. Universal partnership of profits. (Art. 1780) 2. Particular partnership. (Art. 1783) As to liability of the partners General partnership: one consisting of general partners who are liable pro rata and subsidiary and sometimes solidarily w/ their separate property for partnership debts. Limited partnership: one formed by two or more persons having as members one or more general partners and one or more limited partners, the latter not being personally liable for the obligations of the partnership. As to duration Partnership at will: one in w/c no time is specified and is not formed for a particular undertaking or venture and w/c may be terminated at any time by mutual agreement of the partners, or by the will of any one partner alone; or one for a fixed term or particular undertaking w/c is continued after the end of the term or undertaking w/o express agreement. Partnership with a fixed term: one w/c the term for w/c the partnership is to exist is fixed or agreed upon or one formed for a particular undertaking. As to the legality of its existence De jure partnership: one w/c has complied w/ all the legal requirements for its establishment. De facto partnership: one w/c has failed to comply w/ all the legal requirements for its establishment. As to representation to others Ordinary or real partnership: one w/c actually exists among the partners and also as to 3rd persons. Ostensible partnership or partnership or partnership by estoppel: one w/c in reality is not a partnership, but is considered a partnership only in relation to those who, by their conduct or admission, are precluded to deny or disprove its existence. As to publicity Secret partnership: one wherein the existence of certain persons as partners is

not avowed or made known to the public by any of the partners. Open or notorious partnership: one whose existence is avowed or made known to the public by the members of the firm. As to purpose Commercial or trading partnership: one formed or the transaction of business. Professional or non-trading partnership: one formed for the exercise of a profession. Kinds of partners Under the Civil Code 1. Capitalist partner: one who contributes money or property to the common fund. 2. Industrial partner: one who contributes only his industry or personal service. 3. General partner: one whose liability to 3rd persons extends to his separate property. 4. Limited partner: one whose liability to 3rd persons is limited to his capital contribution. 5. Managing partner: one who manages the entity. 6. Liquidating partner: one who takes charge of the winding up of partnership affairs upon dissolution. 7. Partner by estoppel: one who is not really a partner but is liable as a partner for the protection of innocent 3rd persons. He is one represented as being a partner but who is not so between the partners themselves. 8. Continuing partner: one who continues the business of a partnership after it has been dissolved by reason of the admission of a new partner, or the retirement, death or expulsion of one or more partners. 9. Surviving partner: one who remains after a partnership has been dissolved by the death of any partner. 10. Subpartner: one who, not being a member of the partnership, contracts w/ a partner w/reference to the latter’s share in the partnership. Other classifications 1. Ostensible partner: one who takes active part and known to the public as a partner. 2. Secret partner: one who takes active part in the business but is not known to be a partner by outside parties nor held 7

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3.

4.

5.

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out as a partner by the other partners. He is an actual partner. Silent partner: one who does not take any active part in the business although he may be known to be a partner. Dormant partner: one who does not take active part in the business and is not known or held out as a partner. He would be both a silent and a secret partner. Original partner: one who is a member of the partnership from the time of its organization. Incoming partner: a person lately, or about to be, taken into an existing partnership as a member. Retiring partner: one withdrawn from the partnership; a withdrawing partner. Art. 1777. A universal partnership may refer to all the present property or to all the profits.

Art. 1778. A partnership of all present property is that in which the partners contribute all the property which actually belongs to them to a common fund, with the intention of dividing the same among themselves, as well as all the profits they may acquire therewith. Art. 1779. In a universal partnership of all present property, the property which belongs to each of the partners at the time of the constitution of the partnership becomes the common property of all the partners, as well as all the profits which they may acquire there with. A stipulation for the common enjoyment of any other profits may also be made; but the property which the partners may acquire subsequently by inheritance, legacy or donation cannot be included in such stipulation, except the fruits thereof. Universal partnership of all present property explained A universal partnership of profits is one w/c comprises all that the partners may acquire by their industry or work during the existence of the partnership and the usufruct of movable or immovable property w/c each of the partners may possess at the time of the celebration of the contract. In this kind of partnership, the following become the common property of all the partners:

Property w/c belonged to each of them at the time of the constitution of the partnership; Profits w/c they may acquire from the property contributed. Contribution of future property General rule: future properties cannot be contributed. The very essence of the contract of partnership that the properties contributed be included in the partnership requires the contribution of things determinate. The position of a partner is like that of a donor, and donations cannot comprehend future property. Thus, property subsequently acquired by 1.inheritance; 2. Legacy; or 3. Donation cannot be included by stipulation except the fruits thereof. Hence, any stipulation including property so acquired is void. Profits from other sources (not from properties contributed) will become common property only is there’s a stipulation. Art. 1780. A universal partnership of profits comprises all that the partners may acquire by their industry or work during the existence of the partnership. Movable or immovable property which each of the partners may possess at the time of the celebration of the contract shall continue to pertain exclusively to each, only the usufruct passing to the partnership. Universal partnership of profits explained A universal partnership of profits is one w/c comprises all that the partners may acquire by their industry or work during the existence of the partnership and the usufruct of movable or immovable property w/c each of the partners may possess at the time of the celebration of the contract. Ownership of present and future property The partners retain their ownership over their present and future property. What passes to the partnership are the profits or income and the use or usufruct of the same. Consequently, upon dissolution, such property is returned to the partners who own it. Profits acquired through chance Since the law only speaks of profits w/c the partners may acquire by their industry or work, profits acquired purely by chance are not included. 8

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Fruits of property subsequently acquired Fruits of property subsequently acquired by the partners do not belong to the partnership. Such profits, however, may be included by express stipulation. Art. 1781. Articles of universal partnership, entered into without specification of its nature, only constitute a universal partnership of profits. Presumption in favor of universal partnership of profits Reason for presumption: universal partnership of profits imposes less obligations on the partners, since they preserve the ownership of their separate property. Art. 1782. Persons who are prohibited from giving each other any donation or advantage cannot enter into a universal partnership. Limitations upon the right to form a partnership Persons who are prohibited by law to give donations cannot enter into a universal partnership for the reason that each of the partners virtually makes a donation. To allow it would be permitting them to do indirectly what the law expressly prohibits. A partnership formed in violation of this article is null and void. Consequently, no legal personality is acquired. A husband and wife, however, may enter into a particular partnership or be members thereof. Relevant provisions: Art. 87: Donations between spouses during marriage void, except moderate gifts on occasion of family rejoicing. Also applies to those living together as husband and wife w/o valid marriage. Art. 739: The following donations are void: Those made between persons who are guilty of adultery or concubinage at the time of the donation (no need for conviction; preponderance of evidence only required); Those made between persons found guilty of the same criminal offense, inconsideration thereof; c.)Those made to a public officer or his wife, descendants and ascendants, by reason of his office.

Art. 1783. A particular partnership has for its object determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation. Particular partnership explained A particular partnership is one w/c is neither a universal partnership of present property nor a universal partnership of profits. The fundamental difference between a universal partnership and a particular partnership lies in the scope of their subject matter or object. In the former, the object is vague and indefinite, contemplating a general business w/ some degree of continuity, while in the latter, it is limited and well-defined, being confined to an undertaking of a single, temporary, or ad hoc nature. Business of partnership need not be continuing in nature The carrying on of a business of a continuing nature is not essential to constitute a partnership. An agreement to undertake a particular piece of work or a single transaction or a limited number of transactions and immediately divide the resulting profits would seemt o fall w/in the meaning of the term “partnership” as used in the law. Rule under American law The above is not true under the Uniform Partnership Act w/c does not include joint ventures w/c exists for a single transaction or a limited number of transactions. Joint venture While a joint venture is not a formal partnership in the legal or technical sense, both are governed, subject to certain qualifications, practically by the same rules or principles of partnership. This is logical since in a joint venture, like in a partnership, there is a community of interest in the business and a mutual right of control and an agreement to share jointly in profits and losses. Corporation as a partner While under the Philippine Civil Code, a joint venture is a form of partnership w/ a legal personality separate and distinct from the parties composing it, and should thus be governed by the law of partnership, the Supreme Court has recognized the distinction between these two business 9

Law on Business Organizations Reviewer forms, and has held that although a corporation cannot enter into a partnership contract, it may, however, engage in a joint venture if the nature of the venture is authorized by its charter. Art. 1784. A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated. (1679) Art. 1785. When a contract for a fixed term or particular undertaking is continued after the termination of such term or particular undertaking without any express agreement, the rights and duties of the partners remains the same as they were at such termination, so far as is consistent with a partnership at will. A continuation of the business by the partners or such of them as habitually acted therein during the term, without any settlement or liquidation of the partnership affairs, is prima facie evidence of a continuation of the partnership. Partnership at will is one in which no term of existence has been fixed and which may be terminated at the will of any partners. Art. 1786. Every partner is a debtor of the partnership for whatever he may have promised to contribute thereto. He shall also be bound for warranty in case of eviction with regard to specific and determinate things which he may have contributed to the partnership, in the same cases and in the same manner as the vendor is bound with respect to the vendee. He shall also be liable for the fruits thereof from the time they should have been delivered, without the need of any demand. Obligations of partners to contribute: 1. Shall deliver at the beginning of the partnership or, if a different date has been agreed upon, at the stipulated time the properties he agreed to contribute; 2. Shall answer for eviction, in case the partnership is deprived of the ownership of any specific property he contributed; 3. Shall answer to the partnership for the fruits of the properties whose delivery he delayed from the date he should

have contributed it up to actual delivery without necessity of any demand; 4. Shall preserve said properties with the diligence of a good father of a family pending their delivery to the partnership; 5. And shall indemnify the partnership for any damage caused it by the retention of said properties or by the delay in their contribution. Art. 1787. When the capital or part thereof which a partner is bound to contribute consists of goods, their appraisal must be made in the manner prescribed in the contract of partnership, and in the absence of stipulation, it shall be made by experts chosen by the partners, and according to current prices, the subsequent changes thereof being for the account of the partnership. Art. 1788. A partner who has undertaken to contribute a sum of money and fails to do so becomes a debtor for the interest and damages from the time he should have complied with his obligation. The same rule applies to any amount he may have taken from the partnership coffers, and his liability shall begin from the time he converted the amount to is own use. Liability of partner for estafa Failure to return the money taken, there is the element of fraudulent appropriation of the money delivered to a partner with specific instructions for the use of the partnership, then estafa is committed under the Revised Penal Code. Art. 1789. An industrial partner cannot engage in any business for himself, UNLESS the partnership expressly permits him to do so; and if he should do so, the capitalist partners may either exclude him from the firm or avail themselves of the benefits which he may have obtained in violation of this provision, with a right to damages in either case. Industrial partner is one who contributes his industry or labor in the partnership. Industrial partner barred from engaging in business

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Law on Business Organizations Reviewer To prevent any conflict of interest between the industrial and the partnership, and to insure faithful compliance by said partner with his prestation. Art. 1790. Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the capital of the partnership. Art. 1791. If there is no agreement to the contrary, in case of an imminent loss of the business of the partnership, any partner who refuses to contribute an additional share to the capital, except an industrial partner, to save the venture, shall be obliged to sell his interest to the other partners. Art. 1792. If a partner authorized to manage collects a demandable sum, which was owed to him in his own name, from a person who owned the partnership another sum also demandable, the sum thus collected shall be applied to the two credits in proportion to their amounts, even though he may have given a receipt for his own credit only; but should he have given it for the account of the partnership credit, the amount shall be fully applied to the latter. The provisions of this article are understood to be without prejudice to the right granted to the debtor by Art. 1252, but only if the personal credit of the partner should be more onerous to him.

compensate them with the profits and benefits which he may have earned for the partnership by his industry. However, the courts may equitably lessen this responsibility if through the partner’s extraordinary efforts in other activities of the partnership, unusual profits have been realized. Partner liable for damages caused the partnership Art. 1794 follows the general rule of contracts that where a person is at fault in the fulfillment of his obligations he shall be liable for the payment of damages. The partner’s fault, however, must be determined in accordance with the circumstances of person, time and place. Liquidation necessary to ascertain damages It is first necessary that a liquidation of the business thereof be made to the end that the profits and losses may be known and the causes of the latter and the responsibility of the defendant as well as the damages which each partner may have suffered, may be determined. Art. 1795. The risk of specific and determinate things, which are not fungible, contributed to the partnership so that only their use and fruits may be for the common benefit, shall be borne by the partner who owns them.

Requisites: 1. Two existing debts 2. Both debts must be demandable 3. The one who collected the debt is a partner who is authorized to manage and is actually managing the partnership

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

Art. 1793. A partner who has received, in whole or in part, his share of a partnership credit, when the other partners have not collected theirs, shall be obliged, if the debtor should thereafter become insolvent, to bring to the partnership capital what he received even though he may have given receipt for his share only.

Risk of Specific and determinate things The risk of specific and determinate things which are not fungible, like a boat, only the use of which is contributed, shall be borne by the partner as the ownership thereof is not transferred to the partnership. This follows the general rule that the thing perished with the owner.

Art. 1794. Every partner is responsible to the partnership for damages suffered by it through his fault, and he cannot

Things fungible or perishable If the things contributed are fungible or cannot be kept without deteriorating 11

Law on Business Organizations Reviewer (perishable) like wine, oil, etc., even if they are contributed only for the use of the partnership, the risk of loss shall be for the account of the partnership for the latter cannot make use of them without their getting consumed or presumed. Things contributed to be sold If the things contributed are to be sold, the partnership bears the risk of loss, for obviously the partnership is the intended owner; otherwise, the firm cannot make the sale. Things brought and appraised in inventory The partnership bears the risk of loss of things brought and appraised in the inventory as this has the effect of an implied sale thus making the partnership the owner of said things. Art. 1796. The partnership shall be responsible to every partner for the amounts he may have disbursed on behalf of the partnership and for the corresponding interest, from the time the expenses are made; it shall also answer to each partner for the obligations he may have contracted in good faith in the interest of the partnership business, and for the risk inconsequence of its management. Responsibility of the partnership to a partner If a partner has advanced funds for the partnership, he is entitled to recover the amounts advanced by him with interest. This must be so for the reason that a partner is a mere agent of the partnership and under the rules of agency, an agent who advances funds for his principal may recover the same interest. Art. 1797. The profits and losses shall be distributed in conformity with the agreement. If only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same proportion. In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to what he may have contributed, but the industrial partner shall not be liable for the losses. As for the profits, the industrial partner shall receive such share as may be just and equitable under the circumstances. If besides his services he has contributed capital, he shall

also receive a share in the profits in proportion to his capital. Rules in profit sharing: 1. The partners share the profits in accordance with the ratio established by their contract. 2. If there is no such stipulation in the partnership contract, then: 1. If all are capitalist partners they have the profits in proportion to their capital contributions; 2. If there are capitalist as well as industrial partners, the industrial partner get a share each that is just and equitable while the capitalist partners divide the remainder in proportion to their capital contributions; and 3. If there is a capitalist-industrial partner, he gets a share in the profits as an industrial partner and an additional share in proportion to his capital contribution to be determined as in (b), above. Rules in loss sharing: 1. The stipulation in the partnership agreement regarding loss sharing must be followed. 2. If there is no such agreement, but the contract provides for a profit sharing ration, the profit sharing ratio shall also be the loss sharing ration. 3. In the absence of loss sharing and profit sharing stipulations in the contract, then the loss shall be borne by the partners in proportion to their capital contributions; but a purely industrial partner is exempted from participation in the loss. Share of industrial partner in profits and losses Unless agreed upon, the industrial partner shall receive such share in the profits as may be just and equitable under the circumstances. As for the losses, the industrial partner is not liable. However, under Art. 1816, if the partnership has a contractual debt and it cannot pay, the industrial partner equally with the capitalist partners, can be compelled by the creditor to pay his pro rata share out of his own property or assets. Art. 1798. If the partners have agreed to entrust to a third person the designation of 12

Law on Business Organizations Reviewer the share of each one in the profits and losses, such designation may be impugned only when it is manifestly inequitable. In no case may a partner who has begun to execute the decision of the third person, or who has not impugned the same within a period of three months from the time he had knowledge thereof, complain of such decision. The designation of profits and losses cannot be entrusted to one of the partners. Reason for the provision Admittedly, the designation of profits and losses cannot be entrusted to one of the partners as the fulfillment of a contract cannot be left to one of the contracting parties. It may, however, be entrusted to a third person by common interest. Art. 1799. A stipulation which excludes one or more partners from any share in the profits or losses is void. Stipulation to exclude a partner from profits and losses is void The law does not allow a provision in the contract of partnership excluding one or more partners from sharing in the profits and losses. The reason is that a partnership is organized for the common benefit or interest of the partners. Reason for exclusion of industrial partner An industrial partner is not liable for losses because if the partnership fails to realize any profits, the industrial partner would have contributed his labor in vain. Furthermore, the industrial partner cannot withdraw the work already done by him for the partnership. Art. 1800. The partner who has been appointed manager in the articles of the partnership may execute all acts of the administration despite the opposition of his partners, unless he should act in Bad faith., and his powers is irrevocable without the just or lawful cause. The vote of the partners representing the controlling interest shall be necessary for such revocation of power. A power granted after the partnership has constituted may revoked at any time. Each partner has a right to an equal voice in the conduct of the partnership business. This right is not dependent on the amount or size of the

partner’s capital contribution. Appointed as manager after the constitution of the partnership Partner appointed in arts of partnership may execute all acts of administration notwithstanding the opposition of the other partners, unless he should act in bad faith. His power is revocable only upon just and lawful cause and upon the vote of the partners representing the controlling interest. Reason: revocation represents change in terms of contract. In case of mismanagement: Usual remedies allowed by law including dissolution. Appointment as manager after the constitution of the partnership Appointment may be revoked at any time for any cause what so ever. Reason: revocation not founded on a change of will on the part of the partners. Appointment not condition of contract. It is merely a simple contract of agency, which may be revoking at any time. It is believe that the vote for revocation must also represent the controlling interest. Scope of the power of the managing partner General rule: partner appointed as manager has all the powers of a general agent as well as all the incidental powers necessary to carry out the object of the partnership in the transaction of its business. Exception: When powers of manager is specifically restricted. A managing partner may not bind the partnership by contract foreign to its business. Compensation for service rendered Partner Generally not entitle to compensation, In the absence of an agreement to the contrary, each member of the partnership assumes the duty to give his time, attention, and skill to the management of its affairs, as may be reasonably necessary to the success of the common enterprise; and for this service a share of the profits is his only compensation. In managing partnership affairs, a partner is practically taking care of his own interest or managing his own business. In the absence of any prohibition in the arts. Of partnership for the payment of salaries to general partners, there is 13

Law on Business Organizations Reviewer nothing to prevent the partners to enter into a collateral verbal agreement to that effect. EXCEPTIONS: In proper cases, the law may imply a contract for compensation; 1. A partner engaged by his co-partners to perform services not required of him in fulfilment of the duties and in capacity other than that of a partner. 2. When there is extraordinary neglect on the part of one partner to perform his duties, imposing entire burden on remaining partner. 3. One partner may employ the other to do work for him outside of and independent of the co-partnership. 4. Partners exempted by terms of partnership from rendering services may demand pay for services rendered. 5. Where one partner is entrusted with management and devotes his whole time and devotion at the instance of the other partners who are attending to their individual business and giving no time or attention to the partnership business. Art. 1801. If two or more partners have been intrusted with the management of the partnership without the specification of their respective duties or without the stipulation that one of them shall not act without the consent of all others, each one separately execute all acts of administration, but if anyone of them should oppose the act of each other, the decision of the majority shall prevail. In the case of tie the partners owning the controlling interest shall decide the matter. Where respective duties of two or more managing partners not specifies. Each one may separately perform acts of administration 1. If one or more of the managing partners shall oppose the acts of the others, then the decision of the majority of the managing partners shall prevail. Right to oppose can be exercise only by those entrusted with mgt. 2. In case of tie, matter shall be decided by the vote of the partners owning the controlling interest. REQUISITES FOR APPLICATION OF RULE 1. Two or more partners have been appointed as managers; 2. There is no specification of their

respective duties; 3. There is no stipulation that one of them shall not act without the consent of all the others. ART. 1802 In case it should have been stipulated that none of the managing partner shall act without the consent of the others, the concurrence of all shall be necessary for validity of the acts, and the absence or disability of any one of them cannot alleged, unless there is imminent danger of grave or irreparable injury to the partnership. When unanimity of action stipulated concurrence necessary for validity of acts The partners may stipulate that none of the managing partners shall act without the consent of the others. In such a case, the unanimous consent of all the managing partners shall be necessary for the validity of their acts. This consent is so indispensable that neither absence nor disability of any one of them may allege as excuse to dispense with requirement. Exception: When there is imminent danger of grave or irreparable injury to the partnership then a partner may act alone without consent of partner who is absent or under disability. Consent of managing partners not necessary in routine transactions The requirement of written authority refers evidently to formal and unusual written contracts. Art. 1803. When the manner of management has not agreed upon, the following rules shall observed: 1. All partners shall be considered agents and whatever any one of them may do alone shall bind the partnership without prejudice to the provision of article 1801 2. None of the partners may, without the consent of others, make any important alteration in the immovable property of the partnership, even if it may be useful to the partnership, but if there ids refusal of the consent by the other partners is manifestly prejudicial to the interest of the partnership, the court’s intervention may be sought.

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Law on Business Organizations Reviewer Rules when manner of the management that has not agreed upon all partners considered as managers and agents All partners shall have equal rights in the mgmt. and conduct of partnership affairs. All of them shall considered mgrs. and agents and whatever any one of them may do alone shall bind the partnership. If there is timely opposition, however, the matter shall decided by majority vote. In case of tie, vote of partners representing controlling interest. Unanimous consent required for alteration of immovable property The consent need not be express. It may presume from the fact of knowledge of the alteration without interposing any objection. Prohibition only applies to immovable property because of the greater importance of this kind of property, and the alteration thereof must be important. This would be an act of strict dominion. If refusal to give consent is manifestly prejudicial to the interest of the partnership, court intervention maybe sought. Consent may presume from silence (lack of opposition despite knowledge).If alteration is necessary for preservation of the property, consent of the other partners not required. Art. 1804. Every partner may associate another person with him in his share, but the associates shall not admitted into the partnership without the consent of all other partners, even of the partner having an associate should be a manager of subpartnership nature The partnership formed between a member of a partnership and a third Person for a division of the profits coming to him from the partnership enterprise is termed subpartnership. It is a partnership within a partnership and is distinct and separate from the main or principal partnership. Right of the person associated with the partnership’s share Subpartnership agreements do not affect the composition, existence, or operations of the firm. The subpartners are partners interest, However, in the absence of the mutual assent of all the parties, a subpartner does

not become a member of the partnership, even if the other partners know about the agreement. Not being a member of the partnership, he does not acquire the rights of a partner nor is he liable for its debts. Reason for the rule Partnership is based on mutual trust and confidence among the partners. Inclusion of new partner would be a modification of the original contract of partnership requiring unanimous consent of all the partners. Prohibition applies even if person associated is already a partner. Art. 1805. The partnership books shall be kept, subject to any agreement between the partners, at the principal place of the business of the partnership, and every partner shall at any reasonable hour have access to and may inspect and copy any of them. Keeping of partnership books Partner with duty to keep partnership books The duty to keep true and correct books showing the firm’s accounts, such books being at all times open to inspection of all members of the firm, primarily rests on the managing or active partner. It is presume that the partners have knowledge of the contents of the partnership books and that said books state accurately the state of accounts, but errors can corrected. Rights with the respect to partnership books Books should kept at the principal place of business as each partner has the right to free access to them and to inspect or copy any of them at any reasonable time, even after dissolution. Inspection rights not absolute can restrained from using info for other than partnership purpose. Access to partnership books Rights can exercise at any reasonable hour. This means reasonable hours on business days throughout the year and not merely during some arbitrary period of a few days chosen by the managing partners. Art. 1806. Partners shall render on demand true and full information of all things affecting the partnership to any partner or the legal representative of any deceased 15

Law on Business Organizations Reviewer partner or of any partner under legal disability. Duty to render information, there must be no concealment between partners in all matters affecting the partnership. Information must use only for partnership purpose. Not just on demand but partner also has duty of voluntary disclosure. However, duty to render info does notarise with respect to matters appearing in partnership books since each partner has the right to inspect those. Good faith not only requires that a partner should not make a false statement but also that he should abstain from any false concealment. Art. 1807. Every partner must account the partnership for any benefit, and hold as trustee for it any profits derived from him without the consent of the partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of his property. The relation between the partners is essentially fiduciary involving trust and confidence, each partner considered in law, as he is, in fact, the confidential agent of the others. The duties of a partner are analogous to those of a trustee. Duty to act for common benefit Cannot use and apply exclusively to own individual benefit partnership assets or results of knowledge and info gained in character of partner. Managing partners particularly owe a fiduciary duty to inactive partners. Duty begins during the formation of partnership Principle of good faith applies not only during partnership but during the negotiations leading to the formation of the partnership. Also, a person who agreed w/ another to form a partnership has the obligation to account for commissions and discounts received in acquiring property for the future partnership. Duty continues even after the dissolution of the partnership Duty of partner to act w/ utmost good faith towards his co-partners continues throughout the entire life of the partnership even after dissolution for whatever reason or whatever means, until the relationship is terminated,

i.e. the winding up of partnership affairs is completed. Duty to account for secret and similar profits The duty of a partner to account as a fiduciary operates to prevent from making a secret profit out of the operation of the partnership and from carrying on the business for his private advantage or a business in competition w/ the firm w/o consent of other partners. Violation may be ground for dissolution. Duty to account for earnings accruing even after termination of partnership If a partner uses info obtained by him from the partnership for his own account w/o the consent of the other partners, he is liable to account for any benefit he might obtain. Duty to make full disclosure of information belonging to partnership A partner is also subject to the fiduciary duty of undivided loyalty and complete disclosure of info of all things affecting the partnership. By Information is meant information, which can be used for the purposes of the partnership. Info cannot use for a partner’s private gain – even if after termination. Duty not to acquire interest or right adverse to partnership If partner does, he holds it in trust for the benefit of the partnership and must account to the firm for the profits of the transaction, unless it appears that the others consented Art. 1808. The Capitalist partners cannot engage for their own account in any operation, which is of the kind of business in which the partnership is engaged, unless there is a stipulation to the contrary. Any capitalist partner violating this prohibition shall bring to the common funds any profit accruing to him from his transactions, and shall personally bear all the losses. Prohibition against partner engaging the business Prohibition relative – Prohibition against capitalist partner to engage in business is relative, unlike the industrial partner who is absolutely prohibited from engaging in any business for himself. Capitalist partner is only prohibited from engaging for his own account in any operation which is the same 16

Law on Business Organizations Reviewer as or similar to the business in which the partnership is engaged and which is competitive w/ said business VIOLATION – Obligation to bring to common fund any profits derived and in case of losses, he shall bear them alone. Partners, however, by stipulation may permit it. The law permits him to carry on a business not connected or competing with that of the partnership. Law is silent on whether he can engage in same line of business for the account of another. Prohibition still applies because of fiduciary position imposing duties of utmost good faith. He may not carry on any other business in rivalry w/ the partnership. Reason for prohibition Fiduciary nature of relationship imposes obligation of utmost good faith. Rule prevents use of info obtained in course of transaction of partnership business or because of connection w/ firm regarding business secrets and clientele of firm to its prejudice. Art. 1809. Any partner shall have the right to a formal account as partnership affairs: 1. If he is wrongfully excluded from the partnership business or possession of its property by his co-partner; 2. If the right exists under the terms of any agreement; 3. Provided by article 1807; 4. Whenever other circumstances render it just and reasonable, Right of the partner to a formal account. General rule: During existence of partnership, a partner is not entitled to a formal account of partnership affairs. Reason: rights of partner amply protected in arts1805 and 1806. In addition, it would cause much inconvenience and unnecessary waste of time. Exception: In the special and unusual situations enumerated under art. 1809. Right of partner to demand an accounting w/o bringing about dissolution is a necessary corollary to right to share in profits. A formal account is a necessary incident to the dissolution of the partnership.

Art. 1810. The property rights of a partner are: 1. His rights in specific partnership property; 2. His interest in the partnership; 3. His right to participate in the management, extent of property rights of a partner. Principal Rights 1. Rights in specific partner property; 2. Interest in partnership; 3. Right to participate in management. RELATED RIGHTS 1. Right to reimbursement for amounts advanced to partnership and to indemnification for risks inconsequence of management (art. 1796). 2. Right of access and inspection of partnership books (art. 1805). 3. Right to true and full information of all things affecting partnership (art. 1806). 4. Right to formal account of partnership affairs under certain circumstances (art. 1809). 5. Right to have partnership dissolved also under certain conditions (arts. 18301831). Partnership property and capital distinguished Partnership property Changes Variable: its value value may vary from day today w/ changes in market value

partnership Partnership capital Constant: it remains unchanged as the amount is fix by agreement of the partners, and is not affected by fluctuations in the value of the partnership property, although it may be increased and decreased by 17

Law on Business Organizations Reviewer

Assets Included

Includes not only the original capital contributions, but also all property subsequently acquired because of the partnership or w/ partnership funds, including partnership name and goodwill.

unanimous consent of the partners. The aggregate of the individual contributions made by the partners in establishing or continuing the partnership.

Ownership of certain property Property use by the partnership – Where there is no express agreement that property used by a partnership constitutes partnership property, such use does not make it partnership property, and whether it is so depends on the intention of the parties, w/c may be shown by proving an express agreement or acts of particular conduct. The intent of the parties is the controlling factor. Property acquired by a partner with partnership funds – Unless a contrary intention appears, property acquired by a partner in his own name w/ partnership funds is partnership property. However, if the property was acquired after dissolution but before the winding up of the partnership affairs, it would be his separate property but he would be liable to account to the partnership for the funds used in its acquisition. Art. 1811. A partner is co-owner with his partners of specific partnership property. The incidents of this co-ownership are such that; 1. A partner, subject to the provision of this title and any agreement between the partner, has an equal right with his partners to possess specific partnership property for partnership purposes; but he has no right to possess such property for any other purpose without the consent of his

partners; 2. A partner’s right in specific partnership property is not assignable except in connection with the assignment of rights of all the partners in the same property; 3. A partner’s right in specific partnership property is not subject to attachment or execution, except on a claim against the partnership; 4. A partner’s right in specific partnership property is not subject to legal support under art. 291 nature of a partner’s right in specific partnership property Art. 1811 contemplates tangible property but not intangible things. A partner is a coowner w/ his partners of specific partnership property, but the rules on coownership do not necessarily apply. The legal incidents of this tenancy in partnership are distinctively characteristic of the partnership relation. They are as follows: Equal rights of possession - Ordinarily, a partner has an equal right to possess specific partnership property for partnership purposes. None of the partner scan possesses and uses the specific partnership property other than for partnership purposes w/o the consent of the other partners. Should any of them use the property for his own benefit, he must account, like a stranger, to the others for the profits derived there from or the value of his wrongful possession or occupation. A partner wrongfully excluded from possession of partnership property by a co-partner has a right to formal account and may even apply for a judicial decree of dissolution. On the death of a partner, his right in specific partnership property vests in the surviving partners. By agreement, the right to possess specific partnership property may surrender. In the absence of special agreement, however, neither partner separately owns, or has the exclusive right of possession of any partnership property or any proportional part thereof. Each has dominion over the entire partnership property. The possession of partnership property by one partner is the possession of all until his possession becomes adverse. A partner cannot initiate title by adverse possession until and unless he makes an adverse claim. 18

Law on Business Organizations Reviewer

Right not assignable - A partner cannot separately assign his right to specific partnership property but all of them can assign their rights in the same property. Reasons for non-assignability: 1. It prevents interference by outsiders in partnership affairs; 2. It protects the right of other partners and partnership creditors to have partnership assets applied to firm debts; 3. It is often impossible to determine the extent of a partner’s beneficial interest in a particular partnership asset. Reason for impossibility: Each partner, having a beneficial interest in the partnership property considered as a whole, has a beneficial interest in each part. Where, however, none of the above reasons apply, an authorized assignment by a partner of his right in specific partnership property is void, but it may be regarded as a valid assignment of the partner’s interest in the partnership. The law allows a retiring partner to assign his rights in partnership property to the partner(s) continuing the business. Right limited to share of what remains after partnership debts has been paid Strictly speaking, no particular partnership property or any specific or an aliquot part thereof can be considered the separate or individual property of any partner. The whole of partnership property belongs to the partnership considered as a juridical person, and a partner has no interest in it but his share of what remains after all partnership debts are paid. Consequently, specific partnership property is not subject to attachment, execution, garnishment, or injunction, w/o the consent of all the partners except on a claim against the partnership. For the same reason that the property belongs to the partnership, the partners cannot claim any right under the homestead or exemption laws when it is attached for partnership debts. However, a judgment creditor may levy upon a partner’s interest in the partnership itself because it is actually his property, by means of a “charging order.” The right of the partners to specific partnership property is not subject to legal support since the property belongs to the

partnership and not to the partners. However, their interest in the partnership is. The method of reaching a judgment debtor’s interest in partnership property is specifically set forth in art.1814. Art. 1812. A partner’s interest in the partnership is his share of the profits and surplus. Share of profits and surplus – The partner’s interest in the partnership consists of his share in the undistributed profits during the life of the partnership as a going concern and his share in the undistributed surplus after its dissolution. Profits: the excess of returns over expenditure in a transaction or series of transactions; or the net income of the partnership for a given period. Surplus: the assets of the partnership after partnership debts and liabilities are paid and settled and the rights of the partners among themselves are adjusted. It is the excess of assets over liabilities. If the liabilities are more than the assets, the difference represents the extent of the loss. Art.1813. A conveyance by a partner by his whole interest in the partnership does not of itself dissolve the partnership, or, against the other partners in the absence of agreement, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any information or account of the partnership transactions, or to inspect the partnership books; however it merely entitles the assignee to receive the accordance with his contract, the profits to which the assigning partner would otherwise be entitled. In case of fraud in the management of the partnership, the assignee may avail himself of the usual remedies. In case of dissolution of the partnership, the assignee is entitle to receive his assignor’s interest and may require an account from the date only of the last account agreed to by all partners. Effect of assignment of partner’s whole interest in partnership. A partner’s right in specific partnership property is not assignable but he may assign 19

Law on Business Organizations Reviewer his interest in the partnership to any of his co-partners or to a third Person irrespective of the consent of the other partners, in the absence of agreement to the contrary. Rights withheld from assignee 1. To interfere in the management. 2. To require any information or account. 3. To inspect any of the partnership books. No one can be compelled to be partners w/ someone else. The assignment does not divest the assignor of his status and rights as a partner nor operate as dissolution. The law, however, provides the nonassigning collaborates w/ a ground for dissolving the partnership if they so desire. Remedy of other partners Dissolution of partnership not intended – Many partnership agreements are made merely as security for loans, the assigning partner never intending to destroy the partnership relation. If the assigning partner neglects his duties after assignment, the other partners may dissolve the partnership under art. 1830. Dissolution of partnership intended – A partner’s conveyance of his interest in the partnership operates as dissolution of the partnership only when it is clear that the parties contemplated and intended the entire withdrawal from the partnership of such partner and the termination of the partnership as between the partners. Rights of assignee of partner’s interest 1. To receive in accordance w/ his contract the profits accruing to the assigning partner; 2. To avail himself of the usual remedies provided by law in the event of fraud in the management; 3. To receive the assignor’s interest in case of dissolution; 4. To require an account of partnership affairs, but only in case the partnership is dissolved, and such account shall cover the period from the date only of the last account agreed to by all partners. The purchaser of a partner’s interest may apply to the court for dissolution after the termination of the specified term or undertaking or at any time if the partnership is one at will. Art. 1814.

Without prejudice to the

preferred rights of the partnership creditors on due application to a competent court by any judgement creditor of the partner, the court which entered the interest of the debtor partner with payment of the unsatisfied amount of such judgement debt with the interest thereon; and may then or later appoint a receiver of his share of the profits, and of any other money due or to fall due to him in respect of the partnership, and make all other orders, directions and accounts and inquiries which the debtor partner might have made, or which circumstances of the case may require. The interest charged may redeem at any time before foreclosure, or in any case of a sale being directed by the court, may be purchase without thereby causing dissolution: 1. With separate property, by any one or more of the partners; 2. With partnership property, by any one or more of the partners with the consent of all the partners a whose interest are not so charged or sold, nothing in this title shall be held to deprive a partner of his right, if any, under the exemption laws, as regards his interest in the partnership. Application for a charging order after securing judgement on his credit While a separate creditor of a partner cannot attach or levy upon specific partnership property for the satisfaction of his credit because partnership assets are reserved for partnership creditors, he can secure a judgment on his credit and then apply to the proper court for a “charging order”, subjecting the interest of the debtor partner in the partnership w/ the payment of the unsatisfied amount of such judgment w/ interest thereon w/ the least interference w/ the partnership business and the rights of the other partners. By virtue of the charging order, any amount or portion thereof w/c the partnership would otherwise pay to the debtor-partner should instead be given to the judgment creditor. This remedy, however, is w/o prejudice to the preferred rights of partnership creditors whose claims should be satisfied first. Availability of other remedies Art. 1814 have made this an exclusive 20

Law on Business Organizations Reviewer remedy so that a writ of execution will not be proper. However, if the judgment debt remains unsatisfied, the court may resort to other courses of action notwithstanding the issuance of the charging order. Redemption or purchase of interest charged Redemptioner – The interest of the debtorpartner so charged may be redeemed or purchased w/ the separate property of any one or more of the partners, or w/ partnership property but w/ the consent of all the partners whose interests are not so charged or sold. Redemption Price – The value of the partner’s interest in the partnership has no bearing on the redemption price w/c is likely to be lower since it will be dependent on the amount of the unsatisfied judgment debt. Right of redeeming non-debtor partner – There deeming non-debtor partner does not acquire absolute ownership over the debtor-partner’s interest but holds it in trust for him consistent w/ principles of fiduciary relationship. Rights of partner under exemption laws A partner cannot claim any right under the homestead laws or exemption laws when specific partnership property is attached for partnership debt. W/ respect, however, to the partner’s interest in the partnership as distinguished from his interest in specific partnership property, the partner may avail himself of the exemption laws after partnership debts have been paid. A partner’s interest or share in the partnership property is really his property. Art. 1815. Every partnership shall operate under a firm name, which may or may not include the name of one or more of the partners, those who, not being members of the partnership, include their names in the firm name, shall be subject to liability of a partner Requirement of the firm name Meaning of word “firm” – The name, title, or style under which a company transacts business; a partnership of two or more persons; a commercial house. In its common acceptation, the term implies a partnership. The term is also used as

synonymous with “company,” “house,” and “concern.” Importance of having a firm name A partnership must have a firm name under which it will operate. A firm name is necessary to distinguish the partnership, which has a distinct and separate juridical personality from the individuals composing the partnership and from other partnerships and entities. Right of the partners to choose firm name The partners enjoy the utmost freedom in the selection of the partnership name. As a general rule, they may adopt any firm name desired. Use of misleading name – The partners cannot use a name that is identical or deceptively confusingly similar to that of any existing partnership or corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws, as to mislead the public by passing itself off as another partnership or corporation, or its goods or services as those of such other company. Liability inclusion of name in the firm name – Persons who, not being partners, include their names in the firm name do not acquire the rights of a partner but shall be subject to the liability of a partner insofar as 3rd Persons without notice are concerned. Such persons become partners by estoppel. Art. 1815 does not cover the case of a limited partner who allows his name to be included in the firm name, orof a person continuing the business of a partnership after dissolution, who uses the name of the dissolved partnership or the name of a deceased partner as part thereof. Art. 1816. All partners, including industrial ones, shall be liable pro rata with all their property and after all the partnership assets have been exhausted, for the contracts which may be entered into in the name and for the account of the partnership, under its signature and by a person authorized to act for the partnership. However, any partner may enter into a separate obligation to perform a partnership contract. Article 1816 distinguished from article 1787

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Law on Business Organizations Reviewer Article 1816 applies in cases where third party creditors are concerned as it falls under the heading of section 3. “Obligations of the Partners with Regard to Third Persons.” Article 1797 applies only where the issue is among the partners as it falls under the heading of Section 1, Chapter 2, which states: “Obligations of the Partners Among Themselves.” The pro rata liability of partners to third persons under Article 1816 being a clear mandate of the law, any stipulation changing or modifying such liability is void except as among the partners. Refers to partnership obligations Article 1816 which refers to the payment of partnership obligations arising from contracts clearly imposes subsidiary and joint (pro rata) liability for contractual debts owing to third persons upon all the partners, including industrial partners who ordinarily are not liable for losses. The liability is subsidiary because the partners cannot be made answerable with their separate property unless the partnership property has first been exhausted. Pro rata liability – Literally, pro rata liability means proportionate distribution of liability. In the law of obligations, the concurrence of two or more debtors in one and the same obligation makes it prima facie a joint (pro rata) obligation, and the debts is presumed divided into as many equal shares as there are debtors and each one of them is bound to pay only his share. Art. 1817. Any stipulation against the liability laid down in the preceding article shall be void, except as among the partners. Industrial partner cannot exempt himself from liability to third persons Each one of the industrial partners is liable to third persons for the debts of the firm and if he has paid such debts out of his private property during the life of the partnership, when its affairs are settled he is entitled to credit for the amount so paid, and if its results that there is not enough property in the partnership to pay him, then the capitalist partners must pay him. Our conclusion is that neither on principle nor on authority can the industrial partner be relieved from liability to third persons for the debts of the partnership.

Art. 1818. Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such liability. An act of a partner which is not apparently for the carrying on of business of the partnership in the usual way does not bind the partnership unless authorized by the other partners. Except when authorized by the other partners or unless they have abandoned the business, one or more but less than all the partners have no authority to: 1. Assign the partnership property in trust for creditors or on the assignee’s promise to pay the debts of the partnership. 2. Dispose of the goodwill of the business. 3. Do any other act which would make it impossible to carry on the ordinary business of a partnership. 4. Confess a judgment. 5. Enter into a compromise concerning a partnership claim or liability. 6. Submit a partnership claim or liability to arbitration. 7. Renounce a claim of the partnership. No act of a partner in contravention of a restriction on authority shall bind the partnership to persons having knowledge of the restriction. Art. 1819. Where title to real property is in the partnership name, any partner may convey title to such property by a conveyance executed in the partnership name; but the partnership may recover such property unless the partner's act binds the partnership under the provisions of the 22

Law on Business Organizations Reviewer first paragraph of article 1818, or unless such property has been conveyed by the grantee or a person claiming through such grantee to a holder for value without knowledge that the partner, in making the conveyance, has exceeded his authority. Where title to real property is in the name of the partnership, a conveyance executed by a partner, in his own name, passes the equitable interest of the partnership, provided the act is one within the authority of the partner under the provisions of the first paragraph of Article 1818. Where title to real property is in the name of one or more but not all the partners, and the record does not disclose the right of the partnership, the partners in whose name the title stands may convey title to such property, but the partnership may recover such property if the partners’ act does not bind the partnership under the provisions of the first paragraph of Article 1818, unless the purchaser or his assignee, is a holder for value, without knowledge. Where the title to real property is in the name of one or more or all the partners, or in a third person in trust for the partnership, a conveyance executed by a partner in the partnership name, or in his own name, passes the equitable interest of the partnership, provided the act is one within the authority of the partner under the provisions of the first paragraph of Article 1818. Where the title to real property is in the name of all the partners a conveyance executed by all the partners passes all their rights in such property. Art. 1820. An admission or representation made by any partner concerning partnership affairs within the scope of his authority in accordance with this Title is evidence against the partnership. Art. 1821. Notice to any partner of any matter relating to partnership affairs, and the knowledge of the partner acting in the particular matter, acquired while a partner or then present to his mind, and the knowledge of any other partner who reasonably could and should have communicated it to the acting partner, operate as notice to or knowledge of the

partnership, except in the case of fraud on the partnership, committed by or with the consent of that partner. Notice to partner is notice to partnership Clearly a third person desiring to give notice to a partnership of some matter pertaining to the partnership business need not communicate with all of the partners. If notice is delivered to a partner, that is an effective communication to the partnership. Knowledge before becoming partner Where the knowledge or notice had been received by the partner before he became a partner, and his partners are ignorant of this, and he is not the partner acting in the particular matter, there is no doubt that there has been neither knowledge of nor notice to the partnership. Art. 1822. Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of copartners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act. Partner liable for wrongful act of a partner The partners are liable for the negligent operation of a vehicle by a partner, acting in the course of business, which results in a traffic accident. If he is driving a partnership-owned vehicle for purposes of his own, the acting partner alone is liable it is not a partnership tort. Partnership may proceed against negligent partner Where a partnership is liable to a third person, there is a right of indemnity against the partner whose negligence caused the injuries. Art. 1823. The partnership is bound to make good the loss: 1. Where one partner acting within the scope of his apparent authority receives money or property of a third person and misapplies it.

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Law on Business Organizations Reviewer 2. Where the partnership in the course of its business receives money or property of a third person and the money or property so received is misapplied by any partner while it is in the custody of the partnership. Partnership bound by partner’s breach of trust The partnership is liable for the conversion (misappropriation) of money or property entrusted to the partnership by a third person. The effect under Article 1824 is the same whether by the partnership and subsequently misappropriated by a partner. Art. 1824. All partners are liable solidarily with the partnership for everything chargeable to the partnership under Articles 1822 and 1823. Law imposes solidary liability The law imposes solidary liability upon the partners and the partnership in cases of torts and acts of conversion by a partner as provided in Art. 1824. It may be stated that the liability of a partner for a debt of the partnership depends upon whether the debts is contractual or it arises from tort or conversion. If it arises from contract, the liability is subsidiary and pro rata; if it arises from tort or conversion, the liability is solidary. Business partners solidarily liable Arts. 1711 and 1712 of the New Civil Code and Sec. 2 of the Workmen’s Compensation Act reasonably indicate that in compensation cases, the liability of business partners should be merely joint and not solidary, and one of them happens to be insolvent, the amount awarded to the dependents of the deceased employee would only be partially satisfied, which is evidently contrary to the intent and purpose of the law to give full protection to the employee. Art. 1825. When a person, by words spoken or written or by conduct, represents himself, or consents to another representing him to anyone, as a partner in an existing partnership or with one or more persons not actual partners, he is liable to any such persons to whom such representation has been made, who has, on the faith of such representation, given credit to the actual or apparent partnership,

and if he has made such representation or consented to its being made in a public manner he is liable to such person, whether the representation has or has not been made or communicated to such person so giving credit by or with the knowledge of the apparent partner making the representation or consenting to its being made: 1. When a partnership liability results, he is liable as though he were an actual member of the partnership. 2. When no partnership liability results, he is liable pro rata with the other persons, if any, so consenting to the contract or representation as to incur liability, otherwise separately. When a person has been thus represented to be a partner in an existing partnership, or with one or more persons not actual partners, he is an agent of the persons consenting to such representation to bind them to the same extent and in the same manner as though he were a partner in fact, with respect to persons who rely upon the representation. When all the members of the existing partnership consent to the representation, a partnership act or obligation results; but in all other cases it is the joint act or obligation of the person acting and the persons consenting to the representation. Estoppel – A preclusion, in law, which prevents a man from alleging or denying a fact, in consequence of his own previous act, allegation, or denial of a contrary tenor. Person bound by his representation A person who hold himself out as a partner in a business, or consents to his being so held out, is liable on contracts made with third persons who deal with the persons carrying on the business on the faith of the representation. He is stopped to deny the apparent agency. Art. 1826. A person admitted as a partner into an existing partnership is liable for all the obligations of the partnership arising before his admission as though he had been a partner when such obligations were incurred, except that this liability shall be satisfied only out of partnership property, unless there is a stipulation to the contrary. 24

Law on Business Organizations Reviewer Incoming partner liable for existing obligations A newly admitted partner is liable for obligations of the partnership at the time of his admission. The obligation of the incoming partner shall be satisfied only out of partnership property. This is not a harsh rule because the incoming partner “partakes of the benefit of the partnership property, and an established business. He has every means of obtaining full knowledge of protecting himself, because he may insist on the liquidation or settlement of existing partnership debts. On the other hand, the creditors have no means of protecting themselves. Art. 1827. The creditors of the partnership shall be preferred to those of each partner as regards the partnership property. Without prejudice to this right, the private creditors of each partner may ask the attachment and public sale of the share of the latter in the partnership assets. Art. 1828. The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business. Art. 1829. On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed. “Dissolution,” “Winding up,” and “Termination” explained Dissolution, winding up, and termination should not be confused because they are distinct terms in law. Dissolution “designates the point in time when the partners cease to carry on the business together: termination is the point in time when all partnership affairs are wound up; winding up is the process of settling partnership affairs after dissolution.” Art.

1830.

Dissolution

is

b. By the express will of any partner, who must act in good faith, when no definite term or particular is specified. c. By the express will of all the partners who have not assigned their interests or suffered them to be charged for their separate debts, either before or after the termination of any specified term or particular undertaking. d. By the expulsion of any partner from the business bona fide in accordance with such a power conferred by the agreement between the partners 2. In contravention of the agreement between the partners, where the circumstances do not permit a dissolution under any other provision of this article, by the express will of any partner at any time. 3. By any event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership. 4. When a specific thing which a partner had promised to contribute to the partnership, perishes before the delivery; in any case by the loss of the thing, when the partner who contributed it having reserved the ownership thereof, has only transferred to the partnership the use or enjoyment of the same; but the partnership shall not be dissolved by the loss of the thing when it occurs after the partnership has acquired the ownership thereof. 5. By the death of any partner. 6. By the insolvency of any partner or of the partnership.

caused: 7. By the civil interdiction of any partner.

1. Without violation of the agreement between the partners: a. By the termination of the definite term or particular undertaking specified in the agreement.

8. By decree of court under the following article. Causes of dissolution in general Generally, a partnership may be dissolved by causes: (1) without violation of the 25

Law on Business Organizations Reviewer agreement between the partners; or (2) in contravention of the agreement. Other specific causes are; (3) an event which makes the business of the partnership unlawful; (4) loss of a specific thing which a partner had promised to contribute to the partnership; (5) the death of a partner; (6) the insolvency of any partner or of the partnership itself; (7) civil interdiction of any partner; and lastly (8) by judicial decree. Partnership ceased upon expiration of term; no more juridical personality A partnership having ceased to exist since 1959, the partnership has no more juridical personality nor capacity to sue and be sued. (Reynolds Philippine Corporation vs. Court of appeals, G.R. No. 36187, Jan. 17, 1989) Effect of Withdrawal before expiration of the term Under Article 1830, even if there is a specified term, one partners cause its dissolution by expressly withdrawing eve n before the expiration of the period, with or without justifiable cause. Of course, if the cause is not justified or no cause was given, the withdrawing partner is liable for damages but in no case can he be compelled to remain in the firm. With his withdrawal, the number of members is decreased, hence, the dissolution. And in whatever way we view the situation, the conclusion is inevitable that the partners were to be guided in the liquidation of the partnership by the provisions of its duly registered articles of partnership. (Roxas vs. Maglana, G.R. L-30616, Dec. 10, 1990) Art. 1831. On application by or for a partner the court shall decree a dissolution whenever: 1. A partner has been declared insane in any judicial proceeding or is shown to be of unsound mind. 2. A partner becomes in any other way incapable of performing his part of the partnership contract. 3. A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business. 4. 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 only be carried on at a loss. 6. Other circumstances dissolution equitable.

render

a

On the application of the purchaser of a partner's interest under Article 1813 or 1814: 1. After the termination of the specified term or particular undertaking. 2. At any time if the partnership was a partnership at will when the interest was assigned or when the charging order was issued. Who may petition for dissolution Dissolution of a partnership may be decreed by the court on application either (1) by a partner or, in case he has assigned his interest, (2) by his assignee. Art. 1832. Except so far as may be necessary to wind up partnership affairs or to complete transactions begun but not then finished, dissolution terminates all authority of any partner to act for the partnership: 1. With respect to the partners a. When the dissolution is not by the act, insolvency or death of a partner. b. When the dissolution is by such act, insolvency or death of a partner, in cases where article 1833 so requires. 2. With respect to persons not partners, as declared in article 1834. General Rule If the cause of dissolution is not by act, death, or insolvency of a partner, the authority ceases immediately. Exception For the purposes of winding-up partnership affairs. 26

Law on Business Organizations Reviewer

Art. 1833. Where the dissolution is caused by the act, death or insolvency of a partner, each partner is liable to his co-partners for his share of any liability created by any partner acting for the partnership as if the partnership had not been dissolved unless: 1. The dissolution being by act of any partner, the partner acting for the partnership had knowledge of the dissolution. 2. The dissolution being by the death or insolvency of a partner, the partner acting for the partnership had knowledge or notice of the death or insolvency. General Rule If the cause of dissolution is the death, act, or insolvency of a partner, authority of a partner to bind ceases upon the knowledge of the dissolution. If dissolution is caused by act of one of parties, co-partners are also liable to contribute towards a liability as if no dissolution has happened, provided that there is no notice or the partner does not have knowledge of the dissolution. Art. 1834. After dissolution, a partner can bind the partnership, except as provided in the third paragraph of this article: 1. By any act appropriate for winding up partnership affairs or completing transactions unfinished at dissolution. 2. By any transaction which would bind the partnership if dissolution had not taken place, provided the other party to the transaction: a. Had extended credit to the partnership prior to dissolution and had no knowledge or notice of the dissolution. b. Though he had not so extended credit, had nevertheless known of the partnership prior to dissolution, and, having no knowledge or notice of dissolution, the fact of dissolution had not been advertised in a newspaper of general circulation in the place (or in each

place if more than one) at which the partnership business was regularly carried on. The liability of a partner under the first paragraph, No. 2, shall be satisfied out of partnership assets alone when such partner had been prior to dissolution: 1. Unknown as a partner to the person with whom the contract is made. 2. So far unknown and inactive in partnership affairs that the business reputation of the partnership could not be said to have been in any degree due to his connection with it. The partnership is in no case bound by any act of a partner after dissolution: 1. Where the partnership is dissolved because it is unlawful to carry on the business, unless the act is appropriate for winding up partnership affairs. 2. Where the insolvent.

partner

has

become

3. Where the partner has no authority to wind up partnership affairs; except by a transaction with one who — a. Had extended credit to the partnership prior to dissolution and had no knowledge or notice of his want of authority. b. Had not extended credit to the partnership prior to dissolution, and, having no knowledge or notice of his want of authority, the fact of his want of authority has not been advertised in the manner provided for advertising the fact of dissolution in the first paragraph, No. 2 (b). Nothing in this article shall affect the liability under article 1825 of any person who after dissolution represents himself or consents to another representing him as a partner in a partnership engaged in carrying on business. General Rule Dissolution terminates the authority of the partners to bind partnership. 27

Law on Business Organizations Reviewer Exceptions Any act appropriate for winding-up partnership affairs or completing transactions unfinished at dissolution If third persons that transacted had no actual knowledge of the dissolution. *Persons extending credit prior to dissolution are entitled to notice of dissolution. If they had no notice or knowledge of dissolution, they may hold the retired partner for obligations made by continuing partners after dissolution. Art. 1835. The dissolution of the partnership does not of itself discharge the existing liability of any partner. A partner is discharged from any existing liability upon dissolution of the partnership by an agreement to that effect between himself, the partnership creditor and the person or partnership continuing the business; and such agreement may be inferred from the course of dealing between the creditor having knowledge of the dissolution and the person or partnership continuing the business. The individual property of a deceased partner shall be liable for all obligations of the partnership incurred while he was a partner, but subject to the prior payment of his separate debts. General Rule Dissolution of a partnership does not itself discharge the existing liability of any partner. Exception A partner can be discharged from any existing liability upon dissolution of the partnership provided that there is an agreement between the partnership creditor and the person or partners continuing the business. *Individual properties of the deceased partner shall be liable to all obligations of the partnership made while he was a partner. Art. 1836. Unless otherwise agreed, the partners who have not wrongfully dissolved the partnership or the legal representative of the last surviving partner, not insolvent, has the right to wind up the partnership affairs, provided, however, that any partner, his legal representative or his

assignee, upon cause shown, may obtain winding up by the court. Who may wind up Partnership Affairs? Partner designated in the agreement. In absence of agreement, the part that did no wrongfully dissolved the partnership. If all partners died, the legal representative of the last surviving partner provided that the partner is not insolvent. Winding up of a dissolved partnership may be done Extrajudicially by the partners themselves. Judicially under the control of a competent court. *Managing partner or winding-up partner has the right to sell firm property even after the life of the partnership has expired. Art. 1837. When dissolution is caused in any way, except in contravention of the partnership agreement, each partner, as against his co-partners and all persons claiming through them in respect of their interests in the partnership, unless otherwise agreed, may have the partnership property applied to discharge its liabilities, and the surplus applied to pay in cash the net amount owing to the respective partners. But if dissolution is caused by expulsion of a partner, bona fide under the partnership agreement and if the expelled partner is discharged from all partnership liabilities, either by payment or agreement under the second paragraph of article 1835, he shall receive in cash only the net amount due him from the partnership. When dissolution is caused in contravention of the partnership agreement the rights of the partners shall be as follows: 1. Each partner who has not caused dissolution wrongfully shall have: a. All the rights specified in the first paragraph of this article. b. The right, as against each partner who has caused the dissolution wrongfully, to damages breach of the agreement. 2. The partners who have not caused the dissolution wrongfully, if they all desire 28

Law on Business Organizations Reviewer to continue the business in the same name either by themselves or jointly with others, may do so, during the agreed term for the partnership and for that purpose may possess the partnership property, provided they secure the payment by bond approved by the court, or pay any partner who has caused the dissolution wrongfully, the value of his interest in the partnership at the dissolution, less any damages recoverable under the second paragraph, No. 1 (b) of this article, and in like manner indemnify him against all present or future partnership liabilities. 3. A partner who has caused dissolution wrongfully shall have:

the

a. If the business is not continued under the provisions of the second paragraph, No. 2, all the rights of a partner under the first paragraph, subject to liability for damages in the second paragraph, No. 1 (b), of this article. b. If the business is continued under the second paragraph, No. 2, of this article, the right as against his copartners and all claiming through them in respect of their interests in the partnership, to have the value of his interest in the partnership, less any damage caused to his copartners by the dissolution, ascertained and paid to him in cash, or the payment secured by a bond approved by the court, and to be released from all existing liabilities of the partnership; but in ascertaining the value of the partner's interest the value of the good-will of the business shall not be considered. Rights of partners upon dissolution 1. Dissolution is caused without violation of the agreement. 2. In contravention of the agreement. If partnership is dissolved without violation of the agreement 1. All partners may have the property sold for payment of partnership liabilities. 2. If there is surplus, after paying the liabilities of the firm, it shall be given in cash to the partners.

If the partnership was dissolved in contravention of the agreement 1. The remaining partners have the right to sell partnership property to pay the partnership’s liabilities and the surplus is distributed to the remaining partners as well. 2. As against the guilty partner for the dissolution of the partnership, the remaining partners have the right to recover damages for breach. 3. The remaining partners may also continue the business up to end of the stipulated term of the partnership. Art. 1838. Where a partnership contract is rescinded on the ground of the fraud or misrepresentation of one of the parties thereto, the party entitled to rescind is, without prejudice to any other right, entitled: 1. To a lien on, or right of retention of, the surplus of the partnership property after satisfying the partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest in the partnership and for any capital or advances contributed by him. 2. To stand, after all liabilities to third persons have been satisfied, in the place of the creditors of the partnership for any payments made by him in respect of the partnership liabilities. 3. To be indemnified by the person guilty of the fraud or making the representation against all debts and liabilities of the partnership. Right of partner to rescind contract of partnership If one is induced by fraud or misrepresentation to become a partner, the contract is voidable. If the contract is annulled, the injured party is entitled to restitution. Here, the fraud or misrepresentation vitiates consent. However, until the partnership contract is annulled by a proper action in court, the partnership relations exist and the defrauded partner is liable for all obligations to third persons. 1. Right of injured partner where partnership contract rescinded 29

Law on Business Organizations Reviewer 2. Right of retention of partnership property 3. Right to be subrogated in place of creditors of partnership 4. Right to be indemnified by the guilty partner against all liabilities of the partnership. Art. 1839. In settling accounts between the partners after dissolution, the following rules shall be observed, subject to any agreement to the contrary: 1. The assets of the partnership are: a. The partnership property. b. The contributions of the partners necessary for the payment of all the liabilities specified in No. 2. 2. The liabilities of the partnership shall rank in order of payment, as follows: a. Those owing to creditors other than partners. b. Those owing to partners other than for capital and profits. c. Those owing to partners in respect of capital. d. Those owing to partners in respect of profits. 3. The assets shall be applied in the order of their declaration in No. 1 of this article to the satisfaction of the liabilities. 4. The partners shall contribute, as provided by article 1797, the amount necessary to satisfy the liabilities. 5. An assignee for the benefit of creditors or any person appointed by the court shall have the right to enforce the contributions specified in the preceding number. 6. Any partner or his legal representative shall have the right to enforce the contributions specified in No. 4, to the extent of the amount which he has paid in excess of his share of the liability.

7. The individual property of a deceased partner shall be liable for the contributions specified in No. 4. 8. When partnership property and the individual properties of the partners are in possession of a court for distribution, partnership creditors shall have priority on partnership property and separate creditors on individual property, saving the rights of lien or secured creditors. 9. Where a partner has become insolvent or his estate is insolvent, the claims against his separate property shall rank in the following order: a. Those owing to separate creditors. b. Those owing creditors.

to

partnership

c. Those owing to partners by way of contribution. Rules for settling accounts between the partners 1. The assets of the partnership 2. Liabilities of the partnership 3. Application of assets 4. Contribution by the partners Assets of the partnership 1. Partnership property 2. The contributions of the partners necessary for the payment of all liabilities Order of application of the assets 1. Those owing to partnership creditors 2. Those owing to partners other than for capital and profits such as loans given by the partners or advances for business expenses 3. Those owing for the return of the capital contributed by the partners 4. The share of the profits, if any, due to each partner Order of application of partner who become insolvent or his estate his insolvent, the claims against his separate property 1. Those owing to separate creditors 2. Those owing to partnership creditors 3. Those owing to partners by way of contribution

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Law on Business Organizations Reviewer Liability of deceased partner’s individual property The individual property of a deceased partner shall be liable for his share of the contributions necessary to satisfy the liabilities of the partnership incurred while he was a partner. Art. 1840. In the following cases creditors of the dissolved partnership are also creditors of the person or partnership continuing the business: 1.

2.

When any new partner is admitted into an existing partnership, or when any partner retires and assigns (or the representative of the deceased partner assigns) his rights in partnership property to two or more of the partners, or to one or more of the partners and one or more third persons, if the business is continued without liquidation of the partnership affairs. When all but one partner retire and assign (or the representative of a deceased partner assigns) their rights in partnership property to the remaining partner, who continues the business without liquidation of partnership affairs, either alone or with others.

3.

When any partner retires or dies and the business of the dissolved partnership is continued as set forth in Nos. 1 and 2 of this article, with the consent of the retired partners or the representative of the deceased partner, but without any assignment of his right in partnership property.

4.

When all the partners or their representatives assign their rights in partnership property to one or more third persons who promise to pay the debts and who continue the business of the dissolved partnership.

5.

When any partner wrongfully causes a dissolution and the remaining partners continue the business under the provisions of article 1837, second paragraph, No. 2, either alone or with others, and without liquidation of the partnership affairs.

6.

When a partner is expelled and the remaining partners continue the business either alone or with others without liquidation of the partnership affairs.

The liability of a third person becoming a partner in the partnership continuing the business, under this article, to the creditors of the dissolved partnership shall be satisfied out of the partnership property only, unless there is a stipulation to the contrary. When the business of a partnership after dissolution is continued under any conditions set forth in this article the creditors of the dissolved partnership, as against the separate creditors of the retiring or deceased partner or the representative of the deceased partner, have a prior right to any claim of the retired partner or the representative of the deceased partner against the person or partnership continuing the business, on account of the retired or deceased partner's interest in the dissolved partnership or on account of any consideration promised for such interest or for his right in partnership property. Nothing in this article shall be held to modify any right of creditors to set aside any assignment on the ground of fraud. The use by the person or partnership continuing the business of the partnership name, or the name of a deceased partner as part thereof, shall not of itself make the individual property of the deceased partner liable for any debts contracted by such person or partnership. Dissolution of a partnership by change of members Causes 1. New partner is admitted 2. Partner retires 3. Partner dies 4. Partner withdraws 5. Partner is expelled from partnership 6. Other partners assign their rights to sole remaining partner 7. All the partners assign their rights in partnership property to third persons. *Any change in membership dissolves a partnership and creates a new one *When a business of a dissolved partnership is continued by former or 31

Law on Business Organizations Reviewer without new partners, the old creditors are creditors of the person or partnership that is continuing the business.

person or partnership continuing the business, at the date of dissolution, in the absence of any agreement to the contrary.

Art. 1841. When any partner retires or dies, and the business is continued under any of the conditions set forth in the preceding article, or in article 1837, second paragraph, No. 2, without any settlement of accounts as between him or his estate and the person or partnership continuing the business, unless otherwise agreed, he or his legal representative as against such person or partnership may have the value of his interest at the date of dissolution ascertained, and shall receive as an ordinary creditor an amount equal to the value of his interest in the dissolved partnership with interest, or, at his option or at the option of his legal representative, in lieu of interest, the profits attributable to the use of his right in the property of the dissolved partnership; Provided, That the creditors of the dissolved partnership as against the separate creditors, or the representative of the retired or deceased partner, shall have priority on any claim arising under this article, as provided article 1840, third paragraph.

Right to demand an accounting of partnership affairs must be directed against 1. Winding-up partners 2. Surviving partners 3. The person the partnership continuing the business

Rights of retiring of properties of deceased, partner when business continued To have the value of the interest of the retiring partner or deceased partner in the partnership determined as of the date of dissolution.

Not proper party to proceedings Interest is assignable with assignee acquiring all rights of the limited partner His name may Name not included appear in the firm in firm name name Prohibited from No prohibition engaging in a business like partnership’s His retirement, His retirement, insolvency and insolvency and death dissolves the death does not partnership dissolve the partnership

To receive thereafter, as an ordinary creditor, an amount equal to the value of his share in the dissolved partnership with interest, or, at his option, in place of interest, the profits attributable to the use of his right. General Rule When partner retires from the partnership, he is entitled to the payment of what may be due to him after liquidation. Exception No liquidation needed when there is settlement as to what retiring partner shall receive. Art. 1842. The right to an account of his interest shall accrue to any partner, or his legal representative as against the winding up partners or the surviving partners or the

Art. 1843. A limited partnership is one formed by two or more persons under the provisions of the following article, having as members one or more general partners and one or more limited partners. The limited partners as such shall not be bound by the obligations of the partnership. General partner Personally liable for partnership obligations Have equal right in management of partnership May contribute money, property or industry Proper party to proceedings Interest cannot be assigned to make new partner

Limited partner Liability extends only to his capital contribution. No share in management of partnership. May contribute money and property

Characteristics of limited partnership 1. Must be formed in accordance with the requirements of the law. 2. There must be one or more general partners who control the management of the business. 3. There must be one or more limited partners contributing to the capital and

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Law on Business Organizations Reviewer sharing in the profits but have nothing to do with the management. 4. Obligations of the partnership must be paid out of common fund and in the separate properties of the general partners.

l.

Art. 1844. Two or more persons desiring to form a limited partnership shall:

m. The right, if given, of the remaining general partner or partners to continue the business on the death, retirement, civil interdiction, insanity or insolvency of a general partner.

1. Sign and swear to a certificate, which shall state — a. The name of the partnership, adding thereto the word "Limited". b. The character of the business. c. The location of the principal place of business. d. The name and place of residence of each member, general and limited partners being respectively designated. e. The term for which the partnership is to exist. f. The amount of cash and a description of and the agreed value of the other property contributed by each limited partner. g. The additional contributions, if any, to be made by each limited partner and the times at which or events on the happening of which they shall be made. h. The time, if agreed upon, when the contribution of each limited partner is to be returned. i.

j.

The share of the profits or the other compensation by way of income which each limited partner shall receive by reason of his contribution. The right, if given, of a limited partner to substitute an assignee as contributor in his place, and the terms and conditions of the substitution.

k. The right, if given, of the partners to admit additional limited partners.

The right, if given, of one or more of the limited partners to priority over other limited partners, as to contributions or as to compensation by way of income, and the nature of such priority.

n. The right, if given, of a limited partner to demand and receive property other than cash in return for his contribution. 2. File for record the certificate in the Office of the Securities and Exchange Commission. A limited partnership is formed if there has been substantial compliance in good faith with the foregoing requirements. Qualifications of limited partnership 1. The partners must sign and swear to a certificate of limited partnership 2. Must file for record the certificate in the office of the Securities and Exchange Commission Art. 1845. The contributions of a limited partner may be cash or property, but not services. Limited partners can only contribute money and property and cannot contribute services to the partnership to protect persons dealing with the firms with frauds. Art. 1846. The surname of a limited partner shall not appear in the partnership name unless: 1. It is also the surname of a general partner. 2. Prior to the time when the limited partner became such, the business has been carried on under a name in which his surname appeared. A limited partner whose surname appears in a partnership name contrary to the provisions of the first paragraph is liable as 33

Law on Business Organizations Reviewer a general partner to partnership creditors who extend credit to the partnership without actual knowledge that he is not a general partner. Limited partner’s surname is not included in the firm name provided these circumstances 1. If the surname of general partner is the same with limited partner’s 2. If the limited partner’s surname was included and was carried on the new partnership *If the limited partner’s surname was included in the firm name, he is liable as a general partner. Art. 1847. If the certificate contains a false statement, one who suffers loss by reliance on such statement may hold liable any party to the certificate who knew the statement to be false: 1. At the time he signed the certificate. 2. Subsequently, but within a sufficient time before the statement was relied upon to enable him to cancel or amend the certificate, or to file a petition for its cancellation or amendment as provided in article 1865. Liability for false statement in certificate Under this provision, any partner to the certificate containing a false statement is liable provided the following requisites are present: 1. He knew the statement to be false at the time he signed the certificate, or subsequently, but having sufficient time to cancel or amend it or file a petition for its cancellation or amendment, he failed to do so. 2. The person seeking to enforce liability has relied upon the false statement in transacting business with the partnership. 3. The person suffered loss as a result of reliance upon such false statement. ART. 1848. A limited partner shall become liable as a general partner unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business. Limited partner has no control in business

A limited partner is excluded from any active voice in the control of the affairs of the firm. Limited partner cannot perform acts of administration Limited partners may not perform any act of administration with respect to the interests of the partnership, not even in the capacity of agents of the managing partners. ART. 1849. After the formation of a limited partnership, additional limited partners may be admitted upon filling an amendment to the original certificate in accordance with the requirements of Article 1865. The writing to amend a certificate 1. Shall conform to the requirements of Article 1844 as far as necessary to set forth clearly the change in the certificate which it is desired to make. 2. Be signed and sworn to by all members, and an amendment substituting a limited partner. ART. 1850. A general partner shall all have the rights and powers and be subject to all the restrictions and liabilities of a partner in a partnership without limited partners. However, without the written consent or ratification of the specific act by all the limited partners, a general partner or all of the general partners have no authority to: 1. Do any act in contravention of the certificate. 2. Do any act which would make it impossible to carry on the ordinary business of the partnership. 3. Confess a judgement partnership.

against

the

4. Possess partnership property, or assign their rights in specific partnership property, for other than a partnership purpose. 5. Admit a person as a general partner. 6. Admit a person as a limited partner, unless the right so to do is given in the certificate. 7. Continue the business with partnership property on the death, retirement, insanity, civil interdiction or insolvency of a general partner, unless the right so to do is given in the certificate. 34

Law on Business Organizations Reviewer

Powers of general partner in limited partnership The general partner shall have all the right and powers and be subject to all the restrictions and liabilities of a partner in a partnership without limited partners. ART. 1851. A limited partner shall have the same rights as a general partner to: 1. Have the partnership books kept at the principal place of business of the partnership, and at a reasonable hour to inspect and copy any of them. 2. Have on demand true and full information of all things affecting the partnership, and a formal account of partnership affairs whenever circumstances render it just and reasonable. 3. Have dissolution and winding up by decree of court. A limited partner shall have the right to receive a share of the profit or other compensation by way of income and to the return of his contribution as provided in Articles 1856 and 1857. Rights of limited partner It has lesser rights than a general partner. It may exercise rights similar to a general partner. ART. 1852. Without prejudice to the provisions of Article 1848, a person who has contributed to the capital of a business conducted by a person or partnership erroneously believing that he has become a limited partner in a limited partnership, is not, by reason of his exercise of the rights of a limited partner, a general partner with the person or in the partnership carrying on the business, or bound by the obligations of such person or partnership; provided that on ascertaining the mistake he promptly renounces his interest in the profits of the business, or other compensation by way of income. Conditions for exemption from liability 1. Prompt renunciation of interest and/ or income upon ascertaining the mistake. 2. Non-inclusion of limited partner’s name in the firm name.

3. Non-participation in the management of the business. ART. 1853. A person may be a general partner and a limited partner in the same partnership at the same time, provided that this fact shall be stated in the certificate provided for in Article 1844. A person who is a general, and also at the same time a limited partner, shall have all the rights and powers and be subject to all restrictions of a general partner; except that, in respect to his contribution, shall have the rights against the other members which he would have had if he were not also a general partner. ART. 1854. A limited partner also may loan money to and transact other business with the partnership and unless he is also a general partner, receive on account of resulting claims against the partnership, with general creditors, a pro rata share of the assets. No limited partner shall in respect to any such claim: 1. Receive or hold as collateral security any partnership property. 2. Receive from a general partner or the partnership any payment, conveyance, or release from liability, if at the time the assets of the partnership are not sufficient to discharge partnership liabilities to persons not claiming as general or limited partners. The receiving of collateral security, or a payment, conveyance, or release in violation of the foregoing provisions is a fraud on the creditors of the partnership. Loans and business transactions with limited partners A limited partner is allowed to loan money to the firm; transact other business with the partnership, and receive a pro rata share in the assets with general creditors. Limited partner not allowed to hold collateral security A limited partner may not receive partnership property as collateral security.

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Law on Business Organizations Reviewer ART. 1855. Where there are several limited partners the members may agree that one or more of the limited partners shall have a priority over other limited partners as to the return of their contributions, as to their compensation by way of income, or as to any other matter. If such an agreement is made it shall be states in the certificate, and in the absence of such a statement all the limited partners shall stand upon equal footing. ART. 1856. A limited partner may receive from the partnership the share of the profits or the compensation by way of income stipulated for in the certificate; provided, that after such payment is made, whether from the property of the partnership or that of a general partner, the partnership assets are in excess of all liabilities of the partnership except liabilities to limited partners on account of their contributions and to general partners. ART. 1857. A limited partner shall not receive from a general partner or out of partnership property any part of his contributions until: 1. All liabilities of the partnership, except liabilities to general partners and to limited partners on account of their contributions, have been paid or there remains property of the partnership sufficient to pay them. 2. The consent of all members is had, unless the return of the contribution may be rightfully demanded under the provisions of the second paragraph. 3. The certificate is cancelled or so amended as to set forth the withdrawal or reduction. Subject to the provisions of the first paragraph, a limited partner may rightfully demand the return of his contribution: 1. On the dissolution of a partnership. 2. When the date specified in the certificate for its return has arrived. 3. After he has given six months’ notice in writing to all other members, if no time is specified in the certificate, either for

the return of the contribution or for the dissolution of the partnership. In the absence of any statement in the certificate to the contrary or the consent of all members, a limited partner, irrespective of the nature of his contribution, has only the right to demand and receive cash in return for his contribution. A limited partner may have the partnership dissolved and its affairs wound up when: 1. He rightfully but unsuccessfully demands the return of his contribution. 2. The other liabilities of the partnership have not been paid, or the partnership property is insufficient for their payment as required by the first paragraph, No. 1, and the limited partner would otherwise be entitled to the return of his contribution. Conditions of a limited partner entitled to return of his contribution 1. All liabilities of the partnership have been paid or there are assets sufficient to pay partnership liabilities. 2. The consent of all the partners is obtained. 3. The certificate is cancelled or so amended as to set forth the withdrawal or reduction of the contribution. When limited partner may demand return 1. The partnership is dissolved 2. The date specified for its return has arrived 3. If no term is specified, after six months’ notice in writing to all other partners. Limited partner to receive cash It will be noted that the limited partner has a right to demand and receive cash only in return for his contribution even when he contributed property. ART. 1858. A limited partner is liable to the partnership: 1.

For the difference between his contribution as actually made and that stated in the certificate as having been made.

2.

For any unpaid contribution which he agreed in the certificate to make in the 36

Law on Business Organizations Reviewer future at the time and on the conditions stated in the certificate.

return of his contribution, to which his assignor would otherwise be entitled.

A limited partner holds a trustee for the partnership: 1. Specific property stated in the certificate as contributed by him, but which was not contributed or which has been wrongfully returned.

An assignee shall have the right to become a substituted partner if all the members consent thereto or if the assignor, being thereunto empowered by the certificate, gives the assignee that right.

2. Money or other property wrongfully paid or conveyed to him on account of his contribution. The liabilities of a limited partners as set forth in this article can be waived or compromised only by the consent of all members; but a waiver or compromise shall not affect the right of a creditor of a partnership who extended credit or whose claim arose after the filling and before a cancellation or amendment of the certificate, to enforce such liabilities. When a contributor has rightfully received the return in whole or in part of the capital of his contribution, he is nevertheless liable to the partnership for any sum, not in excess of such return with interest, necessary to discharge its liabilities to all creditors who extended credit or whose claims arose before such return. Limited partner liable to partnership for sum returned A limited partner whose contribution has been rightfully returned is still liable to the partnership for an amount not in excess of the sum returned plus interest as may be necessary to pay the claims of persons who extended credit or whose claims arose before the return. ART. 1859. A limited partner’s interest is assignable. A substitute limited partner is a person admitted to all the rights of a limited partner who has died or has assigned his interest in a partnership. An assignee, who does not become a substituted limited partner, has no right to require any information or account of the partnership transactions or to inspect the partnership books; he is only entitled to receive the share of the profits or other compensation by way of income, or the

An assignee becomes a substituted limited partner when the certificate is appropriately amended in accordance with Article 1865. The substituted limited partner has all the rights and powers, and is subject to all the restrictions and liabilities of his assignor, except those liabilities of which he was ignorant at the time he became a limited partner and which could not be ascertained for the certificate. The substitution of the assignee as a limited partner does not release the assignor from liability to the partnership, under article 1847 and 1858. Limited partner’s interest assignable A limited partner’s interest in the partnership is assignable. The assignee, however, of a limited partner’s interest does not necessarily become a substituted limited partner. ART. 1860. The retirement, death, insolvency, insanity or civil interdiction of a general partner dissolves the partnership, unless the business is continued by the remaining general partners: 1. Under a right so to do stated in the certificate. 2. With the consent of all members. It must be observed that the death, etc., of a general partner dissolves the partnership while the death of a limited partner does not cause the dissolution of the firm, unless there is only one limited partner. ART. 1861. On the death of a limited partner his executor or administrator shall have all the rights of a limited partner for the purpose of settling his estate, and such power as the deceased had to constitute his assignee a substituted limited partner. 37

Law on Business Organizations Reviewer

The estate of a deceased limited partner shall be liable for all his liabilities as a limited partner. ART. 1862. On due application to a court of competent jurisdiction by any creditor of a limited partner, the court may charge the interest of the indebted limited partner with payment of the unsatisfied amount of such claim, and may appoint a receiver, and make all other orders, directions, and inquiries which the circumstances of the case may require. The interest may be redeemed with the separate property of any general partner, but may not be redeemed with partnership property. The remedies conferred by the first paragraph shall not be deemed exclusive of others which may exist. ART. 1863. In settling accounts after dissolution the liabilities of the partnership shall be entitled to payment in the following order: 1. Those to creditors, in the order of priority as provided by law, except those to limited partners on account of their contributions, and to general partners. 2. Those to limited partners in respect to their share of the profits and other compensation by way of income on their contributions. 3. Those to limited partners in respect to the capital of their contributions. 4. Those to general partners other than for capital and profits.

contribution respectively, in proportion to the respective amounts of such claims. Art. 1864. The certificate shall be cancelled when the partnership is dissolved or all limited partners cease to be such. A certificate shall be amended when: 1. There is a change in the name of the partnership or in the amount or character of the contribution of any limited partner. 2. A person is substituted as a limited partner. 3. An additional admitted.

limited

partner

is

4. A person is admitted as a general partner. 5. A general partner retires, dies, becomes insolvent or insane, or is sentenced to civil interdiction and the business is continued under article 1860. 6. There is a change in the character of the business of the partnership. 7. There is a false or erroneous statement in the certificate. 8. There is a change in the time as stated in the certificate for the dissolution of the partnership or for the return of a contribution. 9. A time is fixed for the dissolution of the partnership, or the return of a contribution, no time having been specified in the certificate.

5. Those to general partners in respect to profits.

10. The members desire to make a change in any other statement in the certificate in order that it shall accurately represent the agreement among them.

6. Those to general partners in respect to capital.

Art. 1865. The writing to amend a certificate shall:

Subject to any statement in the certificate or to subsequent agreement, limited partners share in the partnership assets in respect to their claims for capital, and in respect to their claims for profit or for compensation by way of income on their

1.

Conform to the requirements of article 1844 as far as necessary to set forth clearly the change in the certificate which it is desired to make.

2.

Be signed and sworn to by all members, and an amendment substituting a 38

Law on Business Organizations Reviewer limited partner or adding a limited or general partner shall be signed also by the member to be substituted or added, and when a limited partner is to be substituted, the amendment shall also be signed by the assigning limited partner. The writing to cancel a certificate shall be signed by all members. A person desiring the cancellation or amendment of a certificate, if any person designated in the first and second paragraphs as a person who must execute the writing refuses to do so, may petition the court to order a cancellation or amendment thereof. If the court finds that the petitioner has a right to have the writing executed by a person who refuses to do so, it shall order the Office of the Securities and Exchange Commission where the certificate is recorded, to record the cancellation or amendment of the certificate; and when the certificate is to be amended, the court shall also cause to be filed for record in said office a certified copy of its decree setting forth the amendment. A certificate is amended or cancelled when there is filed for record in the Office of the Securities and Exchange Commission, where the certificate is recorded: 1. A writing in accordance with the provisions of the first or second paragraph. 2. A certified copy of the order of the court in accordance with the provisions of the fourth paragraph. 3. After the certificate is duly amended in accordance with this article, the amended certified shall thereafter be for all purposes the certificate provided for in this Chapter. A certificate is considered cancelled or amended when there is filed for record 1. A writing to amend the certificate; or 2. A certified copy of the order of the court in the event of an unjustified refusal of a partner to sign the writing.

Art. 1866. A contributor, unless he is a general partner, is not a proper party to proceedings by or against a partnership, except where the object is to enforce a limited partner's right against or liability to the partnership. Art. 1867. A limited partnership formed under the law prior to the effectivity of this Code, may become a limited partnership under this Chapter by complying with the provisions of article 1844, provided the certificate sets forth: 1. The amount of the original contribution of each limited partner, and the time when the contribution was made. 2. That the property of the partnership exceeds the amount sufficient to discharge its liabilities to persons not claiming as general or limited partners by an amount greater than the sum of the contributions of its limited partners. A limited partnership formed under the law prior to the effectivity of this Code, until or unless it becomes a limited partnership under this Chapter, shall continue to be governed by the provisions of the old law. CORPORATIONS TITLE I GENERAL PROVISIONS DEFINITIONS AND CLASSIFICATIONS Sec. 1. Title of the Code. – This Code shall be known as “The Corporation Coder of the Philippines”. Sec. 2. Corporation defined. - A corporation is an artificial being created by operation of law having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. Definition A corporation is an artificial being created by operation of law having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. Attributes 1. It is an artificial being. 2. It is created by operation of law. 3. It has the right of succession.

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Law on Business Organizations Reviewer 4. It has only the powers, attributes and properties expressly authorized by law or incident to its existence. Similarities between a partnership and a corporation 1. Juridical personality separate and distinct from the individuals composing it. 2. Act only through its agents. 3. Composed of an aggregate of individuals. 4. Distribute profits to those who contribute to capital. 5. May be organized only when there is a law authorizing it. 6. Subject to income tax.

Right of Succession Extent of Liability to Third Persons

Transferability of interest

Distinctions between a partnership and a corporation Point of Comparison Manner of Creation

Number Parties

of

Commencement of Juridical Personality

Powers

Management

Partnership By mere agreement of the parties By a minimum of two (2) persons Generally from the moment of execution of the contract

May exercise powers authorized by partners provided the same are not contrary to law, morals, good customs, public policy or public order. When it is not agreed upon, each partner is an agent of the

Corporation By law operation law

or of

Requires at least five (5) incorporators From the date of the issuance of the certificate of incorporation of the Securities and Exchange Commission (SEC) Can exercise only the powers expressly granted by law or incident to its existence.

Term existence

Firm name

Dissolution

Governing Laws

It is vested in the board of directors or trustees.

of

partnership. No right of succession Partners (except limited partners) are liable personally and subsidiarily for partnership debts to third persons. A partner cannot transfer interest so as to make a partner without the consent of all other existing partners. May be established for any period of time stipulated by the partners. A limited partnership is required to add the word ‘Ltd.’ to its name.

May be dissolved at any time by the will of any or all partners. Civil Code

Possesses right of succession Stockholders are liable only to the extent of their investments as represented by the shares subscribed by them.

A stockholder has the right to transfer his shares without the prior consent of the other stockholders.

May not be formed for a term in excess of 50 years extendible to not more than 50 years. A corporation may adopt a firm name provided it is not identical or deceptively similar to any registered firm name or contrary to existing laws. May only be dissolved with the consent of the state.

Corporation Code

Advantages of a corporate form of business organizations 1. The capacity to hold property, to contract, to sue and be sued as a legal unit or distinct entity. 2. Exemption of shareholders from individual liability. 40

Law on Business Organizations Reviewer 3. Continuity of existence in spite of death or changes of members. 4. Transferability of shares. 5. Centralized management under a board of directors. 6. Standardized methods of organization, management and finance for the protection of shareholders and creditors under statutory regulations. Disadvantages of a corporate form of business organizations 1. The limited liability of the stockholders serves to limit the credit available to the corporation. 2. The transferability of shares permits the uniting of incompatible and conflicting interests in one enterprise. 3. The minority stockholders are usually subservient to the wishes of the majority. 4. In big corporations, the stockholders’ voting rights have become largely theoretical because of widespread ownership, lukewarmness and disinterest in management, inertia, and inaccessible meeting places. 5. In large corporations, management and control has been separated from ownership. 6. By and large corporations are subject to governmental restrictions, controls, and report requirements not imposed on other forms of business organizations. 7. Corporate sphere of activity is limited in the transaction of its business to the state of the organization. 8. The corporate form involves “double taxation” on corporation income. Sec. 3. Classes of corporations. – Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of shares held are stock corporations. All other corporations are non-stock corporations. Other kinds of corporations 1. Quasi-corporations – from the word “quasi”, meaning “as if”, are entities that are not absolutely corporations but are considered as if they were. Eg. Public boards created by law

2. Quasi-public – are entities engaged in rendering basic services of such public importance as to entitle them to certain privileges like eminent domain or use of public property. Eg. Electric, gas, water and telephone companies. 3. Government-owned or controlled – are entities organized by the government or corporations of which the government is a majority stockholder. Eg. Philippine Air Lines 4. Domestic – one incorporated under Philippine laws. 5. Foreign – one formed, organized, or existing under any laws other than those of the Philippines. 6. Corporation aggregate – one composed of more than one member or corporator. 7. Corporation sole – consists of one member or corporator and his successors. 8. Religious corporations, sole or aggregate – organized, either as sole or aggregate, to administer properties of the church. 9. Ecclesiastical – organized for religious purposes. 10. Lay – organized for a purpose other than religious 11. Eleemosynary – organized for charitable purposes. 12. Civil – are those than ecclesiastical and eleemosynary, whether public or private. 13. Close – one wherein all the outstanding stock is owned by the persons who are active in management and conduct of the business. 14. Open – one in which all the members or corporations have a vote in the election of the directors and other officers. 15. Multi-national – one having been created or organized in one state conducts business or activities across national boundaries and but subject to the legal sanctions of the countries in which they operate. 16. Non-profit – organized without contemplation of gains, profits or dividends to their members on invested capital. 17. De Jure – one created in strict or substantial conformity with the statutory requirements for incorporation and whose right to exist as a corporation cannot be successfully

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Law on Business Organizations Reviewer attacked even in a direct proceeding for that purpose by the State. Sec. 4. Corporations created by special laws or charters. – Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. Sec. 5. Corporators and incorporators, stockholders, and members. – Corporators are those who compose a corporation, whether as stockholders or members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. Corporators in a stock corporation are called stock-holders or shareholders. Corporators in a non-stock corporation are called members. Components of a Corporation 1. Corporators – are those who composed a corporation, whether as stockholders of members. The term includes incorporators, stockholders or members. 2. Incorporators – are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. 3. Stockholders or shareholders – are those corporators in a stock corporation. 4. Members – are those corporators in a non-stock corporation. 5. Promoters – is a self-constituted organizer who finds an enterprise or venture and helps to attract investors, form a corporation and launch it in business, all with a view to promotion profits. Promotion – is the act of procuring the initial finances and the making of all preparations necessary to launch a corporation. Activities of a promoter 1. The discovery and investigation of a promising business opportunity.

2. The formulation of business and financial plans. 3. Assembling the enterprise by negotiations and obtaining some control over the subject matter by option or contracts made on behalf of the proposed corporation or on his own credit. 4. The making of arrangements for financing the enterprise and the floatation of securities. 5. Arrange tactful and painless methods for getting his own reward for the task of promotion out of the prospective investors and for reimbursement for his expenses, contracts, and services without frightening away those who are expected to provide the funds. General rule: A corporation is not bound by any agreement made by a promoter. Exception to the rule: Unless and until the corporation approves the agreement. Sec. 6. Classification of shares. – The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock. Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and 42

Law on Business Organizations Reviewer conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission. Shares of capital stock issued without par value shall be deemed fully paid and nonassessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends. A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share. Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of incorporation.

the

articles

of

2. Adoption and amendment of by-laws. 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property. 4. Incurring, creating or increasing bonded indebtedness. 5. Increase or decrease of capital stock. 6. Merger or consolidation of the corporation with another corporation or other corporations. 7. Investment of corporate funds in another corporation or business in accordance with this Code.

8. Dissolution of the corporation. Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. Definition A “stock” or share of stock is one of the units into which the capital stock has been divided. It represents the interest or right that the holder of the stock or stockholder has in the corporation. A stock certificate certifies that one is a holder or owner of a certain number of shares of stock in the corporation. It is a mere documentary evidence of the holder’s ownership of shares and a convenient instrument for the transfer of title. Classes or series of shares of stock subject to restrictions 1. Shares shall not be deprived of voting rights except preferred or redeemable shares but non-voting shares must still be entitles to vote on matters specified in the last paragraph of Section 6 like matters relating to amendment of the articles of incorporation and dissolution of the corporation. 2. Where non-voting shares are provided for there must always be a class or series of shares with complete voting rights. 3. Banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock. 4. Preferred shares of stock which may be given preference in the distribution of assets in case of liquidation and distribution of dividends or other preferences may be issued only with stated par value. 5. The terms and conditions of preferred shares or series thereof may be fixed by the board of directors only when authorized by the articles of incorporation the effectivity thereof shall be reckoned from the filing of certificate with the SEC. 6. Shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share.

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Law on Business Organizations Reviewer 7. Unless otherwise provided by law the rights, privileges or restrictions on classes or series of shares must be stated in the articles of incorporation and in the stock certificates. Classes or series of shares 1. Voting and Non-Voting Shares; General rule: Every member of a nonstock corporation and every legal owner of shares in a stock corporation, has a right to be present and vote at all corporate meetings. Exception to the rule: Unless there is a stipulation in contrary. 2. Par Value and No-Par Value Shares Par value is the given fixed or definite value of a share in the articles of incorporation. 3. Common and Preferred Shares. Preferred shares of stock may be: (a) preferred as to assets; (b) preferred as to dividends. Preferred as to dividends may either be cumulative or noncumulative, or participating or nonparticipating 4. Promotion Shares – are such stocks issued to those who may originally own the mining ground or valuable rights connected therewith, in consideration of their deeding the same to the mining company when the company is incorporated, or it may mean such stock as is issued to promoters. 5. Shares of Escrow – are shares subject to an escrow agreement, that is, an agreement under which the shares are deposited by the grantor or his agent with a third person, to be delivered by the depositary to the vendee or subscriber only upon the happening of certain conditions. 6. Founder’s Shares; 7. Redeemable “Callable” Shares; 8. Treasury Shares; 9. Other shares classified to comply with constitutional or legal requirements. Instances when non-voting shares may vote 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation of business in accordance with the Corporation Code; and 8. Dissolution of the corporation. Sec. 7. Founders’ shares. – Founders' shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. The five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission. Definition Founders’ shares, generally common stock, are given to the founders or promoters of a corporation in payment of money expended or services rendered in the promotion of it. Sec. 8. Redeemable shares. – Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares. Definition Redeemable (“Callable”) shares of stock which are usually preferred are frequently issued subject to redemption at the option of either the corporation, the stockholder, or both, at a definite price representing premium above the amount originally paid. Sinking fund refers to a fund set-up by the corporation where cash is gradually set aside in order to accumulate the amount necessary to meet the redemption price of 44

Law on Business Organizations Reviewer redeemable shares of specified dates in the future.

extension as may be determined by the Securities and Exchange Commission.

Sec. 9. Treasury shares. - Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors. (n)

Sec. 12. Minimum capital stock required of stock corporations. – Stock corporations incorporated under this Code shall not be required to have any minimum authorized capital stock except as otherwise specifically provided for by special law, and subject to the provisions of the following section.

Definition Treasury shares are owned by the corporation having been reacquired by the issuing corporation by “purchase, redemption, donation or through some other lawful means.” It has no voting rights or rights as to dividends or distributions.

Sec.13. Amount of capital stock to be subscribed and paid for purpose of incorporation. – At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twentyfive percent (25%) of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of fixed date or dates, upon call for payment by the board of directors: Provided, however, that in no case shall the paid-up capital be less than five thousand (P5,0000) pesos.

TITLE II - INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Definition Incorporation is the act of creating a corporation. Sec. 10. Number and qualifications of incorporators. – Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. Qualifications of incorporators 1. Must be a natural person. 2. Must be of legal age. Sec. 11. Corporate term. – A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier

Amount to be subscribed and paid Illustration: If X, Inc. has authorized capital stock of P100, 000 divided into 1,000 shares with par value of P100.00 per share, it must be shown that at least P25, 000 or 250 shares of the authorized capital stock must be subscribed. Of the total subscription of P25, 000, at least P6, 250.00 or 25% of total subscription must be paid. It is not necessary that each subscriber pay Twentyfive percent (25%) on his subscription. On the other hand, where the authorized capital stock is stated at 2,000 no par value shares , it must be shown that at least 500no par value share have been subscribed. The basis of computation is on the number of shares. Securities and Exchange Commission (SEC) may conduct compliance with paid-up capital requirements because it has come to the knowledge of the Commission that some corporation have been organized merely as fronts for some hidden objectives with no real intention of carrying out the purported purposes in their articles of incorporation. If a bigger capital

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Law on Business Organizations Reviewer stock is required, the abuse of the privileges of a corporation would be minimized. Capital stock requirements under the special laws 1. In case of mining and agricultural incorporation, or corporation organized for the purpose of the disposition , exploitation, development or utilization of natural resources of the Philippines, as well as corporation organized for the operations of public utilities, the Constitution provides that at least 60 % of the capital stock of such corporation must be owned by citizens of the Philippines. 2. The Insurance Code provide that “no domestic insurance company shall, if a stock corporation, engage in business in the Philippines unless posses of a paid up capital stock equal to at least two million pesos”. Where the insurance company is to engage in insurance business it must have a “paid-up capital stock of at least five million pesos” to be invested in securities specified by law, which securities are to be deposited with the Insurance Commissioner. 3. The Financing Company Act requires that “at least sixty per centum of the capital of financing companies must be owned by citizens of the Philippines and shall have a paid-up capital of not less than five hundred thousand pesos”. 4. Commercial banks are required to have a paid-up capital of 100 million pesos. When a commercial bank having licence to operate an expanded foreign currency deposit system it must have a paid-up capital of at least 150 million pesos and when a commercial bank is authorized to engage in universal banking it must have a paid up capital of at least 500 million pesos. 5. The New Constitution provides that: “The ownership and management of mass media shall be limited to citizens of the Philippines or to corporations or association wholly-owned and manage by such citizen”.

the Philippines, and no association, partnership, or corporation the capital of which is not wholly owned by citizens of the Philippines, shall engage directly or indirectly in the retail trade business. 7. Only vessels of domestic ownership are authorized to engage in coastwise shipping in the Philippines. Vessels are considered of domestic ownership when such ownership is vested in some one or more of the following: (1) Citizens of the Philippines; (2) any corporation or any company composed wholly of the citizens of the Philippines; (3) any corporation or company created under the laws of the Philippines, provided at least 75% of the capital stock thereof or of any interested in said capital is wholly owned by the citizens of the Philippines. Sec.14. Contents of articles of the incorporations. – All corporation organized under this Code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages, duly signed and acknowledged by all of the incorporators containing substantially the following matters, except as otherwise prescribed by this Code or by special laws: 1. The name of the corporation. 2. The specific purpose or purposes for which the corporation is being incorporated. Where the corporation have more than one stated purpose, the article of incorporation shall state which the primary is and which is/are the secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such. 3. The place where the principal office of the corporation is to be located, which must be within the Philippines. 4. The term for which the corporation is to exist. 5. The names, nationalities and residences of the incorporators.

6. Under the Retail Trade Nationalization law “no person who is not a citizen of 46

Law on Business Organizations Reviewer 6. The number of directors or trustees which shall not be less than five (5) nor more than fifteen (15). 7. The names, nationalities and residences of the person who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified accordance with this Code. 8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares which it is divided, and in case the shares are par value shares, the par value of each, the names, nationalities and residences of the original subscriber, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated. 9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount, contributed by each. 10. Such other matters are not inconsistent with law and which the incorporators may deem necessary and convenient. The Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscriber showing that at least 25% of the authorized capital stock of the corporation has been subscribed, and at least 25% of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which are equal to at least 25% of the said subscription , such paid up capital being not less than five-thousand pesos (P5,000). Sec.15. Forms of Articles of Incorporation. – Unless otherwise prescribed by special law, articles of incorporation of all domestic corporations shall supply substantially the following requirements in the form as provided for by the SEC:

Incorporators may choose any name they see fit , however strange, uneuphonious, or unrhetorical it may be , provided it is one not identical with or prejudicially similar to a name which has previously been adopted by and is being use by another corporation as its corporate name Change of Corporate name The change of the corporate name doesn’t mean a new corporation, nor the successor of the original corporation. It is the same corporation with a different name having its character with no respect change. The corporation continues, as before, responsible in its new name for all debts or other liabilities it had previously contracted or incurred. 2. Specific purpose or purposes. The statement of the purpose has its principal function the affirmative authorization of the management to enter into those contracts and business transactions which may be considered as incidental to its attainment of the purposes. It also imposes implied limitations of their authority by the exclusion of lines of activity which are not covered. 3. Principal office of the Corporation. The principal office of the corporation must be within the Philippines. It is where the books of the corporation are kept and its officers usually and ordinarily meet for the purpose of managing the affairs and transactions of the business of the corporation. 4. Terms of Existence of the Corporation. The corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. 5. Names, Nationalities and residences of incorporators. The names, nationalities and residences of the incorporators must be stated in the articles of the corporation for the purpose of complying with legal requirement that majority of the incorporators must be residents of the Philippines and complying with the statutory requirement on share ownership and in other instances where Filipino Citizens are required.

1. The name of the corporation. 6. Number of directors and trustees. 47

Law on Business Organizations Reviewer The number of the director and trustees must not be less than five (5) nor more than fifteen (15). 7. Names, nationalities and residences of directors. A majority of the directors or trustees of all corporation organized under this Code must be a residents citizens of the Philippines. 8. Amount of authorized capital stock. A stock corporation must state the “amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the shares are par value shares, the par value of each, the names, nationalities, and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all the shares are without par value, such fact must be stated”. 9. Non-stock Corporation. The Corporation Code requires the articles of the non-stock corporation to states: the amount of its capital, the names, nationalities and residences of its contributors and the amount contributed by each. A non-stock corporation may have capital but it has no authorized capital stock. 10. Inclusion of other matters. The articles of incorporation “may include other matters that is not inconsistent with law and which the incorporators may deem necessary and convenient”. Sworn Statement of the Treasurer The Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least: 1. 25% of the authorized capital stock has been subscribed. 2. 25% of the subscription has been fully paid in actual cash or property. 3. The paid-up capital being not less than P5,000.00. SEC Policy

Property as subscription payment – Generally, all forms of tangible properties are acceptable for purposes of payment to subscription provided that the three test of paid-up capital determination are complied with, i.e., ownership, existence and valuable, subject to certain restrictions as may be imposed by law. SEC adopted the policy that discourages the inclusion of intangible assets as goodwill, lease-hold rights, or timber concession rights, payment of such properties Motor vehicle, real estate properties and navigable vessels in payment of pre-incorporation subscription, increases of capital stock or in exchange for additional issuance of shares are allowed only by the SEC provided that: 1. There has been a proof of valid transfer; 2. All taxes due from the properties has been paid; and 3. Such properties have been reasonably valued. Papers to accompany articles with SEC The SEC requires the following papers to be submitted to it with the articles of incorporation: 1. A verification slip executed by the Chief of the Record Section states that the proposed name of the corporation has been verified and found to be distinct/ not similar to the names of already existing corporation or those pending registration. 2. Written undertaking to change corporate name in case there is a person, firm or entity with a prior right to the use of said name or one similar to it. 3. Sworn statement of assets and liabilities, duly executed under oath by the corporate treasurer together with the amount P50.00 to defray publication expenses. 4. Bank certificate of deposit, issued under oath by the bank manager or any authorized bank officer, that there is a deposit of the stated amount representing the paid-up capital of the corporation either in the name of the treasurer in trust for the corporation or in the name of the corporation itself.

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Law on Business Organizations Reviewer 5. Written authority to verify bank deposit signed by the corporate treasurer empowering the SEC and /or the Central bank to check and inspect the existence of the bank deposit of the corporate paid-up capital. 6. Taxpayer account number of the incorporators pursuant to Executive order No. 213. 7. Registration Data Sheet, a statement in statistical data form, signed by an authorized representative of the corporation regarding important information about the corporate seal, corporate name, principal office, capital structure, their subscription and TAN (SEC Bulletin, Oct. 1982). Sec. 16. Amendment of Articles of Incorporation. – Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least twothirds (2/3) of the outstanding capital stock, without prejudice to the appraisal rights of dissenting stockholders in accordance with the provision of this Code, or the vote or written assent of two-thirds (2/3) of the members if it be a non-stock corporation. The original and amended articles altogether shall contain all provision required by law to be set out in the articles of incorporation. Such articles, as amended shall be indicated by underscoring the change or changes made, and the copy thereof duly certified under oath by the corporate secretary and the majority of the directors or trustees stating the fact that said amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the Securities and Exchange Commission. The amendment shall take effect upon its approval by the Securities and Exchange Commission or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation.

Law reserves the rights to modify the charter The constitution and the Corporation Code reserved the right to amend the charter of a private corporation. The constitution provides that “no franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the National Assembly when public interest so requires. Amendment of Articles of Incorporation The articles of incorporation may be amended for legitimate purposes that refer to any matter stated in the articles of incorporation. It may refer to: 1. Change of corporate name; 2. Extension of term of corporation; 3. Change in classes or series of shares; 4. Change in rights, privileges or restrictions in share ownership; 5. Increase or decrease in the number of directors; and 6. Change in purpose or purposes and other necessary changes. Vote or recent assent required in amendment of the articles of incorporation shall be as follows: Stock Corporation – A majority vote of the directors or trustees and the vote or written assent of the stockholders representing at least two- thirds (2/3) of the outstanding capital stock. Under section 81 of the Code, a dissenting stockholder may exercise his appraisal right if he is against the amendment to be made and demand payment of the fair value of his shares. Non-stock Corporation – A majority vote of board of directors and the vote or written assent of 2/3 of the members. The amendments to the articles of incorporation shall take effect upon its approval by the Securities and Exchange Commission or from the filing with the said Commission if not acted upon within six months from the date of filing for a cause not attributable to the corporation. Sec. 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. – The Securities and Exchange Commission may reject the articles of incorporation or disapproved any amendment thereto if the same is not in compliance with the requirements of this 49

Law on Business Organizations Reviewer Code: Provided, That the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such amendment or disapproval: 1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein. 2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulation. 3. That the Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is false. 4. That the required percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws of the constitution. No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan association, trust companies, public utilities, educational institution, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favourable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. Sec. 18. Corporate name. – No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or its patently deceptive, confusing or contrary to existing laws. When the change in a corporate name is approved, the commission shall issue an amended certificate of incorporation under the amended name. Necessity of Corporate name It is necessary that a corporation should have a name because that is the only way

by which the corporation can be identified and distinguished from other corporation, firms or entities. Change of corporate name A corporation may change its name by merely amending its charter in the manner prescribed by law. The change of name of the corporation does not result in dissolution. The changing of the name of a corporation is no more the creation of a corporation than the changing of the name of a natural person. Restriction in use in certain names of words There are special laws prohibiting the use of certain names and/or words. Thus, under the General Banking Act, no person or entity not conducting the business of commercial banking shall use the words “bank”, “banking”, “banker”, “building and loan association”, “trust corporation”, etc. or words of similar import. The word “National” under Act 2612 may not be use by those doing business as bankers, brokers, or savings institutions. “United Nations” both in its full and abbreviated forms, for commercial and business purposes. There are other names or words which pursuant to other special laws may not be used. Sec. 19. Commencement of Corporate Existence. – A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members, and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. Sec. 20. De Facto corporation. – The due incorporation any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry

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Law on Business Organizations Reviewer may be made by the Solicitor General in a quo warranto proceeding. De facto corporation – generally refer to organizations exercising corporate power under colour of a more or less legally constituted corporation. Elements of De facto corporation 1. Existence of a valid law under which a corporation can be organized. 2. An attempt in good faith to incorporate. 3. Actual exercise of incorporate powers. Quo warranto – an inquiry made into the right of a corporation to conduct business. Illustration Seven competent individual organized a corporation by filing the articles of incorporation and securing a certificate of incorporation with the SEC. However, the addresses of two of the original subscribers were omitted in the articles of incorporation. In suit filed by X, a creditor, against the corporation he alleged that the corporation has no valid existence and sought to hold the seven incorporators (also directors) liable personally on the obligation. X’s allegation that the corporation had no valid existence would constitute a collateral (side) attack in a private suit. Only the Solicitor General as government lawyer may raise the question by quo warranto proceeding. (Literally by “what right”). Sec. 21. Corporation by estoppel. – All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. One who assumes an obligation to an ostensible corporation as such cannot resist performance thereof on the ground that there was in fact no corporation. Estoppel – It is preclusion, which prevent a man from denying a fact in consequences of his own previous act, allegations, or denial

of a contrary tenor. The object of the principle of estoppel is to prevent injustice to an otherwise innocent person. Sec. 22. Effect of non-use of corporate charter and continuous in operation of a corporation. – If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be ground for the suspension or revocation of its corporate franchise or certificate of incorporation. This provision shall not apply if the failure to organize, commence the transactions of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission. Organization The idea of organization in reference to corporations means executive structure, election of officers, providing for subscription and payment of capital, adoption of by-laws, and other steps necessary to endow the legal entity with capacity to transact business for which it was created. The Grant of corporate existence, conferred by the issuance of certificate of incorporation, is subject to two subsequent conditions, to wit: 1. The corporation must “formally organize”. 2. The corporation must actually begin the “transaction of its business”. Failure to comply with either or both of these conditions within two (2) years from the date of its incorporation, its corporate power cease and the corporation must be deemed dissolved. Sec. 23. The board of directors or trustees. – Unless otherwise provided in this Code, the corporate powers of all corporation formed under this Code shall be exercised , 51

Law on Business Organizations Reviewer all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stock, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified. Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is the director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. Qualifications of directors 1. He must own at least one (1) share of the capital stock of the corporation in his name. 2. Majority of the directors must be a resident citizen of the Philippines. 3. A director must not have been convicted by final judgement of an offense punishable by imprisonment exceeding six (6) years or a violation of the provisions of the Corporation Code committed within five (5) years prior to the date of election or appointment. The directors, once elected, become the representatives of the corporation itself, not its stockholders. The directors of a nonstock corporation are required to be members thereof and like stock corporations “majority of the directors and trustees of all corporations organized under the Corporation Code must be residents citizen of the Philippines”. There are some special corporation not organized with the Corporation Code where directors are required to be citizens of the Philippines. They are as follows: 1. Bank and banking institution, at least 2/3 of the members of the board of directors shall be citizen of the Philippines. 2. Rural banks, every member of the board of directors shall be citizens of the Philippines.

3. Domestic air carrier, the directing head or 2/3 of the board of directors and other managing officers shall be citizens of the Philippines. 4. Registered investments companies, the directors thereof must be Filipino citizen. 5. Private development banks, all the members of the board of directors shall be citizen of the Philippines. 6. In case of financing corporation, at least 2/3 of all members of the board of directors shall be citizen of the Philippines. Sec. 24. Election of directors or trustees. – At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of the majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any voting stockholder or member. In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of the election; and said shareholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute them on the same principle among as many candidate as he shall see fit; Provided, That the total number of votes cast by him shall not exceed the numbers of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, that no delinquent stocks shall be voted. Unless otherwise provided in the articles of incorporation, or in the by- laws, members of corporation which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to 52

Law on Business Organizations Reviewer time but not sine die or definitely if, for any reason, no election is held, or if there are not present or represented by proxy, at the meeting, the owners of the majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. Methods of voting The voting methods which may be resorted to by a voting stockholder are as follows: 1. Straight voting. 2. Cumulative voting for one candidate. 3. Cumulative voting by distribution. Example of Straight Voting A owns 100 shares of stock in X corporation. During the meeting for the purpose of electing five directors, he may cast his vote by giving each of the five candidates 100 votes, hence, he distribute equally his vote without preference or discrimination. Example of Cumulative voting for one candidate In the preceding illustration, if A owns 100 voting shares and there are five directors to be elected, A is entitled to 500 votes which he may “cumulate” by giving it to candidate Z alone. Example of Cumulative voting by distribution As in the same example above, if A owns 100 voting shares, and there are five directors to be elected, A is entitled to 500 votes which he may distribute to candidate Y and Z giving the former 300 and the latter 200 provided that the total number of votes cast by him does not exceed 500 votes. Voting of sequestered shares of stock It has been held that the “Presidential Commission on Good Government may properly exercise the prerogative to vote sequestered stock of corporation, granted to it by the President of the Philippines xxx pending the outcome of proceeding to determine the ownership of sequestered shares of stock. xxx Substitution of directors is not be done without reason or rhyme, and undertaken only when essential to prevent disappearance or wastage of corporate property, and always under such circumstance as assure that replacements are truly processed of competence, experience and probity.

Sec. 25. Corporate officers, quorum. – Immediately after their election, the directors of a corporation must formally organized by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and by the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide form a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act , except for the election of the officers which shall require the vote of a majority of all the members of the board. Qualification of corporate officer 1. President. He must be a director. 2. Treasurer. He may or may not be a director. 3. Secretary. He must be a resident and citizen of the Philippines 4. Other officers provided for in the bylaws. Three levels of corporate control 1. The board of director which is responsible for the corporate policies and the general management of the business affairs of the corporation. 2. The officers, who in theory execute the policies lay down by the board , but in practice often have wide latitude in determining the course of business operations. 3. Stockholders who like amendments of the articles of incorporation. Teleconferencing of Board Members In the Philippines, teleconferencing and videoconferencing of members of board of directors of private corporation is a reality, in light of the Republic Act No. 8792.The Securities and Exchange Commission issued 53

Law on Business Organizations Reviewer SEC Memorandum Circular No. 15, on November 30, 2001, providing the guidelines to be complied with related to such conferences. Thus, the court agrees with the RTC that persons in the Philippines may have a teleconference with a group of persons in South Korea relating to business transactions or corporate governance. Directors and officers distinguished The officers of a corporation, unlike the directors, are true agent of the corporation. Each officer may bind the corporation by his individual acts within the actual or apparent scope of authority. On the other hand, a director has no authority to act for the corporation. Authority of corporate officers The corporation transact its business through its officers or agents. An officer’s power as an agent of the corporation must be sought from the statute, charter, and the by-laws or in a delegation of authority to such officers, from the acts of board of directors, formally expressed or implied from a habit or custom of doing business. Chairman of the Board A chairman of the board of directors must himself director be a director of the corporation. His duty as presiding officer is not an executive one. It has been suggested that he well be given advisory duties in determining executive salaries, bonus plans and pensions, determining dividend policy, selecting auditors, and dealing questions with labor and company policy. President The president must be a director of the corporation. The powers of the president of a corporation are vested in him by law or the by-laws; otherwise, he has no power over the corporate property and business than has any other director. However, he may be given actual authority to make particular contracts, or to execute conveyances, borrow money, execute mortgages, and do other acts, by the charter, the by-laws, resolutions of directors or their informal acquiescence. Vice- President In the absence of the president, or if the office of the president becomes vacant, as a rule, the vice president elected and appointed by the shareholders or directors

has authority to act in his stead, and to perform the duties of the office. Secretary A secretary must be a resident citizen of the Philippines. It is generally its duty to make and keep corporate records; to make proper entries of the votes, resolution and proceedings of the shareholders and directors in the management of the corporation, and of all other matters required to be entered in the records. The secretary is the ministerial officer who cannot bind the corporation unless he is authorized to do so. Treasurer The treasurer of the corporation “may or may not be a director”. He is the proper officer and the only proper officer in the absence of express provision to the contrary, to receive and keep the money of the corporation and to disburse them as he may be authorized. Other officers The by-laws of the corporation may provide for such other officers and agent as may be necessary and convenient considering the nature and needs of the business. Their compensation is provided for by the by-laws and the board of directors in a suitable manner. Quorum – signifies the number of persons belonging to a corporation required to transact business. Section 25 of the Corporation Code requires more people than a simple majority to form a quorum. If no such defining number is determined, a quorum is a simple majority. Directors cannot vote by proxy The directors cannot vote by proxy but must personally present, and act by themselves. Sec. 26. Report of election of directors, trustees and officers. – Within thirty (30) days after the election of the officers, trustees and directors of the corporation, the secretary, or any other officer of the corporation shall submit to the Securities and Exchange Commission, the names, nationalities and residences of the directors, trustees and officers elected. 54

Law on Business Organizations Reviewer Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the secretary or any other officer of the corporation, or the director, trustee or officer himself, shall immediately report such fact to the Securities and Exchange Commission. Sec. 27. Disqualification of directors, trustees or officers. – No person convicted by final judgement of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code, committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation. Sec. 27 of the Corporation Code is an additional safeguard that only upright and honest individuals be entrusted with management of the corporate affairs. A director of a cooperative who is subsequently elected as member of the Sangguniang Panglungsod (City Council) becomes automatically disqualified from continuing as such director by virtue of the clear mandate of PD No. 269 providing that except for “barrio captains and councillors” elective officials are ineligible to become officers and/or directors of any cooperative. The SEC ruled that firms engage in wholly or partially nationalized activities, aliens are banned from being appointed to management position such as president, vice-president, treasurer, auditor, secretary, etc. of said companies. However, they can be elected directors in preparation to their allowable participation or share in the capital of such activities, in accordance with the Commonwealth Act No. 108, as amended by PD 715, otherwise known as the Anti- Dummy Law. Sec. 28. Removal of director or trustees. – Any director or trustee of the corporation may be removed from office by a vote of the stockholders holding or representing at least two- thirds (2/3) of the outstanding capital stock, or if the corporation be a nonstock corporation , by a vote of at least twothirds (2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or at the special meeting called

for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of the corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote. Should the secretary failed to refuse to call the special meeting upon such demand, or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members of any by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as the intention to propose such removal, must be given by publication or by written notice as prescribed in this Code. The vacancy resulting from removal pursuant to this section may be filled by election at the same meeting without further notice, or at any regular or at any special meeting called for the purpose after giving notice as prescribed in this Code. Removal may be with or without cause: Provided, That removal without cause may not be used to deprived minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code. Directors or trustee may be removed even without cause The legislative policy is that the shareholders shall be the ultimate masters, not the directors. The shareholders should be clothed with the power of judging the competency and fitness of the directors and of choosing a board that will carry out of their business policy. Directors representing minority may not be removed without cause. The power to removed director or trustee even without cause given to shareholders or members may not be used to deprived minority shareholders or members of the right of representation to which they may be entitled under Section 24 of the Corporation Code. Cumulative voting of 55

Law on Business Organizations Reviewer directors in a stock corporation is mandatory and cannot be dispensed with in the by-laws. Being a statutory right, the stockholders cannot be deprived of the use of cumulative voting. May the result of the duly held election of directors be altered by mere agreement of the directors? The Securities and Exchange Commission ruled that: “An agreement by which director is reposed in any body except majority of stockholders is in violation of ‘public policy’ and ‘enforceable’ ”. The Securities and Exchange Commission has jurisdiction or authority to “hear and decide cases” involving controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations. Controversy concerning removal of directors or trustees may also be heard by the SEC. Sec. 29. Vacancies in the office of director or trustee. – Any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill the vacancy shall be elected only for the unexpired term of his predecessor in office. Any directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall be filled only by an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting. Sec. 30. Compensation of directors. – In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, That any such compensation (other than pier diems) may be granted to directors by the vote of the stockholders representing at least a

majority of the outstanding capital stock at a regular or special stockholders’ meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten percent (10%) of the net income before income tax of the corporation during the preceding year. Sec. 31. Liability of directors, trustees or officers. – Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors, or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. Directors are trustees It is well-stated rule in corporate law that directors of corporations are trustees and are required to act in the utmost good faith. Liability of corporate directors and officers for illegal dismissal of employees In cases of illegal dismissal, corporate directors and officers are solidarily liable with the corporation, where terminations of employment are done with malice or in bad faith. (Acesite Corp. vs. NLRC, G.R. No. 152308, January 26, 2005, 449 SCRA 360) Sec. 32. Dealings of directors, trustees or officers with the corporation. – A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not 56

Law on Business Organizations Reviewer necessary to constitute a quorum for such meeting. 2. That the vote of such director or trustee was not necessary for the approval of the contract. 3. That the contract is fair and reasonable under the circumstances. 4. That in the case of an officer, the contract with the officer has been previously authorized by the Board of Directors. Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances. Director disqualified to vote if he has personal interest A director is disqualified to vote at a meeting of the board if he has any personal interest in a matter before the board; in such case, his vote cannot be counted in making up a quorum. Disclosure of adverse interest by director It has been held that in dealing with their corporation the directors must make full disclosure of all relevant facts or the transaction is voidable. The failure of a director to inform his fellow directors of his adverse bargaining position and other material circumstances should be seriously considered and inspected by the courts as manner on the fairness and good faith of the transaction and whether it is just and reasonable as to the corporation. Exceptions in Signing contract without authority of Board of Directors is void If a private corporation intentionally or negligently clothed its officers or agents with apparent power to perform acts of it, the corporation will be estopped to deny that such apparent authority is real, as to innocent third persons dealing in good faith

with such officers or agents. (Yao Ka Sin Trading vs. Court of Appeals, G.R. No. 53820, June 15, 1992, citing Francisco vs. GSIS, 7 SCRA 577) Corporate president presumed to have authority As a strict rule, the corporate president has no inherent power to act for the corporation, slowly giving way to realization that such officer has certain limited powers in the transaction of the usual and ordinary business of the corporation. In the absence of agreement or by law provision to the contrary, the president is presumed to have the authority to act within the domain of the general of his or her usual duties. (People’s Aircargo, and Warehousing Co., Inc. vs. Court of Appeals, G.R. No. 117847, Oct. 7, 1998) Sec. 33. Contracts between corporations with interlocking directors. – Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone; Provided, That if the interest of the interlocking director in one corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Stockholdings exceeding twenty percent (20%) of the outstanding capital stock shall be considered substantial for purposes of interlocking directors. Interlocking directors – Interlocking directors are persons who serve as member of the board of directors of two or more competing corporations or corporations engaged in practically the same kind of business. Effect of Corporate contracts with interlocking directors Interlocking directors of corporations does not make a contract between or among the corporations void and of no effect provided there in no fraud and reasonable under the circumstances. Sec. 34. Disloyalty of a director. – Where a director, by virtue of his office, acquires for himself a business opportunity which 57

Law on Business Organizations Reviewer should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable notwithstanding the fact that the director risked his own funds in the venture. Duties of directors Directors owe a three-fold duty to the corporation. First, they must be obedient; they owe a duty to keep within the powers of the corporation as well as within those of the board of directors. Second, they must be diligent; they owe a duty to exercise reasonable care and prudence. The third duty owing by directors is that of individual loyalty. Concept of “corporate or business opportunity.” The doctrine of “corporate opportunity” is but one phase of the cardinal rule of undivided loyalty on the part of the fiduciaries. If there is a presented to a corporate officer or director a business opportunity which the corporation is financially able to undertake, is from its nature, in the line of the corporation’s business and is of practical advantage to it, is one in which the corporation will be brought into conflict with that of his corporation, the law will not permit him to seize the opportunity for himself. Director is a fiduciary. He who is in such fiduciary position cannot serve himself first and his cestuis (beneficiary) second. He cannot manipulate the affairs of his corporation to their disadvantage and in disregard of the standards of common decency. He cannot by the intervention of a corporate entity violate the ancient principle against serving two masters. Sec. 35. Executive Committee. – The bylaws of a corporation may create an executive committee, composed of not less than three members of the board, to be appointed by the board. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a

majority vote of the board, except with respect to: (1) approval of any action for which shareholders’ approval is also required; (2) the filling of vacancies in the board; (3) the amendment or repeal of bylaws or the adoption of new by-laws; (4) the amendment or repeal of any resolution of the board which by it express terms is not so amenable or repealable; and (5) a distribution of cash dividends to the shareholders. Sec. 36. Corporate powers and capacity. – Every corporation incorporated under this Code has the power and capacity: 1. To sue and be sued in its corporation name. 2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation. 3. To adopt and use a corporate seal. 4. To amend its articles of incorporation in accordance with the provisions of this code. 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code. 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this code; and to admit members to the corporation if it be a non-stock corporation. 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may be reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution. 8. To enter into with other corporations merger or consolidation as provided in this code. 9. To make reasonable donations, including those for the public welfare or 58

Law on Business Organizations Reviewer for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity. 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees. 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in its articles of incorporation. Powers of a corporation A corporation has such powers, and such powers only, as are conferred upon it by law or by its agreement. Powers may be conferred upon a corporation: 1. Expressly. 2. Impliedly, because they are incidental to corporate existence. 3. Impliedly, because they are necessary or proper in order to exercise the powers expressly conferred. General express powers Section 36 of the Corporation Code enumerates the general and express powers of corporations. Other corporate powers The Corporation Code enumerates other express powers of corporations as follows: 1. Power to extend or shorten corporate term (Sec. 37). 2. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness (Sec. 38). 3. Power to deny pre-emptive right (Sec. 39). 4. Power to sell or dispose assets (Sec. 40). 5. Power to acquire own shares (Sec. 41). 6. Power to invest corporate funds in another corporation or business or for any other purpose (Sec. 42). 7. Power to declare dividends (Sec. 43). 8. Power to enter into management contracts (Sec. 44). Sec. 37. Power to extend or shorten corporate term. – A private corporation may extend or shorten its terms as stated in the articles of incorporation when improved by a majority vote of the board of directors

or trustees and ratified at a meeting by the stockholders representing at least twothirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. Extension of corporate term limited to 50 years The corporate term may be extended for periods not exceeding 50 years in any single instance as provided by section 11 of the Corporation Code. No extension can be made earlier than 5 years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as determined by the SEC. Corporation cannot extend expired term. A corporation cannot extend its life by amendment of its articles of incorporation effected during the three-year statutory period for liquidation when its original term of existence had already expired. Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. – No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholders’ meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of and bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholders’ meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as 59

Law on Business Organizations Reviewer shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and secretary of the stockholders’ meeting, setting forth: 1. That the requirements of this section have been complied with. 2. The amount of the increase diminution of the capital stock.

or

3. If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of shares of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stockholder if such increase is for the purpose of making effective stock dividend therefor authorized. 4. Any bonded indebtedness to incurred, created, or increased.

be

5. The actual indebtedness of the corporation on the day of the meeting. 6. The amount of the stock represented at the meeting. 7. The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificate shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of

incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the Treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five percent (25%) of such increased capital stock has been subscribed and that at least twenty-five percent (25%) of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five percent (25%) of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission, if its effect shall prejudice the rise of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least twothirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof. Bonds – Bonds are in form and effect similar to promissory notes, secured by mortgage or trust deed upon specified property of the debtor corporation. Properties to a bond Every bond issue usually involve three parties: (1) the debtor – corporation; (2) the creditor – bondholder; and (3) the trustee. Bonds classified Bonds are classified into: coupon or registered bonds, mortgage bonds, debentures, convertible bonds, participating bonds, collateral trust bands, and guaranteed bonds.

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Law on Business Organizations Reviewer Coupon or registered bonds Coupon bonds are payable to bearer or to the order of a person, and have attached to them coupon notes for each instalment of interest as it falls due. Mortgage bond A mortgage bond is one secured by a mortgage on corporate property. Debenture bonds Debenture bonds are not secured by specific corporate property but rather solely on the issuer’s ability to pay the indebtedness. Convertible bonds Convertible bonds are those which includes a provision which permits the holder of the bond to convert the bond into a specified number of shares of stock of the corporation at his option within a period fixed therein. Participating bonds The owners or holders of participating bonds entitle them to participate in earnings of the corporation above the specified rates of interest fixed. Collateral trust bonds Collateral trust bonds are secured by a lien on securities deposited with a named trustee constituting the collateral. Guaranteed bonds Guaranteed bonds are guaranteed or secured by another corporation other than the issuing corporation. Sec. 39. Power to deny pre-emptive right. – All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt.

Pre-emptive right – It means literally to establish a prior right. A stockholder’s preemptive right is his right to subscribe to new shares of stock in proportion to his existing stockholdings, before the new shares are issued to others. Sec. 40. Sale or other disposition of assets. – Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock; or in case of nonstock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholders’ or members’ meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with the postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members. 61

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Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. In non-stock corporations, where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. Sec. 41. Power to acquire own shares. – A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends. 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale. 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. Sec. 42. Power to invest corporate funds in another corporation or business or for any other purpose. – Subject to the provisions of this code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least twothirds (2/3) of the outstanding capital stock, or by at least two-thirds (2/3) of the

members in the case of non-stock corporations, at a stockholders’ or members’ meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally; Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That were the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. Sec. 43. Power to declare dividends. – The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purposes. Stock corporation are prohibited from retaining surplus profits in excess of one hundred percent (100%) of their paid-in capital stock, except: (1) when justified approved by the Board of Directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstance obtaining in the corporation, such as when there is a need for special reserve for probable contingencies. Concept of dividends 62

Law on Business Organizations Reviewer A dividend is a corporate profit set aside, declared and ordered by the directors to be paid to the stockholders on demand or at a fixed time. Dividends distinguished from profits “Dividends” means the profits or that portion of the profits of the corporation which its board of directors, by proper resolution, sets apart for rotable distribution among the stockholders. It is distinguished from “profits” for the profits in the hands of a corporation do not become dividends until they have been set apart, or at least declared, as dividends and transferred to the separate property of the individual stockholders. Surplus profits – Surplus or net profits of a corporation is the difference between the total present value of its assets, after deducting losses and liabilities, and the amount of its capital stock. (11 Fletcher, Sec. 5335) Basis of dividend declaration The board of directors of a stock corporation may declare dividends on the basis of outstanding stock held by the stockholders. The basis therefore is the stockholder’s total subscription and not on the amount paid by him on the subscription. This is for the reason that his entire subscription represents his holding in the corporation for which he pays interests on any unpaid portion. (SEC Opinion, Dec. 17, 1973) Classes of dividends Dividends which a corporation may declare and distribute to its stockholders may be classified into: cash dividend, stock dividend, property dividend, scrip dividend, and liquidating dividend. Cash dividend Cash dividend is one payable in money. Stock dividend Stock dividend is a dividend payable in stock instead of cash or property. Property dividend The directors in their discretion may authorize distributions in bonds or in property, such as warehouse receipts for whiskey or shares of stock of a subsidiary corporation.

Scrip dividend Scrip dividend is a writing or a certificate issued to a stockholder entitling him to the payment of money or the like at some future time inasmuch as the company, at the time the scrip dividends are declared, has profits not in cash. Liquidating dividend Liquidating dividend involves the distribution of assets by a corporation to its stockholders upon dissolution. Sec. 44. Power to enter into a management contract. – No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the Board of Directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least majority of the members in the case of a non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (a) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own and control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (b) where the majority of the members of the Board of Directors of the managing corporation also constitute a majority of the members of the Board of Directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning of at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in case of a non-stock corporation. No management contract shall be entered into for a period longer than five years for any one term. The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of the other corporation, whether such contracts are called service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of 63

Law on Business Organizations Reviewer natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations. Concept of management contract A management contract is an agreement under which the board of directors of a corporation delegates the powers of management to another person or corporation for a period of time provided for in the agreement. Effects of Management contracts Contracts by which the board of directors delegates the power of supervision and management to another person or corporation for a specified period are invalid if they involve a surrender by the board of its power and duty of supervision and control. Management prerogatives An owner of a business enterprise is given considerable margin in managing his business because it is deemed important to society as a whole that he should succeed. Sec. 45. Ultra vires acts of corporations. – No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. Intra vires – The acts of a corporation within its express or implied powers. Ultra vires – The acts of a corporation outside its express or implied powers. It denotes some act or transaction on the part of a corporation which, although not unlawful or contrary to public policy of executed by an individual, is yet beyond the legitimate powers of the corporation as they are defined by the statute under which it is formed, or which are applicable to it, or by its charter or incorporation papers. Admittedly, if the contract is executed on both sides neither party can maintain an action to set aside the transaction or to recover what has been parted with. The courts will not interfere in such a case to

deprive either the corporation or the other part of money or property acquired under the contract. On the other hand, the great weight of authority is to consider executor contracts as unenforceable. Ultra vires contracts accepted doctrines 1. If the contract is fully executed on both sides, the contract is effective and the courts will not interfere to deprive either part of what has been acquired under it. 2. If the contract is executor on both sides, as a rule either party can maintain an action for its non-performance. 3. Where the contract is executor on side only, and has been fully performed on the other, the courts differ as whether an action will lie on the contract against the party who has received benefits of performance under it. Majority of the courts hold that the party who has received benefits from the performance is stopped” to set up that the contract us ultra vires to defeat an action on the contract. There is, however, a rule which is widely recognized by the courts that ultra vires. “Should not be allowed to prevail, when involved for or against the corporation, where it will defeat the ends of justice or work a legal wrong. Acts which are ultra vires are voidable but may be ratified. In order that such ultra vires may be ratified it must be shown that 1. The act was consummated or executed. 2. No creditors are prejudiced or they have given their consent thereto. 3. The right of the public or the state are not involved. 4. All of the stockholders consent thereto. A corporation, like an individual, may ratify and thereby render binding upon it the originally authorized acts of its officers or other agents. This is true because the questioned investment is neither contrary to law, morals, public order or public policy. It is a corporate transaction or contract which is within the corporate powers but 64

Law on Business Organizations Reviewer which is defective from a purported failure to observe in its execution the requirement of the law that the investment must be authorized by the affirmative vote of the stockholders holding 2/3 of the voting power.

the appropriate government agency to the effect that such by-laws or amendments are in accordance with law.

Sec. 46. by-laws Adoption. – Every corporation formed under this code, must, within one month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a new code of by-laws for its government not inconsistent with this code. For the adoption of by-laws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the outstanding capital stock, or of at least a majority of the members, in the case of non-stick corporations, shall be necessary. The bylaws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours; and a copy thereof, duly certified to by a majority of the directors or trustees and countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation.

Corporation has inherent power to adopt by-laws One of its legal incidents and is usually expressly granted by law of the charter subject to such limitations as may be contained in the statute or the charter, subject to such limitations as may be contained in the statute or charter, and the general requirements of validity. If a corporation fails to file its by-laws within the period required by law its certificate of incorporation may be suspended or even revoked.

Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation. In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with the Code. The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of

Necessity of by-laws The corporation must adopt the code of bylaws for its internal government.

Section 46 allows the adoption and filing of the by-laws before incorporation provided the same is approved by all the incorporators and submitted to the Securities and Exchange Commission together with the articles of incorporation. By-laws cannot provide for unreasonable restriction Restriction upon the traffic in stock must have their source in legislative enactment, as the corporation itself cannot create such impediments. By-laws are created for protection and not for restriction. Elements of valid by-laws 1. Must not be inconsistent with the general law and the Corporation Code. 2. Must not be inconsistent with public policy. 3. Must be general in application and not directed against particular individuals. 4. Must not be inconsistent with the articles of incorporation. 5. Must not impair obligations and contracts. 6. Must not be in restraint of trade. 7. Must not restrict religious freedom. By-laws validity As a rule, the by-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objects of the corporation, and are not contradictory to the general policy of the laws of the land.

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Law on Business Organizations Reviewer Binding effect of by-laws By-laws when valid, substantially the same force and effect as laws of the corporation as have the provisions of its charter in so far as the corporation, the persons within it is concerned. They are in effect written into the charter and in this sense; they become part of the fundamental law of the corporation. And the corporation, and its directors and officers are bound by and must comply with them. Strangers, however, are not bound to know by-laws which are merely provisions for the government of a corporation and notice of them will not be presumed. Sec 47. Contents of by-laws. – Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees. 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members. 3. The required quorum in meetings of stockholders or members and the manner of voting therein. 4. The form for proxies of stockholders and members and the manner of voting them. 5. The qualifications, duties and compensation of directors or trustees, officer and employees. 6. The time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof. 7. The manner of election or appointment and the term of office of all offices other than directors or trustees. 8. The penalties for violation of the bylaws. 9. In the case of stick corporations, the manner of issuing stock certificates. 10. Such other matter as may be necessary for the proper or convenient

transaction of its corporate business and affairs. The enumerations of contents of by-laws are not exclusive and neither does the provision require all the matters mentioned to appear in the by-laws. The By-laws must not violate the Constitution, the Corporation Code, other special laws and the articles of incorporation. A corporation which has failed to file its bylaws within the prescribed period does not ipso facto lost its powers as such. Sec. 48. Amendments to by-laws. – The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a nonstock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of 2/3 of the outstanding capital stock or 2/3 of the members in a non-stick corporation may delegate to the repeal any by-laws or adopt new by-laws: provided, that any power delegated to the board of directors or trustees shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. Whenever any amendment or new by-laws are adopted, such amendment or new bylaws shall be attached to the original bylaws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission, the same to be attached to the original articles of incorporation and original bylaws. Amender or new by-laws shall only be effective upon the issuance by the SEC of a certification that the same are not inconsistent with this code. The authority to make or adopt the original by-laws of a corporation cannot be given to the board of directors or trustees. The 66

Law on Business Organizations Reviewer stockholders of a stock corporation or the members of the non-stick corporation adopt or make the original by-laws.

Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member.

An amendment of by-law renders stockholder ineligible as director It is well-settled xxx that corporations have the power to make by-laws declaring a person employed in the service of a rival company to be ineligible for the corporation’s Board of Directors. An amendment which renders ineligible, or if elected, subjects to removal, a director if he be also a director in a corporation whose business is in competition with or is antagonistic to the other corporation is valid. This is based upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other. Such an amendment advances the benefit of the corporation and is good.

Whenever, for any cause, there is no person authorized to call a meeting, the SEC, upon petition of a stockholder or member, and on the showing of good cause there for, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws. The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have chosen one of their numbers as presiding officer.

Meetings Necessity A majority of the stockholders or members can bind the corporation only at a meeting regularly held and conducted. To constitute a legal meeting, so as to render the acts and vote of the majority binding the meeting must be regularly called by one having authority. In the absence of provision to the contrary such authority exists in the directors or managing agents. Sec. 49. Kinds of Meeting. – Meetings of directors, trustees, stockholders, or members may be regular or special. Sec. 50. Regular and special meetings of stock holders or members. – Regular meetings of stockholders or members shall be held annually on a date fixed in the bylaws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees: Provided, that written notice of regular meetings shall be sent to all stockholders or members of record at least 2 weeks prior to the meeting, unless a different period is required by the by-laws. Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws: Provided, however, that at least 1 week written notice shall be sent to all stock holders or members, unless otherwise provided in the by-laws.

Corporate decisions; rationale of meetings As a rule, a majority of the shareholders or members have no power to vote or act for the corporation as to matters on which shareholders have authority, except at a meeting called and conducted according to law. Written or oral consent to a corporate act by the shareholders or members individually, even though a majority may agree, is not binding on the corporation. When there is no person authorized to call a meeting A stockholder or member may petition the SEC upon showing of good cause, to call a meeting and directing the petitioner (stockholder or member) to give notice required by the Code and the by-laws. The petitioning stockholder or member shall preside at such meeting until at least a majority of the stockholders or members present have chosen one of their numbers as presiding officer. Sec. 51. Place and time of meetings of stockholders or members. – Stockholders’ or members’ meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation: Provided, that Metro Manila shall, for the purposes of his section, be considered a city or municipality Notice of meetings shall be in writing, and the time and place thereof stated therein. All proceedings had and any business transacted at any meeting of the stockholders or members, if within the 67

Law on Business Organizations Reviewer powers or authority of the corporation, shall be valid even of the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. Place of meetings (Regular or special) meetings shall be held in the city or municipality where the principal office of the corp. is located. If the meeting be improperly held or called (as when there was a defective notice) the same shall still be valid provided that 1. The act done was within the powers of the corporation. 2. All the stockholders or members were present or duly represented. Sec 52. Quorum in meetings. – Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations. Quorum – Signifies the number of persons belonging to a corporation required to transact business. Within the meaning of section 52 above, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations. Sec. 53. Regular of special meetings of directors or trustees. – The meetings shall be held monthly, unless the by-laws provide otherwise. Special meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in the by-laws Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the bylaws provide otherwise. Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least 1 day prior to the scheduled meeting, unless otherwise provided in the by-laws. A director or trustee may waive this requirement, either expressly or impliedly.

Sec. 54. Who shall preside at meetings. – The president shall preside at all meeting of the directors or trustees as well as of the stockholders or members, unless the bylaws provide otherwise. The meetings of directors or trustees may be held anywhere in the by-laws. Notice of regular or special meetings of directors or trustees must be sent to them at least 1 day prior to the scheduled meeting, unless the by-laws provided otherwise. Sec. 55. Right to vote of pledgors, mortgagors and administrators. – In case of pledged or mortgaged share in stock corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, unless the pledge or mortgagee is expressly given such right in writing which is recorded on the appropriate corporate books by the pledgor or mortgagor. Executors, administrators, receivers and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy. The pledgor or mortgagor of shatem in the absence of agreement to the contrary, if the shate remain in his name on the books of the corporation has the right to attend and vote at meetings of stockholders. A person who appears on the books of a corporation or otherwise as the absolute owner of stock clearly has the right to vote, although in face he may hold it as trustee. Executor and administrator has the right, to vote shares belonging to the estate of his decedent, and it can make no difference that the share stand on the books of the corporation in the name of the decedent. Sec. 56. Voting in case of joint ownership of stock. – In case of share of stock owned jointly by 2 or more persons, in order to vote the same, the consent of all the coowners shall be necessary, unless there is a written proxy, signed by all the co-owners. Authorizing one or some of them or any other person to vote such share or shares: provided, that when the shares are owned 68

Law on Business Organizations Reviewer in an capacity by the holders therof, any one of the joint owner can vote said shares or appoint a proxy therfor. If share are owned by 2 or more persons jointly, the right to vote is in them jointly, and , in order that the shares may be voted, they must agree upon the vote. This rule of joint action applies to shares held by several executors or trustees, in the absence of provision for a majority vote if the fiduciaries disagree. Sec. 57. Voting right for treasury share. – Treasury shares shall have no voting right as long as such stock remains in the treasury. Treasury shares have no voting rights. Sec. 58. Proxies. – Stockholders and members may vote in person or by proxy in all meetings of stock holders or members. Proxies shall be in writing, signed by the stock holder or member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five years at any one time. Proxy – In corporate law, is a person who votes for and this represents the stockholders or members. Voting by proxy Ordinarily the right to vote shall be exercised by the stockholders themselves or by their duly authorized representatives. Proxy to be valid must be: 1. In writing, signed by the stockholder or member giving it. 2. Filed with the corporate secretary before the scheduled meeting. 3. It is valid only for the meeting for which it is intended unless otherwise stipulated. 4. Even if the proxy is a continuing one it shall not be longer than 5 year at any one time. Sec 59. Voting trusts. – One or more stockholders of a stock corporation may be create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the share for a period not exceeding 5 years at any one time: Provided, that in the case

of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding 5 years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the SEC: otherwise, said agreement is ineffective and unenforceable. The certificate or of stock covered by the voting trust agreement shall be cancelled and new one shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement. The Trustee or trustees shall be execute and deliver to the transferors voting trust certificates, which shall be transferable in the same manner and with the same effect as certificates of stock. The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record: Provided, That both the transferor and the trustee or trustees may exercise the right of inspection of all corporate books and records in accordance with the provisions of this code. Any other stock holder may transfer his shares to the same trustee or trustees upon the terms and conditions stated in the voting trust agreement, and there upon shall be bound by all the provisions of said agreement. No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud. Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stick in the name of the trustee or trustees shall thereby be deemed cancelled and new

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Law on Business Organizations Reviewer certificates of stock shall be reissued in the name of the transferors. The voting trustee or trustees may vote by proxy unless the agreement provides otherswise. Concept of voting trusts A voting trust is an agreement by which stockholders surrender their voting power and place it irrevocably in the hands of others for a definite period of time. In exchange for the certificates of stock the trustee delivers to the stockholder voting trust certificates. Limitations on voting trust agreement 1. It shall be for a period not exceeding 5 years but if required under a loan agreement, the period may be for more than 5 years but shall automatically cease upon full payment of the loan. 2. It must be in writing and notarized. 3. It shall not be entered into to circumvent laws on monopolies and restraint of trade, nor shall it be entered into purposes of fraud. 4. It shall be filed with the corporation and with SEC otherwise it shall be ineffective and unenforceable. 5. It shall be subject to examinations by any stockholder in the same manner as any other corporate book or record. 6. Parties to the voting trust agreement shall be bound by all the provisions of said agreement. Sec. 60. Subscription contract. – Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. How can a person become a shareholder in a stock corporation? 1. By subscription contract with an existing corporation for the acquisition of unissued shares. 2. By purchase from the corporation of treasury shares. 3. By transfer from a previous stockholder of the outstanding shares or existing subscription to shares.

No person can become a stockholder in a corporation by virtue of a subscription for stock unless there is a valid contract between him and the corporation. When a contract of subscription for stock in a corporation is binding it is a contract between the subscriber or subscribers and the corporation, and its formation and validity are governed by the same principles substantially as any other contract except in so far as such principles may be rendered inapplicable by particular charter or statutory provisions. No express promise to pay is necessary to make the subscriber liable. No form required of subscription contracts Unless otherwise required by law. Thus, a person who accepts a certificate of stock from a corporation, or who acts as a stockholder by participating in stockholders’ meeting, making payments, or otherwise, thereby becomes a stockholder and liable as such, not only to creditors, but also to the corporation, although there may have no express contract of subscription. Sale of Shares of Stock Needs SEC Approval The Securities Act requires that before a corporation, except a public utility, bank, corporation association and a few others, sells, or offers for sale in the Philippines any of its securities, like shares of stocks or bonds, it must register the same and/or secure a permit from the SEC for the purpose. The authorization is in the form of an exemption from the requirements of registration and licensing, and is issued by the way of resolution of the SEC. Power to issue shares is lodged in the board of directors and no stockholders’ meeting is necessary to consider it because additional issuance of shares of stock does not need approval of the stockholders. The “Board of Trustees shall, in of stock of the corporation and shall prescribe the form of the certificate of stock of corporation.” Kinds of Subscription: 1.1. Pre-incorporation – is one agreed upon before the incorporation of the proposed corporation. 1.2. Post-incorporation Subscription – entered into after the incorporation or formation of the corporation.

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Law on Business Organizations Reviewer 2. Absolute Subscription – one not subject to any condition or happening of certain unknown events. 3. Conditional Subscription – its fulfillment depends upon the happening of uncertain events of contingencies. It does not make the subscriber a stockholder or render him liable to pay the amount of the subscription, until performance or fulfillment of the condition. 4. Subscription upon special terms – where “the corporation agreed, as an independent element, to do a certain thing or things, but not as condition to the accrual of liability of the subscriber or the acquisition of the rights of a stockholder.

Sec. 62. Considering for stocks. – Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following:

Sec. 61. Pre-incorporation subscription. – A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission.

4. Previously incurred indebtedness of the corporation.

SEC. 61 Pre-incorporation subscription is mandatory (Sec. 13 & 14) at least 25% of the authorized capital stock has been subscribed and at least 25% of the total subscription has been fully paid. Subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least 6 months from the date of subscription, unless: 1. All subscribers consent to its revocation. 2. The incorporation fails to materialize within 6 months or a longer period as agreed upon. The irrevocability of pre-incorporation prevents a subscriber from speculating on the stocks of the proposed corporation and protects the corporation from financially irresponsible subscribers.

1. Actual cash paid to the corporation. 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued. 3. Labor performed for or services actually rendered to the corporation.

5. Amounts transferred from unrestricted retained earnings to stated capital. 6. Outstanding shares exchanged for stocks in the event of reclassification or conversion. Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission. Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose. Consideration for issuance of stock may be any or any combination of any two or more of the ff: 1. Cash 2. Property – tangible or intangible 3. Labor performed or services actually 71

Law on Business Organizations Reviewer rendered 4. Previously incurred indebtedness by the corporation 5. Amounts transferred from unrestricted retained earnings to stated capital 6. Outstanding shares exchanged for stock in the event of reclassification or conversion Sources of corporate capital 1. Funds furnished by shareholders 2. Borrowings 3. Profits and stock dividends Different modes by which a corporation may issue shares of stock 1. By subscription before and after incorporation, to original, unissued stocks. 2. By sale of treasury stock after incorporation for money property, or service. 3. By subscription to new stocks, when all the original stocks have been issued and the amount of the capital stock increased. 4. By making a stock dividend. Limitations in the issuance of stocks 1. Shall not be issued for a consideration less than the par or issued price thereof except treasury shares so long as the price is reasonable. 2. Shall not be issued in exchange of promissory notes or future services. 3. When the consideration is other than actual cash or consists of intangible property, the value thereof shall be initially determined by the incorporators or the board of directors, subject to the approval of the SEC. 4. The issued price of no par value shares must be fixed as provided in Sec. 62.  issued price may vary from time to time but value may not be less than P5. Sec. 63. Certificate of stock and transfer of shares. – The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates endorsed by the owner or his attorney-in-

fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. SEC. 63 The capital stock of stock corporation shall be divided into shares Certificate of stock shall be issued for said shares. Nature of a certificate of stock 1. It is a written instrument signed by the proper officer of a corporation stating or acknowledging that the person named therein is the owner of a designated number of shares of stock. 2. It indicates the name of the holder, the number, kind and class of shares represented, and the date of issuance. 3. It i merely the evidence of the holder's interest in the corporation, his ownership of the share represented thereby. 4. It is not essential to make one a stockholder in a corporation. 

  

Every stockholder has a right to have proper certificate issued to him as soon as he has complied with the conditions which entitle him to one. A corporation cannot issue shares in excess of the maximum authorized in its AOI. An over issued stock is absolutely void even if possessor is in good faith. Shares can be transferred represented by the certificate by its endorsement by the owner or his agent and delivery to the transferee.

Restrictions on transfer of stock 1. A by-law prohibits a transfer of stock without the consent or approval of all stockholders or of the president or board of directors is ILLEGAL. 72

Law on Business Organizations Reviewer 2. A provision in the certificate that is transferable only to some person first approved by the board of directors unlawfully restricts the right of the stockholder. 3. The condition “non-transferable” appearing on certificates of stock is VOID. 4. corporations which will engage in any business reserved for Filipino citizens are required to indicate in AOI and all certificates. Two requirements to effect transfer of stocks Endorsement and delivery of stock certificate -the usual practice is for the stockholder to sign the form on the back of the stock certificate. -if the holder of the certificate desires to assume the legal right of the stockholder he fills up the blank in the form inserting his name as transferee. -then he delivers the certificate to the secretary of the corporation so that the transfer may be entered in the books. Other modes of transfer 1. Assignment thru a separate instrument. 2. Judicial or extra-judicial settlement of the estate. Validity of stock transfer 1. As between parties -merely the delivery of the certificate indorsed by the owner or his attorneyin-fact or other person legally authorized to make the transfer. 2. As against third persons -the transfer of shares must be entered and noted upon the books of the corporation -only absolute transfer are recorded Effects of unregistered shares 1. It is valid and binding as between the transferor and transferee. 2. It is invalid insofar as the corporation is concerned except when notice is given to the corporation for purposes of registration. a) the transferor has the right to vote and to be voted for, and has the right to participate in any meeting b) the transferor has the right to

dividends as against the corporation but the transferor, as the nominal owner of the share, is the trustee for the benefit of the real owner. 3. It is invalid as against corporate creditors, and the transferor is still liable to the corporation. The transfer of stock by a shareholder does not relieve him from the liability to creditors of the corporation for unpaid subscription until the transfer is consummated by being registered in the books. 4. It is invalid as against creditors of the transferor without notice of the transfer. Shares of stock against which the corporation holds any unpaid claim shall not be transferable in the books – no unpaid claims against the stock.  no unpaid subscriptions due and payable. Sec. 64. Issuance of stock certificates. – No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid. SEC. 64 It is prohibited to issue certificates of stock to a subscriber who has not paid the full amount of his subscription together with interest and expenses. Derivative suit – one brought by one or more stockholders or members in the name and in behalf of the corporation to redress wrongs committed against it or to protect or vindicate corporate rights. Individual suit – one brought by a stockholder in his own name against the corporation for direct violation of his contractual rights such as right to vote, to dividends etc. Representative suit – a group of stockholders may bring a direct suit against the corporation. This is when a wrong is committed against a group of stockholders. Certificate of Stock – a written instrument signed by the proper corporate officers, and evidencing the fact that the person therein named is the registered owner of the share or shares therein described. 73

Law on Business Organizations Reviewer Nature and Functions of Certificates It represents the number of shares which the corporation acknowledges that the holder of the certificate is entitled to and is a solemn and continuing affirmation by the corporation that the person to whom it was issued is entitled to all the rights and subject to all the liabilities of a stockholder in the company in respect of the number of shares named, and that the company will respect his rights and the rights of anyone to whim he may transfer such shares, by refusing to admit any new transferee to the rights of a stockholder except upon the surrender of the certificate. Issuance of Stock Certificate. It requires: 1. sign by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation, and issued in accordance with the law. 2. The certificate must be delivered or mailed to the subscriber, with the documentary stamps required by law affirmed thereon. 3. The par value with respect to shares with par value, or the full subscriptions, as to no-par value shares must be fully paid. 4. Where it involves transfer of outstanding shares, the original certificate must be retained. Purpose of Registration of Transfer 1. To enable the corporation to know at all times who its actual shareholders are, because mutual rights and obligations exist between the corporation and its stockholders. 2. To afford to the corporation an opportunity to object or refuse its consent to the transfer in case it has any claim against the stock sought to be transferred or for any other valid reason. 3. To avoid fraudulent or fictitious transfer. 4. It is intended also for the benefit and protection of persons who may deal with the corporation and become creditors, so that they know who are the stockholders, and as such liable to its creditors. Right to Transfer shares of stock 1. By delivering the certificate, duly indorsed on the back.

2. By delivering the certificate accompanied by a separate assignment. 3. Where stock is levied on in execution of judgment, by delivering the certificate coupled with an assignment by the sheriff who conducted the levy. 4. Transfer by sale of delinquent shares. Liabilities of a stockholders 1. Liability to the corporation for unpaid subscription 2. Liability to the corporation for interest on unpaid subscription 3. Liability to creditors of the corporation on unpaid subscription 4. Liability for watered stock 5. Liability for dividends unlawfully paid 6. Liability for failure to create a corporation Sec. 65. Liability of directors for watered stocks. – Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same. SEC. 65 watered stocks – stock issued for no value at all or for a value less than its equivalent either in cash, property, shares, stock dividends, or services the law prohibits the issuance of watered stocks (only refers to original issue) 1. To protect persons who may acquire stock and those who may become the creditors of the corporation on the faith of its outstanding capital stock being fully paid. 2. To secure equality among subscribers and prevents discrimination against those who have paid in full the par or issued value. Who are liable for watered stocks? Both consenting director or officer and the stockholder concerned for the whole amount of difference.

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Law on Business Organizations Reviewer Trust Fund Theory – involves an implied promise to the corporation to pay the par value of the shares in money or its equivalent, supplementing it by a legal restriction against release or fictitious payment of this obligation to the prejudice of creditors. Sec. 66. Interest on unpaid subscriptions. – Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate. Sec. 67. Payment of balance of subscription. – Subject to the provisions of the contract of subscription, the board of directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary. Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. If within thirty (30) days from the said date no payment is made, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise. Remedies to enforce payment of stock subscription 1. Extra-judicial sale at public auction – Permits the corporation to put up unpaid stock for sale and dispose of it for the account of the delinquent subscribers (governed by sections 67-69 of the Corporation Code of the Philippines). 2. Judicial action by court action (provided under Section 70)

3. Denying a stockholder delinquent for unpaid subscription the right to vote (under section 71) 4. Collection from cash dividends and withholding stock dividends (under Section 43) Sanctions on stock delinquent 1. Rights denied to stockholder shall not be voted or be entitled to vote or representation at any stockholders' meeting, nor entitled the holder thereof to any of the rights of a stockholder except the right to dividends. 2. Right given to the corporation. 3. The corporation has the right to apply cash dividends due on delinquent stock to the unpaid balance on the subscription plus cost and expenses. While stock dividends, corporation to withhold the same from the delinquent stockholder until his unpaid subscription is fully paid. When is the balance of subscription payable? 1. On the date specified in the contract of subscription. 2. In the absence of any specified date in the contract of subscription, on the date stated in the call made by the board of directors. When does the stock become delinquent? A stock becomes delinquent upon failure of the holder to pay the unpaid subscription or balance thereof within 30 days from the date specified in the contract of subscription or on the date stated in the call. Call – a declaration officially made by a corporation usually expressed in the form of a resolution of the board of directors requiring payment of all or a certain prescribed portion of a subscriber's stock subscription. Requisites for a valid call 1. It must be made in the manner prescribed by law. 2. It must be made by the board of directors. 3. It must operate uniformly upon all shares.

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Law on Business Organizations Reviewer Sec. 68. Delinquency sale. – The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent. Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located. Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code.

Procedure: 1. The board of directors passes a resolution declaring payable the whole or certain percentage of the unpaid subscription stating the date fixed for payment. If the date of payment is specified in the contract of subscription, no call is necessary. 2. The stockholders are given notice of the resolution by the secretary of the corporation. If the stockholders fails to pay within 30 days from date specified, the stocks becomes delinquent. 3. the board of directors, by resolution, orders the sale of delinquent stocks, stating the amount due and the date, time, and place of sale with notice to the delinquent stockholders which notice shall be published. 4. On the date of sale, will be sold at public auction to higher bidder for cash. Highest bidder – the person offering at the sale to pay the full amount of the balance on the subscription together with accrued interest, cost of advertisement and expenses of sale, for the smallest number of shares. In the absence of bidders or highest bidder, the corporation may purchase for itself the delinquent stock. Sec. 69. When sale may be questioned. – No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate; and no such action shall be maintained unless it is commenced by the filing of a complaint within six (6) months from the date of sale. Grounds for the recovery of stock unlawfully sold for delinquency are: 1. Irregularity or defect in the notice of sale 2. Irregularity or defect in the sale itself of the delinquent stock Sec. 70. Court action to recover unpaid subscription. – Nothing in this Code shall prevent the corporation from collecting by 76

Law on Business Organizations Reviewer action in a court of proper jurisdiction the amount due on any unpaid subscription, with accrued interest, costs and expenses. As a general rule, a corporation may not maintain a suit for the enforcement of unpaid subscription without first making a call. Judicial remedy is limited to the amount due on any unpaid subscription with accrued interest, costs and expenses Sec. 71. Effect of delinquency. – No delinquent stock shall be voted for be entitled to vote or to representation at any stockholder's meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of advertisement, if any. SEC. 71 Stock delinquency does not deprive the holder of all his rights as a stockholder except the right to be voted for or be entitled to representation at any stockholders' meeting. He shall still receive dividends. But delinquent stocks shall be subject to delinquency sale. Effects of Stocks declared delinquent: 1. Cannot be voted for or be entitled to vote in corporate meetings or be represented by proxy at any stockholders’ meeting. 2. The holder of delinquent stock is not entitled to exercise the rights of a stockholder (i.e. to inspect books and records, etc.). 3. The holder of delinquent stocks is entitled to dividends. Section 43 provides however, that “ any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expense, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid”. Sec. 72. Rights of unpaid shares. – Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder.

SEC. 72 Before unpaid shares become delinquent, the holder thereof is not considered to have violated any contract with the corporation, and, therefore, he has all the rights of a stockholder which rights include the right to vote. Sec. 73. Lost or destroyed certificates. – The following procedure shall be followed for the issuance by a corporation of new certificates of stock in lieu of those which have been lost, stolen or destroyed: 1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation an affidavit in triplicate setting forth, if possible, the circumstances as to how the certificate was lost, stolen or destroyed, the number of shares represented by such certificate, the serial number of the certificate and the name of the corporation which issued the same. He shall also submit such other information and evidence which he may deem necessary. 2. After verifying the affidavit and other information and evidence with the books of the corporation, said corporation shall publish a notice in a newspaper of general circulation published in the place where the corporation has its principal office, once a week for three (3) consecutive weeks at the expense of the registered owner of the certificate of stock which has been lost, stolen or destroyed. The notice shall state the name of said corporation, the name of the registered owner and the serial number of said certificate, and the number of shares represented by such certificate, and that after the expiration of one (1) year from the date of the last publication, if no contest has been presented to said corporation regarding said certificate of stock, the right to make such contest shall be barred and said corporation shall cancel in its books the certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof new certificate of stock, unless the registered owner files a bond or other security in lieu thereof as may be required, effective for a period of one (1) year, for such amount and in such 77

Law on Business Organizations Reviewer form and with such sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued even before the expiration of the one (1) year period provided herein: Provided, That if a contest has been presented to said corporation or if an action is pending in court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed. Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described. SEC. 73 The registered owner of certificates of stock in a corporation or his legal representative shall file with the corporation an affidavit setting forth how certificate were lost, stolen or destroyed, the number of shares represented by each certificate, the serial numbers of the certificate and name of the corporation which issued the same. The affidavit shall be verified Corporation shall publish a notice in a newspaper in general circulation published in the place where the corporation has its principal office for 3 consecutive weeks. After 1 year from the date of the last publication, if no contest presented to the corporation, corporation shall cancel in the books the lost certificates and issue new certificates. Sec. 74. Books to be kept; stock transfer agent. – Every corporation shall keep and carefully preserve at its principal office a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and

every act done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand. The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to 78

Law on Business Organizations Reviewer whom made; and such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable. Books and records to be kept by Corporation 1. Record of all business transactions 2. Minutes of all meetings of stockholders or members, or of board of directors or trustees 3. Stock and transfer books 4. Optional records and supplementary books as many be necessary or required by special laws SEC Rules requiring filing of documents. The SEC requires all corporations whose securities are listed in any stock exchange or with permits to sell shares to the public or with twenty or more stockholders shall hereafter submit to this Commission within thirty (30) days after approval of the corporate action, certified true copies of the following documents evidencing the same, to wit: a. Minute of meetings 1. Calling for payment of unpaid subscriptions 2. Increasing or decreasing the capital stock 3. Changing the nomenclature of shares of stock or certificates of indebtedness 4. Authorizing the borrowing of material sums of money b. Other documents, such as:

1. Certificated changing the composition of the board of directors and officers 2. Certificates changing the ownership of the controlling interest in the corporation Management contracts duly approved by the stockholders. Sec. 75. Right to financial statements. – Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations. At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified by an independent certified public accountant. However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation. Stockholder’s rights to financial statements and reports 1. Balance sheet as of the end of the last taxable year. 2. A profit and loss statement for said taxable year. 3. The board of directors or trustees shall present “a financial report” to stockholders or members. SEC REPORTORIAL REQUIREMENTS Period Requirements Within 30 days from a) Set up books of registration of accounts duly articles onaf registered with the incorporation BIR wherein receipts and disbursements made are immediately recorded. b)

Set

up

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Law on Business Organizations Reviewer register with the SEC its stock and transfer book.

Within 15 days from end of 3 months from registration

a) Within 105 days after the end of its fiscal year

c) File its by-laws with the Commission. Submit a statement of sources and application of funds certified by an independent CPA. i) If paid-up capital > P50,000, file a copy of BS and P&L statement.

ii) If paid-up capital < P50,000, same as (i) and certified under oath by the Treasurer or any responsible officer. b) Within 45 days Certified under oath by the Treasurer or any responsible officer. Within 30 days from Submit: the date of annual 1) General meeting information sheet for the fiscal year. 2) Minutes of meeting of stockholders/memb ers electing the BoD certified by the Secretary and subscribed and sworn to before a notary public. 3) Minutes of meeting of BoD electing the officers, certified by the secretary and subscribed and sworn to before a notary public Within 5 days from Submit list of stockholders/memb stockholders/memb ers meeting ers as of the date of annual or special stockholders/memb ers’ meeting, showing:  Name of the

stockholder  Address  Nationality  No. of shares subscribed  Amt. subscribed by each Shall be made for inspection. Within 5 days Submit list of before the date of stockholders/memb annual meeting ers entitled to vote as of a date prior to the meeting. The SEC must be notified of any: 1. Change or transfer of address. 2. Any investment of corporate funds in any of the secondary purposes of the corporation by filing a copy of the resolution approved by 2/3 of the subscribed capital stock entitled to vote authorizing the BoD to invest in any of the secondary purposes. Sec. 76. Plan of merger or consolidation. – Two or more corporations may merge into a single corporation which shall be one constituent corporations or may consolidate into a new single corporation which shall be consolidated corporation. The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of merger or consolidation setting forth the following: 1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations. 2. The terms of the merger or consolidation and the mode of carrying the same into effect. 3. A statement of the changes. If any, in the articles of incorporation of the surviving corporation in case of merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code.

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Law on Business Organizations Reviewer 4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. Sec. 77. Stockholders’ or members’ approval. – Upon approval by majority vote of each of the board of directors or trustees of the constituent corporations of the plan of merger or consolidation, the same shall be submitted for approval by the stockholders or members of each of such corporations at separate corporate meetings duly called for stockholders or members of the respective corporations, at least two (2) weeks prior to the date of meeting, either personally or by registered mail. Said notice shall state the purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation as the case may be. The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporations in case of stock corporations or at least two-thirds of the members in case of non-stock corporations, shall be necessary for the approval of such plan. Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with this Code; Provided, That if after the approval by the stockholders of such plan, the board of directors should decide to abandon the plan, the appraisal right shall be extinguished. Any amendment to the plan of merger or consolidation may be made, provided such amendment is approved by majority vote of the respective boards of directors or trustees of all the constituent corporations and ratified by the affirmative vote of stockholders representing at least twothirds (2/3) of the members of each of the constituent corporations. Such plan, together with any amendment, shall be considered as the agreement of merger or consolidation. Definition Consolidation – the uniting or amalgamation of two or more existing corporations to form a new corporation. The united concern resulting from the union is called the consolidated corporation. Merger – a union effected by the absorbing of one or more existing corporations by another which survives and continues the combined business. The parties to a

combination by consolidation or merger are called the “constituent” corporations. Sec. 78. Articles of merger or consolidation. – After the approval by the stockholders or members as required by the preceding section, articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be signed by the president or vice-president and certified by the secretary or assistant secretary of each corporation setting forth: 1. The plan of the merger or the plan of the consolidation. 2. As to stock corporations, the number of shares outstanding, or in case of nonstock corporations, the number of members. 3. As to each corporation, the number of shares or members voting for and against such plan, respectively. Sec. 79. Securities and Exchange Commission’s approval and effictivity of merger or consolidation. – The articles of merger or of consolidation signed and certified as hereinabove required, shall be submitted to the Securities and Exchange Commission in quadruplicate for its approval: Provided, That in the case of merger or consolidation of banks or banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained. Where the Commission is satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the provisions of this Code and existing laws, it shall issue a certificate of merger or consolidation, as the case may be, at which time the merger or consolidation shall be effective. If, upon investigation, the Securities and Exchange Commission has reason to believe that the proposed merger or consolidation is contrary to or inconsistent with the provisions of this Code or existing laws, it shall set a hearing to give the corporations concerned the opportunity to be heard. Written notice of the date, time and place of said hearing shall be given to each 81

Law on Business Organizations Reviewer constituent corporation at least two (2) weeks before said hearing. The Commission shall thereafter proceed as provided in this Code. Sec. 80. Effects of merger or consolidation. – The merger or consolidation, as provided in the preceding sections shall have the following effects: 1. The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation. 2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation. 3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code. 4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other chooses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be taken and deemed to be transferred to and vested in such surviving or consolidated corporation without further act or dead. 5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any claim, action or proceeding pending by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated

corporation, as the case may be. Neither the rights of creditors nor any lien upon the property of any of such constituent corporations shall be impaired by such merger or consolidation. Steps to achieve merger or consolidation 1. The BoD of each corporation must draw up a plan of merger or consolidation. 2. A plan must be submitted to the S/M of each corporation for approval. The vote or two-thirds (members) or two-thirds of the outstanding capital stock (stockholders) would be required. 3. There has to be a formal agreement known as the articles of M/C by the officers of each of the constituent corporations. 4. The articles of M/C must be submitted to the SEC for approval. 5. The SEC shall if it deems necessary set a hearing giving notice to all corporations concerned. 6. The SEC issues the certificate of M/C. The M/C becomes effective upon the issuance of the corresponding certificate. Remedy of creditors of constituent corporations The only remedy is either against the united corporation, or to pursue the assets of the constituents into its hands on the ground of fraudulent conveyance. Sec. 81. Instances of appraisal right. – Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances: 1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholders or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence. 2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in this Code.

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Law on Business Organizations Reviewer 3. In case of merger or consolidation. Sec. 81, not exclusive. Such appraisal right may also be exercised when a stockholder dissents when a corporation or business or for a purpose other than its main purpose. (Sec. 42) When a stockholder of a close corporation may for any reason compel the corporation to purchase his shares from the par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities, exclusive of capital stock. (Sec. 105) Sec. 82. How right is exercised. – The appraisal right may be exercised by any stockholder who shall have voted against the proposed corporate action, by making a written demand on the corporation within thirty (30) days after the date on which the vote was taken for payment of the fair value of his shares: Provided, That failure to make the demand within such period shall be deemed a waiver of the appraisal right. If the proposed corporate action is implemented or effected, the corporation shall pay to such stockholder, upon surrender of the certificate(s) of stock representing his shares, the fair value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action. If within a period of sixty (60) days from the date the corporate action was approved by the stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and appraised by three (3) disinterested persons, one of whom shall be named by the stockholder, another by the corporate and the third by the two (2) thus chosen. The findings of the majority of the appraisers shall be final, and their award shall be paid by the corporation within thirty (30) days after such award is made: Provided, That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retain earnings in its books to cover such payment: and Provided, further, That upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his shares to the corporation.

Exercising the appraisal right By one who has voted against the proposed corporate action, by making a written demand on the corporation within thirty (30) days after the date on which the vote was taken for payment of the fair value of his shares. Those who are absent and present abstained their vote cannot exercise the appraisal right. Sec. 83. Effect of demand and termination of right. – From the time of demand for payment of the fair value of a stockholder’s shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, all rights accruing to such shares, including voting and dividend rights, shall be suspended in accordance with the provisions of this Code, except the right of such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall be immediately be restored. Sec. 84. When right to payment ceases. – No demand for payment under this Title may be withdrawn unless the corporation consents thereto. If, however, such demand for payment is withdrawn with the consent of the corporation, or if the proposed corporate action is abandoned or rescinded by the corporation or disapproved by the Securities and Exchange Commission where such approval is necessary, or if the Securities and Exchange Commission determines that such stockholder is not entitled to the appraisal right, then the right of said stockholder to be paid the fair value of his shares shall cease, his status as a stockholder shall thereupon be restored, and all dividend distributions which would have accrued on his shares shall be paid to him. Effect of refusal of corporation to pay If... Then... FV of the shares Restore all his rights within thirty (30) automatically. days from the award Insufficiency of the Restore by unrestricted RE reacquiring his former status as a stockholder. Abandoned; 83

Law on Business Organizations Reviewer Rescinded; Unsecured approval of the SEC; Stockholder is not Same effects entitled; above. Withdrawal (dissenting stockholder with consent of the corp)

  as

Sec. 85. Who bears costs of appraisal. – The costs and expenses of appraisal shall be borne by the corporation, unless the fair value ascertained by the appraisers is approximately the same as the price which the corporation may have offered to pay the stockholder, in which case they shall be borne by the latter. In case of an action to recover such fair value, all costs and expenses shall be assessed against the corporation, unless the refusal of the stockholder to receive payment was unjustified. Consideration of the costs of appraisal Expenses of appraisal:  Appraisers’ fees  Attorneys’ fees  Expert accountants’ fees  Witnesses before the appraisers’ fees Thus, clarifies an otherwise delicate aspect of appraisal proceeding. Sec. 86. Notation on certificate(s); right of transferee. – Within ten (10) days after demanding payment for his shares, a dissenting stockholder shall submit the certificate(s) of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares. His failure to do so shall, at the option of the corporation, terminate his rights under this Title. If shares represented by the certificate(s) bearing such notation are transferred, and the certificate(s) consequently cancelled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions which would have accrued on such shares shall be paid to the transferee. Valuation of shares of dissenting shareholders Appraisers should consider the elements that tend to affect market quotations:

  

The rate of dividends The regularity with which they have been paid The management and reputation of the company Its prospects for the future All other circumstances which will aid them in estimating the future course of the stock in the market

The important thing to consider in arriving at the appraisal value is whether the valuation arrived at is fair, just and reasonable to all parties concerned. Other instances when appraisal right may be granted 1. Amendment of “any provision or matter stated in the articles of incorporation.” 2. When the corporate term is extended. 3. Any purpose other than the primary purpose. 4. Close corporation – a stockholder may compel the corporation to purchase FV “for any reasons.” Exercise of appraisal right provided compensatory alternative to investor Appraisal statutes extending to corporate purpose or duration amendments would seem to be of limited value. Appraisal rights cannot challenge this power but they can provide a compensatory alternative to an investor faced with a loss of existing stock rights and should be so employed. When right of stockholder to payment ceases 1. The demand for payment is withdrawn with the consent of the corporation. 2. The proposed corporate action is abandoned or rescinded by the corporation. 3. Proposed action is disapproved by the SEC where such approval is necessary. 4. Such stockholder is not entitled to exercise his appraisal right. Sec. 87. Definition. – For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution: Provided, That, any profit which a non-stock corporation may obtain as an incident to its operation shall, whenever necessary or proper, be used for 84

Law on Business Organizations Reviewer the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title.

under such conditions which may be, prescribed by, the Securities and Exchange Commission.

The provisions governing stock corporations, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title.

Voting by proxy may be denied in articles or by-laws The law makes voting by proxy merely directory in the case of non-stock corporations and even allows the articles of incorporation or by-laws thereof to deny proxy voting.

Definition Non-stock corporation – one where no part of its income is distributable as dividends to its members, trustees, or officers. Sec. 88. Purposes. – Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations. Distinction between a stock corporation and a non-stock corporation Point of Stock Non-Stock Comparison Corporation Corporation Membership Ownership Consent of of stock the associates Solicitation of gifts, donations or contributions by non-stock corporations A certificate of registration must be secured from the Insurance Commissioner otherwise the articles of incorporation cannot be filed. Sec. 89. Right to vote. – The right of the members of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote. Unless otherwise provided by the articles of incorporation or the by-laws, a member may vote by proxy in accordance with the provisions of this Code. Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-stock corporations with the approval of, and

If proxy voting may be denied outrightly in the articles or by-laws of non-stock corporations, it necessarily follows that the qualifications or limitations on who should be appointed proxies may also be made therein. Sec.90. Non-transferability of membership. – Membership in a non-stock corporation and all rights arising therefrom are personal and non-transferable, unless the articles of incorporation or the by-laws otherwise provide. Sec.91. Termination of membership. – Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws. Termination of membership shall have the effect of extinguishing all rights of a member in the corporation or in its property, unless otherwise provided in the articles of incorporation or the by-laws. Sec.92. Election and term of trustees. – Unless otherwise provided in the articles of incorporation or the by-laws, the board of trustees of non-stock corporations, which may be more than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of office of one-third (1/3) of their number shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period. No person shall be elected as trustee unless he is a member of the corporation.

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Law on Business Organizations Reviewer Unless otherwise provided in the articles of incorporation or the by-laws, officers of a non-stock corporation may be directly elected by the members. Three-year term for trustees in non-stock corporation The term of trustees in non-stock corporation is three (3) years except educational corporations where the term is five (5) years. Elections of directors by regions in nonstock corporations not allowed The Securities and Exchange Commission in an opinion stated that the “Election of members of the Board of Directors of a non stock corporation by zones or regions would violate the law which requires that at all elections of directors, there must be present a majority of the members entitled to vote. ” Sec.93. Place of meetings. – The by-laws may provide that the members of a nonstock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located: Provided, That proper notice is sent to all members indicating the date, time and place of the meeting: and Provided, further, That the place of meeting shall be within the Philippines. Supporting papers required to be submitted to the Securities and Exchange Commission: 1. LETTER OF UNDERTAKING addressed to the Commission signed by at least a majority of the incorporators or by a duly authorized representative, to the effect that the association will change its corporate name in the event another person, firm or entity has acquired a prior right to use the same name or similar to it. (3 copies) 2. MODUS OPERANDI or a detailed explanation as to how the association shall carry out its objectives signed by atleast a majority of the incorporators or by a duly authorized representative. (3 Copies) 3. RESOLUTION of the Board signed by atleast a majority of the Directors or certified under oath by the Secretary in the following tenor to wit: (3 Copies)

“RESOLVED, that the corporation or associatin will comply with the S.E.C. REQUIREMENTS FOR NON-STOCK CORPORATION dated May 24, 1963 , in the course of its operation.” 4. LIST OF MEMBERS of the association containing their manual signature and attested by the Acting Secretary, if the incorporators are the present members so far, state such fact in writing and further state that the list of additional members who will be admitted in accordance with the by-laws of the association shall e submitted to the Commission from time to time. (3 Copies) Sec. 94. Rules of distribution. – In case dissolution of a non-stock corporation in accordance with the provisions of this Code, its assets shall be applied and distributed as follows: 1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefore. 2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements. 3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation according to a plan of distribution adopted pursuant to this Chapter. 4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the articles of incorporation 86

Law on Business Organizations Reviewer or the by-laws, determine the distributive rights of members, or any class or classes of members, or provide for distribution. 5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter. Sec. 95. Plan of distribution of assets. – A plan providing for the distribution of assets, not inconsistent with the provisions of this Title, may be adopted by a non-stock corporation in the process of dissolution in the following manner: The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights. Written notice setting forth the proposed plan of distribution or a summary thereof and the date, time and place of such meeting shall be given to each member entitled to vote, within the time and in the manner provided in this Code for the giving of notice of meetings to members. Such plan of distribution shall be adopted upon approval of at least twothirds (2/3) of the members having voting rights present or represented by proxy at such meeting. Distribution of assets of non-stock corporations to the members on dissolution is not forbidden, unless it holds its assets upon some trust, public or private, in which case the claims of the state, the beneficiaries, or of the founder and his successors may have to be considered. A non-stock (non-profit) corporation may not ordinarily organize as a stock corporation, authorized to issue shares of stock, but may issue membership certificates which do not entitle to the holder to dividends. Sec. 96. Definition and applicability of Title. – A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: 1. All the corporation's issued stock of all classes, exclusive of treasury shares,

shall be held of record by not more than a specified number of persons, not exceeding twenty (20). 2. All the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title. 3. The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides. Sec. 97. Articles of incorporation. – The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section. 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock. 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the 87

Law on Business Organizations Reviewer stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: 1. No meeting of stockholders need be called to elect directors. 2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code. 3. The stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors. Requisites of Close Corporation Within the meaning of a close corporation under the Corporation Code the following are its attributes: 1. Its stockholders are limited not exceeding 20 persons. 2. Its shares of stock are subject to one or more restrictions on transfer. 3. Its shares of stock are not listed in any stock exchange. Salient Feature of Close Corporations 1. It has only a few stockholders, who if not related by blood or marriage, know each other well and are aware of each other’s business skills. 2. All or more of them are active in the corporate business, either as directors, officers or as key men in management. 3. The stocks of the corporation are not listed on the exchange nor is there trading in them outside the stock market. *It would seem that base on these features many corporations in the Philippines would be close corporations. Reasons for formation of close corporations “The existence of close corporations can be attributed to the desire of intimate groups of business associates to obtain the advantages of a corporate organization, like that of limited liability. However, the

identity and personality of each shareholder are important to his associates, so that although they may consider their business as corporation in their dealings with third persons, among themselves the stockholders act and feel as partners.” Entities which may not be organized as close corporations  Mining or oil companies  Stock exchanges  Banks  Insurance companies  Public utilities  Educational institutions  Corporations declared to be vested with public interest Stockholders authorized to manage close corporations As a rule, management of stock corporation is normally given to board of directors or trustees. However, the Corporation Code provides: “The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors.” Also, “The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors.” Sec. 98. Validity of restrictions on transfer of shares. – Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person. Sec. 99. Effects of issuance or transfer of stock in breach of qualifying conditions. – 1. If stock of a close corporation is issued or transferred to any person who is not entitled under any provision of the 88

Law on Business Organizations Reviewer articles of incorporation to be a holder of record of its stock, and if the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice of the fact of his ineligibility to be a stockholder. 2.

If the articles of incorporation of a close corporation states the number of persons, not exceeding twenty (20), who are entitled to be holders of record of its stock, and if the certificate for such stock conspicuously states such number, and if the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact.

3. If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that he has acquired stock in violation of the restriction, if such acquisition violates the restriction. 4. Whenever any person to whom stock of a close corporation has been issued or transferred has, or is conclusively presumed under this section to have, notice either (a) that he is a person not eligible to be a holder of stock of the corporation, or (b) that transfer of stock to him would cause the stock of the corporation to be held by more than the number of persons permitted by its articles of incorporation to hold stock of the corporation, or (c) that the transfer of stock is in violation of a restriction on transfer of stock, the corporation may, at its option, refuse to register the transfer of stock in the name of the transferee. 5. The provisions of subsection (4) shall not applicable if the transfer of stock, though contrary to subsections (1), (2) of (3), has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its articles of incorporation in accordance with this Title.

6. The term "transfer", as used in this section, is not limited to a transfer for value. 7. The provisions of this section shall not impair any right which the transferee may have to rescind the transfer or to recover under any applicable warranty, express or implied. Restrictions on transfer of shares of stock The corporation may provide in its articles of incorporation, in its by-laws as well as in the certificate of stock restrictions on the right of stockholders to transfer their shares of stocks. If not so provided as aforesaid the same “shall not be binding on any purchaser thereof in good faith.” Charter restrictions on the transfer of shares are binding on all who become shareholders, as they become parties to the charter contract and take their shares subject to it. Considerable latitude allowed incorporators and shareholders in imposing transfer restrictions in the articles of incorporation and they will not usually be declared against public policy unless palpably unreasonable under the circumstances. “Stock in the corporation is not merely property. It also creates a personal relation analogous otherwise than technically to a partnership. There seems to be no greater objection to retaining the right of choosing one’s associates in a corporation than in a firm.” Reasons for restriction on shares of stock In a close corporation, the identity of the other stockholders is important to each; the incorporators have confidence in one another which they may not have in an outsider. Furthermore, the incorporators may feel that the success of the enterprise depends upon the retention of the personnel who formed it, or they may be manufacturing under secret processes which they do not want outsiders to learn. In the family corporation it is often the desire of he father to pass the corporation to his son without interference from other outside the family. Any one of these factors may induce the incorporators to attempt to restrict the transfer of stock. Effect of the transfer of stock in breach of qualifying conditions

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Law on Business Organizations Reviewer Unless “consented to by all the stockholders or if the close corporation has amended its articles of incorporation,” a transfer of shares of stock in breach of qualifying conditions would justify the corporation through the corporate secretary to refuse to register the transfer of stock. Such transfer need not be for value, hence it may be the result of a donation. Sec. 100. Agreements by stockholders. – 1. Agreements by and among stockholders executed before the formation and organization of a close corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall continue to be valid and binding between and among such stockholders, if such be their intent, to the extent that such agreements are not inconsistent with the articles of incorporation, irrespective of where the provisions of such agreements are contained, except those required by this Title to be embodied in said articles of incorporation. 2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as determined in accordance with a procedure agreed upon by them. 3. No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make them partners among themselves. 4. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors: Provided, That such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed by this Code on directors. 5. To the extent that the stockholders are actively engaged in the management or

operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance. Effect of the Stockholders’ agreement before and after formation of corporation Stockholders’ agreements before and after formation and organization of the corporation survive incorporation and shall be valid and binding for as long as they are not inconsistent with the articles of incorporation. Agreements made prior to incorporation require fairly literal performance. There must be an actual contractual relation. Given such relation, the pre-incorporators are promoters and may arrange agreements to form and manage the corporation. Sec. 101. When board meeting is unnecessary or improperly held. – Unless the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if: 1. Before or after such action is taken, written consent thereto is signed by all the directors. 2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing. 3. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders. 4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing. If a director's meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof. 90

Law on Business Organizations Reviewer Sec. 102. Pre-emptive right in close corporations. - The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise. Exceptions in Section 39, not applicable It is submitted that in a close corporation, the exceptions provided in Sec 39 are not applicable. The first exception mentioned therein regarding the shares issued in compliance with laws requiring stock offerings or minimum stock ownership by the public cannot by its very nature refer to a close corporation. The pre-emptive right of shareholders in close corporation is thus broadened to include all issues without any exception, unless of course, restricted by the articles of incorporation and printed in the stock certificates. It may be mentioned however, that any prior waiver of preemptive right must be expressly provided for in the articles of incorporation and not in an ordinary agreement executed by the parties. This rule however, would not militate against the unanimous agreement of all the stockholders. Sec. 103. Amendment of articles of incorporation. – Any amendment to the articles of incorporation which seeks to delete or remove any provision required by this Title to be contained in the articles of incorporation or to reduce a quorum or voting requirement stated in said articles of incorporation shall not be valid or effective unless approved by the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the articles of incorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose. Rule and Exceptions when board meeting unnecessary General Rule: the directors of a corporation cannot act individually or separately in order to bind the corporation. They must act as a board at a meeting duly called for the purpose. Exception: Section 101. It enumerates the instances when a board at a meeting is

unnecessary or even if improperly held would be valid. The by-laws, however, may provided otherwise or a stockholder may file his written objection in writing after having knowledge of the action taken by the directors. Pre-emptive right in close corporations; Issuance of new Stock A stockholder in a close corporation has a right to purchase his pro rata share of the new stock. If the pre-emptive right is violated he can sue the corporation for damages, enjoin the stock issue, obtain an order permitting him to subscribe, or obtain cancellation of the issue. But even where the stockholder’s pre-emptive right is preserved. The right may be inadequate as a protective devise for the stockholder in a close corporation because the lack of a market for his stock leaves him with the alternatives of investing more capital or having the value of his stock diluted. Sec. 104. Deadlocks. - Notwithstanding any contrary provision in the articles of incorporation or by-laws or agreement of stockholders of a close corporation, if the directors or stockholders are so divided respecting the management of the corporation's business and affairs that the votes required for any corporate action cannot be obtained, with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally, the Securities and Exchange Commission, upon written petition by any stockholder, shall have the power to arbitrate the dispute. In the exercise of such power, the Commission shall have authority to make such order as it deems appropriate, including an order: 1. Canceling or altering any provision contained in the articles of incorporation, by-laws, or any stockholder's agreement. 2. Canceling, altering or enjoining any resolution or act of the corporation or its board of directors, stockholders, or officers. 3. Directing or prohibiting any act of the corporation or its board of directors, stockholders, officers, or other persons party to the action. 91

Law on Business Organizations Reviewer 4. Requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders.

provided either for directorial disputes or for stockholder disputes. Although there are some disadvantages of arbitration proceedings, nevertheless, the advantages of arbitration, in saving both money and hard feelings, would seem to outweigh the disadvantages in most cases.

5. Appointing a provisional director. 6. Dissolving the corporation. 7. Granting such other relief as the circumstances may warrant. A provisional director shall be an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose further qualifications, if any, may be determined by the Commission. A provisional director is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. A provisional director shall have all the rights and powers of a duly elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the Commission or by all the stockholders. His compensation shall be determined by agreement between him and the corporation subject to approval of the Commission, which may fix his compensation in the absence of agreement or in the event of disagreement between the provisional director and the corporation. Deadlock – Deadlock signifies a standstill in the management of the corporate affairs resulting from the evenly divide action of directors or stockholders in a close corporation. In the event of deadlocks SEC may arbitrate In the event of a deadlock in a close corporation, the SEC has the power to arbitrate the deadlock “upon written petition of any stockholder.” In close corporations that are subject to a checks and balances system because of control devices there are bound to be deadlocks, and some steps must be taken to cope with them. Many of the problems that arise can be settled by arbitration, Arbitration (the determination of a matter of difference between contending parties) may be

Provisional director and SEC supervised management In accordance with Section 104, the SEC may in case of deadlocks in the close corporation appoint a provisional director. “A provisional director shall be an impartial person who is neither a stock-holder nor a creditor of the corporation and whose other qualifications, may be determined by the SEC.” Under Section 2 (Pres Decree No. 1653), the SEC has the power “to create and appoint a management committee, board, or body to undertake the management of corporations, partnership or other associations in appropriate cases wherein there is imminent danger or dissipation, loss or wastage or destruction of assets or other properties or paralization of business operations of such corporations or entities prejudicial to the interest of the minority, party-litigants or the general public.” Sec. 105. Withdrawal of stockholder or dissolution of corporation. – In addition and without prejudice to other rights and remedies available to a stockholder under this Title, any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock: Provided, That any stockholder of a close corporation may, by written petition to the Securities and Exchange Commission, compel the dissolution of such corporation whenever any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted. • Appraisal rights in regular corporations can be opted by the dissenting stockholder only in cases where the fundamental 92

Law on Business Organizations Reviewer change in the corporate structure or operations is involved, whereas a stockholder of a close corporation may, for any reason, compel the said coporation to purchase his shares at their par value, when the corporation has sufficient assets in its books to cover his debts and liabilities exclusive of capital stock. ( In Appraisal right, fair value of shares is given but in Withdrawal Right, the fair value cannot be less than the par or issued value of the shares; In Appraisal right, there must be present unrestricted retained earnings in the books of the corporation)

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

• The corporation is not a close corporation even if the shares belong to less than twenty if not all the requisites are present. San Juan Structural and Steel Fabricators v. CA (1998)

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

EDUCATIONAL CORPORATIONS For Educational corporations, where the trustees should be divided into multiples of five. So you should have five, ten or fifteen trustees if they are organized as non-stock corporation. And unless otherwise provided in the articles of incorporation or by-laws, the terms of the trustees should be five years, and every year only one fifth (1/5) is elected, again to provide for continuity in policies. But you can provide that they will be all elected instead for a term of one year, everybody has to be elected. Sec. 106. Incorporation. – Educational corporations shall be governed by special laws and by the general provisions of this Code. Sec. 107. Pre-requisites to incorporation. – Except upon favourable recommendation of the Ministry of Education and Culture, the Securities and Exchange Commission shall not accept or approve the articles of incorporation and by-laws of any educational institution. Sec. 108. Board of trustees. – Trustees of educational institutions organized as nonstock corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall be in multiples of five (5). Unless otherwise provided in the articles of incorporation on the by-laws, the board of trustees of incorporated schools, colleges,

** There are three (3) ways by which a religious organization can provide for the administration of its properties: 1. by forming a non-stock corporation 2. by corporation sole 3. by religious aggregate or society Corporation sole may constitute of one person only so the head of a religious sect would incorporate himself for the purpose of administering the properties of a religious sect. To incorporate what you will file with the SEC is an affidavit. The affidavit will state that the affiant is the head of a religious denomination or sect and would want to become a corporation sole. and the rules of his religion allow him to incorporate as a corporation sole and that he is charged with the administration of its properties and in fact he will be required to submit an inventory and the manner in which the successor will be chosen and the place where he will hold his office. The Roman Catholic Archbishop of Manila is a corporation sole so if Cardinal Sin dies the new archbishop will simply submit his appointment and he need not incorporate again because the corporation is different from the occupant of the position. The Iglesia ni Kristo is incorporated as a corporation sole. The court has held in Roman Catholic Apostolic Adm. of Davao, Inc. v. Land Registration Commission that although the Bishop was a foreigner, he could register a parcel of land in his name because he is a mere administrator the property really 93

Law on Business Organizations Reviewer belongs to the faithful and since they are Filipinos they could register the land in the administrator’s name. Under the law if a corporation sole wants to dispose of or mortgage real property, he has to get authorization from the Regional Trial Court unless the rules of the religious sect allow him to dispose of or mortgage real property and that is usually the case. The last is the religious aggregate or religious society. It can incorporate for the purpose of managing its properties and the articles would indicate that the members constitute a religious order or society and that at least 2/3 of the members have agreed to incorporate, that the rules allow them to incorporate they desire to incorporate to manage their properties in the place where located. The recollects are incorporated to manage their properties, they are the single biggest bloc of stockholder of San Miguel Corporation. RELIGIOUS CORPORATIONS Sec. 109. Classes of religious corporations. – Religious corporations may be incorporated by one or more persons. Such corporations may be classified into corporations sole and religious societies. Religious corporations shall be governed by this Chapter and by the general provisions on non-stock corporations insofar as they may be applicable. a) Corporation Sole  Corporation sole is a special form of corporation usually associated with the clergy and consists of one person only and his successors, who are incorporated by law to give some legal capacities and advantages.  Nationality. A corporation sole does not have any nationality but for purposes of applying our nationalization laws, nationality is determined not by the nationality of its head but by the nationality of the members constituting the sect in the Philippines even if it is headed by the Pope. (Roman Catholic Apostolic Church v. LRC, 1957)  Effect of Separation of Members. Members of the sect who left and who formed a separate religious group are not entitled to any right to vote over the properties of their former sect. (Canete v. CA, 1989)  Dissolution. By filing a verified declaration of dissolution. (JRS at 323)

Who may form and for what purpose? Sec. 110. Corporation sole. – For the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church. (154a) How formed? Sec. 111. Articles of incorporation. – In order to become a corporation sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church must file with the Securities and Exchange Commission articles of incorporation setting forth the following: 1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his religious denomination, sect or church and that he desires to become a corporation sole. 2. That the rules, regulations and discipline of his religious denomination, sect or church are not inconsistent with his becoming a corporation sole and do not forbid it. 3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is charged with the administration of the temporalities and the management of the affairs, estate and properties of his religious denomination, sect or church within his territorial jurisdiction, describing such territorial jurisdiction. 4. The manner in which any vacancy occurring in the office of chief archbishop, bishop, priest, minister, rabbi of presiding elder is required to be filled, according to the rules, regulations or discipline of the religious denomination, sect or church to which he belongs. 5. The place where the principal office of the corporation sole is to be established and located, which place must be within the Philippines.

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Law on Business Organizations Reviewer The articles of incorporation may include any other provision not contrary to law for the regulation of the affairs of the corporation. Sec. 112. Submission of the articles of incorporation. – The articles of incorporation must be verified, before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and accompanied by a copy of the commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified to be correct by any notary public. From and after the filing with the Securities and Exchange Commission of the said articles of incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned in the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall become a corporation sole and all temporalities, estate and properties of the religious denomination, sect or church theretofore administered or managed by him as such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a corporation sole, for the use, purpose, behalf and sole benefit of his religious denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof. Need for by-laws  No need for by-laws since the business is conducted by only one man. Power to acquire and alienate property Sec. 113. Acquisition and alienation of property. – Any corporation sole may purchase and hold real estate and personal property for its church, charitable, benevolent or educational purposes, and may receive bequests or gifts for such purposes. Such corporation may sell or mortgage real property held by it by obtaining an order for that purpose from the Court of First Instance of the province where the property is situated upon proof made to the satisfaction of the court that notice of the application for leave to sell or mortgage has been given by publication or otherwise in such manner and for such time

as said court may have directed, and that it is to the interest of the corporation that leave to sell or mortgage should be granted. The application for leave to sell or mortgage must be made by petition, duly verified, by the chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as corporation sole, and may be opposed by any member of the religious denomination, sect or church represented by the corporation sole: Provided, That in cases where the rules, regulations and discipline of the religious denomination, sect or church, religious society or order concerned represented by such corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and personal property, such rules, regulations and discipline shall control, and the intervention of the courts shall not be necessary. Filling of vacancies Sec. 114. Filling of vacancies. – The successors in office of any chief archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation sole shall become the corporation sole on their accession to office and shall be permitted to transact business as such on the filing with the Securities and Exchange Commission of a copy of their commission, certificate of election, or letters of appointment, duly certified by any notary public. During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church incorporated as a corporation sole, the person or persons authorized and empowered by the rules, regulations or discipline of the religious denomination, sect or church represented by the corporation sole to administer the temporalities and manage the affairs, estate and properties of the corporation sole during the vacancy shall exercise all the powers and authority of the corporation sole during such vacancy. Dissolution Sec. 115. Dissolution. – A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the Securities and Exchange Commission a verified declaration of dissolution.

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Law on Business Organizations Reviewer The declaration of dissolution shall set forth: 1. The name of the corporation. 2. The reason for dissolution and winding up. 3. The authorization for the dissolution of the corporation by the particular religious denomination, sect or church. 4. The names and addresses of the persons who are to supervise the winding up of the affairs of the corporation. Upon approval of such declaration of dissolution by the Securities and Exchange Commission, the corporation shall cease to carry on its operations except for the purpose of winding up its affairs. Religious societies or corporations aggregate Sec. 116. Religious societies. – Any religious society or religious order, or any diocese, synod, or district organization of any religious denomination, sect or church, unless forbidden by the constitution, rules, regulations, or discipline of the religious denomination, sect or church of which it is a part, or by competent authority, may, upon written consent and/or by an affirmative vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the administration of its temporalities or for the management of its affairs, properties and estate by filing with the Securities and Exchange Commission, articles of incorporation verified by the affidavit of the presiding elder, secretary, or clerk or other member of such religious society or religious order, or diocese, synod, or district organization of the religious denomination, sect or church, setting forth the following: 1. That the religious society or religious order, or diocese, synod, or district organization is a religious organization of a religious denomination, sect or church. 2. That at least two-thirds (2/3) of its membership have given their written consent or have voted to incorporate,

at a duly convened meeting of the body. 3. That the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to incorporate is not forbidden by competent authority or by the constitution, rules, regulations or discipline of the religious denomination, sect, or church of which it forms a part. 4. That the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the administration of its affairs, properties and estate. 5. The place where the principal office of the corporation is to be established and located, which place must be within the Philippines. 6. The names, nationalities, and residences of the trustees elected by the religious society or religious order, or the diocese, synod, or district organization to serve for the first year or such other period as may be prescribed by the laws of the religious society or religious order, or of the diocese, synod, or district organization, the board of trustees to be not less than five (5) nor more than fifteen (15). Case Long v. Basa (2001) • Since in matters purely ecclesiastical the decisions of the proper church tribunals are conclusive upon the civil tribunals, then a church member who is expelled from the membership by the church authorities, or a priest or minister who is by them deprived of his sacred office, is without remedy in the civil courts. Long v. Basa, 366 SCRA 113 (2001). Additional Material: SEC Opinion No. 04-45, Nov.28, 2004 to Ferrer and Ferrer Law Office re term of existence of religious corporation. SEC Opinion No. 04-45, (Nov. 28, 2004) Re: Term of Existence of Religious Corporations Section 116 (as well as Sec. 160 of the former Corporation Law) does not provide for a term of existence of religious corporations, whether classified as a 96

Law on Business Organizations Reviewer corporation sole or a corporation aggregate. As such, the law intends that religious organizations may exist perpetually (SEC Opinion dated Dec. 10, 1981). Moreover, where the Articles of Incorporation does not provide for a term of existence, it shall be understood that the intention is for the corporation to exist for an indefinite period (SEC Opinion dated Oct. 23, 1995) DISSOLUTION Dissolution of a corporation is the extinguishment of the franchise of a corporation and termination of its corporate existence. Modes of Dissolution: 1. Voluntary Dissolution 2. Involuntary Dissolution 3. Shortening of term 4. Expiration of term (JRS at 311) 5. Failure to organize and commence business within two years from the date of issuance of certificate of incorporation 6. Legislative Dissolution (CLV’s CLR at 936) Effects of Dissolution: 1. Transfer of Legal title to corporate property. 2. The corporation ceases as a body corporate to continue the business for which it was established. 3. Continuation of a body corporation (the corporation continues as a body corporate for 3 years for purposes of winding up or liquidation). 4. After the expiration of the 3 year winding up period, the corporation ceases to exist for all purposes. (JRS at 314). 

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The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liability of such entity, since it is allowed to continue as a juridical entity for 3 years for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property, and to distribute its assets. Republic v. Tancinco, 394 SCRA 386 (2002). A board resolution to dissolve the corporation does not operate to so

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dissolve the juridical entity. For dissolution to be effective “[t]he requirements mandated by the Corporation Code should have been strictly complied with.” Vesagas v. Court of Appeals, 371 SCRA 509, 516 (2002). A corporation cannot extend its life by amendment of its articles of incorporation effected during the threeyear statutory period for liquidation when its original term of existence had already expired, as the same would constitute new business. Alhambra Cigar & Cigarette Manufacturing Company, Inc. v. SEC, 24 SCRA 269 (1968). When the period of corporate life expires, the corporation ceases to be a body corporate for the purpose of continuing the business for which it was organized. PNB v. Court of First Instance of Rizal, Pasig, Br. XXI, 209 SCRA 294 (1992).

DISSOLUTION ** There are different ways to dissolve a corporation one is voluntarily and the other involuntarily, under the law there are three provisions governing voluntary dissolution. The first one is if no creditors are affected. In all the methods of voluntary dissolution, you need a resolution approved by a majority of directors and a resolution approved by at least 2/3 of the stockholders In Section 118, where no creditors are affected the directors and the stockholders pass the resolution dissolving the corporation and that will be filed in the SEC for approval. In a case where a suit was filed and the corporation said, we have already been dissolved and they submitted a board resolution, the SC held that it is not enough to dissolve a corporation. The Second one, is under Section 119 where creditors are affected. Here the board and the stockholders will approve the dissolution but a petition will be filed signed by the majority of the directors and verified by the president, secretary or one of the directors which will indicate the claims of creditors. That will be set for hearing and not less than thirty (30) days nor more than sixty (60) days after the entry of the issuance of the order and a copy of the order will be published once a week for three consecutive weeks in a newspaper of general circulation and that will also be posted for three weeks in three public 97

Law on Business Organizations Reviewer places like the bulletin board of a municipal hall, post office, the plaza and then the SEC will set that for hearing and determine w/n the corporation should be dissolved. The third one you will just shorten the corporate life and this is the simplest and fastest way of dissolving the corporation voluntarily like when Ford Philippines decided to close its subsidiary they simply amended the articles of corporation that the corporation will exist until December 31, 1978. The SEC will require getting a tax clearance from the BIR and the stockholders will be required to sign an undertaking that they will answer for the claim of the creditors to the extent of the liquidating dividends they will receive. Then you can have an involuntary dissolution. This could be done by filing a quo warranto case under rule 66 of the ROC on the ground mentioned there or a corporation can be dissolved for certain violation of the corporation code as mentioned in the Corporation Code or PD 902-A and also a minority stockholder may file a petition to dissolve the corporation where the majority is mismanaging the assets of the corporation, dissipating its assets, and fraudulently disposing of its properties and a receiver may be appointed in an action for involuntary dissolution. The SC held in the leading case of El Hogar Filipino, 50 Phil. 399(1927) the first corporation organized under the Corporation Act, the government filed a case to dissolve that corporation and invoked 17 grounds, the SC denied the petition. Building and loans association like banks are required to dispose of within 5 years of any properties they foreclosed they disposed of the properties after 6 years but they exerted their best efforts, they hired real estate brokers, they advertised in newspapers but they just could not find buyers, they acquired this land and building, the SC held that it is not illegal, that they leased the space that they did not need for their office, that is not illegal they are maximizing their property, that they provide a provision in the by-laws that stockholders can be compelled to surrender their shares, to be bought out well the court said that that is void but that is not sufficient ground to dissolve the corporation. In other words the court is saying that you do not dissolve a

corporation for every infraction, the infraction must be serious, because dissolution is imposing the death penalty upon the corporation. The Court said the employees of a railroad are required to wear uniform indicating their positions in their nameplate, now tell me if one employee did not have such a nameplate you are going to dissolve a corporation because that is a legal requirement? It has to be a serious violation! But in one case, the SC dissolved a corporation which was engaging in banking without authorization from the monetary board, it was accepting deposits from the public, the court considered that as a serious violation. When a minority stockholder files a case and asks to dissolve the corporation, the court said that that is a harsh remedy unless the situation is really beyond redemption you should not impose that remedy. The corporation has three years after it should have been dissolved for the purpose of winding up its affairs. The SEC has said the three year period should be counted from the time the dissolution was approved by the SEC even if the directors and stockholders pass a resolution dissolving the corporation that is not effective until it has been approved by the SEC. For three years, the corporation will continue to exist it will no longer be a going concern but only for the purpose of winding up that is why the SC has said that the corporation cannot for example renew its contract of lease because it is no longer a going concern. During the three year period, it should devote its time prosecuting and defending law suits, winding up its affairs disposing its properties so they can be used to pay off its creditors and to distribute balance to the stockholders. There are two ways of providing for the winding up of its affairs under the law. This is voluntary either the directors themselves may take care of winding up the affairs of the corporation or they may appoint a trustee like when Ford Philippines decided to close its subsidiary here one of the last acts of the BOD was to pass a resolution appointing Ricardo Romulo as trustee vesting upon him legal title to all the assets of Ford Philippines to be used to pay off its creditors and to dispose of its properties of Ford Philippines. to distribute the balance as liquidating dividends. 98

Law on Business Organizations Reviewer Supposed to be, this was the rule before if any case is not finished within the three year period, the case will be abated whether the corporation is plaintiff or whether it is defendant but recent jurisprudence has rendered that obsolete. That rule is applicable if it is the directors winding up the corporation. if the corporation is under receivership, it is the receiver who may wind up the affair of the corporation. But if it is the trustee that will not apply, the trust will subsist until the affairs of the corporation are wound up and until any creditor can sue the trustee provided that the applicable prescriptive period has not yet lapsed. So if his cause of action is based on a written contract he has ten (10) years to sue the trustee. The Court has said that the remedy there if the three years will end and there are still pending cases, is for the board to appoint a trustee but more recent jurisprudence has fashioned a practicable solution to that the lawyer handling the cases may be considered as trustee of the corporation and therefore the cases will not be abated but should continue. In one case, the SC held that the directors may be considered as trustees after three years so that they can continue to wind up the affairs of the corporation and in effect the three year period has become ineffectual. What are the various methods of dissolving corporations? Sec. 117. Methods of dissolution. – A corporation formed or organized under the provisions of this Code may be dissolved voluntarily or involuntarily. Voluntary Requirements where no creditors are affected. Sec. 118. Voluntary dissolution where no creditors are affected. – If dissolution of a corporation does not prejudice the rights of any creditor having a claim against it, the dissolution may be effected by majority vote of the board of directors or trustees, and by a resolution duly adopted by the affirmative vote of the stockholders owning at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members of a meeting to be held upon call of the directors or trustees after publication of the notice of time, place and

object of the meeting for three (3) consecutive weeks in a newspaper published in the place where the principal office of said corporation is located; and if no newspaper is published in such place, then in a newspaper of general circulation in the Philippines, after sending such notice to each stockholder or member either by registered mail or by personal delivery at least thirty (30) days prior to said meeting. A copy of the resolution authorizing the dissolution shall be certified by a majority of the board of directors or trustees and countersigned by the secretary of the corporation. The Securities and Exchange Commission shall thereupon issue the certificate of dissolution. 

When a corporation is contemplating dissolution, it must submit tax return on the income earned by it from the beginning of the year up to the date of its dissolution and pay the corresponding tax due. BPI v. Court of Appeals, 363 SCRA 840 (2001).

Requirements where creditors are affected Sec. 119. Voluntary dissolution where creditors are affected. – Where the dissolution of a corporation may prejudice the rights of any creditor, the petition for dissolution shall be filed with the Securities and Exchange Commission. The petition shall be signed by a majority of its board of directors or trustees or other officers having the management of its affairs, verified by its president or secretary or one of its directors or trustees, and shall set forth all claims and demands against it, and that its dissolution was resolved upon by the affirmative vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members at a meeting of its stockholders or members called for that purpose. If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose of the petition, fix a date on or before which objections thereto may be filed by any person, which date shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order. Before such date, a copy of the order shall be published at least once a week for three (3) consecutive weeks in a newspaper of general circulation published in the municipality or city where the 99

Law on Business Organizations Reviewer principal office of the corporation is situated, or if there be no such newspaper, then in a newspaper of general circulation in the Philippines, and a similar copy shall be posted for three (3) consecutive weeks in three (3) public places in such municipality or city. Upon five (5) days’ notice, given after the date on which the right to file objections as fixed in the order has expired, the Commission shall proceed to hear the petition and try any issue made by the objections filed; and if no such objection is sufficient, and the material allegations of the petition are true, it shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation. Sec. 120. Dissolution by shortening corporate term. – A voluntary dissolution may be effected by amending the articles of incorporation to shorten the corporate term pursuant to the provisions of this Code. A copy of the amended articles of incorporation shall be submitted to the Securities and Exchange Commission in accordance with this Code. Upon approval of the amended articles of incorporation of the expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved without any further proceedings, subject to the provisions of this Code on liquidation. SEC requirements on shortening corporate term 1. Amended article of incorporation shortening its corporate term in accordance with Section 16 of the Code. 2. A director’s certificate signed by at least a majority of the directors/trustees and attested by the secretary, certified under oath, stating that the amended articles of incorporation is a true and correct copy as amended by the stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members in case of non-stock corporations. 3. A certification that no creditor shall be prejudiced by the dissolution. 4. A list of creditors, if any. 5. Consent of the creditors with regard to the dissolution.

6. Affidavit of stockholders/directors/ officers/members regarding any valid claim against the corporation. 7. Latest balance sheet which must be earlier than the date of the meeting of the stockholders approving the amendment of the articles of incorporation. 8. Notice of dissolution. 9. Tax clearance from the BIR. 10. Affidavit of the publisher anent the publication of the notice of the dissolution once a week for three (3) consecutive weeks in two (2) newspapers of general circulation in the Philippines. The SEC may appoint a receiver to collect such assets and pay the debts of the corporation. It has been held that where corporate directors are guilty of a breach of trust and intracorporate remedy is futile, the minority stockholders may resort to the courts for appropriate relief and, incidentally, as for the appointment of a receiver for the protection of their rights. Section 121. Involuntary dissolution. – A corporation may be dissolved by the Securities and Exchange Commission upon filing of a verified complaint and after proper notice and hearing on the grounds provided by existing laws, rules and regulations. Rules of Court provides that a quo warranto proceedings may be brought against a corporation: 1. When it has offended against a provision of an Act for its creation or renewal. 2. When it has forfeited its privileges and franchises by non-user. 3. When it has committed or omitted an act which amounts to a surrender of its corporate rights, privileges, or franchises. 4. When it has misused a right, privilege, or franchise conferred upon it by law, or when it has exercised a right, privilege or franchise in contravention of law. Section 122. Corporate liquidation. – Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence 100

Law on Business Organizations Reviewer for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. Methods of Liquidation 1. Liquidation by the directors themselves. 2. Liquidation by a duly appointed receiver. 3. Liquidation by trustees to whom the board of directors had conveyed the corporate assets. Rules of corporate recovery The SEC approved the Rules of Procedure on Corporate recovery effective on January 15, 2000. 1. It governs the rules on definition of terms 2. Common provisions 3. Suspension of payments 4. Rehabilitation

5. Dissolution and liquidation A corporation that has a pending action and which cannot be terminated within the three-year period after dissolution is authorized to convey all its property to trustees to enable it to prosecute and defend suits by or against the corporation beyond the three-year period. Distribution of Assets Distribution among the shareholders of the assets in winding up, formal or informal may be made only to the prior claim of creditors and after all debts have been paid or provided for. This is sometimes expressed in terms of the trust fund doctrine. Liquidation Connotes a winding up or setting with creditors and debtors.

Rehabilitation - Connotes a reopening of reorganization .

It is a winding up of a corporation so that assets are distributed to those entitled to receive them.

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It is the process of reducing assets to cash, discharging liabilities and dividing surplus or loss.

Contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation in its former position of successful operation and solvency.

Section 123. Definition and rights of foreign corporations. – For the purposes of this Code, a foreign corporation is one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency. Definition Foreign Corporation is one formed, organized or existing under any laws other than those of the Philippines and whose 101

Law on Business Organizations Reviewer laws allow Filipino citizens and corporations to do business in its own country or state. Section 124. Application to existing foreign corporations. – Every foreign corporation which on the date of the effectivity of this Code is authorized to do business in the Philippines under a license therefore issued to it, shall continue to have such authority under the terms and condition of its license, subject to the provisions of this Code and other special laws. A foreign corporation can have no legal existence beyond the bounds of the state or sovereignty by which it is created. It exists only in contemplation of law and by force of the law, and where that law ceases to operate, the corporation can have no existence. It must dwell in the place of its creation, and cannot migrate to another sovereignty. Foreign corporations may do business in the Philippines either by directly entering into transactions with resident persons, firms or corporations or by creating a domestic subsidiary corporation which would have its own distinct personality. Licensed foreign corporations is authorized to do business in the Philippines shall continue to have such authority under the terms and condition of its license, subject to the provisions of the Code and other special laws. Section 125. Application for a license. – A foreign corporation applying for a license to transact business in the Philippines shall submit to the Securities and Exchange Commission a copy of its articles of incorporation and by-laws, certified in accordance with law, and their translation to an official language of the Philippines, if necessary. The application shall be under oath and, unless already stated in its articles of incorporation, shall specifically set forth the following: 1. The date and term of incorporation. 2. The address, including the street number, of the principal office of the corporation in the country or state of incorporation.

3. The name and address of its resident agent authorized to accept summons and process in all legal proceedings and, pending the establishment of a local office, all notices affecting the corporation. 4. The place in the Philippines where the corporation intends to operate. 5. The specific purpose or purposes which the corporation intends to pursue in the transaction of its business in the Philippines: Provided, That said purpose or purposes are those specifically stated in the certificate of authority issued by the appropriate government agency. 6. The names and addresses of the present directors and officers of the corporation. 7. A statement of its authorized capital stock and the aggregate number of shares which the corporation has authority to issue, itemized by classes, par value of shares, shares without par value, and series, if any. 8. A statement of its outstanding capital stock and the aggregate number of shares which the corporation has issued, itemized by classes, par value of shares, shares without par value, and series, if any. 9. A statement of the amount actually paid in. 10. Such additional information as may be necessary or appropriate in order to enable the Securities and Exchange Commission to determine whether such corporation is entitled to a license to transact business in the Philippines, and to determine and assess the fees payable. Attached to the application for license shall be a duly executed certificate under oath by the authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the country or state of the applicant allow Filipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good standing. If such certificate is in a foreign language, a 102

Law on Business Organizations Reviewer translation thereof in English under oath of the translator shall be attached thereto. The application for a license to transact business in the Philippines shall likewise be accompanied by a statement under oath of the president or any other person authorized by the corporation, showing to the satisfaction of the Securities and Exchange Commission and other governmental agency in the proper cases that the applicant is solvent and in sound financial condition, and setting forth the assets and liabilities of the corporation as of the date not exceeding one (1) year immediately prior to the filing of the application. Foreign banking, financial and insurance corporations shall, in addition to the above requirements, comply with the provisions of existing laws applicable to them. In the case of all other foreign corporations, no application for license to transact business in the Philippines shall be accepted by the Securities and Exchange Commission without previous authority from the appropriate government agency, whenever required by law.

Section 126. Issuance of a license. – If the Securities and Exchange Commission is satisfied that the applicant has complied with all the requirements of this Code and other special laws, rules and regulations, the Commission shall issue a license to the applicant to transact business in the Philippines for the purpose or purposes specified in such license. Upon issuance of the license, such foreign corporation may commence to transact business in the Philippines and continue to do so for as long as it retains its authority to act as a corporation under the laws of the country or state of its incorporation, unless such license is sooner surrendered, revoked, suspended or annulled in accordance with this Code or other special laws. Within sixty (60) days after the issuance of the license to transact business in the Philippines, the license, except foreign banking or insurance corporation, shall deposit with the Securities and Exchange Commission for the benefit of present and future creditors of the licensee in the Philippines, securities satisfactory to the

Securities and Exchange Commission, consisting of bonds or other evidence of indebtedness of the Government of the Philippines, its political subdivisions and instrumentalities, or of government-owned or controlled corporations and entities, shares of stock in “registered enterprises” as this term is defined in Republic Act No. 5186, shares of stock in domestic corporations registered in the stock exchange, or shares of stock in domestic insurance companies and banks, or any combination of these kinds of securities, with an actual market value of at least one hundred thousand (P100,000.) pesos; Provided, however, That within six (6) months after each fiscal year of the licensee, the Securities and Exchange Commission shall require the licensee to deposit additional securities equivalent in actual market value to two (2%) percent of the amount by which the licensee’s gross income for that fiscal year exceeds five million (P5,000,000.00) pesos. The Securities and Exchange Commission shall also require deposit of additional securities if the actual market value of the securities on deposit has decreased by at least ten (10%) percent of their actual market value at the time they were deposited. The Securities and Exchange Commission may at its discretion release part of the additional securities deposited with it if the gross income of the licensee has decreased, or if the actual market value of the total securities on deposit has increased, by more than ten (10%) percent of the actual market value of the securities at the time they were deposited. The Securities and Exchange Commission may, from time to time, allow the licensee to substitute other securities for those already on deposit as long as the licensee is solvent. Such licensee shall be entitled to collect the interest or dividends on the securities deposited. In the event the licensee ceases to do business in the Philippines, the securities deposited as aforesaid shall be returned, upon the licensee’s application therefor and upon proof to the satisfaction of the Securities and Exchange Commission that the licensee has no liability to Philippine residents, including the Government of the Republic of the Philippines. Definition Transacting business means the carrying on of the operations of the corporation, or 103

Law on Business Organizations Reviewer some portion of them, in the usual and regular course of the prosecution of the corporate enterprise for profit. The Corporation Code outlines the procedural requirements for the application and issuance of a license before a foreign corporation may transact business in the Philippines. Except in the case of foreign banking, financial and insurance corporations and other subject to special laws, rules and regulations, if the applicant foreign corporation has complied with all the requirements of issuance of a license, the SEC shall issue such license and thereafter the foreign corporation may transact business in the Philippines. Republic Act No. 5455. Regulates the entry of foreign investments whenever foreign equity participation exceeds 30 percent of the capital stock. Under Republic Act no. 5455 “doing business includes”: a. Soliciting orders, purchases, service contracts, opening offices whether called liaison offices or branches. b. Appointing representatives or distributors who are domiciled in the Philippines or who in any calendar year stay in the Philippines for a period or periods totalling one hundred eighty days or more. c. Participating in the management, supervision, or control of any domestic business firm, entity, or corporation in the Philippines. d. Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplates to that extent the performance of acts or works, or the exercise of some of the function normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization. The Board of Investments requires license not only of corporations organized abroad but also of domestic corporations, if more than 40% of its voting shares are owned and held by aliens or more than 30% of its total capitalization is in the hands of aliens. Guidelines for issuance of certificate of authority to do business under BOI (Rep. Act No.5455)

1. That the operation or activity is not inconsistent with the Investment Priorities Plan. 2. That the business or economic activity will contribute to the sound and balanced development of the national economy on a self-sustaining basis. 3. That the activity will not conflict with the Constitution and laws of the Philippines. 4. That the nosiness or economic activity is not one (1) adequately exploited by Philippine Nationals. 5. That the entry of the applicant will not pose a clear and present danger of promoting monopolies or combination in restraint of trade. Presidential Decree No. 151 allows citizens of the Philippines or corporations which have acquired lands of the public domain or which or any other law, to enter into service contracts for financial, technical, management or other forms of assistance with any foreign person or entity whenever and wherever such contracts are vital to achieve sound and more expeditious exploration, development, exploitation or utilization of such lands owned, held or controlled by such citizens or corporations. Section 127. Who may be a resident agent. – A resident agent may be either an individual residing in the Philippines or a domestic corporation lawfully transacting business in the Philippines: Provided, That in the case of an individual, he must be of good moral character and of sound financial standing. Section 128. Resident agent; service of process. – The Securities and Exchange Commission shall require as a condition precedent to the issuance of the license to transact business in the Philippines by any foreign corporation that such corporation file with the Securities and Exchange Commission a written power of attorney designating some person who must be a resident of the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation, and consenting that service upon such resident agent shall be admitted and held as valid as if served upon the duly authorized officers of the foreign corporation at its home office. Any such foreign corporation shall 104

Law on Business Organizations Reviewer likewise execute and file with the Securities and Exchange Commission an agreement or stipulation, executed by the proper authorities of said corporation, in form and substance as follows: “The (name of foreign corporation) does hereby stipulate and agree, in consideration of its being granted by the Securities and Exchange Commission a license to transact business in the Philippines, that if at any time said corporation shall cease to transact business in the Philippines, or shall be without any resident agent in the Philippines on whom any summons or other legal processes may be served, then in any action or proceeding arising out of any business or transaction which occurred in the Philippines, service of any summons or other legal process may be made upon the Securities and Exchange Commission and that such service shall have the same force and effect as if made upon the dulyauthorized officers of the corporation at its home office.” Whenever such service of summons or other process shall be made upon the Securities and Exchange Commission, the Commission shall, within ten (10) days thereafter, transmit by mail a copy of such summons or other legal process to the corporation at its home or principal office. The sending of such copy by the Commission shall be necessary part of and shall complete such service. All expenses incurred by the Commission for such service shall be paid in advance by the party at whose instance the service is made. In case of a change of address of the resident agent, it shall be his or its duty to immediately notify in writing the Securities and Exchange Commission of the new address. The SEC shall require as a condition precedent to the issuance of the license to transact business in the Philippines by any foreign corporation that such corporation file with the SEC, a written power of attorney designating some person who must be a resident of the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation.

Section 129. Law applicable. – Any foreign corporation lawfully doing business in the Philippines shall be bound by all laws, rules and regulations applicable to domestic corporations of the same class, except such only as provide for the creation, formation, organization or dissolution of corporations or those which fix the relations, liabilities, responsibilities, or duties of stockholders, members, or officers of corporations to each other or to the corporation. Licensed foreign corporations lawfully doing business in the Philippines shall be subject to our laws just like domestic corporations of the same class. Philippine laws will not apply when it refers to the creation, formation, organization or dissolution of corporations or such as fux the relations, liabilities, responsibilities, or duties of stockholders, members, or officers of corporations to each other or to the corporation. Section 130. Amendments to articles of incorporation or by-laws of foreign corporations. – Whenever the articles of incorporation or by-laws of a foreign corporation authorized to transact business in the Philippines are amended, such foreign corporation shall, within sixty (60) days after the amendment becomes effective, file with the Securities and Exchange Commission, and in the proper cases with the appropriate government agency, a duly authenticated copy of the articles of incorporation or by-laws, as amended, indicating clearly in capital letters or by underscoring the change or changes made, duly certified by the authorized official or officials of the country or state of incorporation. The filing thereof shall not of itself enlarge or alter the purpose or purposes for which such corporation is authorized to transact business in the Philippines. Section 131. Amended license. – A foreign corporation authorized to transact business in the Philippines shall obtain an amended license in the event it changes its corporate name, or desires to pursue in the Philippines other or additional purposes, by submitting an application therefor to the Securities and Exchange Commission, favorably endorsed by the appropriate government agency in the proper cases. 105

Law on Business Organizations Reviewer Section 132. Merger or consolidation involving a foreign corporation licensed in the Philippines. – One or more foreign corporations authorized to transact business in the Philippines may merge or consolidate with any domestic corporation or corporations if such is permitted under Philippine laws and by the law of its incorporation: Provided, That the requirements on merger or consolidation as provided in this Code are followed. Whenever a foreign corporation authorized to transact business in the Philippines shall be a party to a merger or consolidation in its home country or state as permitted by the law of its incorporation, such foreign corporation shall, within sixty (60) days after such merger or consolidation becomes effective, file with the Securities and Exchange Commission, and in proper cases with the appropriate government agency, a copy of the articles of merger or consolidation duly authenticated by the proper official or officials of the country or state under the laws of which merger or consolidation was effected: Provided, however, That if the absorbed corporation is the foreign corporation doing business in the Philippines, the latter shall at the same time file a petition for withdrawal of it license in accordance with this Title. Section 132 covers two legal situations: 1. The merger of a licensed foreign corporation with a domestic corporation.  Must be accomplished by complying with the provisions of the Corporation Code. 2. The merger of a licensed foreign corporation with another corporation in its country of origin which is not doing business in the Philippines.  If the licensed foreign corporation is absorbed by merger or consolidation, it must withdraw its license to do business in the Philippines.  Nevertheless, if the foreign absorbing corporation desire to continue the business of the absorbed corporation in the Philippines, it has to file an application for a license to do business pursuant to the requirements of Philippines law on the matter.

Section 133. Doing business without a license. – No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws. Unlicensed foreign corporations doing business in the Philippine do not have the capacity to sue before the local court is well-established. A foreign corporation which is not licensed to transact business therein can maintain an action in the courts of the Philippines for the purpose of protecting its reputation, corporate name and goodwill. A foreign corporation doing business in the Philippines without a license may maintain suit in the Philippines against a domestic corporation or person who is party to a contract as the domestic corporation or person is deemed estopped from challenging the personality of the foreign corporation. Section 134. Revocation of license. – Without prejudice to other grounds provided by special laws, the license of a foreign corporation to transact business in the Philippines may be revoked or suspended by the Securities and Exchange Commission upon any of the following grounds: 1. Failure to file its annual report or pay any fees as required by this Code. 2. Failure to appoint and maintain a resident agent in the Philippines as required by this Title. 3. Failure, after change of its resident agent or of his address, to submit to the Securities and Exchange Commission a statement of such change as required by this Title. 4. Failure to submit to the Securities and Exchange Commission an authenticated copy of any amendment to its articles of 106

Law on Business Organizations Reviewer incorporation or by-laws or of any articles of merger or consolidation within the time prescribed by this Title.

1. All claims which have accrued in the Philippines have been paid, compromised or settled.

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

2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions have been paid.

6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions.

3. The petition for withdrawal of license has been published once a week for three (3) consecutive weeks in a newspaper of general circulation in the Philippines.

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

Sec. 137. Outstanding capital stock defined. – The term "outstanding capital stock", as used in this Code, means the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares.

8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines. 9. Any other ground as would render it unfit to transact business in the Philippines. Sec. 135. Issuance of certificate of revocation. – Upon the revocation of any such license to transact business in the Philippines, the Securities and Exchange Commission shall issue a corresponding certificate of revocation, furnishing a copy thereof to the appropriate government agency in the proper cases. The Securities and Exchange Commission shall also mail to the corporation at its registered office in the Philippines a notice of such revocation accompanied by a copy of the certificate of revocation. Sec. 136. Withdrawal of foreign corporations. – Subject to existing laws and regulations, a foreign corporation licensed to transact business in the Philippines may be allowed to withdraw from the Philippines by filing a petition for withdrawal of license. No certificate of withdrawal shall be issued by the Securities and Exchange Commission unless all the following requirements are met:

Sec. 138. Designation of governing boards. – The provisions of specific provisions of this Code to the contrary notwithstanding, non-stock or special corporations may, through their articles of incorporation or their by-laws, designate their governing boards by any name other than as board of trustees. Sec. 139. Incorporation and other fees. – The Securities and Exchange Commission is hereby authorized to collect and receive fees as authorized by law or by rules and regulations promulgated by the Commission. Sec. 140. Stock ownership in certain corporations. – Pursuant to the duties specified by Article XIV of the Constitution, the National Economic and Development Authority shall, from time to time, make a determination of whether the corporate vehicle has been used by any corporation or by business or industry to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their prevention or correction. Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be vested with a public interest pursuant to the provisions of this section, belonging to individuals or groups 107

Law on Business Organizations Reviewer of individuals related to each other by consanguinity or affinity or by close business interests, or whenever it is necessary to achieve national objectives, prevent illegal monopolies or combinations in restraint or trade, or to implement national economic policies declared in laws, rules and regulations designed to promote the general welfare and foster economic development. In recommending to the Batasang Pambansa corporations, business or industries to be declared vested with a public interest and in formulating proposals for limitations on stock ownership, the National Economic and Development Authority shall consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the activity, the export potential, as well as other factors which are germane to the realization and promotion of business and industry. Sec. 141. Annual report or corporations. – Every corporation, domestic or foreign, lawfully doing business in the Philippines shall submit to the Securities and Exchange Commission an annual report of its operations, together with a financial statement of its assets and liabilities, certified by any independent certified public accountant in appropriate cases, covering the preceding fiscal year and such other requirements as the Securities and Exchange Commission may require. Such report shall be submitted within such period as may be prescribed by the Securities and Exchange Commission. Sec. 142. Confidential nature of examination results. – All interrogatories propounded by the Securities and Exchange Commission and the answers thereto, as well as the results of any examination made by the Commission or by any other official authorized by law to make an examination of the operations, books and records of any corporation, shall be kept strictly confidential, except insofar as the law may require the same to be made public or where such interrogatories, answers or results are necessary to be presented as evidence before any court.

Sec. 143. Rule making power of the Securities and Exchange Commission. – The Securities and Exchange Commission shall have the power and authority to implement the provisions of this Code, and to promulgate rules and regulations reasonably necessary to enable it to perform its duties hereunder, particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or officers. Sec. 144. Violations of the Code. – Violations of any of the provisions of this Code or its amendments not otherwise specifically penalized therein shall be punished by a fine of not less than one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in the discretion of the court. If the violation is committed by a corporation, the same may, after notice and hearing, be dissolved in appropriate proceedings before the Securities and Exchange Commission: Provided, That such dissolution shall not preclude the institution of appropriate action against the director, trustee or officer of the corporation responsible for said violation: Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a corporation provided in this Code. Sec. 145. Amendment or repeal. – No right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof. Sec. 146. Repealing clause. – Except as expressly provided by this Code, all laws or parts thereof inconsistent with any provision of this Code shall be deemed repealed. Sec. 147. Separability of provisions. – Should any provision of this Code or any part thereof be declared invalid or unconstitutional, the other provisions, so

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Law on Business Organizations Reviewer far as they are separable, shall remain in force. Sec. 148. Applicability to existing corporations. – All corporations lawfully existing and doing business in the Philippines on the date of the effectivity of this Code and heretofore authorized, licensed or registered by the Securities and Exchange Commission, shall be deemed to have been authorized, licensed or registered under the provisions of this Code, subject to the terms and conditions of its license, and shall be governed by the provisions hereof: Provided, That if any such corporation is affected by the new requirements of this Code, said corporation shall, unless otherwise herein provided, be given a period of not more than two (2) years from the effectivity of this Code within which to comply with the same. Sec. 149. Effectivity. – This Code shall take effect immediately upon its approval. Approved: May 1, 1980

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