While every precaution has been taken in the preparation of this book, the publisher assumes no responsibility for errors or omissions, or for damages resulting from the use of the information contained herein.

THE LAW ON PARTNERSHIP & CORPORATIONS

First edition. July 20, 2021.

Copyright © 2021 Art Saguinsin.

Written by Art Saguinsin.

Table of Contents

Title Page

Copyright Page

The Law on Partnership & Corporation

Compiled & Edited by

White v. Long | 1927, 289 Pa. St. 526

Sharruf and Co. v. Baloise Fire Insurance Co.

Ormachea Tin Congco v. Trillana | 13 Phil 194

Recentes v. Court of First Instance | GR- 40504 July 29, 1983

The Law on Partnership & Corporation

Compiled & Edited by

ARTEMIO T. SAGUINSIN

Copyright@2021 Artemio Saguinsin

All Rights Reserved

TABLE OF CONTENTS

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PART 1 PARTNERSHIPS Chapter 1 GENERAL PROVISIONS ARTICLE 1767 Partnership; Defined Essential features of a partnership Elements of characteristics of partnership contract Juridical personality of partnership ARTICLE 1768 Test to determine existence of a partnership ARTICLE 1769 Parties not partners as to each other Co-ownership or Co-possession not controlling: Sharing of gross returns Receipt of share in the profits

Payment of debt by installments Rent to landlord or wages of employee Annuity to widow Interest on a loan Consideration for sold goodwill Distinction between Partnership and Co-ownership Partnership’s unlawful object ARTICLE 1770 ARTICLE 1771 Form not essential in a partnership Capital requirement of a partnership ARTICLE 1772 Essential requirements ARTICLE 1773 ARTICLE 1774 Capacity of the partnership to acquire property Limitation Public instrument ARTICLE 1775 Interest and action by co-owners ARTICLE 1776

Kinds of partnership As to liability of the partners it may be general or limited Partnership by estoppel Kinds of partners ARTICLE 1777 ARTICLE 1778 ARTICLE 1779 Concept of universal partnership of all present property Contribution of future properties ARTICLE 1780 Concept of universal partnership rights Prescription of universal partnership of profits ARTICLE 1781 Limitation on the formation of universal partnership ARTICLE 1782 Other instances of void donations ARTICLE 1783 Distinction between universal and particular partnerships Review Questions Define the following: Contract of Partnership

Delectus personae Particular Partnership Universal Partnership of all present property Universal Partnership of Profits What are the essential features of a partnership Distinguish partnership from co-ownership Distinguish partnership from conjugal partnership SUMMARY Review Questions CHAPTER 2 OBLIGATIONS OF THE PARTNERS ARTICLE 1784 Commencement of a partnership Agreement of partnership on the commencement Commencement of a partnership Creation of future partnership and contributions ARTICLE 1785 Resumption of partnership beyond fixed term Partnership at will Obligations as to contribution of property Effect of failure to contribute

Eviction, construed ARTICLE 1786 Obligations of the partners among themselves & to the partnership Failure to fulfill promised contribution Eviction and liability of a partner Three duties of every partner Case Duty to warrant Problem Article 1787 Contribution of goods Contribution constitutes goods Appraisal is made thru: ARTICLE 1788 Criminal liability of a partner Rule of failure to contribute No demand needed in default Article 1789 Industrial partner ARTICLE 1789 Remedies available from industrial partner

Classification of Partners Definitions and Characteristics Distinction between a Capitalist and an Industrial Partner Article 1790 Amount of contribution to partnership capital ARTICLE 1790 Obligation to contribute a capitalist partner Amount of Contribution ARTICLE 1791 When a Capitalist Partner is Obliged to Sell Rule for the Industrial Partners ARTICLE 1792 When a Managing Partner collects a Credit ARTICLE 1793 Requisites of the law: Article 1794 Damages to partnership ARTICLE 1794 Risk of loss of specific and determinate things Effect of death of the negligent partner ARTICLE 1795

Article 1796 Responsibility of the partnership to a partner Risk of loss ARTICLE 1796 ARTICLE 1797 Distribution of profits Profits and Losses of an Industrial Partner ARTICLE 1798 Reason for the rule Article 1799 Exclusion of a partner from profit/loss sharing Exclusion of industrial partner ARTICLE 1799 Designation by Third Person of shares in profits and losses Why Industrial partner is exempted from losses Problem ARTICLE 1800

Rights of the appointed manager

Reason for the revocation

Scope and limitations of power of a managing partner Stipulation excluding a Partner from Profits and Losses Appointment of Manager Appointment in Articles of Partnership Appointment other than Articles of Partnership ARTICLE 1801 Requisites of the law When there are two or more Managers Article 1802 Consent of managing partners ARTICLE 1802 ARTICLE 1803 When Unanimity is required Manners of managing by partners Third party can assume that partner has authority Case Article 1804 Sub partner in the partnership Associate of Partner Article 1805 Custodianship of the partnership’s books

Time to inspect the books ARTICLE 1805 Partnership Books ARTICLE 1806 Duty of partners to render information Case Who can demand information ARTICLE 1807 Highest degree of good faith Duty to Problems Case ARTICLE 1808 Prohibition to capitalist partner Reason for prohibition Instances when there is no Prohibition Effect of violation Dissolution as a remedy in a partnership ARTICLE 1809 Right to demand a formal SECTION 2

PROPERTY RIGHTS OF A PARTNER Scope of property rights of a partner The property rights of a partner are: ARTICLE 1810 Distinction between partnership property and partnership capital ARTICLE 1811 Incidents of right in specific property Assignment of right Not subject to attachment or execution Right of a partner not subject to legal Rights of a partner in Specific Partnership Property Case Article 1812 Assignment without causing dissolution Article 1813 Effect of Conveyance Rights of the Assignee Rule in mortgages Case ARTICLE 1814 Preference

Homestead laws Preferential rights of Partnership Creditors Receivership Redemption of interest charged

SECTION 3 OBLIGATIONS OF THE PARTNERS WITH REGARD TO THIRD PERSONS

ARTICLE 1815 Firm name defined Significance of a firm name Persons including their names Right to choose firm name Rule on the use of names Case Liability of Strangers who include their names Article 1816 Liability distinguished from Losses Liability of a Partner who has withdrawn Unequal contribution of capital partners

Pro rata liability ARTICLE 1817 Stipulation eliminating liability ARTICLE 1818 As mutual agency Third persons Acts of partners Liability to third persons Instances when a partner can bind or cannot bind the firm When a Partner can bind the Partnership Instances of implied authorization: Instances when act of the partner is not binding to the partnership Why the seven (7) acts of ownership are Unusual Transfer of real property of the partnership ARTICLE 1819 Equitable interest, defined Registration of real property Conveyance executed by partners; title in the name of partnership Title in the name of one or more but not all Title in name of all partners, conveyance in name of all partners ission of partner with effect

ARTICLE 1820 Rule in the ission of a partner Representation made by a partner Restriction on the rule Case ARTICLE 1821 Notice and effect to partnership Knowledge that partners should know ARTICLE 1822 Liability of the partners for the wrongful act Injury to an employee When the firm and the other partners are not liable ARTICLE 1823 Solidary liability for tort or breach of trust Liability of a Partner for misappropriation ARTICLE 1824 Requisites of Article 1822 for liability Solidary liability of the partners with the Partnership ARTICLE 1825 Estoppel; defined Partner by estoppel and liability

ission of a new partner and his liability When estoppel does not apply Burden of Proof Problem Rule for making new partner liable ARTICLE 1826 Entry of a new partner New partnership prior to entry of a new partner Liability of a new partner for previous Obligation Rights and preference to payment Remedy of private creditors ARTICLE 1827 Preference of partnership creditors Sale by a partner SUMMARY Review Questions CHAPTER 3 DISSOLUTION AND WINDING UP Dissolution; Winding Up, and Termination ; defined ARTICLE 1828 Dissolution does not terminate partnership

Case Termination defined Effect of obligations ARTICLE 1829 ARTICLE 1830 Causes of dissolution Delectus personae Instances when business becomes unlawful Lost of specific thing Death of a partner Civil Interdiction Insolvency of any partnership of partnership No violation of agreement Case Who liquidates? Insolvency of any partner Civil Interdiction of any partner Decrease of causes of dissolution Case Judicial dissolution ARTICLE 1831

Who can Sue for Dissolution Insanity of a Partner Prejudicial conduct Case Appointment of Receiver ARTICLE 1832 Effects of dissolution Effect on previous contracts Creditors who have not been prejudiced ARTICLE 1833 Two kinds of Causes of Dissolution Effect of act, insolvency and death Causes of dissolution Right of partner to contribute from co-partners after dissolution ARTICLE 1834 Dissolution terminates authority of partners Persons extending credit prior to dissolution Possibilities when firm is bound or not bound When is the firm not bound? Case ARTICLE 1835

How a partner’s liability is discharged Problem Effect of death on pending action ARTICLE 1836 Winding up partner’s right to sell partnership property Manner of winding up Persons authorized to wind up Rule if Survivor Is not a Manager ARTICLE 1837 Two aspects of causes of dissolution Right of Innocent partners to continue Right to get cash Rights of partners upon dissolution Rights of partners who have not caused dissolution Rights of parties who wrongfully caused the dissolution Rights of partner entitle to rescind agreement Rights of partner to rescind contract of partnership Partner wrongfully excluded ARTICLE 1838 Rescission or Annulment of partnership contract Three rights

ARTICLE 1839 Rules for settling s between parties Settling partnership liabilities shall be done in the following manner: Assets of the Partnership Order of Payment of Firm’s liabilities New Contributions Problem Preference with respect to the assets Partner is Insolvent ARTICLE 1840 Old partners, old creditors in the dissolved partnership Right of Old Creditors to be new creditors ARTICLE 1841 ARTICLE 1842 Rights of the partners Review Questions & Problems SUMMARY Review Questions Definitions CHAPTER 4 LIMITED PARTNERSHIP

ARTICLE 1843 Distinction of general partners and limited partners Persons in the partnership Characteristics of limited partnership Reason for the formation of limited partnerships ARTICLE 1844 Requisites of limited partnership Presumption in favor of general partnership Non-Fulfillment of the Requisites Effect if only aggregate contribution is stated Effect of Omitting the term “limited” in the firm name ARTICLE 1845 Limitations of a limited partner’s contribution ARTICLE 1846 Violation of the provision Non-Inclusion of Name of the Limited Partner ARTICLE 1847 False statement in the certificate Liability for a False Statement ARTICLE 1848 Limited partner’s limitations in business affairs

Effect of taking part in the Control of the Business ARTICLE 1849 Amendment in the certificate When additional partners may be itted Effect of failure to amend ARTICLE 1850 Powers, rights and liabilities of general partners in limited partnership Acts of istration and acts of dominion Conflicts rule governing capacity of the limited partner ARTICLE 1851 Rights of a limited partner ARTICLE 1852 Erroneous belief to be a limited partner When he becomes liable as a general partner ARTICLE 1853 Dual role in the partnership Rights ARTICLE 1854 Loans and business transactions of limited partners Restrictions to limited partners ARTICLE 1855

Preference for benefits Nature of the Preference ARTICLE 1856 Compensation of limited partner ARTICLE 1857 Return of contributions to limited partner Instances when the limited partner may demand return Receipt of cash Requisites for the return of contributions Instances when limited partners may demand partnership dissolution Liability of a limited partner who has withdrawn ARTICLE 1858 Liability of limited partner to partnership Problem involving liability to creditors Unpaid contributions Liability as trustee ARTICLE 1859 Changes in the partnership Rights of assignee Substituted partner Requisites to become a substituted partner

Liability of substituted partner Assignment of a limited partner Problems Substituted limited partner Problems Causes affecting dissolution of a partnership ARTICLE 1860 Some causes of dissolution of a limited partnership Executor of a limited partner ARTICLE 1861 Death of a limited partner ARTICLE 1862 Rights of third party of limited partner Charging the interest of a limited partner ARTICLE 1863 Payment of liabilities of the limited partnership ARTICLE 1864 Cancellation of Certificate ARTICLE 1865 Requisites for amending or canceling the certificate ARTICLE 1866

ARTICLE 1867 Provisions on Limited Partnership SUMMARY Review Questions Definitions PRIVATE CORPORATIONS Section 1. Section 2. Corporations defined Attributes of Private Corporations: Private corporations as artificial being Advantages of a corporation over partnership and other business organizations Corporation construed; Right of Succession Transfer of ownership Liability of stockholders Distinction between Corporation and Partnership Rationale for the formation of Corporation Entity theory Doctrine of piercing the corporate veil The Grandfather rule

Advantages of a business corporation Disadvantages of a business corporation Section 3 Classes of corporations Kinds of Corporations. According to whether their hip is represented by shares of stock or not: According to the number of corporation who compose the same: According to whether they are for purposes of religion or not: Corporations that are created for charitable purposes or not: Corporations that are created whether for government purposes or not: Corporations according to state under the laws of which they have been created: According to whether they are full corporations or not; Corporations that are created whether the of corporations are limited to a few persons: Corporations that are created according to legal existence: According to control According to organization: Compositions of Public corporations : Essentials of a de facto corporation Distinction between Public Corporations and Private Corporations Section 4 Corporations created by special laws or charters Supplementary law

Section 5. Corporators and incorporators, stockholders and Procedures in the creation of a corporation Persons composing a corporation : Other classes of persons composing a corporation Corporation requiring a certain percentage of the capital stock of a Filipino ownership Rights of Stockholders Proprietary rights of stockholders. Shares of stock defined Section 6. Classification of shares Classification of Shares Promotion stock or shares Shares in escrow Convertible share Founders’ shares Redeemable shares Treasury shares Capital stock Distinction between Capital and Capital Stock Issuance of Authorized shares Certificate of Stock

Distinction between certificate of stock and share of stock Par value Book value Market value Private corporations may not issue no-par value shares such as the following: Section 7. Founder ‘s shares Section 8. Redeemable shares When redeemable share issued Redemption regardless of unrestricted retained earnings. Insolvency of corporation Advantages of par value shares Disadvantages of par value shares Advantages of no par value shares Disadvantages of no par value shares Preference in the issuance of preferred shares Doctrine of Equality of shares Section 9. Treasury shares Bonus Stock TITLE II Section 10. Number and qualifications of incorporators Persons composing the corporation

Incorporator Corporator Stockholder Member Incorporation defined Steps in Incorporation Number and qualifications of Incorporators Steps in the creation of a corporation Minimum stockholders or Ownership by an individual Capacity to enter into contract Residents of the Philippines Citizens of the Philippines Corporate form One-Man Corporation Section 11. Corporate term. Life of a corporation Steps for the extension of corporate life Section 12. Capital stock requirement Authorized Capital Stock, defined

Capital Stock requirement Section 13. Paid-up capital and subscription requirements The 25% subscription requirement Subscription defined Section 14. Contents of articles of incorporation Documents required in the Articles of Incorporation Articles of Incorporation defined Domiciliary test Control test Limitations of other Corporations Section 15 Forms of Articles of Incorporation TREASURER’S AFFIDAVIT Significance of the corporation Incorporators or directors and trustees Stock subscribers Restriction for transfer of stock Section 16 Amendment of Articles of Incorporation Amendment for ’ meeting Section 17. Reasons for rejecting the articles of incorporation

Section 18 Corporate name Corporate name Revocation of the certificate of registration Section 19 Commencement of corporate existence Certificate of Incorporation Corporate Structure Kinds of Franchises Section 20. De facto corporation De Jure Corporation Requisites of de jure corporation: Test of de facto existence Requisites of a de facto corporation Instances where f de facto and de jure exist Attack on corporate existence Grounds for the rule against collateral attack Section 21. Corporation by estoppel Estoppel, defined Corporation by Estoppel No de facto existence of Corporation by estoppel Section 22

Non-use of Corporate charter Failure to complete organization Corporate Powers Construed Conditions Precedent Effects of continuous inoperation Section 23 The board of directors or trustees Board of Directors defined Directors not liable for misconduct of co-directors Functions of the of the board of directors The basic management functions of the of the boards of directors Corporate acts of the board of directors Powers to bind the corporation Exceptions to the rule Delegation of Powers of office of directors Number composing the directors or trustees Qualifications of directors Requirements of citizenship for the share in some corporations Section 24 Election of directors or trustees Election of Directors/Trustees Methods of voting

Cumulative voting Straight voting Alternative Ways on how cumulative voting is done Advantage and disadvantage of Cumulative voting Section 25 Corporation officers, quorum Positions concurrently held by same person Powers of corporate officers Secretary Treasurer General Manager Requisites in order to hold a board meeting Quorum defined Breach of Duty Power of stockholders Section 26 Report of election of directors, trustees and officers Requirement of Sec 26 Section 27 Ground for disqualification of director Section 28 Removal of directors or trustees Requisites for removal of directors or trustees Instances of removing the director or trustee

Authority of the board for removal Vacancy left by directors Section 29. Vacancies in the office of director or trustee Instances of Filling of vacancies By stockholders or By the of the board Section 30 Compensation of directors Remuneration of directors Per diems Compensation of officers Corporate officers who are not directors Corporate officer who directors Section 31 Liability of directors, trustees or officers Scope of liability Instances where directors/trustees may be held liable for damages Section 32. Dealing of directors, trustees or officers with the corporation. Fiduciary relationship of directors Roles of Directors Section 33. Contracts between corporations with interlocking directors. Interlocking Directors and the Corporation Section 34. Disloyalty of a director.

Prejudicial Intent of the Director Section 35. Executive Committee. Role of Executive Committee Section 36. Corporate powers and capacity. Concept of Corporate Powers The powers of a corporation may be into two sets: The power to sue and be sued The three classification of corporate powers 1. Express powers 2. Implied powers 3. Incidental powers Incidental powers have five classifications : Limitations on the Power of the Corporation Section 37. Power to extend or shorten corporate term. Power to shorten corporate term Section 38. Ways to increase or decrease authorized capital stock Required minimum subscription and paid-up capital Importance for increasing capital stock Extent and limitations on the power of a corporation Trust Deed or Trust Indenture

Bonds and Debentures as long-term debt instruments Corporate bond indebtedness Section 39. Power to deny pre-emptive right. Pre-emptive rights of stockholders Limitations to the rule Pre-emptive rights are discretionary. Power of the stockholders to deny pre-emptive right Stockholders’ pre-emptive right as to treasury shares. Section 40. Sale or other disposition of assets. Power to dispose of all corporate assets Dissenting stockholder’s appraisal right Section 41. Power to acquire own shares. Section 42. Power of a corporation to invest funds Distinction between shareholders and bondholders Power to invest funds in other corporations Debt Financing of a corporation Third party debt and the leverage Sources of funds for a corporation Equity capital Loans from shareholders

Loans from third persons. Internally generated funds. Concept about dividends Unrestricted retained Kinds of Dividends Cash Dividend Liquidating Dividend Composite Dividend Optional Dividend Property Dividend Stock or Bond Dividend Distinction between Cash Dividend and Stock Dividend Reasons for declaring stock dividends Distribution in liquidation distinguished from Ordinary dividend Surplus of the corporation Section 43. Power to declare dividends. Declaration of dividends The authority of the board of directors in the declaration of dividends Section 44. Power to enter into management contract. Power of a corporation to a management contract Management

Section 45. Ultra vires acts of corporation The Principle of Ultra Vires Illegal act distinguished from Ultra vires act Title V By-Laws Section 46. Adoption of by-laws. By-laws, defined Elements of valid by-laws Section 47. Contents of by-laws. Position of director Term of office Section 48. Amendments to by-laws. List of qualifications of by-laws upheld by the courts: Distinction between articles of incorporation and by-laws Consideration for amended by-laws Title VI MEETINGS Section 49. Kinds of meetings. Meetings of directors, and stockholders or Meetings of directors or trustees may be : Meetings of stockholders or .

Section 50. Regular and special meetings of stockholders or . Section 51. Place and time of meetings of stockholders or . Section 52. Quorum in meetings. Section 53. Regular and special meetings of directors or trustees. Section 54. Who shall preside at meetings. Notice of Meetings Purposes of Meeting Requisites for a valid meeting Required Quorum in meetings of stockholder Persons who call a meeting Increase and decrease of capital stock Place and time of meetings of directors Section 55. Right to vote of pledgors, mortgagors, and s. Section 56. Voting in case of t ownership of stock. Section 57. Voting right for treasury shares. Rule on shareholders’ right to vote Instances where the Code requires a specified number of votes Stockholders’ manner of voting Section 58. Proxies. Proxy, defined. Kinds of Proxies

Distinction between Proxy and Voting trust Voting by mail and Proxy voting Requirements of proxy voting Revocability and Irrevocability Section 59. Voting trusts. Powers or rights of voting trustees Voting trust agreement Title VII STOCKS AND STOCKHOLDERS Section 60. Subscription contract. Subscription, defined Subscription contract Subscribers, defined Subscription distinguished from purchase of shares of stock Section 61. Pre-incorporation, subscription. Pre-incorporation, subscription Section 62. Consideration for stocks. Manner by which shares of stock may be issued Sources of capital of corporation Section 63. Certificate of stock and transfer of shares. Definition and concept of certificate of stock

Transfer of shares of stock Street Certificate and suit of stockholder Section 64. Issuance of stock certificate. Stock option, defined Reason for Stock issuance Actions by stockholders or Actions by a Corporation Liabilities of stockholder Relation of stockholder to corporation Section 65. Liability of directors for watered stocks. Watered stock, defined Prohibition to issue watered stock When watered stock arises Liability for watered stock and implications Section 66. Interest on unpaid subscription. Legal rate construed Liability for interest Section 67. Payment of balance of subscription. Manners of enforcing payment of stock subscription When delinquent stock arises Distinction between call and assessment

Section 68. Delinquency sale. Highest bidder Sale of delinquent stocks The steps in the sale of delinquent stocks are as follows : Section 69. When sale may be questioned. Grounds for the recovery of unlawfully sold stock Section 70. Court action to recover unpaid subscription. Section 71. Effect of delinquency. Procedures in the collection of unpaid subscription Cash dividends for delinquent shares Effect of stock delinquency Section 72. Rights of unpaid shares. Rights of unpaid shares before delinquency Section 73. Lost or destroyed certificates. Exoneration of a corporation TITLE VIII CORPORATE BOOKS AND RECORDS Section 74. Books to be kept; stock transfer agent. Right to inspection of books not absolute Limitations on the right of stockholder or member to inspect the books Right to examine corporate records

Legitimate and illegitimate purposes and Instances Instances of legitimate purpose Instances of illegitimate purpose: Section 75. Right to financial statements. Access to financial records Financial disclosures to shareholders TITLE IX MERGER AND CONSOLIDATION Section 76. Plan of merger or consolidation. Merger and Consolidation, defined Section 77. Effecting corporate or business combinations Section 78. Articles of merger or consolidation. Section 79. Securities and Exchange Commission’s approval and effectivity of merger or consolidation. Section 80. Effects of merger or consolidation. Articles of Merger or Consolidation, defined Definition of Constituent Corporations Fair Value Leverage

Leverage buy-out Going private Types of corporate reorganizations TITLE X APPRAISAL RIGHT Section 81. Instances of appraisal right When appraisal right available Instances when appraisal right available Section 82. How right is exercised. Ways to exercise right Section 83. Effect of demand and termination of right. Effect of right exercised Section 84. When right to payment ceases. Cessation of the right to payment Section 85. Who bears costs of appraisal. Liabilities to be borne Section 86. Notation on certificate (s); right of transferee. Notation on certificate(s) TITLE XI NON – STOCK CORPORATIONS Section 87. Definition

Section 88. Purposes Non- stock Corporation, defined Purpose for the formation of Non-stock corporation Requirements of SEC for Non-stock Corporations ing documents for SEC CHAPTER 1- Section 89. Right to vote. Section 90. Non-transferability of hip. Section 91. Termination of hip. CHAPTER II TRUSTEES AND OFFICERS Section 92. Election and term of trustees, Section 93. Place of meetings. CHAPTER III DISTRIBUTION OF ASSETS IN NON-STOCK CORPORATIONS Section 94. Rules for distribution. Section 95. Plan of distribution of assets. TITLE XII CLOSE CORPORATIONS Section 96. Definition and applicability of Title. Close Corporation, defined

Characteristics of Close Corporations Section 97. Articles of incorporation. Section 98. Validity of restrictions on transfer of shares. Section 99. Section 100. Agreements by stockholders. Section 101. When board meeting is unnecessary or improperly held. Section 102. Pre-emptive right in close corporation. Section 103. Amendment of articles of incorporation. Section 104. Deadlocks. Section 105. Withdrawal of stockholder or dissolution of corporation Right of stockholder to withdraw TITLE XIII CHAPTER I. - EDUCATIONAL CORPORATIONS Section 106. Incorporation. Educational Corporation, defined Governing law applicable Section 107. Pre-requisites to incorporation. Section 108. Board of trustees. Board of trustees CHAPTER II. RELIGIOUS CORPORATIONS Section 109. Classes of religious corporation

Section 110. Corporation sole Section 111. Articles of incorporation Section 112. Submission of the articles of incorporation. Section 113. Acquisition and alienation of property. Section 114. Filling of vacancies. Section 115. Dissolution. Religious Corporation, defined Classes of Religious Corporations Religious corporations may be classified into: Corporation sole Religious societies Eleemosynary Corporation Capacity to acquire lands Filing of Articles of Incorporation Corporation sole acquires and alienates property Section 116. Religious societies. Succession in the office Laws on ownership of lands Life of corporation sole Dissolution of corporation sole TITLE XIV

DISSOLUTION Section 117. Methods of dissolution. Section 118. Voluntary dissolution where no creditors are affected. Dissolution, defined Section 119. Voluntary dissolution where creditors are affected. Section 120. Dissolution by shortening corporate term. Section 121. Involuntary dissolution. Modes of dissolving a corporation A. Voluntary dissolution B. Involuntary dissolution Voluntary Dissolution Section 122. Corporate liquidation. Meaning of ‘Liquidation’ Methods to liquidate liabilities of insolvent businesses Liquidation by simple settlement with creditors Assignment in favor of creditors Liquidation by court receivership. Liquidation by trustees to whom the board of directors had conveyed the assets. Trust Fund Doctrine TITLE XV FOREIGN CORPORATIONS

Section 123. Definition and rights of foreign corporations. Meaning of Foreign Corporation Existence of Corporation within the State Requirements to foreign corporations Foreign Corporation with license Section 124. Application to existing foreign corporations. Section 125. Application for a license. Section 126. Issuance of a license. Reason for requiring license Section 127. Who may be a resident agent. Resident Agent, defined Meaning of ‘Doing’ or ‘ Transacting Business’ Section 128. Resident agent; service of process. Instances not amounting to ‘Doing Business’ How service of summons to private foreign corporations is served Section 129. Law applicable. Applicable laws to foreign corporations Section 130. Amendments to articles of incorporation or by-laws of foreign corporations. Section 131. Amended license. Section 132. Merger or consolidation involving a foreign corporation licenses in the Philippines. Merger or Consolidation of a foreign corporation

Section 133. Doing business without a license. Consequences on foreign corporation without license but engaged in business Instances when foreign corporation without license can sue Status of contracts perfected by unlicensed foreign corporations Void contract Valid contract as to innocent persons. Enforceable contract upon compliance. Section 134. Revocation of license. Effect of revocation of license Section 135. Issuance of certificate of revocation. Section 136. Withdrawal of foreign corporation. TITLE XVI MISCELLANEOUS PROVISIONS Section 137. Outstanding capital stock defined. Outstanding capital stock, defined Section 138. Designation of governing board. Authority given to governing boards Section 139. Incorporation and other fees. Section 140. Stock Ownership in certain corporation. Section 141. Annual report of corporations. Annual Report, defined

Visitorial Power of State Essential powers of the SEC Section 142. Confidential nature of examination results. Procedures in examination Section 143. Rule-making power of the Securities and Exchange Commission. Section 144. Violations of the Code. Penalties for violation of the Code Section 145. Amendment or repeal. Limitations on legislative power to amend Section 146. Repealing clause. Section 147. Separability of provisions. Section 148. Applicability to existing corporations. Application of Code Section 149. Effectivity.

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PREFACE The study of Business Organizations is one of the most vital subject matters of Business Law which involves Partnerships and Private Corporations. In this course, the students of law and commerce are taught the nature of Business Organizations based on the provisions of the Civil Code.

As you (students) study each type of business organization you will be able to appreciate the value of knowing the nature of this subject and may ultimately realize that there really is a need to study and know business organizations in these present undertakings and even in your future endeavor. This book may be intended for those inspired and aspiring commerce and law students whose ideals and beliefs know no barriers to explore the legal aspects in the business world.

PART 1

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PARTNERSHIPS

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Chapter 1 GENERAL PROVISIONS ARTICLE 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.

Two or more persons may also form a partnership for the exercise of a profession.

Partnership; Defined It is an exercise of profession or services and an engagement in business for profit. Profession is a calling for the practice of profession, thus, defined as a group of men pursuing a learned art of as a common calling in the spirit of public service – no less a public service because it may incidentally be a means of livelihood. However, the law allows it to associate profession and business by two or more persons as partners.

Example : Al and Bob agreed to contribute money for the purpose of engaging into the business of buy and sell of books giving each P 10,000. Thereby, dividing the profit by themselves. The contract is one of partnership because there is voluntary agreement between them. It is a personal relation in which the element of delectus personae exists. By Delectus Personae is meant the right to select persons with whom he wants to be associated in partnership. Selection of partners depend on a person’s honesty, integrity, solvency, reputation and above all, trust and confidence which a person reposes in his associate. A partner, therefore, can be a member of the partnership without the consent of all other partners. -Contributions of partners may be in the form of anything that has value in use or value in exchange. It refers to any right, whether of ownership, or use, or of usufruct. -Industry includes all human faculties susceptible of useful application whether intellectual, moral or physical. Essential features of a partnership

Voluntary agreement or Valid Contract - No person may be compelled to be a partner to others without his/her express consent. Therefore, a partnership must come from purely voluntary agreement of parties.

Legal Capacity of Parties to enter into the contract - Partners into a partnership must have legal capacity entering into a contractual relations in order for the contract to be valid. Otherwise, the contract is void. A Partnership cannot allow the following persons to enter into the contract:

1. Unemancipated minors - These are minors who are below the age of majority and forbidden by law to enter into the contract. that a person may be

allowed only upon reaching the age of majority and emancipated. Emancipation under Article 234 takes place by the attainment of majority as majority commences at the age of 18. How does emancipation take place? RA 6809 says “ Emancipation shall terminate parental authority over the person and property of the child who shall then be qualified and responsible for all acts of civil life, with the exception established by existing laws in special cases.

Emancipation takes place :

Reaching the age of majority that is 18 years old By agreement executed through a public instrument by the parent exercising parental authority and the minor that should be recorded in the civil . It shall be irrevocable under the Family Code.

3. Insane or demented persons. –These persons are understood that they cannot give consent to a contract of partnership, however, a question might arise if the contract entered into by persons suffering from temporary insanity or lucid interval are valid? It depends. Referring to Article 1328 says, “ Contracts entered into during a lucid interval are valid. Contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable.”

Therefore, contracts entered into during lucid interval is valid while contract agreed during the state of drunkenness or during a hypnotic spell are voidable.

Deaf- mutes who do not know how to write

Persons who are suffering from civil interdiction

Civil Interdiction is a penalty imposed by law to a person or offender which deprives him during during the time of his sentence if the rights of parental authority, or guardianship, either as to the person or property of any ward, of martial authority, of the right to manage his property and of the right to dispose of such property by any act or any conveyance inter vivos – Article 34 Revised Penal Code.

Mutual contribution of capital to a common fund.

Capital contributions of the partners may either be money, property or industry. Other evidence of indebtedness such as promissory note, real or effective credit is considered property. When industry is contributed it may be either intellectual or manual, but there must be an active exertion or contributing of efforts and not merely working for a salary.

The object or purpose is lawful

What makes the purpose or object of the partnership unlawful? When its object or purpose is contrary to law, morals and good customs, and public order or public policy. Therefore the object or purpose of the partnership must be lawful, otherwise, no partnership can arise if the contract is void ab initio (void from the beginning)

The primary purpose to obtain profit and to divide among themselves. It is a fact that the main purpose of partnership is to obtain profit and divide it among themselves which is far from the partnership involving religious or social organizations. The latter being formed for the purpose of raising fund to aid

religious social activities.

Mutual agency of partners and exposition of Articles

In respect of all partnership acts, a partner, the agent of the firm and his partners, and that relationship is highly fiduciary and character. While a partnership has been formed, all partners have the right to know the contents of the articles of partnership and each one must be given the opportunity equally with the others. Matters affecting the partnership and the partners’ interests must be disclosed as transparency in carrying on the business objectives must be observed. In effect, the interests of all are protected in the same manner the interest of the third party is also protected.

Elements of characteristics of partnership contract

It is consensual as it is perfected by mere consent. Bilateral as it is formed by two or more persons creating reciprocal rights of obligations. Nominate as it has a special designation in the law. Onerous because certain contributions in the form of money, property or industry have to be made. Commutative – the undertaking of each of the partner is considered as the equivalent of that of the others. Preparatory because other contracts vital in the business have to be contracted into after the contract has been perfected. Principal because it can stand alone and defend its validity upon some other

contract.

Article 1768 Juridical personality of partnership Upon the formation of partnership, juridical personality is acquired which is separate and distinct from that of the partners. As a juridical person partnership may acquire and own property of all kinds as well as incur obligations and bring civil or criminal actions in conformity with the laws and regulations of their organizations. This is stated in ARTICLE 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. Example: If Jay and Jeff are partners in JJ & Co., there are three distinct persons in the partnership, namely, Jay, Jeff and JJ & Co. It should be understood that they are distinct as to each other and as they enter into a contract each may sue and be sued, and either of the three may be solvent and insolvent. In addition, the death of the partners is not a ground for the dismissal of the suit against the partnership, JJ & Co. The partners: Jay and Jeff may not sue on a cause of action which belongs to JJ & Co., in his own name and benefit. The partnership’s juridical personality remains even if the former fails to comply with the requirements of SEC ( Securities and Exchange Commission)

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Article 1769 Test to determine existence of a partnership Partnership may not be in existent at all times which means that it must be

gauged if it really exists. that an authentic partnership relation depends upon a contract which is express or implied. As mentioned earlier in general, the existence of a partnership is established when all essential features and elements are present. However, in case of doubt, ARTICLE 1769 shall apply, stating “ In determining whether a partnership exists, these rules shall apply:

Except as provided by article 1825, persons who are not partners as to each other are not partners as to third persons; Co- ownership or co-possession does not establish a partnership, whether such co- owners or co- possessors do or do not share any profits made by the use of the property. The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a t or common right or interest in any property from which the returns are derived. 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:

As a debt by installments or otherwise; As wages of an employee or rent to a landlord; As an annuity to a widow or representative of a deceased partner. As interest on a loan, though the amounts of payment vary with the profits of the business; As the consideration for the sale of a good will of a business or other property by installments or otherwise.

Parties not partners as to each other Partners who are not partners to each other are not partners to third persons or vice-versa, parties who are partners as between themselves are partners as to third parties. Therefore, If Peter and John are not partners neither will they will be partners to Andrew, ( third person). Co-ownership or Co-possession not controlling: Co-ownership is defined as a possession of an undivided thing or right which belongs to different persons.(Art484) Co-ownership does not establish the existence of a partnership. Thus, if Jack and Jill are co-owners and copossessors of a piece of land, they are not necessarily partners, because coownership or co-possession does not of itself establish a partnership. Although the profits from co-ownership of a thing are shared by co-owners, partnership’s profits should be derived from operation of the business to be shared by the partners and not merely from property ownership. Example : Jones and Jorge inherited a parcel of land from their parents which is leased to Jim. Are they partners? NO. They are merely co-owners or co-possessors whether or not they share in the profits made by the lease of the land. Example: Dick and Jane contributed many for the purpose of buying and selling of auto spare parts, thereby, dividing the profit equally which they earned. In this case, the two formed a partnership. Sharing of gross returns This does not indicate the existence of partnership because partners share the net profit or returns after deducting expenses and liabilities from operations. However, the test to determine the existence of partnership may be tested by the recipient of a share of the profits who have the voice and control of the business and a question of whether he owns a share as a partner of the partnership.

Receipt of share in the profits It may appear that an agreement stipulating the sharing of both profits and losses in the partnership strongly establishes the existence of a partnership and firmly disproves its existence if the absence of the said stipulation. But the agreement in profit-sharing does not guarantee its existence as contradicted by other circumstances. As stated in Article 1769 par 4, alleging that the sharing of profits by a person is a prima facie evidence that he is a partner in the business enumerated in cases under sub par a,b,c, & e. It affirms that profits in some other respects or for some other purpose. The presumption that Rani is a partner in the business conducted by Sam can be rebutted by evidence to the contrary. Thus, the presumption that Rani is a partner upon receiving a share from Sam is a disputable presumption, concluding the former is a partner of Sam, otherwise he should not be receiving profits from Sam. However, the above presumptions do not exist in the following cases: Payment of debt by installments Jeanne borrows money from Jane and they agree that Jeanne cannot be presumed a partner of Jane because her share in the profit is just a payment of a debt in installments. Rent to landlord or wages of employee It has been held that compensation to employees in amounts varying with net profits, does not constitute partnership. In this case, Al who is employed by Ella and as compensation he receives a percentage of the profits., Al is not Ella’s partner as the amount which he receives is as a wage of an employee in which case the elements of participation in management and co-ownership of property are absent. Annuity to widow A widow, who has been bequeathed the interest for life by her deceased partner, and as surviving partner receives payment of a share in the profits, is not considered a partner. Thus, partner Adel dies and partner Brad continues the business of the partnership using the partnership assets. Based from the contract, if a partner

dies, the other partner shall continue the business, but he shall pay the widow of the deceased partner 20% of the net profit as her annuity. Adel’s widow cannot be considered a partner of Brad. Interest on a loan A lender of money who lends money to a person who is to engage in a business or new business, and is to receive a share in the profits in lieu of interest the authorities do not hold the investor to be a partner in cases where the element of participation in management is lacking. Consideration for sold goodwill Sale of goodwill payable out of the profits of the business does not make the buyer a partner of the seller. Distinction between Partnership and Co-ownership Partnership Co-ownership Personality Juridical Personality None Creation Agreement of partners Operation of law Disposition of Interest Without the consent Without the consent Of partners of co-owners Purpose For profit Not necessarily for profit Duration No duration not more than 10 years Distinction between Partnership and Conjugal partnership Partnership Conjugal Personality Juridical personality None Creation Agreement of parties celebration of marriage Disposition of interest According to agreement Equal distribution

Purpose For profit To regulate the property relationship of husband and wife.

Disposition of shares Without the consent cannot be disposed even Of partners with consent of the other. Partnership and syndicate are practically the same, but a syndicate is always organized for a temporary existence. Partnership’s unlawful object Whenever a partnership is formed for unlawful purpose, its existence is void, although parties possess absolute freedom to choose the kind of transactions they engage in. But the thing is the object must be lawful for the common benefit of the . This provision is based from the general principles of morality and justice. Thus, a partnership for gambling purposes or to create illegal monopolies or restraint in trade, or for prostitution is unlawful objects. These limitations are expressed in ARTICLE 1770 stating, “ A partnership must have 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. ARTICLE 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 not essential in a partnership No specific form is necessary for the partnership to be valid. However, it is

necessary and a must that whenever immovable property is contributed real rights are contributed, it must be executed through a public instrument. The contract may be made orally or in writing regardless of the value of the contribution unless immovable property which must be in public instrument.

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Capital requirement of a partnership In order for the Partnership to be ed there must be a capital of P 3,000 or more in money or property. Failure to comply with the requirement of the law does not prevent the partnership from acquiring juridical personality as stated in ARTICLE 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 thereof to third persons. Example: Jon and Jing formed a partnership with a capital of P 3000. Under the law, the partnership control should appear in a public instrument and be recorded in the office of the Securities and Exchange Commission. Supposing the contract of the partners appears only a private instrument and is not ed. May partners and the partnership be held liable by third party creditors? YES because failure to comply with the requirements of Article 1772 shall not affect the liability of the partners and the partnership to third persons. Essential requirements When immovable property is contributed by a partner to the partnership the law requires that the contract of partnership must be in a public instrument. There must be an inventory of said property signed by the partners and attached to the public instrument as stated in

ARTICLE 1773 A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said inventory is not made, signed by the parties, and attached to the public instrument. Example: Ben and Boy agreed to form a partnership contributing real properties thereto. It is necessary that they should execute it in a public instrument, and an inventory of the property must be made, signed by the parties and attached to it . Noncompliance will make the contract void. ARTICLE 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. Capacity of the partnership to acquire property A partnership being juridical person can acquire and possess property as it can also convey such property in the partnership name. Limitation A partnership which is 60% owned by aliens, is not qualified under the Philippine Constitution to own immovables such as land be it agricultural, residential or even commercial. Public instrument It is one which is acknowledged before a notary public or any official authorized to ister oath, by the person who executed the same. ARTICLE 1775 Associations and societies, whose articles are kept secret among the , and wherein anyone of the 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. Interest and action by co-owners Where two or more persons having a common interest in a business or property bring an action in court are presumed that they prosecute the same in their

individual capacity as co-owners and not in behalf of a partnership which does not exist juridically. It is essential that the Articles of Partnership be given publicly for the protection not only of the themselves but also third persons. Associations where agreements are kept secret among its and wherein anyone of them may contract in his own name with third persons are deprived of juridical personality for apparently, such association are not partnerships . They shall be governed by co-ownership. Thus, when Jake and Jek formed an association for the purpose of engaging in trading cereal products. They hjave kept the Articles of Partnership secret among themselves. It was provided that either of the two could contract in his own name. Consequently, this association does not have juridical personality and should be regulated by the rules on co-ownership. ARTICLE 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. Kinds of partnership A partnership may be : universal or particular. Universal partnership are of two kinds: Universal partnership of all present property; and Universal partnership of profits. Universal Partnership refers to all the present property or to all profits ( Art 1777) Universal Partnership of all present property ( Defined in Art 1778) Universal Partnership of Profits ( Defined in Art 1780) Particular Partnership ( Defined in Art 1783) As to liability of the partners it may be general or limited A general partnership is one where all the partners are general partners who are liable for partnership debts.

A Limited partnership is one where there is at least one general partner and at least one limited partner with limited partner not being liable for partnership debts except to the extent of his contribution. Partnership may also be classified into a partnership at will and a partnership with a fixed term. Partnership at will is one in which no term of existence has been fixed and which may be terminated at the will of any partner. Partnership with a fixed term is one whose period of existence has been fixed and agreed upon by the partners. Partnership by estoppel It is one which in reality is not a partnership but is considered a partnership in relation to those who cannot deny its existence by reason of agreement, ission of conduct. Example 1 Cleo, Dello and Freo are only co-owners of an apartment. In a given occasion, Freo with the knowledge and without the objection of Cleo and Dello informs Greo that he is a partner of the two and that they own the apartment. Greo believes the representation of Freo. Greo extends credit to Freo, relying on the representation. Can either Cleo and Dello deny liability on the debt because they are not actually partners with Freo? NO because they are partners by estoppel. Example 2 A & Co. was formed to A & B on January 10,2000. Two months later A & Co. borrowed from Z P 24,000 payable October 23, 2000. On June 12, 2000 C was itted as a new partner by contributing P 10,000. On due date assets of A & Co. is only P12,000. Who are liable to Z ? - A and B are liable. Kinds of partners Partners are classified according to their interest in the Partnership or liabilities to third persons:

Capitalist partner or one who contributes money or property to the common fund.

Industrial partner or one who contributes only his industry or personal services. General partner or one whose liability to third persons extends to his separate property; he may either be a capitalist or industrial partner. Limited partner or one whose liability to third persons is limited to his capital contribution. He is also know as special partner. Unlike the general partner, he does not participate in the management of the business. Managing partner or one who manages the affairs or business of the partnership; he may be appointed either in the articles of partnership or after the constitution of the partnership. He is also known as a general or real partner. Liquidating partner or one who takes charge of the winding up of partnership affairs upon dissolution. Partner by estoppel or one who is not really a partner, not being a party to a partnership agreement but is liable as a partner for the protection of innocent third persons. He is one who is represented as being in fact, a partner but who is not so as between the partners themselves. He is also known as partner by implication or nominal partner. Quasi partner is sometimes used and is liable for the debts of the firm to those who in good faith believed him to be a partner; and Continuing partner or one who continues the business of a partnership after it has been dissolved by reason of the ission of a new partner, or the retirement, death, or expulsion of one or more partners. Surviving partner or one who remains after a partnership has been dissolved by the death of any partner. Sub partner or one who, not being a member of the partnership, contracts with a partner with reference to the latter’s share in the partnership. Ostensible partner is one who takes active part and known to the public as a partner in the business whether or not he has an actual interest in the firm. Secret partner is one who takes active part in the business but is not known to be a partner by outside parties nor held out as a partner by the other partners, although he participates in the profits and losses of the business.

Silent partner is one who does not take any active part in the business. He may be known to be a partner and need not be a secret partner. He must give notice to those persons whom he associate with in the firm when withdraws from the partnership. Dormant partner is one who does not take active part in the business and is not known as partner. The term used is synonymous with sleeping partner. He can retire from the firm without giving notice and cannot be held liable for the obligations of the firm subsequent to his withdrawal. Original partner is one who is a member of the partnership from the time of its organization. Incoming partner is a person who about to be taken into a partnership as a member. Retiring partner is one who is withdrawing from the partnership or a withdrawing partner.

ARTICLE 1777 A Universal partnership may refer to all the present property or to all the profits. ARTICLE 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 which they may acquire therewith. ARTICLE 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 therewith. 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. Concept of universal partnership of all present property

It is one in which the partners contribute all the properties which actually belongs to each of them at the time of the constitution of partnership to a common fund with the intention of dividing the same among themselves as well as the profits which they may acquire. Example A & B organized A&Co., a partnership stipulating that they would contribute all properties that they had to the common fund and enjoy the same as well as the fruits . A contributed all his properties consisting of lathe machines and P 10,000. A contributed also all his properties, land and building and P 20,000. Titles of the said properties were transferred to A & Co. This a universal partnership of all present property. Contribution of future properties Future properties acquired by inheritance, legacy, or donation cannot be contributed even if there is stipulation to that effect. Donation cannot include future properties. However, the contract may stipulate that the fruits of properties subsequently acquired by any partner by inheritance, legacy or donation shall be contributed to the common fund for the enjoyment of all the partners. ARTICLE 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 ing to the partnership. Concept of universal partnership rights It is one which consists all the partners may acquire by their industry or work during the existence of the partnership and the usufruct of movable or immovable property which each of the partners may possess at the time of the celebration of the contract. Example

Jess and Jun are drivers and owners of a bus each which is their only property. They form a partnership, agreeing to drive and use the bus for hire, but each should retain ownership of the bus. They secure income from the their buses and agree to deduct expenses and profits equally. The partnership is one that is universal partnership of profits. Should the buses be returned to Jess and June? YES only the use of the buses has been contributed to the common fund and the liquidation of the partnership each gets back what he owns. Prescription of universal partnership of profits In case of doubt as to whether a universal partnership is one of all present property or profits, the law presumes that it is merely a universal partnership profits as it would impose lesser obligations on the partners. This is stated in : ARTICLE 1781 Articles of universal partnership, entered into without specification of its nature, only constitute a universal partnership of profits. Limitation on the formation of universal partnership The law prohibits some persons to give donations and cannot enter into a universal partnership for the reason that each of the partners virtually makes a donation. It will, therefore, be like sanctioning a violation of the law to permit them from forming a universal partnership. Example Gil and Gel are man and wife. During marriage, they enter into a universal partnership. Their contract is void for they cannot give donation to each other. Under the law, every donation between the spouses during the marriage shall be void. These are all embodied in ARTICLE 1782 Persons who are prohibited from giving each other any donation or advantage cannot enter into a universal partnership. Other instances of void donations

Those who are guilty of adultery or concubinage at the time of donation Those made between person found guilty of the same criminal offense Those made to a public officer or his wife, descendants, by reason of his office.

Example Alvin, Bello and Carl formed a limited partnership to engage among other activities, in the marketing, importation and operation of a cameras and film equipments with Bello and Carl as limited partners. Subsequently, Alvin and Bello got married and thereafter, Carl sold his share to Alvin and Bello for a nominal . Was the partnership dissolved after the marriage of Alvin and Bello and the subsequent sale to them by Carl of the latter’s participation? No. The firm was not a universal partnership but a particular one. It follows that the partnership was not one that Alvin and Bello were forbidden to enter under Art 1782. The subsequent marriage of the partners to operate does not dissolve the partnership, for such is not one which causes it dissolution. However, if it is a universal partnership in which the partners entered into, the marriage between Alvin and Bello brings its dissolution in view of the prohibition of Art 1782. ARTICLE 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. Distinction between universal and particular partnerships The distinction between the two consists in the extension of its object, for which in the former the object is vague and indefinite, in the latter it is limited and well- defined. Example Alex and Burt are doctors. They have formed a partnership for the practice of

medicine. There is a particular partnership as it has been organized for the exercise of a profession. Particular Partnership is neither a universal partnership of present property nor a universal partnership of profits. Example of particular partnerships are those formed for the acquisition of an immovable property for the purpose of reselling it at a profit or common enjoyment of its use and the benefits derived therefrom., or those established for the carrying out a specific enterprise such as practice of a profession or vocation and building construction. The word business means business in the commercial sense only, not a t venture which exists for carrying on a single or isolated transaction or limited number of transactions. The rights and liabilities of the t ventures and partners are the same in all other important aspects.

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SUMMARY By the contract of partnership, as defined by Article 1767 ; where two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession.; or it is an association of two or more persons to carry on as coowners a business for profit. Delectus personae is the right of persons to select persons with whom he wants to be associated in partnership. The right of choice of persons whom he wants to deal with in the partnership are those specifically and ideally persons with integrity, honesty, character, trust and confidence, and solvency. Partnership is also an exercise of profession, not a business, nevertheless the law considers it a partnership if practice by a group, t pursuit for mutual help. Partnership must be created or formed with a lawful purpose and that there must be a valid, purely, voluntary agreement of parties and the aim is anything other

than a profit. Articles of partnership must not be secret. All partners are entitled to know the contents of the articles of partnership and each one must be given that opportunity equally with the others. When a partnership is formed, it creates juridical personality that is separate and distinct from the partners. Partnership having juridical personality is a separate personality. It may acquire and possess property as well as incur obligations and can sue and be sued. To determine the existence of a partnership, it can be tested upon a contract, express or implied and the intention of the parties to become parties, Article 1769 provides the rules to determine the existence of a partnership. A partnership to be recorded in the office of Securities and Exchange Commission, the capital of P3,000 or more in money or property which shall appear in a public instrument. Consequently, a contract is void whenever immovable property contributed and if such inventory is not made, signed by the parties and attached to the public instrument Co-ownership exists instead of partnership in associations and societies whenever a partner kept secret among the the articles of partnership. It shall have no juridical personality. A universal partnership refers to all the present property or to all the profits. As regards the liability, a partnership may be general or limited. A universal partnership of all present property is one in which the partners contribute all the properties which belong to each of them. However, future properties cannot be contributed. Acceptable contributions to the partnership requires determinate things. Property acquired by inheritance, legacy and donation cannot be included by stipulation except the fruits thereof. Universal partnership of profits is one which 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 which each of the partners may possess at the time of the celebration of the contract. The partners in this type of partnership retain their ownership over their present and future property. What to the partnership are the profits or income and the usufruct or use of the same. Upon dissolution of the partnership, such property is returned to the

partners who own it. A particular partnership is neither a universal partnership of present property nor a universal partnership of profits. It is a partnership whose object is for the exercise of a profession, to carry on of specific enterprise or business. Husband and wife may form and enter into a particular partnership. But persons prohibited by law to give donations cannot enter into a universal partnership because each of the partners virtually makes a donation, such as those: made between persons who were guilty of adultery or concubinage at the time of the donation; those made between persons found guilty of the same criminal offense; and those made to a public officer and his wife, descendants and ascendants by reason of his wife.

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Review Questions I. Definitions Define and explain the following:

Partnership Delectus personae Universal partnership Universal partnership of all present property Universal partnership of profits Particular partnership

Discussions

What are the essential features of partnership contract ? Explain each. Who are those persons prohibited by law to give donations ? Why? Distinguish Partnership from Co-ownership; Partnership from Conjugal partnership. Who are those persons who cannot give consent to a contract of partnership? Is the contract entered by a person during lucid interval valid? Why?

What are the ways by which a contract of partnership even if formed and ed in the office of the Securities and Exchange Commission void and voidable? Explain.

III

X, R, and T formed a partnership. X, and P contributed money, however, T contributed lot with structure. The partnership was ed with SEC. Does the partnership acquire juridical personality? How about when the partnership was not ed with SEC but the property contributed was in public instrument? Does it have juridical personality?

A, B, and C formed a partnership. It was ed with SEC but C, the managing partner, kept the articles from A, and B who have not even seen the details of the articles. However, A and B as agents of the partnership transact business with third parties. Is the partnership bound for any liability? Does the partnership exist with juridical personality? What governs the associations of the

partners?

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3. A,B, & C own in common apartment houses which they lease to third persons for agreed monthly rentals. From the monthly proceeds of the rental. A,B & C divide the same equally.. Under the circumstances, would you consider A, B,. & C as partners? Why?

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CHAPTER 2

OBLIGATIONS OF THE PARTNERS

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ARTICLE 1784 A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated.

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Commencement of a partnership

A Partnership is a consensual contract, thus it begins from the time the partners agree to the contract unless otherwise stipulated. Thus, If A & B will enter into a contract of partnership this morning. The partnership begins this morning unless A and B expressly stipulate that it shall commence tomorrow. Obligations of the partners and the partnership to third persons produce different personality distinctions which are separate among themselves, namely:

Distinction among the partners themselves; distinction of the partners with the partnership; and distinctions of the partners with third persons with whom it contracts; In other words they produce different relationships in the contract of partnership.

Example If K & L formed a partnership called KL &Co. and the latter transacts business with N, a third person, the relation produced as follows: relations between K & L on one hand, and KL & Co., the third person and the relationship between K and L on one hand, and KL & Co., on the other hand Agreement of partnership on the commencement Partners may agree when to begin the partnership. Partners who have entered into the partnership to become partners do not become partners until the agreed time has arrived and the contract of partnership is perfected. Commencement of a partnership a. From the moment of the execution of the contract, exception, when there is a contrary stipulation. Creation of future partnership and contributions This presupposes that there can be a future partnership which at the moment has

no juridical existence yet. The agreement for a future partnership does not of itself result in a partnership. The intent must later on be actualized by the formation of the intended partnership. If contributions have not yet been made, the firm already exists, for partnership is a consensual contract ( all the requisites formalities for such consent must be present)

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ARTICLE 1785 When a partnership for a fixed term or particular undertaking is continued after the termination of such term or particular undertaking without any express agreement, the rights and duties of the partners remain the same as they were at such termination, so far as is consistent with a partnership at will. A continuation of the business by the partners or such of them as habitually acted therein during the term, without any settlement or liquidation of the partnership affairs is prima facie evidence of a continuation of the partnership. Resumption of partnership beyond fixed term A partnership organized for a fixed term or for a particular undertaking is dissolved at the expiration of the term or accomplishment of the particular undertaking unless the life of the partnership is extended expressly by agreement of the partners or impliedly by the mere continuation of the business by the partner or partners who habitually manage the partnership. Partnership at will If no time is indicated or specified for the continuance of the partnership and it is not formed for a particular transaction, it will be interpreted to become which is to last during the mutual consent of the partners. A partnership at will which may be dissolved by mutual agreement of the partners or by the act of any partner alone in accordance with his own will or pleasure.

There are two kinds of a partnership “ at will” 1. 1st kind - when there is no term, express or implied. 2. 2nd kind - when it is continued by the habitual managers – although the period has ended, or the purpose has been accomplished. ( This is a prima facie evidence of the firm’s continuation) Example O & P formed a partnership for a period of four years. The term has recently ended. But O & P are still continuing the business although without any express agreement to that effect. In this case, A & B continued to be partners, having the same rights and duties as before the expiration of the period. But the partnership is now a partnership at will which may continue or cease at the will of the partners or of either of them. Obligations as to contribution of property The obligations of the partners with respect to contribution of property are as follows:

The partners are obliged to deliver properties he agreed to contribute at the stipulated date or time to the partnership. That in case the partnership is deprived of the ownership of any specific property he contributed, he shall answer for eviction; Partners shall be liable for the delay in the delivery of the properties he has agreed to contribute in the partnership Partners shall take care with utmost diligence of a good father of the family the properties pending delivery to the partnership; Partners shall be liable for damages to the partnership should it cause the latter delay due to retention of properties .

Example Pete, Quit, and Rit formed a partnership. Pete promised to contribute P 10,000 which he failed to pay on the date agreed upon; Quit contributed a parcel of land which was later on recorded by Set by virtue of a judgment of the court that said parcel of land belonged to Set; Rit contributed P 10,000 to the partnership. In this case, What are the remedies of the partnership? The partnership may compel his contribution of P 10,000 plus interest. The partnership may hold Quit liable for damages under warranty against eviction from the land he contributed. Effect of failure to contribute The mutual contribution to a common fund is of the essence of the contract of partnership, when the partnership is in vain with the contributions. It is but logical that the failure to contribute is to make the partner automatically a debtor of the partnership even in the absence of any demand. An action for specific performance (to collect what due) with damages from the defaulted partner who is made a debtor for what he has promised to contribute to the partnership is the remedy of the partners or the partnership but not rescission or cancellation of the contract of partnership. The money and property contributed becomes the property of the partnership. It necessarily follows that the same cannot be withdrawn or disposed of by the contributing partner without the consent or approval of the partnership or of the other partners. Eviction, construed Eviction shall take place whenever by a final judgment based on right prior to the sale or an act imputable to the vendor, the vendee is deprived of the whole or of a part of the thing purchased. The vendor shall answer for the eviction even though nothing has been said in the contract in the subject. The contracting parties, however, may increase, diminish, or suppress the legal obligation of the vendor. ARTICLE 1786. Every partner is a debtor of the partnership for whatever he may have promised to contribute thereto.

He shall also be found 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 be liable for the fruits thereof from the time they should have been delivered, without the need of any demand. Obligations of the partners among themselves & to the partnership The following are the obligations of the partners among themselves and to the partnership with respect to contribution of property:

At the commencement of the partnership, they are obliged to contribute money, property, or industry which he may have promised to contribute; In case the partnership is deprived of the determinate property contributed the partners shall answer for eviction; and To answer for the delayed contribution to the partnership of the fruits of the property that should have been contributed up to the time of actual delivery. To take care of the property for pending delivery to the partnership with diligence of a good father of a family. To indemnify the partnership for any damage caused to it by the retention of the same or by the delay in its contribution.

Failure to fulfill promised contribution Without contributions to the partnership the formation of the business is futile and will not operate to carry on the business objectives. The mutual contribution to a common fund is of the essence of the contract of partnership. Failure of the partners to contribute to the partnership even in the absence of any demand makes the partner liable and debtor of the partnership. The remedy of the partners is an action for specific performance with damages from the defaulting partner who is made a debtor for what he has promised to

contribute to the partnership. All the property or money contributed by a partner to the partnership becomes its property, and it cannot be withdrawn by the contributing partner without the consent or approval of the partnership or of the other partners. Eviction and liability of a partner Eviction takes place whenever by a final judgment based on a right prior to the sale or an act imputable to the vendor, the vendee is deprived of the whole or a part of the thing purchased. The partner is liable in the same cases and in the same manner as the vendor is liable with respect to the vendee. This is governed by the law on sales. This obligation of warranty in case of eviction is congruence of the feature of the contract of partnership which is an onerous contract. Three duties of every partner a. duty to contribute what had been promised. - contribution must be made ordinarily at the time the partnership is entered into, unless a different period is stipulated. No demand is needed to put the partner in default because in a partnership the obligation to contribute is one where time is of the essence ( for without the contribution, the partnership is useless.) the partner must exercise due diligence in preserving the property to be contributed before he actually contributes the same, otherwise he can be held liable for losses and deterioration. b. duty to deliver the fruits of what should have been delivered; and c. duty to warrant. Case Moran Jr. v. Court of Appeals L- 59956, Oct. 31, 1984 J. Gutierrez:

A partner who promises to contribute to the partnership becomes a promissory debtor of the latter. If the partnership venture is a failure, a partner is not entitled to his promised commission; if said promise does not state the basis of the commission,

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Duty to warrant a. The warranty in case of eviction refers to “specific and determinate things” already contributed. b. There is “eviction” whenever by a final judgment based on a right prior to the sale or an act imputable to the partner, the partnership is deprived of the whole or a part of the thing purchased. The parties may, however, suppress, increase, or diminish this legal obligation. The partner who made the contribution should be summoned in the suit for eviction, at the instance of the partnership. Problem If a partner fails to contribute within the stipulated time what was promised, may the partnership contract be rescinded? - As a general rule, No. Because rescission is not the proper remedy; the remedy should be to collect what is owing, as well as damages. The general rule in obligations cannot apply in the case of partnership. However, if the defaulting partner is already dead, rescission may prosper.

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Article 1787

A partner may contribute goods but it may be appraised in accordance to the of the contract of partnership and in the absence of an agreement to this effect, the appraisal shall be made by experts chosen by the partners who shall base their appraisal on current market value of the property or current prices of the goods. This refers to ARTICLE 1787 When the capital or a 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 of the partnership. Contribution of goods In order to determine the value of goods contributed by partners in the partnership, it shall be appraised by expert appraisers and in the absence of stipulation, the share of each partner in the profits and losses is in proportion to his contributions. The manner of appraising the goods shall be done in accordance to what is stipulated in the contract of partnership; in the absence of any stipulation, by experts selected by the partners based from the current prices. The partnership bears the risk or gets the benefit of subsequent changes in their value. In the case of immovable property, the appraisal is made in the inventory of said property, otherwise, it may be made as provided in Article 1773. Contribution constitutes goods Appraisal of value is needed to determine how much has been contributed. Appraisal is made thru: a. prescription by contract; b. in default of the first, by experts chosen by the parties, and at current prices. Risk of loss

After goods have been contributed, the partnership bears the risks of subsequent changes in their value. ARTICLE 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 his own use. The above article is construed by enumerating the obligations of the partners with respect to the partnership capital:

To contribute the amount or capital on due date as he has promised. To reimburse any amount he may have taken from the partnership coffers and converted to his own use. To pay the agreed an legal interest, if he fails to pay his contribution on time or in case he takes any amount from the common fund and converts it to his own use. To pay the partnership for the damages caused to it by the delay in the contribution as the conversion of any sum for his personal benefit.

Example Xeren, Yetex, and Zener are partners . In their contract they agreed to deliver their contributions last October 10,2000. However, Zener failed to deliver his contribution in the sum of P 10,000. Xeren, who was designated managing partner took P 3,000 on January 6, 2004 from the partnership coffers for his personal use. Under the circumstance, Zener is a debtor of the partnership for the delayed contribution of P 10,000 plus interest and damages from October 10,2000, the date when he should have paid the amount. On the other hand, Xeren shall be liable for P 3,000 the amount he took from the partnership safe,

plus interest and damages from January 6, 2004, the date he converted said amount for his own use.. Criminal liability of a partner The offending partner shall be liable for the crime of estafa for misappropriating the money while there is fraudulent appropriation of the money delivered to a partner with specific instructions for the use of partnership. Under the Revised Penal Code the crime committed is estafa. Rule of failure to contribute a, when money promised is not given on time; b. when partnership money is converted to the personal use of the partner. No demand needed in default a. in case of contribution, because is of the essence, a partnership is formed precisely to make use of the contribution, and this use should start from its formation, unless a different period has been set, otherwise, the firm is necessarily deprived of the benefits. Article 1789 Industrial partner An industrial partner is one who contributes his industry or services in the partnership. As partner he cannot engage in business at the expense of the business for himself, unless he is allowed expressly by the partnership. Consequently, capitalist partners may either exclude him from the firm or avail themselves of the benefit which he may have obtained fro violating the law, with a right to damages in either case, as cited in ARTICLE 1789 An industrial partner cannot engage in 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.

In addition, an industrial partner becomes a debtor of the partnership for his work or services from the moment the partnership commences. In effect, the partnership acquires an exclusive right to avail of itself of his industry. Remedies available from industrial partner It is mentioned that if the industrial partner engages in business for himself, without the express permission of the partnership, the partners have the right to exclude him from the partnership. In either case, the capitalist partners have the right for damages. The permission given to industrial partner may be express to exempt him from liability. In the same manner, that the industrial partner is also entitled to the remedy granted since they are equally prejudiced by the act of their co-partner engaging in business for himself. Example Fern and Germs enter into a contract of partnership. They do not agree as to the amount of contribution to be given by each of them. But they stipulate that the common fund is P 5,000. It is presumed that each one of them shall contribute equally. This must be so for the reason that partners are deemed to have equal rights and obligations. Classification of Partners 1. From the viewpoint of Contribution: a. Capitalist b. Industrial 2. From the viewpoint of liability a. General b. Limited 3. From the viewpoint of management

a. Managing b. Silent c. Liquidating 4. Miscellaneous a. ostensible b. Secret c. Dormant d. Nominal Definitions and Characteristics a. Capitalist partner - one who furnishes capital. He is not exempted from losses; he can engage in other business provided there is no competition between the partner and his business. b. Industrial partner - one who furnishes industry or labor. He is exempted from losses as between the partner, he cannot engage in any other business without the express consent of the other partners, otherwise: 1. he can be excluded from the firm ( plus damages) 2. or the benefits he obtains from the other businesses can be availed of by the other partners ( plus damages) c. Capitalist- industrial partner - one who contributes both capital and industry. d. General partner - one who is liable beyond the extent of his contribution. e. Limited partner - one who is liable only to the extent of his contribution. f. Managing partner - one who manages actively the firm’s affairs. g. Silent partner - one who does not participate in the management ( though he shares in the profits or losses.)

h. Liquidating partner - one who liquidates or winds up the affairs of the firm after it has been dissolved. j. Ostensible partner - one whose connection with the firm is public and open ( that is, not hidden) Usually his name is included in the firm name. k. Secret partner - one whose connection with the firm is concealed or kept a secret. l. Dormant partner - one who is both a secret (hidden) and silent ( not managing) partner. m. Nominal partner - one who is not really a partner but who may become liable as such insofar as third persons are concerned. ( Ex, a partner by estoppel) Distinction between a Capitalist and an Industrial Partner a. As to contribution 1. the capitalist partner contributes money or property 2. the industrial partner contributes his industry ( mental or physical) b. As to prohibition to engage in other business: 1. the capitalist partner cannot generally engage in the same or similar enterprise as that of his firm. 2. the industrial partner cannot engage in any business for himself. c. As to profits 1. the capitalist partner shares in the profits according to the agreement thereon; if none, pro-rata to his contribution. 2. the industrial partner receives a just and equitable share. d. As to losses 1. capitalist

a. first, the stipulation as to losses b. if none, the agreement as to profits c. if none, pro rata to contribution 2. the industrial partner is exempted as to losses ( as between the partners) But is liable to strangers, without prejudice to reimbursement from the capitalist partners.

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Article 1790 Amount of contribution to partnership capital In the absence of the partners’ agreement stipulating their contribution of unequal shares to the common fund the presumption is that their contribution shall be in equal shares. This is just and reasonable under the law that partners are deemed to have equal rights and obligations, consequently, the said law does not apply to an industrial partner, unless he has contributed capital pursuant to an agreement to that effect. These facts are cited in ARTICLE 1790 Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the capital of the partnership. Obligation to contribute a capitalist partner As a general rule, a capitalist partner is only obliged to contribute to the partnership what he has agreed to contribute and is not bound to contribute more that has been stipulated in the contract of partnership. However, in case of an imminent loss of the business and there is not agreement to the contrary, he is under obligation to contribute additional share to save the venture. Subsequently, he shall be obliged to sell his interest to the other partners if he refuses to comply, referring what is stated in

Amount of Contribution a. it is permissible to contribute unequal shares, if there is a stipulation to this effect. b. in the absence of proof, the shares are presumed equal. ARTICLE 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.

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Example Gem, Hermie, Ingrid and Jenny are partners in a partnership of which Gem, Hermie and Ingrid are the capitalis partners while Jenny is industrial partner. Due to business reverses, Gem and Hermie have decided to contribute additional shares to the capital to save the business from decline. Ingrid, however, refuses to give additional contributions. If the partnership agreement does not provide that no partner can be compelled by Gem and Hermie to sell his interest to them because Ingrid’s refusal reflects his lack of interest in the business. Jenny cannot be compelled to sell his interest for the reason that being an industrial partner he has given all his industry to the firm. It would be unjust for an industrial partner to remain and reap the benefit of the efforts of the others while he himself refuses to help. The law provides a remedy which incidentally, is just to both parties since the partner who refuses to contribute is paid. The value of his interest while the others are relieved from the burden of continuing their association with him in the business. When a Capitalist Partner is Obliged to Sell a. if there is imminent loss of the business of the partnership. b. and he refuses ( deliberately and not because of poverty, otherwise this would

be unjst) to contribute an additional share to the capital. c. and provided further that there is no agreement to the contrary Rule for the Industrial Partners The industrial partner is exempted. He is already giving his entire industry. ARTICLE 1792 If a partner authorized to manage collects a demandable sum, which was owed to him in his own name, from a person who owed the partnership another sum also demandable, the sum thus collected shall be applied to the two credits in proportion to their amounts, even though he may have given a receipt for his own credit only; but should he have given it for the 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 article 1252, but only if the personal credit of the partner should be more onerous to him. Example Xyle and Byle are partners with Byle as the managing partner. Kyle owes the partnership and Byle the amount of P 8,000 each; both debts are due and demandable. Kyle pays the sum of P 8,000 and Byle issues a receipt. “Received from Kyle 8,000 in payment of his debt to me (Sgd) Byle.” Even if Byle issued a receipt fro his credit only the payment made by Kyle will be divided between Byle and the partnership proportionately,.P 4,000 goes to Byle and the other P 4,000 goes to the partnership. If Byle, on the other hand, gives a receipt for the of the partnership credit, the whole amount of P8,000 shall be applied to the partnership credit. The reason for Art 1792 is that good faith cannot permit a managing partner to subordinate the interest of the partnership to that of his own. When a Managing Partner collects a Credit To apply the following requisites must concur:

a. the existence of at least 2 debts ( one where the firm is the creditor; the other, where the partner is the creditor). b. both sums are demandable. c. the collecting partner is a managing partner. This article does not apply if the partner collecting is not a managing partner,. There is no basis for the suspicion that the partner is in bad faith.

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ARTICLE 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. Requisites of the law:

A whole or in part of his share in the partnership credit must have been received by a partner; There exists an uncollectible amount due the partners; When there is imminent insolvency of the debtor.

Example 1 Al owes partnership A Co., P 5,000. Bill, a partner received a share of P 2,000 ahead of Cyril and Daryl, the two other partners in the partnership. When Cyril and Daryl were collecting from Al, the latter was already insolvent. In this case, even if Bill had given a receipt for his share only, he can be required to share the

P 2,000 with Cyril and Daryl. Example 2 Alex and Bert are partners in a duly formed partnership., Celso owes the partnership the sum of P 3,000. Alex and Bert agree to divide the credit with each effort to collect his own share. Alex collects the sum of P 1,000 from Celso, giving a receipt for his share only. Later, Bert demands payment from Celso , but the latter turns out to be insolvent. In this case, Alex will be required to bring to the partnership capital the P1,000 he has received, the reason being that in case the partnership debtor ( Celso ) becomes insolvent his debt becomes uncollectible (bad debt) and it will be unfair for Alex not to share in the loss with his co-partner Bert. Art 1792 distinguished or compared with Art 1793 – where a partner receives his share of a partnership credit Article 1792 a. there are two debts b. it applies only to managing partner Article 1793 a. one debt ony ( firm credit) b. applies to any partner

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Article 1794 Damages to partnership Under this article, any person guilty of negligence shall be liable for damages, however, the offense must be determined in accordance with the nature of the

obligation and circumstances of the person, time and the place. The rule is affirmed in ARTICLE 1794 Every partner is responsible to the partnership for damages suffered by it through his fault, and he cannot compensate them with the profits and benefits which he may have earned for the partnership by his industry. However, the courts may equitably lessen this responsibility if through the partner’s extraordinary efforts in other activities of the partnership, unusual profits have been realized. Example Alipio, Bartolo and Carlo are partners. Because of the fault of Alipio, the partnership sustained damages in the amount of P 6,000. Under the law, Alipio shall be held liable for such damages. However, if Alipio, through extraordinary efforts like overtime, excellent salesmanship and public relations was able to bring large amount of income to the firm, the court may mitigate or lessen Alipio’s liability for damages. Risk of loss of specific and determinate things The risk of specific and determinate things which are not fungible (like a car ) only the use of which is contributed shall be borne by the partner as the ownership is not conferred to the partnership. This follows the general norm that the thing perishes with the owner. Perishable things such as eggs, cereal products, oil, etc., even if contributed only for the use of the partnership, the risk of loss shall be for the of the partnership. The risk of loss shall be for the of the partnership for the latter’s cannot make use of them without being consumed. If the things contributed are intended to be sold, the partnership bears the risk of loss, for apparently the partnership is the intended owner, otherwise, the firm cannot make the sale. An implied sale produces an effect when the partnership bears the risk of loss of things brought and appraised in the investing. Thus, making the partnership the owner of the things. These facts cited above can be referred to the provisions of law under

Effect of death of the negligent partner If a negligent partner is already dead, suit for recovery may be had against the estate.

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ARTICLE 1795 he risk of specific and determinate things, which are not fungible, contributed to the partnership so that only their use and fruits may be for the common benefit, shall be borne by the partner who owns them. If the things contributed are fungible, or cannot be kept without deteriorating, of 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. Article 1796 Responsibility of the partnership to a partner If a partner has advanced funds for the partnership, he can recover the amount advanced with interest. Every partner is an agent of the partnership for the purpose of its business and under the rules of agency, an agent who advances funds for his principal may recover the same with interest. Example Cohen and Dax are partners in a piggery business. In an occasion, when Cohen was on vacation, Dax advanced the sum of P1,000 for the purchase of rice bran and feeds. May Dax demand reimbursement for the partnership of the sum advanced by him? YES, he may demand payment of the amount advanced with interest from the time when the expenses were made. The significance of the example is stated in Risk of loss

a. specific and determinate things ( not fungible) - like a car, (whose usufruct is enjoyed by a firm) – partner who owns it hears loss for ownership was never transferred to the firm. b. Fungible or Deteriorable - firm bears loss for evidently ownership was being transferred, otherwise use is impossible. c. Things contributed to be sold - firm bears loss for evidently firm was intended to be the owner, otherwise, a sale could not be made. d. Contributed under Appraisal - firm bears loss because this has the effect of an implied sale.

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ARTICLE 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 risks in consequence of its management. The articles of Partnership composed of Kelly, Lance, Martin, and Nick provides that any purchase in excess of P 5,000 must be approved first by the partners. Nick made a purchase of goods worth P 15,000 out of his personal funds without the knowledge and approval of Kelly, Lance and Martin. The partnership incurred a loss. In this case, Nick is not entitled to be reimbursed for the purchase. The provision of the law states that in the absence of an agreement to the contrary no partnership is entitled to compensation for his services to the partnership without the consent of all the partners, unless it can be implied from the circumstances that the parties intended a partner to receive additional compensation where the partner’s work was beyond normal partnership function ARTICLE 1797 The losses and profits 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. Example Abel and Bobby are capitalist partners, contributing P 6,000 each while Carlos is the industrial partner. The partnership makes profit of P 10,000. How much should be the share of Carlos? His share must be that which is just and equitable under the circumstances to be determined by the partners. If the partners decide that P 2,000 is just and equitable after consensus, then such amounts must be given to Carlos. Assuming that the partnership sustain a loss of P 10,000, Carlos is not liable for such loss but it shall be borne by Abel and Bobby as capitalist partners. Distribution of profits

The partners may share the profits according to their stipulated agreement In case there is no agreement, the profits may be distributed in proportion to their capital contributions. Before the capitalist partners divide the profits for themselves, the industrial partner shall receive first his share that may be just and equitable under circumstances. However, the share of the industrial partner is not fixed as in the case of the capitalist partners as it is difficult to determine the value of his services.

Example

Arnel, Mike and Dennis formed a partnership. Each contributed P 20,000. It is stipulated in the agreement that if the partnership realizes profits it should be distributed as follows: Arnel 50% Mike 25% Dennis 25% In the event the partnership realizes profits of P 100,000 at the end of the calendar year, the said amount shall be multiplied to the rate of each partner in order to obtain their shares.. However, in the absence of any agreement with respect to the sharing of profits it may be understood that profits may be distributed equally. But in the absence of stipulation, the share of each partner shall be in proportion to his contribution as follows: Capital Fraction Profit Profit Share Arnel P 50,000 5/11 X P100,000 = P 45,454.56 Mike P 30,000 3/11 X 100,000 = 27,272.72 Dennis P 30,000 3/11 X 100,000 = 27,272.72 Total P 110,000 P 100,000.00 Losses shall be distributed based from their agreement. But if there such agreement as regard the distribution of losses, it shall be in accordance with profit-sharing ratio, but the industrial partner is not liable for losses. However, in the absence of stipulation to the profit-sharing, losses shall be distributed proportionately to their capital contributions. Profits and Losses of an Industrial Partner A just and equitable share ( under the old law, a share equivalent to that of that of the capitalist partner with the least capital.)

While he may be held liable by third persons, still he can recover whatever he is made to give them, from the other partners, for he is exempted from losses, with or without stipulation to this effect. This article applies only to the partners, not when liability in favor of strangers are concerned, particularly with reference to the industrial partner

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ARTICLE 1798 If the partners have agreed to intrust to a third person the designation of the share of each one in the profits and losses, such designation may be impugned only when it is manifestly inequitable. In no case may a partner who has begun to execute the decision of the third person, or who has not impugned the same within a period of three months from the time he had knowledge thereof, complain of such decision. The designation of losses and profits cannot be intrusted to one of the partners. Reason for the rule The designation or entrusting 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 but it may be entrusted to a third party by common consent of the partners. The entrusting to a third person may be impugned only when it is manifestly inequitable, and the partners concerned shall impugn the same within three months from the time he had knowledge of it can no longer complain. The reason behind a short period of time which is three months within which to impugn the designation is to forestall any stoppage in the operations of the partnership.

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Article 1799 Exclusion of a partner from profit/loss sharing The law does not allow a provision 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. Exclusion of industrial partner The law provides that 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. Besides, he cannot withdraw the work already done by him for the partnership. A simulated from or attempt to exclude a partner from any share in the profits and losses shall render the stipulation void. These facts are cited in : ARTICLE 1799 A stipulation which excludes one or more partners from any share in the profits or losses is void. Designation by Third Person of shares in profits and losses a. the article speaks of a third person, not a partner. This is to avoid partiality. b. when designation by 3rd party may be impugned – when it is manifestly inequitable. c. when designation by third party cannot be impugned even if manifestly inequitable: a. if the aggrieved partner has already began to execute the decision; b. or if he has not impugned the same within a period of three months from the time he had knowledge thereof.( not from the time of making) Why Industrial partner is exempted from losses The industrial partner cannot withdraw any labor or industry he had already exerted, while capitalist partners can withdraw their capital. In a certain sense,

he already has shared in the losses in that, if the partnership shows no profit, this means that he has labored in vain. Problem A, B, and C were partners, the first one being an industrial partner. During the first year of operation, the firm made a profit of P30,000. During the second year, a loss of P15,000 was sustained. The net profit for the two years of operation was only P15,000. In the articles of partnership, it was stipulated that A, the industrial partner would get 1/3 of the profits, but would not participate in the losses. Is the stipulation valid? Why? How much will A get, 1/3 of P30,000 or 1/3 of P15,000? Why? -The stipulation is valid, for even the law itself exempts the industrial partner from losses. His share in the profits is presumably fair. -A will get only 1/3 of P15,000, the net profit and not 1/3 of P30,000. While it is true that he does not share in the losses, this only means that he will not share in the net losses. It is understood that he share in the losses insofar as these can be accommodated in the profits. It is but fair to compute all the various transactions in determining the net profits or losses.

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ARTICLE 1800 The partner who has been appointed manager in the articles of partnership may execute all acts of istration despite the opposition of his partners, unless he should act in bad faith; and his power is irrevocable without just or lawful cause. The vote of the partners representing the controlling interest shall be necessary for such revocation of power. A power granted after the partnership has been constituted may be revoked at any time.

Rights of the appointed manager

This provision speaks of the rights and obligations of the appointed manager in the partnership. There are two distinct types of appointments:

Appointment as manager in the Articles of Partnership wherein the appointed manager may execute all acts of istration ( not those of strict ownership as mentioned in Art 1818 par 3) notwithstanding the opposition of the other partners unless he should act in bad faith. He can be terminated from his power upon just and lawful cause revocably and upon the vote of the partners representing the controlling interest. His appointment should not be revoked without the consent of all the partners including the partner thus appointed. The management granted by the partners after the partnership has been constituted independently of the articles of partnership may be revoked at any time for any cause whatsoever.

Reason for the revocation It is also by reason that the revocation is not founded on a change of will of the partners, the appointment not being a condition of the contract. It is merely a simple contract of agency, which may be revoked at any time. The vote for revocation must also represent the controlling interest. This article refers to a partner, not a third party or stranger, who has been appointed as manager. As a rule, a partner is not entitled to compensation to his services other than his share of the profits. Scope and limitations of power of a managing partner A partner appointed as manager has all the necessary and incidental powers to carry out the object of the partnership in the transaction of its business.

Exception, when the powers of the manager are specifically restricted. Hence, unless expressly withheld.

Minor power to issue receipt is inclusive in the general powers of the manager as this is in keeping with present day business dealings. The manager of a partnership in the buy and sell partnership has the authority without the approval of the other partners to purchase on credit as it is usual or customary to buy and sell on . The power of a manager to dismiss an employee particularly where there is a justifiable cause for dismissal, after complying with the requirements prescribed by law for terminating employment.

Stipulation excluding a Partner from Profits and Losses a. The general rule is that a stipulation excluding one or more partners from any share in the profits or losses is void. The partnership is for common benefit. b. one exception is in the case of the industrial partner whom the law itself excludes from losses. If the law itself does this, a stipulation exempting the industrial partner from losses is naturally valid. It is permissible, to stipulate that even the industrial partner shall be liable for losses. Appointment of Manager There are two modes of appointment: a. appointment as manager in the articles of partnership; b. appointment as manager made in an instrument other than the articles of partnership or made orally. Appointment in Articles of Partnership a. power is irrevocable without just or lawful cause

therefore: 1. to remove him for just cause, the controlling partners ( controlling financial interest) should vote to oust him. 2. to remove him without cause, or for an unjust cause, there must be unanimity ( including his vote) b. Extent of power 1. if he acts in good faith, he may do all acts of istration ( not ownership) despite the opposition of his partners. 2. if in bad faith, he cannot, however, he is presumed to be acting in good faith; moreover if he really is in bad faith the controlling interest should remove him. Appointment other than Articles of Partnership a. Power to act may be revoked at any time, with or without just cause; such appointment is a mere delegation of power, revocable at any time. b. extent of power; as long as he remains manager, he can perform all acts of istration, but of course, if the others oppose and he persists, he can be removed.

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ARTICLE 1801 If two or more partners have been intrusted with the management of the partnership without specification of their respective duties, or without stipulation that one of them shall not act without the consent of all the others, each one may separately execute all acts of istration, but if any of them should oppose the acts of the others, the decision of the majority shall prevail. In case of tie, the matter shall be decided by the partners owning the controlling interest. Requisites of the law

This article applies only when the following requisites are present:

Two or more partners have been appointed as managers. There is no specifications of their respective duties; and There is no stipulation that one of them shall not act without the consent of all the others.

Example Darren, Erwin, and Earl are the managers of a business partnership without specification of their respective duties. As such, they may separately execute all acts of istration even without the previous knowledge or consent of the others. But suppose before the act is done, one of the partners interposes an objection; suppose Darren objects to a projected purchase of goods by Erwin and Earl. May Erwin and Earl proceed in spite of the objection; the decision of the majority shall prevail. In case of a tie the matter shall be decided by the partners owning the controlling interest. When there are two or more Managers a. two or more partners are managers; b. there is no specification of respective duties; c. there is no stipulation requiring unanimity; therefore, Art 1801 does not apply if unanimity is required; or when there is a designation of respective duties. Article 1802 Consent of managing partners It has been held that where the business of a partnership is to buy and sell, a partner who purchases on credit in the name of the firm is acting within his implied powers. Since it is usual to buy and sell on credit and persons dealing

with a firm have the right to assume that the authority of a partner is coextensive with the business transacted by his firm. Third persons are not as a rule bound to inquire on the partnership , or for his individual advantage. However, the consent of the managing partners is not necessary in routine transactions, e.g. purchase in the regular course of business by a managing partner of a partnership engaged in buying and selling merchandise or goods regularly purchased by the partnership. Example In the partnership of Greg, Hans, Inigo and Jay, it was agreed that all of them shall be the managing partners and that none of them shall act without the consent of the others. Hence, if Greg without securing the consent of Hans, Inigo and Jay entered into a contract, said contract shall not be valid and the absence or disability of any one of the partners cannot be alleged by Greg as a reason for his not getting such partner’s consent. Example Cyrus, the managing partner of C & Co., sold to Jake, a treasure detecting device without the consent of his partner Mert. The latter alleges that the contract between Cyrus and Jake is not binding by reason that according to their Articles of Partnership, a stipulation that one of the partners cannot bind the partnership by a written contract without the consent of the other partners . Is the transaction made by Cyrus binding upon the partnership? Yes. An obligation is created upon stipulation between the two partners which involves before contracting for the partnership an inquiry to the other partner’s consent. This does not apply to a third person who contract with a partnership. It is presumed that when a third person contracts with a managing partner in the ordinary and usual course of business, the third party has the right to presume that the consent of the other partner is obtained, otherwise, he would not enter into the contract. This aims to protect the third person with one of the managing partners from fraud and deceit. These facts are provided by ARTICLE 1802 In case it should have been stipulated that none of the managing partners shall act without the consent of the others, the concurrence

of all shall be necessary for the validity of the acts, and the absence or disability of any one of them cannot be alleged, unless there is imminent danger of grave or irreparable injury to the partnership. ARTICLE 1803 When the manner of management has not been agreed upon, the following rules shall be observed:

All of the partners shall be considered agents and whatever any one of them may do alone shall bind the partnership, without prejudice to the provisions of article 1801. None of the partners may, without the consent of the others, make any important alteration in the immovable property of the partnership, even if it may be useful to the partnership. But if the refusal of consent by the other partners is manifestly prejudicial to the interest of the partnership, the court’s intervention may be sought.

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When Unanimity is required a. this applies when there must be unanimity in there actuations of the managers. b. suppose one of the managers is absent or incapacitated, is unanimity still required. - yes, for absence or incapacity is no excuse. Exception, when there is imminent danger of grave or irreparable injury to the partnership. Manners of managing by partners When partners in the partnership fail to designate who among them shall act as manager, either when their contract is perfected, all of them shall be considered managers and agents and whatever anyone of them may do alone shall bind the

partnership subject, however, in the case of objection by any partner, the matter shall first be decided by the majority vote for the presumed interest for all the partners representing the controlling interest. It is understood that all partners are to have the right to participate in management, and no partner may be excluded from participation. There may be an agreement for concentration of management in one or more partners. Example Jan, Jen and Jean organized a partnership for the purpose of engaging in trading business. Without a previous express authority, Jan contracted an indebtedness for repairs and maintenance. Are the partners and the partnership liable for indebtedness? Yes. There being no agreement as regards the manner of management all the partners are considered agents of the partnership. Jan must be deemed to have authority to contract the indebtedness in question inasmuch s it was incurred in the prosecution of the partnership business. Third party can assume that partner has authority In the absence of restrictive clauses in the partnership agreement, strangers dealing with a partnership have the right to assume that every general partner has the power to bind the partnership, specially those partners acting with apparent authority. Therefore, the consent of the other partners is not necessary to perfect the sale of partnership properties to third persons where the sale was entered into by one acting as a managing partner. Case Smith, Bell and Co. v. Aznar ( C.A. 40 O.G. 1882 )

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Facts: Tobes, an industrial partner, was authorized to manage, operate, and direct the affairs, business, and activities of the partnership and to make, sign, seal, execute, and deliver contracts – upon and conditions acceptable to him approved in writing by the capitalist partner”. The firm was engaged in the business of buying and selling merchandise of all kinds. One day, Tobes purchased, on credit certain goods regularly purchased by the Company, but without first getting the authority of the capitalist partner. Issue: Is the partnership bound? Held: Yes, since the transaction, even if on credit was a routine one. Moreover, authority to purchase carries with it the implied authority to purchase on credit. The requirement of written authority refers obviously to formal and unusual contracts in writing. Article 1804 Sub partner in the partnership Another person may be dealing with a partner in his share without the consent of the others . This associate is sometimes referred to “ sub partner”. 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 sub partnership. The fact that one who is not a partner of the original partnership is to receive the entire profits of the business will not prevent the formation of a sub partnership. An agreement in the sub partnership does not in any way affect the existence and operations of the firm. The sub partners are partners inter se, but in the absence of the mutual consent of all the partners, a sub partner does not become a member of the partnership, even though the agreement is known to the other of the firm. He does not acquire the rights of a legitimate partner nor is he liable for its debts. These facts are in pursuant to ARTICLE 1804 Every partner may associate another person with him in his share, but the associate shall not be itted into the partnership without the consent of all the other partners, even if the partner having an associate should be a manager.

Example Henry, Ingrid, Jim and Kaye are business partners. Henry wants his friend, Joe to participate in his share in the profits. Henry may associate Joe in his share without the consent of partners Ingrid, Jim and Kaye. However, should Henry desire to have Joe itted as a partner, the consent of all the partners is necessary because the basis of a partnership is mutual trust. A newly-itted partner without the consent of all the partners may destroy that basis. Besides, the ission of a new partner will result in the modification of the partnership contract which cannot be done without the consent of all the partners. Associate of Partner a. For a partner to have an associate in his share, consent of the other partners is no required. b. for the associate to become a partner, all must consent ( whether the partner having the associate is a manager or not) Reasons: 1. mutual trust is the basis of partnership; 2. change in hip is a modification or novation of the contract.

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Article 1805 Custodianship of the partnership’s books Where the transactions for business transactions of a partnership are being done, is also the place where the books should be kept. Specifically, the place of business where all partners are entitled to access to these. It is presumed, though

subject to rebuttal that partners have knowledge of the contents of the partnership books. The books are presumed to state accurately the status of s where errors can be corrected. Time to inspect the books Books can be inspected at reasonable hours. This means on business days throughout the year and not merely during some arbitrary period of a few days chosen by the managing partners. However, partners’ inspection rights are not absolute. He can be restrained from using the information gathered other than partnership purpose. These are all cited in ARTICLE 1805 The partnership books shall be kept, subject to any agreement between the partners, at the principal place of business of the partnership, and every partner shall at any reasonable hour have access to and may inspect and copy any of them. Partnership Books a. the right in the article is granted to enable the partner to obtain true and full information of the partnership affairs, for after all, he is a co-owner of the properties, including the books. b. the article presupposes a “going concern” not one pending dissolution, for here the right depends on the court’s discretion, nor to one already dissolved, for here, although the books belong to all the partners ( in the absence of a contrary agreement) still no single partner is duty bound to continue the place of business for the benefit of the others. Neither is a purchaser of the firm’s goodwill duty bound to keep the books for the inspection of the former partners. c. Art 1805 says “ reasonable hour” What is it?” The Supreme Court has held that the reasonable hour should be on business days throughout the years, and not merely during some capricious or arbitrary period selected by the managers. ARTICLE 1806 Partners shall render on demand true and full information of all things affecting the partnership to any partner or legal representative of any deceased partner or of any partner under legal disability. Duty of partners to render information

Under the same principle of mutual trust and confidence ( fiduciary) among partners, there must be no concealment between them in all matters affecting the partnership. Hence, the duty to give true and full information of all things affecting the partnership shall be upon request and demand. In certain circumstances, the partner is under a duty of voluntary disclosure. There is a duty of voluntary disclosure of material facts relating to what is to become a partnership property, such as the cost at which it is to be obtained by a partner or the interests of a partner in such a partner in such property. Example Dante and Luigi are partners engaged in the buy and sell of used cars. Frank, a car collector was interested in buying a 2002 BMW owned by the partnership at a handsome price. Dante without telling Luigi about the interest of Frank to buy the car convinced Luigi to sell his share in the partnership, Dante was able to sell the car to Frank at a handsome profit. The implication of the case, Dante is liable to Luigi for his share in the profits of the sale. Dante was under obligation to disclose the facts to Luigi about the sale and value of the car . The right of the partners to information and disclosures about the business transactions must be exercised in order to preserve trust and confidence or the right to fiduciary which are elements of a partnership. Case Poss v. Gottlieb 1922, 18 Misc. 318 Facts: A and B were real estate partners. A heard of a possible purchaser of a certain parcel of land owned by the firm. But A did not inform B. Instead, A persuaded B to sell to him (A) B’s share at a nominal amount, after which A sold the whole parcel at a big profit. B sued A for damages for alleged deceit. A’s defense was that he after all had not been asked by B about possible purchaser. Held: A is liable, for he should not have concealed “ good faith not only

requires that a partner should not make any false concealment, but he should abstain from all concealment. Who can demand information The following are entitled to true and full information: a. any partner b. legal representative of a dead partner c. legal representative of any partner under legal disability. The duty to give information is distinct from the duty to under Art 1907.

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ARTICLE 1807 Every partner must to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property. Example Partners Paul and John mortgaged a house and lot to George. George foreclosed the mortgaged property for failure of the two partners to pay the debt. Paul in his own behalf redeemed the property mortgaged and asked the court to cancel the old title of the partnership and order another title to be issued in his own name alone. John objected, but the court granted the petition of Paul. Hence, John appealed to the Supreme Court. Paul’s theory cannot be sustained. A partner is an agent of the partnership. Every partner becomes a trustee for his co-partner with regard to any benefits or profits derived from his act as partner. Consequently, when Paul redeemed the property in question, he became a trustee and held the property in trust for his

co-partner subject to his right to demand from the latter his contribution to the amount of redemption. Highest degree of good faith In business relations, partners are required to exhibit the highest degree of good faith. The relation between partners is essentially fiduciary, each being considered in law, as he is in fact the confidential agent of the other. Invoking the fundamentals of equity jurisprudence that one partner cannot, to the detriment of another, apply exclusively to his own benefit the results of the knowledge and information gained in the character of a partner. Duty to a. The fiduciary relations between the partners are relationships of trust and confidence which must not be abused or used to personal advantage. b. the trust relations exist only during the life of the partnership, not before, nor after. Hence, fiduciary relations do not exist between the persons still negotiating for the formation for partnership. The trust relations end with the death of the partnership unless the foundation for the breach of trust took place even during the existence of the firm. Problems A partner with partnership funds, and unknown to the others, purchased a house in his own name. Who owns the house? - the partnership owns the house. The buying partner should only be considered a trustee. A partner in the real estate business, without the knowledge of the other partners, bought a parcel of land in his daughter’s name and subsequently sold the same at a profit. Should the other partners share in the profits? -Yes, for the transaction can be considered an affair of the partnership. A, B. and C are partners. A, as a result of a transaction connected with the conduct of the partnership has in his hands, so that it may be traced, a specific

sum of money or other property, A is insolvent. Is the claim of the partnership against A a claim against him as an ordinary creditor, or is it a claim to the specific property or money in his hands? - the words, “and hold as trustee for the partnership any profits” indicate clearly that the partnership can claim as their own ( hence specific property) any property or money that can be traced. Case Pang Lim and Galvez v. Lo Seng

42 Phil. 282

Facts: Pang Lim and Lo Seng were partners in the distillery business. The firm was renting for its use a certain parcel of land, upon which the firm made certain improvements. In the lease contracts, it was agreed that the owner of the land would become the owner also of all the improvements made by the firm at the end of 15 years. Before the end of the lease, Pang Lim withdrew as partner and sold his interests to Lo Seng. He also bought the land from its owner. He now wants to terminate the lease on the ground that a purchaser of the lease estate is generally allowed to end the lease. When Lo Seng refused to vacate, Pang Lim brought this action for unlawful detainer. Held: The suit will not prosper because of Pang Lim’s evident bad faith. He obviously desired the termination of the lease, in order to avail himself of the benefits of the improvements which would go to the owner of the land, as per stipulation in the lease contract. Moreover, when he sold his rights as a partner, this included the right to the lease. For him to now disregard the lease, from which sale he had profited, would be most unfair, considering that he seeks to destroy an interest derived from himself, and for which he has already received full value. Finally, one partner cannot, to the detriment of another, apply exclusively to his own benefit the results of the knowledge and information gained in the character of partner. ARTICLE 1808 The capitalist partners cannot engage for their own

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 fund any profits accruing to him from his transaction, and shall personally bear all the losses. Prohibition to capitalist partner Where the industrial partner is absolutely prohibited from engaging in any business for himself so do the capitalist partner who may only be prohibited from engaging for his own in any operation which is the same as or similar to the business in which the partnership is engaged. Failure by the capitalist partner to comply by the provision shall be under obligation to bring to the common fund any profits derived by him from his transactions and in case of losses, he shall bear them alone. However, partners by their stipulation may permit the capitalist partner to engage in the same kind of business. It is provided by law that a partner is free to engage in any business provided that it will not compete and the business he is carrying on is not related or the same nature of business that the partnership he is engaged in is doing. There must not be a usufruct in carrying on of a business. The law is silent on whether a capitalist partner can engage in the same line of business for the of another. However, it is believed that the prohibition applies. Fiduciary relation involving trust and confidence is necessary in the partnership. Each partner owes his co-partners outmost good faith, loyalty and integrity. The partnership and interest may be at risk and may be sacrificed without the prohibition. Reason for prohibition To prevent a partner from availing himself personally of information obtained by him in the course of the transaction of the partnership business or by reason of his connection with the firm regarding the business secrets and clientele of the firm to its prejudice.

Instances when there is no Prohibition a. when it is expressly stipulated that the capitalist partner can so engage himself. b. when the other partners expressly allow him to do so. c. when the other partners impliedly allow him to do so. ( Example: when all of them are likewise violating the article) d. when the company ceases to be engaged in business ( hence during the period of liquidation and winding up, the article no longer applies, even if the engaging partner is himself the liquidating partner) The reason is clear; there can possibly be no unfair competition. Effect of violation a. the violator shall bring to the partnership all the profits illegally obtained b. but he shall personally bear all the losses Suppose he gains a total of P10,000 and loses a total of P2,000, how much must he bring to the firm? - Strictly construed, he must bring P10,000, and suffer the P2,000 loss all by himself: however, this would be unduly harsh, and the proper interpretation it is submitted, is for him to give only P8,000. In other words, losses can be deducted from profits. It is only net losses which he must shoulder. c. Although not mentioned in the law expressly, it is believed that the violator can be ousted from the firm on the ground of loss of trust and confidence, particularly if the violation is repeated after due warning. This would of course, result in the dissolution of the firm. Dissolution as a remedy in a partnership Partners should not always resort to court’s intervention in their business affairs, but the last resort for them if they fail find resolution for their problems is the dissolution and winding up of partnership. Refusal of a partner to render an ing of the partnership affairs is an apparent serious breach of the partnership obligation to warrant the dissolution

by decree of court. However, the reason for the refusal of a partner to render an ing is that the rights of the partner to know the partnership affairs are adequately protected by the provisions of law in Article 1805 and 1806. To entitle the partner to the right to demand a formal ing is a waste of time. The facts and provisions mentioned above may be rebutted by the exception that when a partner is far away for a period of time in connection with the business of the partnership and such partnership books were in the hand of another partner, the right of a partner to demand an ing may be allowed without bringing a dissolution that is corollary to his right to share in the profits. ARTICLE 1809. Any partner shall have the right to a formal as to partnership affairs : (1) If he is wrongfully excluded from the partnership business or possession of its property by his co-partners; (2) If the right exists under the of any agreement; (3) As provided by article 1807; (4) Whenever other circumstances render it just and reasonable. Exceptions to the rule Article 1809 is justified where a partner has been assigned overseas for a long period of time for matters involving partnership business and the partnership books being in the possession of the other partners during that time, thus, an ing may be demanded without the necessity of dissolution as the right of a partner which is corollary to his right to share in the profits. Right to demand a formal a. No formal ing is demandable till after dissolution, After all there is access to the books. b. however, in the instances in Article 1809, it is evident that the formal ing can properly and justifiably be asked for thus;

1. in no. 1 - he may have access to the books 2. in no. 2- there is no express stipulation 3. in no. 3 - it is unfair if other partner can take undue advantage of partnership funds or partnership transactions. 4. in no. 4 - as when one partner has been traveling for a long time on a business involving the firm. Estoppel - An ing made cannot be questioned anymore if it was accepted without objection for this would now be a case of estoppel unless of course, fraud and error are alleged and proved,.

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SECTION 2 PROPERTY RIGHTS OF A PARTNER Scope of property rights of a partner The property rights of a partner are:

Rights in specific partnership property His interest in the partnership Right to participate the management

Other related right may be:

Right to reimbursement for amounts advanced to the partnership and to

indemnification for risks in consequence of management. Right of access and inspection of partnership books. Right to true and full information of all things affecting the partnership. Right to a formal of partnership affairs. Right to have partnership dissolved under certain conditions. These rights provided above are affirmed in ..

ARTICLE 1810 The property rights of a partner are:

His rights in specific partnership property; His interest in the partnership; and His right to participate in the management.

Distinction between partnership property and partnership capital

Partnership property may change its value everyday and with changes in market value of the assets, while partnership capital is constant – it remains unchanged as the amount is fixed by agreement of the partners, and not affected by fluctuations in the value of partnership property. Property include not only the original capital contribution of partners, but all property acquisition of partnership funds while partnership capital represents aggregate of the individual contributions made by partners.

ARTICLE 1811 A partner is co-owner with his partners of specific

partnership property. The incidents of this co-ownership are such that:

A partner, subject to the provisions of this Title and to any agreement between the partners, has an equal right with his partners to possess specific partnership property for partnership purposes; but he no right to possess such property for any other purpose without the consent of his partners; 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; A partner’s right in specific partnership property is not subject to attachment or execution, except on a claim against the partnership. When partnership property is attached for a partnership debt the partners, or any of them, or the representatives of a deceased partner, cannot claim any right under the homestead or exemption laws; A partner’s right in specific partnership property is not subject to legal under 291.

Incidents of right in specific property

Possession of equal right

Each partner possess a right to specific partnership property equally with the others. Thus, if partners A & B possess a specific car, A & B use the same and for partnership purposes. By stipulation a partner alone may possess and use a specific partnership property for partnership objectives. On the other hand, if partners A, B & C own a specific parcel of land, none of

them can possess and use the land other than for partnership purposes.

Should any partner is wrongfully excluded from the possession of its property by his co-partners. He shall have the right to formal of partnership affairs. Should any of them use the land for his own profit, he must to the others for the profits derived from it. Should any partner wrongfully and exclusively possess the property of the partnership it may resort or it may be a ground to dissolution of a partnership.

Assignment of right A partner’s right in specific partnership property cannot be assigned without the consent of his co-partners because it is impossible to determine the extent of his beneficial interest in the property until the liquidation of partnership affairs. Not subject to attachment or execution As example of immovable property is land. Consequently, land is not subject to attachment or execution except on a claim against the partnership. For the same reason that if a land belongs to the partnership; it cannot claim any right under the homestead or exemption laws when it is attached for partnership debts. But a partner’s interest in the partnership itself may be levied upon by a judgment creditor because it is actually his property. Right of a partner not subject to legal The beneficial ownership of a partner in specific partnership cannot use the subject of legal since the latter’s obligation is personal to the partner. Rights of a partner in Specific Partnership Property Example - a car contributed by one of the partners to the partnership a. he has an equal right with his partners to possess the car but only for

partnership purposes ( not for other purposes, except if the other expressly or Impliedly give their consent. b. he cannot assign his right in the car except if all the other partners assign their rights in the same property c. his right in the car is not subject to the attachment or execution ( except on a claim against the partnership) d. his right in the car is not subject to legal under Art 291,. ( said article mentions the people who are obliged to each other. Case Kimbal v. Hamilton F. Ins. Co. ( 1861 ) 8 Bos. ( N.Y. 495 Facts: A and B were partners. Without A’s consent B assigned all the specific partnership properties to X. Do A and B still have insurable interest in said properties? Held: yes, for the assignment is void and is clearly against the law. McGrath v. Cowen ( 1898 ) 57 Ohio St 385 Facts: A and B were partners. A mortgaged his right in a certain specific partnership property. Later, the firm creditor wanted to get said property. Who should prevail, the firm creditor or the mortgagee? Held: The firm creditors, for the mortgage in specific partnership property is void, B not having also assigned his right. This is so, even if the mortgagee’s right therein be entirely destroyed (without prejudice of course to his recovery from A) Article 1812 The partner’s interest in the partnership is his share in the profit and surplus and

the same is personal property. This is cited in the provision of: ARTICLE 1812 A partner’s interest in the partnership is his share of the profits and surplus. Subject to the provisions of Article 195 of the Family Code, the following are obliged to each other to the whole extent set forth in the preceding article:

The spouses; Legitimate ascendants and descendants; Parents and their legitimate and the legitimate or illegitimate children of the latter; Parents and their illegitimate children and the legitimate and illegitimate children of the latter, and Legitimate brothers and sisters, whether of the full or half-blood

The share of the partners cannot be determined until liquidation of the business has taken place and settled. Assignment without causing dissolution The law allows assignment of a partner’s interest in the partnership without causing dissolution. The assignee does not acquire the rights to interfere in the management, to require the information or ing, and to inspect partnership books. Article 1813 The legal effect of assignment or conveyance is the same as that of a partner associating another in his share or interest. The provisions of law is cited in:

ARTICLE 1813 A conveyance by a partner of his whole interest in the partnership does not of itself dissolve the partnership, or, as against the other partners in the absence of agreement, entitle the assignee, during the continuance of the partnership, to interfere in the management or istration of the partnership business or affairs, or to require any information or of partnership transactions, or to inspect the partnership books; but it merely entitles the assignee to receive in accordance with his contract the profits to which the asg partner would otherwise be entitled. However, 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 entitled to receive his assignor’s interest and may require an from the date only of the last agreed to by all the partners.

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This article permits the conveyance by a partner of his whole interest in the partnership ( e.g. sale, donation, as collateral security for a loan as stated above) Assignment does not give the assignee the right : to interfere in the management of the partnership; to require any information or ; or to inspect any of the partnership books. Example Cely, Dely, and Ely were partners. During the existence of the partnership, Ely assigned his interest to Fe Fe, as assignee, was entitled to receive in accordance with his contract with Ely the profits to which Ely would have been entitle. However, Fe would not interfere in the management nor demand information and ing of the books by reason that she had not become partner by assignment. Effect of Conveyance a. if a partner conveys ( assigns, sells, donates ) his whole interest in the

partnership ( his share in the profits and surplus) either of two things may happen: 1. the partnership may still remain; 2. the partnership may be dissolved. b. the assignee ( conveyee) does not necessarily become a partner. The assignor is still the partner, with a right to demand ing, and settlement. c. the assignee cannot interfere in the management or istration of the partnership business or affairs. d. the assignee cannot also demand: 1. information; 2. ing 3. inspection of the partnership books. Rights of the Assignee a. to get whatever profits the assignor-partner would have obtained Is he to be considered an outside creditor who would be entitled to collect before the partners get their own profits? - No, for he merely shares in the profits, the same as the assignor-partner whose share he ( the assignee) will now get. Hence, outside creditors would have to be preferred. b. To avail himself of the usual remedies in case of fraud in the management. c. to ask for annulment of the contract of assignment if he was induced to enter into it thru any of the vices of consent,( fraud, error, intimidation, force, undue influence) or if he himself was incapacitated to give consent ( minor, insane) d. to demand an ing – ( but only if indeed the partnership is dissolved, but even then the can cover the period only from the date of the last ing which had been agreed to by all the partners .

Rule in mortgages Does Art 1813 cover also a case when the partner merely mortgages his interest in the profits? - Yes, but here said interest is not alienated, it is merely given as security, and therefore, the rules on securities for loans, etc. can properly apply. Case

White v. Long

1927, 289 Pa. St. 526

Facts: A, B, C, and D were partners. A assigned his interest in the partnership to his son S. S now wanted to in the management of the enterprise. B, C, and D refused . Is the partnership necessarily dissolved? Held: No, the mere assignment did not dissolve the firm. This is so even if B,. C and D did not allow S to participate in the firm’s business conduct. After all, S did not become a partner. He was a mere assignee ( entitled to collect only whatever profits his father A could have collected)

ARTICLE 1814 Without prejudice to the preferred rights of partnership creditors under article 1827, on due application to a competent court by any judgment creditor of a partner, the court which entered the judgment, or any other court, may charge the interest of the debtor partner with payment of the unsatisfied amount of such judgment debt with interest thereon; and may then or later appoint a receiver of his share of the profits, and of any other money due or to fail due him in respect of the partnership, and make all other orders, directions, s and inquiries which the debtor partner might have made, or which the circumstances of the case may require. The interest charged may be redeemed at any time before foreclosure, or in case of a sale being directed by the court, may be purchased without thereby causing a dissolution:

With separate property, by any one or more of the partners; or With partnership property, by any one or more of the partners with the consent of all the partners whose interests are not so charged or sold.

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.

Preference The partnership creditors shall be preferred to those of each partner, that is, before a creditor of a partner can be paid out of the interest charged. Claims of partnership creditors should first be satisfied. A partnership interest is truly his personal property in his partnership, hence, a partner whose interest is sought to be levied upon or attached may in appropriate cases prevent the levy or attachment by setting up the claim that it is exempt from execution; if it has already been attached or levied upon he may have the attachment or levy lifted on the same ground.

Example Orly, Peter and Quito are partners. Orly is personally indebted to Rex in the amount of P 50,000. Rex filed an action against Orly and obtained a final judgment in his favor from the court. If Orly is insolvent, Rex can ask the same court or any competent court that Orly’s interest in the partnership be attached in payment of his debt. Under an attachment, the property of a defendant is placed in custody of the law to avail determination of a suit. Therefore, partners Peter and Quito may redeem or purchase the interest of Orly before the redemption period fixed by the court without dissolving the partnership. Homestead laws Under the homestead laws or exemption laws a partner cannot claim any right when specific partnership property is attached for partnership debt. However, the partner may avail himself of the exemption laws after partnership debts have been paid, that is, with respect to the partner’s interest in the partnership as distinguished from his interest in specific partnership property. His interest in the partnership is really his property. Preferential rights of Partnership Creditors The law says, “ without prejudice to the preferred rights of partnership creditors under Art 1827. What does this mean? - This simply means that partnership creditors are entitled to priority over partnership assets ( including the partner’s interest in the profits) that is, the separate creditors will get only after the firm creditors have been satisfied.

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Receivership

a. when the charging order is applied for and granted, the court, may at the same time or later appoint a receiver of the partner’s share in the profits or other money due him. b. the receiver appointed is entitled to any relief necessary to conserve the partnership assets for partnership purposes. Thus, he may nullify all efforts to assign specific partnership property. b. Suppose the other partners owe the firm some money, may the receiver be authorized to demand that such amount be collected? -Yes, for such credit forms part of the partnership assets. Redemption of interest charged a. Redemption here merely means the extinguishment of the charge or attachment on the partner’s interest in the profits. b. how is this “ redemption “ made? - the “change” may be “ redeemed” or bought at any time before foreclosure. After foreclosure, it may still be bought with separate property, ( by any one or more of the partners) or with partnership property ( with consent of all the other partners)

SECTION 3 OBLIGATIONS OF THE PARTNERS WITH REGARD TO THIRD PERSONS

ARTICLE 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 of the partnership, include their names in the firm name, shall be subject to the liability of a partner. Firm name defined The word “ firm” is defined as the name, title or style under which a company transacts business; a partnership of two or more persons; a commercial house. It implies a partnership. BY “firm” name the being is distinguished from others, and the juridical personality better determined. The term “ firm” is synonymous with “ company” Significance of a firm name A “ firm” name distinguishes the partnership which has a distinct and separate juridical personality from the individuals composing the partnership and from other partnership, thus, helps to improve business transactions. Persons including their names Persons who involve their names in the firm name shall incur liability of a partner. This aims at protecting customers from being misled as to whom they are dealing with. Right to choose firm name Partners may chose a firm name for their partnership which may be that of an individual partner, the surnames of all the partners or the surname of one or the surnames of more of the with the addition of “and company” or it may consist of individual names entirely distinct from the names of any of the .

Rule on the use of names A partnership cannot continue to use in its firm name the names of deceased partners according to Supreme Court rulings. It is affirmed that a partnership is dissolved by the death of any partner. The firm name, therefore, should be those of living partners, and, in the case of non-partners, should be living persons who can be subjected to liability. In the choice of a firm name, no false, misleading or assumed name shall be used. The continued use of the name of a deceased partner is permissible provided that the firm indicates that said partner is deceased. Example Andy, who was a retiring member of partnership Arax Co., executed a legacy for the said firm which was composed of other , Billy, Carl and Damon. Eventually, Andy died. At the time of his death, the partnership was composed of Earl, Felix, and Greg, the former predeceased Andy. The partnership was continued by agreement of the parties whenever there was a change in hip. The legacy rests in partnership Arax Co., notwithstanding that Earl, Felix and Greg were unknown to Andy during his lifetime. It may be argued that the intention of Andy was to give the legacy to the old partnership which no longer exists. Case

Sharruf and Co. v. Baloise Fire Insurance Co.

64 Phil. 258

Facts: Sharruf and Eskenazi, partners under name “Sharruf and Co., insured for P40,000 their goods. Later, the name was changed to “ Sharruf and Eskenazi” The insured goods were subsequently burned, but the insurance company refused to pay on the ground that its name, having been changed, the partnership now had no juridical personality to sue, nor did it have insurable interest in the goods. Held: The change of name is not important not having been done to defraud the insurance company. Moreover, the remain the same. Therefore, the firm can collect the insurance indemnity. Liability of Strangers who include their names Strangers who include their names in the firm are liable as partners because of estoppel, but do not have the rights of partners for after all, they had not entered into any partnership contract. The purpose of the law is to protect customers from being misled as to whom they are dealing with. If a person misrepresents himself as a partner, and as a consequence thereof, a stranger is misled, the deceiver is liable as a partner ( without the rights of a partner) and this is true, even if he did not include his name in the firm name. If a limited partner includes his name in the firm name, he has obligations, but not the rights of a general partner. The mere fact that a partnership has assumed a fictitious or assumed name, other than its real one, does not affect the validity of contracts otherwise, validly entered into. Article 1816

The pro rata liability of partners third persons under the provision of ARTICLE 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 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. This is a clear mandate of the law in which any stipulation changing or modifying such liability is void except as among the partners. This article refers to the payment of partnership obligations arising from contract clearly imposes subsidiary and t (pro rata) liability for contractual debts owing to third persons upon all the partners, including industrial partners who are not liable for losses. The liability is subsidiary because the partners cannot be made liable with their separate property unless the partnership property has been exhausted. Liability distinguished from Losses While an industrial partner is exempted by law for losses ( as between the partners) he is not exempted from liability ( insofar as third persons are concerned) This means that the 3rd person can sue the firm, and the partners, including the industrial partner. The partners will be personally liable ( tly or pro rata) only after the assets of the partnership have been excluded. Even the industrial partner would have to pay, but of course, he can recover later on what he has paid, from the capitalist partners unless there is contrary agreement. Example A, B,. and C, capitalist partners, each contributed P10,000; and D, the industrial partner contributed his services. Suppose, X, a customer, is the creditor of the firm to the amount of P90,000; what should X do? - X must sue the firm and all the partners, including D. After getting the P30,000 ( capital assets of the firm) he can still recover P60,000 from the 4 partners tly or pro rata ( not solidarily). Hence, he can recover P15,000 the rate of P5,000 each. For after all , he is exempted by the law from losses, as distinguished from liabilities. Liability of a Partner who has withdrawn

A partner who withdraws is not liable for liabilities contracted after he has withdraw, for then he is no longer a partner. If his interest has not yet been paid him, his right to the same is that of a mere creditor. Unequal contribution of capital partners Suppose capitalist partners had contributed unequally to the capital, will their liability to strangers be equal or proportionate to their contributions? - Proportionate for the law says, “ pro-rata” Pro rata liability The term means equally or tly and not proportionately in its literal meaning because pro rate is based on the number of partners and not on the amount of their contributions to the common fund subject to adjustment among the partners. In one case, the fact that a partner has left the country and the payment of his share of the liability cannot be enforced or his liability is condoned by the creditor cannot increase the liability of the other partners. Example If the partnership property of Karl & Co. of which Rod, Hardy, and Karl are the partners has been exhausted and an unsatisfied contractual liability remains to third persons in the sum of P 3,000. Rod, Hardy and Karl will be liable proportionately for P 1,000 each. Karl is liable even if he is an industrial partner. Hence, the creditors are entitled to collect P 1,000 from each, Rod, Hardy, and Karl. The P3,000 is considered a loss of the partnership. Although Article 1797 exempts an industrial partner from partnership losses, unless the contrary is agreed upon, then Karl may be reimbursed of the amount he paid from the capitalist partners. Any stipulation among the partners contrary to the pro rata and subsidiary liability expressly imposed by Article 1816 is in vain and ineffective in so far as it affects the rights of third persons. It is valid and enforceable only as among the partners. This is asserted in : ARTICLE 1817 Any stipulation against the liability laid down in the preceding article shall be void, except as among the partners.

Therefore, an industrial partner is liable to third persons for the debt of the firm and if he has paid such debts from his private funds during the life of the partnership, when its affairs are settled, he is entitled to credit for the amount so paid and if it results that there is not enough property to pay him from the partnership, then the capitalist partners must pay him. Neither principle nor an authority can an industrial partner be relieved from liability to third persons for the debts of the partnership. Stipulation eliminating liability As among the partners, is it permissible to stipulate that a capitalist partner be exempted from liability? - The answer is Yes, under Art 1817, And yet under Art 1709, a stipulation which excludes one or more partners from any share in the profits or losses is void. How can these two articles be reconciled? It would seem that the only way to harmonize the two articles is this: it is permissible to stipulate among them that a capitalist partner will be exempted from liability in excess of the original capital contributed, but will not be exempted insofar as his capital is concerned. - if the exempted partner is an industrial one – the agreement is valid as among themselves, but not insofar as creditors are concerned. - if the exempted partner is a capitalist one – the agreement is void as against creditors of the firm. As among themselves, it is valid – regarding contribution in excess of the capital ( Art 1817) but void, regarding the original contribution. Example A, B, and C, capitalize partners, each contributed P10,000. The firm’s indebtedness amounts to P90,000. It was stipulated that A would be exempted from liability, Assuming that the capital of P30,000 is still in the firm, what would be the rights of the firm’s creditors? - to get the P30,000 and to get still P20,000 each from the 3 partners ( total P90,000). A will thus be liable to the 3rd persons for P20,000 ARTICLE 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 authority. 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:

Assign the partnership property in trust for creditors or on the assignee’s promise to pay the debts of the partnership; Dispose of the goodwill of the business; Do any other act which would make it impossible to carry on the ordinary business of a partnership; Confess a judgment; Enter into a compromise concerning a partnership claim or liability; Submit a partnership claim or liability to arbitration; 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.

As mutual agency

Partnership is a contract of mutual agency, each partner acting as a principal on his own behalf, and as an agent for his co-partners or the firm. As to third person, there must be an agreement among the partners or through implication in the nature of the business according to the usual and ordinary course, which is carried on by those engaged in it in the place necessary for successful prosecution. Third persons The relation of partners to third persons is thus founded on the doctrine of mutual agency. Limitations upon the authority of any one of the partners and not binding upon innocent third persons, who have claimed that every general partner has the power to bind the partnership especially those partners, acting with ostensible authority. Third persons are not bound to enter into contract with any of the partners whether or not the partner has the consent of the other partner. He acts in good faith in transacting to any of the partner. Third party should not assume that a partner has unlimited authority. Acts of partners Every partner in the partnership is an agent of a partnership and may execute such acts with binding effect on the partnership even if he has no authority unless the third person has knowledge of such lack of authority. In other words, the partner so acting has no authority and the third person knows that the acting partner has no authority. Example Partners Kellog and Lyndon Company is engaged in the buying and selling of computers. Kellog, a partner buys computers from David, cash . Is the partnership bound? Yes. Because the act is obviously for carrying on the business of the partnership in the usual way. Suppose Kellog is not actually authorized to make the purchase and David

knows of such lack of authority. Is the partnership bound? No. The rule in the first paragraph of Article 1818 enumerates the reason. As regards the second group, all partners must do the act. Unless one has been authorized by all others, or the others have abandoned the business. Thus, if Kellog ,Lyndon, and Jake are partners in Kellog & Lyndon Company, and the name (goodwill) of the partnership is to be sold, the three must sell or all must authorize one or two of them to sell. Unanimity of action is required. As regards the third group, a partner can do the act when consented by the other partners, that is, by majority of the partners and in case of a tie by the controlling interest. Liability to third persons The partnership is not liable to third persons even if he has actual or presumptive knowledge of the instructions, whether or not the acts are for apparently carrying on in the usual way the business of the partnership. The extent in scope of the implied powers of a partner to bind the partnership will vary with the nature of business of the partnership. Example Partner G compromised and agreed to sell the delivery truck of the partnership to H. May H enforce the agreement against the partnership? NO. The general rule is that a single partner has no implied power to sell the property of the partnership not held for sale. Instances when a partner can bind or cannot bind the firm a. the fact that the partner is an agent. b. the instances when he can bind the partnership; c. the instances when he cannot bind the partnership ( in which case, should be enter into the contract, he alone, and not the firm nor the partners) would be liable. When a Partner can bind the Partnership

a. when he is expressly authorized or impliedly authorized; b. when he acts in behalf and in the name of the partnership . Instances of implied authorization: 1. when the other partners do not object, although they have knowledge of the fact; 2. when the act is for “ apparently carrying on in the usual way the business of the partnership. This is binding on the firm even if the partner was not really authorized, provided that the third party is in good faith. Example A and B are partners in buying and selling car. A, by the partner’s agreement, was authorized to buy cars on a cash basis, never on the installment plan, One day, A bought on credit or on the installment plan a car from X, a client . X did not know of A’s lack of authority. A’s purchase was made on behalf and in the name of the partnership. Is the partnership bound? - Yes, the partnership is bound because although A was not really authorized, still for apparently carrying on in the usual way the business of the partnership., A is implicitly authorized and X was in good faith. Had X known of A’s actual lack of authority, the answer would be bound. Where a business of a partnership is to buy and sell, a partner who purchases on credit in the name of the firm is acting within his implied powers, since it is usual to buy and sell on credit. Instances when act of the partner is not binding to the partnership a. When, although for apparently carrying on in the usual way the business of the partnership, still the partner has in fact no authority and the 3rd party knows that the partner has no authority . b. when the act is not for apparently carrying on in the usual way, of the partnership and the partner has no authority. Why the seven (7) acts of ownership are Unusual

The seven kinds of acts enumerated in Art 1818 are instances of acts which are unusual. The reasons are the following: 1. assign the partnership property - the firm will virtually be dissolved; 2. dispose of the good will - good will is valuable property,. 3. do any other act which would make it impossible to carry on - this is evidently prejudicial 4. confess a judgment - if done before a case is filed, this is null and void, if done later, the firm would be jeopardized. 5. compromise - this is an act of ownership and may be said to be equivalent to alienation (which may not be justified); 6. arbitration - this is also an act of ownership which may not be justified. 7. renounce a claim - why should a partner renounce a claim that does not belong to him but to the partnership.s

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Article 1819 Transfer of real property of the partnership Title in the name of the partnership can only be transferred in the partnership name. The manner of conveyance depends upon the of he conveyance to the partnership. Thus, any partner may convey the title to real property in the partnership name. This is what the provision of this article is asserting: ARTICLE 1819 Where the title to real property is in the partnership name, any partner may convey title to such property by a conveyance executed in the partnership name; but the partnership may recover such property unless the partner’s act binds the partnership under the provisions of the first paragraph

of article 1818, or unless such property has been conveyed by the grantee or a person claiming through such grantee to a holder for value without knowledge that the partner, in making the conveyance, has exceeded his authority., Where title to real property is in the name of the partnership, a conveyance executed by a partner, in his own name, es the equitable interest of the partnership, provided the act in one within the authority of the partner under 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 if the partner’s act does not bind the partnership under the provisions of the first paragraph of article 1818 unless the purchaser of 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 name, es 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 names of all the partners a conveyance executed by all the partners es all their rights in such property. Normally, title to real property or interest belonging to the partnership is ed in the partnership name. The fact is that property purchased with partnership funds belongs to the partnership unless a contrary interest is shown. In the same article, it gives legal effects of the conveyance of real property belonging to the partnership depending in whose name it is ed and in whose name it is conveyed. In addition, the real property may be ed or owned in the name of : The partnership ( pars. 1,2); one or more but not all. The partners ( par 3); one or more or all the partners , or in a third person in rust for the partnership ( par 4); or all the partners ( par 5) In paragraphs 1,3 & 5 . The title of ownership is conveyed, while pars 2 & 4 equitable interest is conveyed. Equitable interest, defined

It is one not duly recognized by law, but only by the principle of equity ( natural justice) Registration of real property Real property may be ed or owned in the name of; the partnership; all the partners; one, some, but not all the partners; one, some, but not all the partners in trust for the partnership; and a third person in trust for the partnership. Example Title in the partnership name Joey, Kyle and Leon are partners in JKL Company. Real property in the name of JKL Company was sold by Leon to Mar without authority. The title was ed to Mar. However, JKL Company may recover the land sold unless the act of Leon was made in the usual way of business in which JKL Company is engaged in the real estate business and Mar had no knowledge that Leon had no authority to do so., or unless the property has already been validly conveyed to a third party who is a purchaser in good faith and for value and without notice that Leon had exceeded his authority in conveying to Mar. Conveyance executed by partners; title in the name of partnership Joey, Kyle and Leon are partners in JKL Company. The partnership is engaged in real estate. Leon with authority sells (in his own name) to Mar a lot in whose title is in the name of the partnership. Mar , the purchaser does not become the owner of the land as he gets only the equitable interest of JKL Company, assuming that the selling of the land is in the usual way of the partnership. Note that real property may be ed or owned in the name of : 1. the partnership; 2. all the partners; 3. one, some, or not all the partners;

4. one, some, or not all the partners in trust for the partnership; 5. third person in trust for the partnership Title in the name of one or more but not all Supposing the land really belongs to Mar, the partnership , but somehow it has been ed in the name of Kyle and Leon, and both sell the land to Mar. In this case, the title is conveyed to Mar; he becomes the owner of the land. The partnership, ordinarily can recover the property but under the facts; it cannot do so because the act Kyle and Leon binds the partnership, the act being the usual way. Title in name of all partners, conveyance in name of all partners If the parcel of land is ed in the name of Joey, Kyle and Leon Conveyance by all of the partners to Mar will title to the property as provided by law saying, “ a conveyance by all the partners es all their rights in such property. The effect is apparently the same through the sale is not in the usual course of business of JKL Company. Article 1820 ission of partner with effect It is issible against the partnership the statements made by a partner with reference to partnership affairs, if the partner concerned is acting within the scope of his authority as partner, speaking for the partnership while engaged in carrying on the business of the partnership. In order that ission of partner is binding in the partnership it is necessary to establish the very existence of the partnership. These provisional statements are affirmed in: ARTICLE 1820 An ission or representation by any partner concerning partnership affairs within the scope of his authority in accordance with Title is evidence against the partnership. Rule in the ission of a partner

A person is not bound by the act, ission statement, or agreement of another of which he has no knowledge or to which he has not given his consent except, by virtue of a particular relations between them. ission by another are received against a party if the former is acting in the capacity of an agent fo the latter. As provided in Article 1820, when a partner makes ission for himself only without purporting to act for the partnership, he alone shall be chargeable with his issions. After dissolution, ission made by a partner will bind the partnership if necessary to wind up partnership affairs. issions by a party as testified to by a third person are issible in evidence against him in litigation. Example 1 Waldo executed a promissory note in favor of Zaldy after he borrowed P 5,000. Waldo made the statement that he was acting for Oscar in which the money was for the of the latter. Oscar now authorized Waldo to borrow money from Zaldy. The declaration of Waldo that he was acting for Oscar and that the money was for him is not issible against Oscar as to make him liable to Zaldy. Example 2 If Waldo was really an agent of Zaldy in the transaction, then,. Whatever is said and done by Waldo while acting within the scope of his authority is issible against Oscar, his principal, the same as if Oscar personally entered into the contract with Zaldy. Representation made by a partner An ission by a partner is an ission against the partnership under the condition given: a. the ission must concern partnership affairs; b. within the scope of his authority Restriction on the rule a. issions made before dissolution are binding only when the partner has authority to act on the particular matter;

b. issions made after dissolution are binding only if the issions were necessary to wind up the business. It is because if the ission is not the act of the partnership (thru the partner) it should not be evidence against it, The words within the scope of the authority produce this result. Case

Ormachea Tin Congco v. Trillana

13 Phil 194

Facts: Trillana owed a distillery partnership the sum of PP5,000, but when sued for the debt, he put up the defense of payment. As proof thereof, he introduced as evidence a declaration made by the former managing partner to the effect that Trillana owed the partnership nothing. The declaration was made, however, after the declarant had ceased to be a partner. Issue: Is the declaration evidence against the partnership? Held: No, it cannot be used against the firm because it was made by a person no longer a partner at the time of declaration. Trillana’s debt therefore still exists.

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ARTICLE 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, committed by or with the consent of that partner. Notice and effect to partnership A third person deserving to give notice to a partnership of matter pertaining to the partnership business need not communicate the partners if noticed is delivered to a partner, that is an effective communication to the partnership. If notice is delivered to a partner, that is an effective communication to the

partnership, notwithstanding the failure of the partner to communicate such notice or knowledge to his co-partners. Knowledge that partners should know When the knowledge or notice had been received by the partner before a partner becomes a partner, and his partners know nothing of this, and he is not the partner acting the particular matter there is no doubt that there has been neither knowledge of nor notice to the partnership. Example Sergio, in behalf of the partnership bought a parcel of land from Mario. Before the sale, Sergio got some knowledge that the land is involved in the litigation in which Fernando claims to be the rightful owner. Nevertheless, Sergio did not convey the information to the partnership. Eventually, Fernando was able to recover the land, Sergio’s knowledge is knowledge of the partnership. Hence, Mario is not liable. Knowledge by Sergio may have been obtained before he became a partner provided the same was then present to his mind. This includes a question of fact and it may be difficult to prove if such knowledge was in Sergio’s mind. ARTICLE 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 his co-partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership, or any penalty is incurred, the partnership is liable therefore to the same extent as the partner so acting or omitting to act. Liability of the partners for the wrongful act A partner who acts for his own personal purpose is solely and personally liable under the law. Thus, if he is driving a partnership-owned vehicle for purposes of his own, which accidentally results in a traffic accident. The acting partner is liable alone. On the other hand, the offending partner who caused damage for the partnership due to his personal negligent shall be liable to the partnership when the latter is

liable to a third person, a right of indemnity against the partner who caused the injuries. Injury to an employee The law speaks of an injury sustained by any person, not being a partner. Does Art 1822 apply to an injury to an employee, not a partner of the firm? - It would seem that the answer is yes, for a mere employee is not necessarily a partner . And yet in a Utah case, the court decided otherwise , apparently because the injury should have been caused a person not connected in any way with the firm. When the firm and the other partners are not liable a. if the wrongful act or omission was not done within the scope of the partnership business and for it benefit or with the authority of the co-partners. b. if the act or omission was not wrongful ( Art 1822 which uses the term “wrongful”) c. if the act or omission , although wrongful, did not make the partner concerned liable himself. c. if the wrongful act or omission was committed after the firm had been dissolved ( stopped its business) and same was not in connection with the process of winding up.

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ARTICLE 1823 The partnership is bound to make good the loss:

Where one partner acting within the scope of his apparent authority receives money or property of a third person and misapplies it; and

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.

Solidary liability for tort or breach of trust The partnership[ is liable for the misappropriation of money or property entrusted to the partnership by a third person. Example 1 Lander, a managing partner in Lorex Company, collected sums of money for the clients of the partnership but spent the money in a drinking-spree. In this case, the partnership and partner Lander are solidarily liable with the other partners to third persons for the wrongful act of a partner. Example 2 Lyndel, Meryl, and Nadine are partners in an electronics repair shop. Rainier deposited P 5,000 for the service fee and pats costing P 2,500 for the repair and electronic components in which the partners should return a change of P 2,500. when the components are claimed However, Nadine misappropriated the money intended to be returned to Nadine. In this case, the partnership and Nadine are solidarily liable to Nadine for the return of the change of P 2,500 at the time the components are to be claimed. Liability of a Partner for misappropriation The difference between par 1 and par 2 is that in the former the misappropriation is made by the receiving partner, while in the latter, the culprit may be any partner. The effect, however, is the same in both cases, as can be seen in Art 1824.

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Article 1824 The law imposes solidary liability upon the partners and the partnership in cases of torts or wrongful acts of a partner as provided in : ARTICLE 1824 All partners are liable solidarily with the partnership for everything chargeable to the partnership under articles 1822 and 1823. It may be cited that the liability of a partner for the debt of the partnership depends upon whether the debt is contractual or it arises from tort or conversion. In Article 1216 it is stated that “ the creditor may proceed against any one of the solidary debtors or some or all of them at the same time. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected( Civil Code) In Article 1816, the liability of the partners is different from their liability for contractual obligations. In this Article 1824, the liability is solidary, while in article 1816, it is t and subsidiary. Article 1816, refers to partnership obligations, Article 1824, refers to civil liability of the partnership arising from the wrongful acts or omissions of any partner. Tort is the act or omission which does not constitute a crime or felony punishable by law. Requisites of Article 1822 for liability

There must be guilty or wrongful act or omission by a guilty partner; A partner must be acting in the ordinary course of business or with the authority of his co-partners even if the act is not business related.

Solidary liability of the partners with the Partnership

a. The liability of the partners, in torts and crimes, is solidary, in contractual obligations, it is generally merely t. While Art 1816 speaks of pro rata liability of the partners, and while the code Commission says that pro rata in this article means “ in proportion to their contribution”, still the Supreme Court has ruled that pro rata means t, such that if 5 partners are liable, each would be responsible for 1/5 of the debt and if one of the five would be excused each of the remaining four would be responsible for 1/5. Thus, “pro rata” is used in the sense of “t” to distinguish the same from solidary liability. If the responsibility of the partners were to be merely t and not solidary, and one of them happens to be insolvent the amount awarded to the dependents of the deceased employee would be only partially satisfied. This is evidently contrary to the intent and purpose of the law to give full protection to the employee. b. Torts and crimes result from individual acts of the partners; while contractual liabilities arise from partnership obligations. c. It is not only the partners that are liable in solidum; it is also the partnership.\ Example A and B are partners. A misappropriates a sum of money belonging to a customer. X, but which was already in the custody of the partnership. Whom can X hold liable? - X can hold liable either the firm or A or B, and the liability is for the whole amount because it is solidary. However, if B is made to pay the full amount, he can recover the whole amount, plus the interest from A later on instead of only A’s share, for the simple reason that it is only A who is guilty.

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ARTICLE 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:

When a partnership liability results. Liable as though he were an actual member of the partnership; 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 of the existing partnership consent to the representation, a partnership act or obligation results; but in all other cases it is the t act or obligation of the person acting and the persons consenting to the representation.

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Estoppel; defined Estoppel means 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. It is also defined as a bar which precludes a person from denying or asserting anything contrary to that which has been established as the truth by his own deed

or representation, which could either be express or implied. Through estoppel, an ission or representation is rendered conclusive upon the person making it and cannot be derived or disproved as against the person relying thereon. Partner by estoppel and liability A person who holds himself out as a partner in a business or consents to his being held out is liable on contracts made with third persons carrying on the business on the faith of the representation. He is estopped to deny the shown agency. that a person who represents himself as partner of a certain partnership but in fact not can be held liable to third persons as if he were a partner when:

He represents or claims himself directly to anyone as a partner in an existing partnership or in a non existing partnership. He represents himself indirectly by consenting to another representing him as partner in an existing partnership or in a non-existing firm.

However, the third party must show that the representing partner showed himself or allowed others to represent him as a partner, and that he dealt with a partnership to his injury in justifiable reliance on such representation.

Example 1

Dan, Ernie and Ferdie are partners in DEF Company. George, a friend of Ferdie represented himself as a partner in DEF Company to Hans, who on the faith of such representation, extended credit to DEF Company. George, is a partner by

estoppel. He is liable to Hands as though he is an actual member of DEF Company.

If all the partners, Dan, Ernie and Ferdie consented to the representation, then a partnership liability results. This is a case of partnership by estoppel. All the partners and George are liable to a third party.

Example 2

Andre, Brando and Chuck were partners in ABC Company. Dave was not a partner. In one occasion in the presence of the three partners, Dave introduced himself to Edward as a partner in ABC Company. Andre, Brando, and Chuck, although heard the representation did not deny the claim of Dave.

Later, Edward believing in good faith in the representation of Dave extended credit to the partnership of ABC Company. When the obligation fell due, Edward demanded payment from ABC Company.

Was ABC Company liable? Yes. Because there was a partnership liability which had been created. According to Article 1825, If there is an actual existence of partnership and all the partners make the representation that they are partners in the said partnership with a person who is not really a partner,. Or all the partners agree or consent, either expressly or impliedly to a representation made by a third person that he is a member of the partnership and the person to whom the representation is made extends credit to the partnership in good faith a partnership debt is created. Should ABC Company failed to pay the debt, then Andre, Brando, Churck and Dave would be liable pro rata.

ission of a new partner and his liability

An incoming partner is liable for obligations of the partnership at the time of his ission. The obligation of the incoming partner shall be satisfied only out of partnership property. For such obligations, his liability is limited to his share in the partnership property, unless there is a stipulation to the contrary.

Those who were already partners at the time when the obligations were incurred and liable with their separate property. For all the obligations accruing subsequent to the ission of the partners, all the partners are liable with their separate properties.

When estoppel does not apply

When although there is misrepresentation, the third party is not deceived, the doctrine of estoppel does not apply. The law says, “liable to any such person to whom such representation has been made, who has, on the faith of such representation, given credit as to the actual or apparent partnership.

Example of a Partner by Estoppel

a. to obtain better credit facilities for a partnership of which he was not a member, X represented himself as having a half-interest therein. If the misrepresentation is believed and acted upon by innocent strangers. X should be considered as a partner by estoppel.

b. X, a rich man, wanted to give better financial credit to a partnership, so he signed the partnership agreement as partner when in fact, he was not really one, People who rely on the misrepresentation can consider him a partner by estoppel.

c. A partnership which for want of the proper legal formalities is not given legal personality, may be considered, at lest insofar as their contractual obligations to strangers are concerned, as a partnership by estoppel. Persons dealing with it are estopped from denying its partnership existence. Where a partnership not given legal personality was not allowed to impugn a chattel mortgage on three cars, a contract which it had voluntarily entered into. For the purpose of its de facto existence it has such attributes of a partnership as domicile.

Burden of Proof

The creditor, or whoever alleges the existence of a partner or partnership by estoppel has the burden of proving the existence of the misrepresentation and the innocent reliance on it.

Problem

A is engaged in business all by himself. With a view to obtaining a better financial standing in the community, A pretended to friends and clients that B was his partner. The misrepresentation was with B’s consent. Who would be preferred later on as to the assets of the business-creditors who trusted only A or creditors who relied on the alleged partnership of A and B?

- While partnership creditors are preferred over separate creditors, still in this

particular case, there was no real partnership creditors properly exist. Therefore, also no preference is given to creditors who relied on the existence of the fictitious firm . Inasmuch no partnership liability results, it follows that deceived creditors may only hold both A and B as tly liable.

Rule for making new partner liable

The law may be harsh, but it is still the law ( Dura lex sed lex) In this case, the rule cannot be said harsh for the new partner because he shared in the benefits of the partnership properly and an established business. He has every means of obtaining full knowledge of and protecting himself because he may insist on the liquidation or settlement of existing partnership debts.

The facts stated are cited in

ARTICLE 1826 A person itted as a partner into an existing partnership is liable for all the obligations of the partnership arising before his ission 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.

Example Ron, Rey, and Ren were the only partners in partnership R & Company. Red was itted as a partner. R & Company had obligations to third persons amounting to P 10,000 which still subsists. May Red be held liable for those obligations? Yes., but Red shall be liable only up to the extent of his capital contributions, and not with his separate property. As for obligations incurred by the partnership subsequent to the ission of

Red there would be no difference between old partners and new partners as all of them shall be liable even with their separate property. Entry of a new partner Example A, B, and C are partners. D is itted as a new partner, Will D be liable for partnership obligations contracted prior to his ission to the partnership? - Yes, but his liability will extend only to his share in the partnership property, not to his own individual properties. ( Art 1826) Ha he been an original partner, he would be liable both insofar as his share in the firm is concerned, and his own individual property. It is understood that the newly itted partner would he liable as an ordinary, original partner for all partnership obligations incurred after his ission to the firm. New partnership prior to entry of a new partner Does the ission of a new partner dissolve the old firm and create a new one? -yes, and it is precisely because of this principle that Art 1826 has been enacted. The reason is simple; since the old firm is dissolved, the original creditors would not be the creditors of the new firm but only of the original partner, hence, they may lose their preference. To avoid this injustice, under the new Civil Code (together with the new creditors of the new firm) they are also considered creditors of the new firm. Thus, it is essential hat the partnership assets of the new firm ( with the capital of the new partner) be available even to the old creditors. Liability of a new partner for previous Obligation Is not the rule of holding the new partner liable ( with his share of the firm’s assets) for previous obligations of the firm unduly harsh on said new partner? - No, it is unduly harsh. After all “ the incoming partner partakes of the benefit of the partnership property, and an established business. He has every means of

obtaining full knowledge and 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. Article 1827 Rights and preference to payment As regards the rights of the partners to payment of the partnership property, the partnership creditors have the first preference for the payment than a partnership partners. This is based upon the theory that the partnership, treated as a legal entity distinct and separate from the consisting it. ( Art. 1768) should apply its property to the payment of its debts in preference to the claim of any partner or his creditors. Remedy of private creditors The private creditors of a partner may ask for the attachment and public sale of the share of the latter in the partnership assets, shares which belong to the partners. The purchaser does not become a partner. These facts are stated in: ARTICLE 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 for the attachment and public sale of the share of the latter in the partnership assets. Preference of partnership creditors After all the partnership is a juridical person with whom the creditors have contracted. Moreover the assets of the partnership must first be exhausted. After all, the remainder ( after paying partnership obligations) really belongs to the partners. The purchaser at the public sale does not necessarily become a partner. Sale by a partner If a partner sells his share to a third party, but the firm itself still remains solvent, creditors of the partnership cannot assail the validity of the sale by alleging that

it is made in fraud of them, since they have not really been prejudiced.

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Example Brian, Brix, Bram are partners in a partnership B & Company. Brax is a creditor of B & Company. While Bred is the separate creditor of partner Brian.

Between creditor Brax and Bred who should be preferred with respect to partnership property?

Brax shall be preferred. The reason is that creditors of B & Company, are creditors of a juridical entity distinct for the partners composing it and the partnership property belongs to B & Company; not to Brian , the partner, and as such should be made to answer for partnership obligations. Remedy of creditors of a partner The creditors of each partner of the partnership may ask for the attachment and public use of the share of the latter in the partnership assets without detriment to the right of preference of the partnership. Such share belongs to the partner. Example Pascal, Louis and Pierre formed a partnership named PLP Company without stipulation regarding the manner of dividing the profits, however, they share equally in the partnership assets: the fraction understandably to be 1/3. After a calendar year, the assets of the partnership amounted to P 80,000. Its liability to Isaac amounted to P 20,000. However, another creditor named Baron, a separate creditor of Pascal has a claim for P 40,000.

As partnership creditor is preferred, Isaac shall be paid first the amount of P 20,000, leaving a net asset of P 60,000. Each partner shall get P 30,000 each as his share in the assets. Baron could collect only P 30,000 from the assets of the partnership. His remedy is to recover the balance of P 10,000 from the private property of Pascal.( Ref to Art 1839(9)) SUMMARY A contract of partnership produces four distinct relationships which are : relationship of parties among themselves; with partnership; with third persons and ; with whom it transacts business. Good faith and highest integrity and great confidence are necessary requirements in order to establish a good business partnership. The conception of partnership begins from the time the partners execute a contract. The life of a partnership depends upon the agreement of the partners. It may be for fixed term and at will, of course, there is not partnership without capital contribution which may be in the form of money, and property and services. In which case failure of a partner to contribute will subject him to damages and interest. Any retention of property or delay in the delivery of the capital to the partnership shall result to penalty as provided by rules of partnership agreement. Goods contributed as share shall be appraised by an expert appraiser to determine its market value or prices. An industrial partner is one who contributes his industry or services in the partnership. He is not allowed to exploit his own services for his profit without the consent or the permission in order to prevent conflict of interest. He may not be compelled nor is he liable for the partnership liabilities Capitalist partners who refuse to contribute additional share to save the venture from collapse shall be obliged to sell his interest to the other interest. A general partner who sustains damages on of partnership shall be liable for payment of damages but may mitigate his responsibility through his good effort to improve the gain of the partnership. Contributions of non-fungible things shall be for the of a partner and not of the partnership for fungible things perish with the owner. As regards the partnership obligations to its , it shall reimburse a partner who has made advances for the of the partnership.

Sharing of profit and loss shall depend upon the agreement , and in the absence of such agreement it shall be divided proportionately. An industrial partner shall receive such share in the profits as may be just and equitable under the circumstances. However, Art. 1816 states that if the partnership has a contractual debt and it cannot pay, the industrial partner equally with the capitalist partners shall be compelled by the creditor to pay his pro rata share of his own property or assets. By common consent of all the partners, the managing partners shall be appointed who may execute all acts of istration which are provided in Article 1818. His power shall be revoked if he should act in bad faith. In the event two managing partners are entrusted with the management of the partnership without specifying their duties, or without stipulation that one of them shall not act without the consent of the others, each one may execute all acts of istration, but if any one opposes the acts of the others, the decision of the majority shall prevail. In case of tie, the matter shall be decided by the partners owning the controlling interest. Sub partner exists and without the consent of the other partners, a partner may associate a sub partner. Sub partner is one formed between a member of a partnership and a third person for a division of the profits coming to him from the partnership enterprise. Sub partnership does not affect the partnership in any way. As regards the partnership books, the rule provides that it shall be kept subject to any agreement between the partner at the principal place of business of the partnership. It shall be inspected and copied at any reasonable hour. And under mutual trust and confidence among partners, there must not be any concealment between them in all matters affecting the partnership, hence, the duty to render true and full information of all things affecting the same upon request or demand. Concerning the rights of the capitalist partner, his right is different from the industrial partner in which the industrial partner is absolutely prohibited from engaging in business similar to that of the partnership. The reason is that the relationship of partners is fiduciary and imposes obligation of utmost good faith among them. In general, during the existence of the partnership, a partner is not entitled to a

formal of partnership affairs because the right of the partner to know the partnership affairs are adequately protected in Art 1805 and 1806, for it may be a waste of time and inconvenience. Exception, in an unusual situations under Art 1809 where a partner is assigned abroad for a business mission and the books are in the possession of other partner. Enumerating the property rights of a partner, right to specific partnership property; right to obtain interest from the partnership; right to participate in the management of the business. A partner is co-owner with his co-partners of partnership property but he has no right to possess such property without the consent of his partners. Assignment may take place in the partnership. This allows conveyance by a partner of his whole interest in the partnership without dissolution. The assignee shall not enjoy all the rights that a general partner has. His tasks are just limited to: receive the assignor’s interest; to require an of partnership affairs. The partnership shall operate with a firm name. It may be that of an individual partner surnames of all the partners with the addition of “ and Company”. However, the name of a deceased partner cannot continue to use in its firm. It will violate Article 1895. Persons not being partners, do not acquire rights of a partner if include their names in the firm, subject to the liability of a partner. The industrial partner who is generally not liable for the liabilities of the partnership 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 of the partnership under its signature and person authorized to act for the partnership. Every partner is an agent and may execute such acts with binding effect on the partnership, however, the partnership is not bound for acts not for carrying on in the usual way, unless authorized by all other partners. The partnership is not liable to third persons having actual or presumptive knowledge of the restrictions whether or not the acts are apparently for carrying on the usual way the business of the partnership. A partner by estoppel creates liability to a third person if such acts of a partner is denied by the partners, however, if the partners do not deny such acts then the partnership shall be held liable. A person not a partner may become a partner by

estoppel, and thus be held liable to third persons as if he were a partner when by words he directly represents himself as a partner in an existing partnership or indirectly represents himself by consenting to another representing him as a partner in an existing partnership or in a non-existing partnership. A person is itted into the partnership is liable for all the obligations of the partnership arising before his ission as though he had been a partner when such obligations were incurred, except that his liability shall be satisfied only out of partnership property, unless there is a stipulation to the contrary. The rule cannot be harsh because he partakes of the benefits of the partnership property and an established business. Creditors are first preference as regard the partnership property without prejudice to this right, otherwise the private creditors may each ask for the attachment and public sale of the share of the partners in the partnership assets.

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Review Questions I. Define the following:

Proportionate

2. Subsidiary liability 3. Partner by Estoppel 4. Equitable interest or title

II.

What are the relationships produced by contract of partnership? What is the legal effect if a contract of partnership with a fixed term is continued after the expiration of the term? Explain. Is an industrial partner free to engage his services for himself outside the partnership What are the property rights of a partner? May the conveyance of the whole interest of a partner dissolve the partnership? Why? Who may bind the partnership in contracts with third persons? What are the exceptions to the rule? What are the instances when a partner may be held liable solidarily with the partnership? Give at least four grounds for the judicial dissolution of a partnership. Who are authorized to wind up the affairs lf a dissolved partnership? Give the rights of an injured partner when a partnership is rescinded or annulled on the ground of fraud or misrepresentation committed against him.

CHAPTER 3

DISSOLUTION AND WINDING UP

Dissolution; Winding Up, and Termination ; defined `Dissolution is the point in time when the partners cease to carry on the business

together; It changes the relation of the partners caused by any partner ceasing to be associated in the carrying of the business. It is the death of a partnership. In its normal course, dissolution takes place by:

Expiration of the partnership term By order of the competent court if it operates at a loss. When the business operation tends to be unlawful Failure to comply with requisites of the Articles of Partnership

Winding Up is the process of settling partnership affairs after dissolution. Termination is the point in time when all partnership affairs are wound up. It signifies the end of the partnership life.

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The defined and explained above are asserted in ARTICLE 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. Example of Dissolution Ellis, Fermin, and Gerry are partners in a partnership at will. Today, Ellis informs Fermin and Gerry that effective this afternoon at the close of business, he shall close to be a partner. The withdrawal of Ellis from the partnership causes its dissolution. After the close of the business today, the partners shall cease to carry on the business together.

Example of Winding Up Lancer, Brix, and Brugs are partners in a partnership known as LBB & Company. Partner Lancer having died, the partnership is dissolved. Surviving partners Brix and Brugs must have to collect the s due the dissolved the LBB & Company, pay its liabilities, finish transactions already begun but still unfinished on the death of Lancer, settle the s among themselves and finally distribute the profits, if any, among themselves. All these acts taken together constitute the winding up. After the affairs of the dissolved partnership are completely wound up the partnership is terminated. Dissolution does not terminate partnership It must not be interpreted to mean that dissolution is extinguishment of the partnership, but it must be understood that dissolution is the cessation of carrying of its business by partners, thus, there begins the change in the relation of the partners caused by any partner ceasing to be part in carrying on of the business. Thereafter, no new business should be undertaken by the partnership but affairs should be liquidated and distribution made to those entitled to the partners’ interest. The partnership continues until winding up is completed. Dissolution refers to the change in partnership relation and not the actual cessation of the partnership business. Case

Recentes v. Court of First Instance

GR- 40504 July 29, 1983

J. Abad Santos; In an action for ing and for payment of money allegedly due a partner, a receiver must be appointed to wind up the dissolved partnership. Termination defined Termination is the point in time after all the partnership affairs have been wound up. Effect of obligations a. just because a partnership is dissolved this does not necessarily mean that a partner can evade previous obligations entered into by the partnership. b. of course, generally, dissolution saves the former partners from new obligations to which they have not expressly or impliedly consented, unless the same be essential for winding up.

ARTICLE 1829 On dissolution, the partnership is not terminated, but continues until the winding up of partnership affairs is completed. ARTICLE 1830 Dissolution is caused:

Without violation of the agreement between the partners:

By the termination of the definite term or particular undertaking specified in the agreement; By the express will of any partner, who must act in good faith, when no definite term or particular undertaking is specified; 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; By the expulsion of any partner from the business bona fide in accordance with such a power conferred by the agreement between the partners;

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; By any event which makes it unlawful for the business of the partnership to be carried on or for the to carry it on in partnership; 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;

By the death of any partner; By the insolvency of any partner or of the partnership; By the civil interdiction of any partner; By decree of court under the following article.

Causes of dissolution Generally, partnership may be dissolved by causes:

Without violation of the agreement between the partners In contravention of the agreement An event which makes the business of the partnership unlawful Loss of a specific thing without a partner had promised to contribute to the partnership Death of a partner The insolvency of any partner or if the partnership itself. Civil interdiction of any partner, and lastly Judicially or extra judicially, that is by decree of court or partner’s settlement themselves.

Note that once the partnership is dissolved, the same partners may form a new partnership to continue the business under the same . Example 1 Dissolution without violation of agreement

Jick, Jack and Jake organized last year a partnership for a period of five years. Upon the expiration of the five-year period the partnership will be dissolved by the termination of the definite term. Dissolution by termination of the definite term is a dissolution not in contravention of the agreement; on the contrary, it is in pursuance of the agreement. Any partner may cause the dissolution of the partnership at any time without the consent of his co-partnership at any time without the consent of his co-partners at his sole pleasure. Delectus personae The doctrine delectus personae allows a partner to have the power although not necessarily the right to dissolve a partnership even though his co-partner wish to continue the business. Legal effects of dissolution The withdrawing partner is liable for damages for unjustified dissolution but in no case can he be compelled to remain in the partnership with his withdrawal, the number of is decreased, hence, the dissolution. Instances when business becomes unlawful Events make the business itself of the partnership unlawful, thus, dissolution may be caused involuntarily:

A law makes continuance of the business unlawful. Declaration of war between countries of which the partners are respectively citizens or makes a unlawful for the partners to carry it on together.

Example Vincent, a lawyer is appointed judge of the Regional Trial Court (RTC). The law prohibits him as judge to give or render legal counseling or advice to the accused

and plaintiff. His job as judge prevents or inhibits him to practice counseling or rendering advice. Lost of specific thing

If the specific thing to be contributed by a partner is lost before delivery. The partnership is dissolved because the thing to be contributed cannot be substituted with another. There is a failure of a partner to fulfill his part of the obligation. If the loss happened after delivery of the thing promised, then the partnership is not dissolved, but it assumes the loss of the thing having acquired ownership thereof. The partnership is dissolved when the use or enjoyment of the thing to be contributed is lost of the same before or after delivery.

Death of a partner The death of a partner ceases his association in the carrying of the business. The surviving partners have no authority to continue the business except so far as it is necessary to wind up. The partnership agreement, however, may provide that the death, withdrawal, or ission of a partner will not affect a dissolution. The estate of the deceased is not liable for obligations after dissolution beyond his capital or interest in the business which is continued. Civil Interdiction A partner requires the capacity of the partner. A person convicted or suffering from the penalty of civil interdiction cannot validly give consent as his capacity to act in limited. Civil interdiction deprives the offender during the time of his sentence of the right to manage his property and dispose of such property by any act or any conveyance inter vivos. Insolvency of any partnership of partnership When a partnership in insolvent its property which is in the hands or custody of

its partner shall be liable to partnership obligations resulting in their inability to continue the business, practically amounting to a dissolution. When a partnership assets have been exhausted without satisfying its obligations to its creditors would also be impossible for an insolvent partner whose interest is subject to the right of his creditors. No violation of agreement In Art 1830 the partnership agreement has not been violated: 1. termination of the definite term or specific under taking. - the is the law between the parties in the firm , however, still continues after said period, it becomes a partnership at will; 2. express will of a partner who must act in good faith when there is no definite term and no specified undertaking. - if he insists on leaving in bad faith, the firm is dissolved, but he may be responsible for damages. 3. express will of all partners ( except those who have assigned or whose interests have been charged) 4. expulsion in good faith of a member. If one is expelled, the number of partner is decreased, hence, the dissolution. If a partner is expelled in bad faith there can also be eventual dissolution for here, there would be apparent lack of confidence, without pre justice of course to liability for damages. Case Bearneza v. Dequilla

43 Phil 237

Facts: Bearneza and Dequilla were partners for the exploitation of a fish pond. Bearneza died in 1912. In 1919, Bearneza’s legal heir demanded from Dequilla the decased’s share in the profits between the time of his death and 1919.

Issue: Should said profits be given? Held: No, because there were profits made after the firm had been dissolved by Bearneza’s death. The plaintiff is entitled only to the profits obtained already at the time of death, for after death what existed was merely a “ partnership in liquidation” - Profits already accruing before death but collected or realized only afterwards should be included, for the basis therefore had already been laid. Who liquidates? - It has been held that when the death of one of the partners dissolves the partnership, the liquidation of its affairs is by law entrusted to the surviving partners, or to liquidation appointed by them, and not to the executors of the deceased partner, still under the new Civil Code it is provided that, any partner, his legal representative, or his assignee, upon cause shown may obtain winding up by the court. Insolvency of any partner a. The insolvency need not be judicially declared, it is enough that the assets be less than the liabilities. - it is submitted that no judicial decree is needed to dissolve the partnership, for otherwise, this cause would have been inserted under no. 8, by decree of the court. Why insolvency is a ground for dissolution - The business of a firm requires solvency or ability to meet the financial demands of creditors. Civil Interdiction of any partner - Civil interdiction (civil death) results in incapacity to enter into disposition of property. Inter vivos. Decrease of causes of dissolution

Can the partners in their contract decrease or limit the causes of dissolution? - No. where the Supreme Court held that a contractual provision prohibiting dissolution except by authorization of two-thirds(2/3) of the , cannot be sustained when the firm had lost its capital, or had become bankrupt, or had utterly abandoned the enterprise for which it had been organized. Case Eugenia Lichauco, et al v. Faustino Lichauco 33 Phil 350 Facts: Faustino Lichauco was the managing partner of a firm for the carrying on of a rice- cleaning business. Because the enterprise was unprofitable, same was discontinued and the rice machinery was dismantled. When sued for an ing he refused on the ground that under the of the partnership contract, dissolution could be done only by a vote of 2/3 of the , and such vote had not yet taken place. Issue: Is his contention correct? Held: His contention is wrong, for when the enterprise was abandoned, and the machines sold, undoubtedly the firm was dissolved by provision of the law; and therefore he has the duty to liquidate and to all and to each of his associates.

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Article 1831 Judicial dissolution There are valid reasons for the dissolution of a partnership which may be subject to dispute or conflicting opinions to make a judicial dissolution necessary. Thus, dissolution of a partnership may be ordered judicially after a hearing on

application either by a partner in the cases mentioned in ARTICLE 1831 On application by or for a partner, the court shall decree a dissolution whenever;

A partner has been declared insane in any judicial proceeding or is shown to be of unsound mind; A partner becomes in any other way incapable of performing his part of the partnership contract; A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business; A partner willfully or persistently commits 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; The business of the partnership can only be carried on at a loss; Other circumstances render a dissolution equitable.

On the application of the purchaser of a partner’s interest under article 1813 or 1814;

After the termination of the specific term or particular undertaking; At any time the partnership was a partnership at will when the interest was assigned or when the charging order was issued.

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Who can Sue for Dissolution a. A partner for any of the six (6) causes given in the first paragraph. b. the purchaser of a partner’s interest in the partnership under Art 1813 or 1814, provided that the period has expired or if the firm was a partnership at will when the interest was assigned or charged. - if the period is not yet over; said purchaser cannot sue for dissolution. Insanity of a Partner a. even if a partner has not yet been previously declared insane by the court, dissolution may be asked, as long as the insanity is duly proved in court. b. For making insanity a cause; the partner will be incapacitated to contract. Incapability to perform This may happen when the partner enters the government service which would prohibit him from participating in the firm; or when he will have to stay abroad for along time. Prejudicial conduct a. when the managers fail to hold regular meetings as provided for in the agreement, fail to make reform or to hear grievances, and fail to give proper financial reports, an action for dissolution would prosper. The same rule holds if ing is unjustifiably refused. b. True exclusion from the management of one of the persons authorized to manage, is indeed a ground for dissolution; but not occasional friction among the managers or trivial faults, particularly if the firm is financially prosperous. Case Potter, et al v. Brown,et al 328 Pa 554, 118 ALR 1415

Facts: In 1934 an insurance partnership was formed, giving almost unlimited powers to Mr. Brown. The partner owning the controlling interest. Mr. Brown, as general manager was also given the powers to fix, increase, and reduce the salaries of the other partners who helped in the business. However, the power to it new partners was given to the numerical majority . One day, Brown proposed the ission of a new partner, Mr. Moore, but he was defeated by a vote of 7 to 3 on the ground that Moore was not an insurance man. Later, Brown called a special meeting for the board of managers to reconsider their vote; but in said meeting Brown’s proposal was again defeated. So, Brown retaliated by reducing the salaries of the others. He relented however, and restored the salaries after a week. But from that time on, the others refused to attend the meeting( the seven partners who had voted against Brown’s proposal) . These seven later on sued for dissolution; and for the right to continue the business. They itted, however, that Brown was a wonderful executive, and that the firm was making immense profits, and that finally Brown had occasionally contributed additional capital whenever the firm needed the same. They alleged however, that the measure of compulsion adopted by Brown to force the acceptance of Moore as a partner, constituted misconduct on the part of Brown. Held: The partnership will not be dissolved. After all:

there was neither allegation nor proof of fraudulent or dishonest practices. the plaintiffs were not really denied their proper share of participation in the management of the business, such rights being stipulated in the partnership agreement. Notice that almost exclusive control was vested in one partner, and this stipulation can strictly be enforced. if the plaintiffs are aggrieved because they are unable to exercise the direction over partnership affairs that they feel is their due, the reason is to be found primarily in the partnership agreement rather than because of any misconduct of Mr. Brown. While the attempt to reduce salaries was really made, still this did not constitute gross misconduct as the restoration was done speedily; nor did the firm suffer. Difference and discord should be settled by the partners themselves by the application of mutual forbearance rather than suits for dissolution, Equity is not

a referee of partnership quarrels. The business is a highly prosperous one. The plaintiffs are not also faultless. It would appear that they are willing to pick up the gauntlet of partnership conflict and to seize upon incidents constituting at their gravest import mere technical misconduct of a partner, for the purpose of acquiring as their own a long established and valuable business to the exclusion of the partner who is the owner of the major interest therein.

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Example 1 Jon, Joe and Joni are partners. A competent court declares Joni insane during the existence of the partnership. In this case, Joe, and Joni may petition the court for the judicial dissolution of the partnership. Example 2 Karl, Kent, and Kurt formed a partnership to continue for five years. On the third year, Kurt sold his entire share and interest to Kim. Such conveyance, under Article 1813, does not dissolve the partnership, and Kim does not become a partner where his only right was to receive the profits to which Kent was supposed to receive. Hence, Kim cannot ask for judicial dissolution of the partnership. But if after the fifth year; the partnership is continued, Kim is entitled to ask for judicial dissolution. The continued partnership may or may not be at will. The partnership may resume . The partnership at will if it is continued without the express agreement. When a charging order was issued by a court against Kurt in favor of Kent ( his creditor), and when a partnership was already at will, Kim, at any time may ask for judicial dissolution. Article 1831 applies if in continuing the business a partnership at will is created or the partnership is a partnership at will from the beginning.

Appointment of Receiver In a suit for dissolution, the court may appoint a receiver at its discretion but a receiver is not needed when practically all the firm assets are in the hands of a sheriff under a writ of replevin or when the existence of a partnership with the plaintiff is denied, particularly if the business of the firm is being conducted successfully. It is understood that a firm whose dissolution is petitioned for in court becomes a dissolved partnership at the time the judicial decree becomes a final judgment. ARTICLE 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:

With respect to the partners,

When the dissolution is not by the act, insolvency or death of a partner; or 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. The partnership ceases to be a going concern upon dissolution and the partner’s authority of representation is confined only to acts incident to winding up , the transactions begun but not then finished. When the dissolution is not by the act, insolvency, or death of a partner, the authority of any partner to bind the partnership by a new contract is immediately terminated, however, when the dissolution is by such act, insolvency, or death, the termination of authority depends upon whether or not the partner had knowledge or notice of the dissolution as provided in

Effects of dissolution a. when a partnership is dissolved, certain effects are inevitable, insofar as the relations of the firm toward third persons are concerned; and insofar as the partners themselves are affected in their relations with one another. Arts. 1832,1833, and 1834 speak of said relationships. b. Art 1832 merely states a general rule, that when the firm is dissolved, a partner can no longer bind the partnership. Effect on previous contracts When a firm is dissolved does this mean that the contracts and obligations previously entered into, whether the firm is the creditor or the debtor, automatically cease? - No, otherwise the result would be unfair. The firm is still allowed to collect previously acquired credits; it is also bound to pay off its debts. A dissolved partnership still has personality for the winding up of its affairs. Creditors who have not been prejudiced If the obligations and rights of a dissolved firm are transferred to another firm, should creditors still hold the former liable even if said creditors have not been prejudiced? - No more, as long as the new firm can indeed take care of said creditors. It would be erroneous to let the old firm still pay, if the new firm can really pay.

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ARTICLE 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:

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

Example Minni, Menny and Manny were partners in M Company. The articles of partnership states that the partnership was fixed and it happened that it had just expired yesterday, thereby, understood to be dissolved. In this case, the dissolution was caused not by the act, insolvency, or death of a partner. However, if Minni after the expiration of the term of the partnership enters into a new transaction ( not for winding up nor complete and unfinished transactions) with Kim, he ( Minni) alone assumes whatever liability may arise under the contract. This is because his authority to act for M Company had terminated when the partnership was dissolved. If the partnership is liable to Kim under Article 1834, Menny and Manny are entitled to indemnity from Minni Two kinds of Causes of Dissolution

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a. On the one hand by: 1. act ( line withdrawing of a partner) 2. insolvency 3. death b. On the other hand by other things like Termination of the period

Effect of act, insolvency and death a. if the partner acting had knowledge ( as distinguished from mere notice, but without actual knowledge) if dissolution is caused by an act ( like withdrawing, retiring) here, only the partner acting assumes liability, in that even if the firm may be held by strangers, and even if the partners will still be individually liable, still the other partners can always recover from the partner acting. b. if the partner acting had knowledge or notice, if dissolution was caused by death or insolvency, here again, while the firm may be liable, in proper cases, recovery can be had by the other partners from the partner acting. Example A, B, and C were partners. A resigned from the firm, Therefore, it was dissolved. B knew this, and yet he still deliberately entered into new transactions with X, an innocent customer. - yes, if the firm assets are not enough. X can still go after the individual assets of A, B, and C. After all of them have paid X can X and C still recover from B, the partner who acted despite his knowledge of the firm’s dissolution? - Yes, because B should not have done what he did.

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Causes of dissolution When a third person enters into a new contract with a partner after a dissolution, the new contract will bind the partners, and each is liable for his share if any liability created by the acting partner as if the partnership had not been dissolved. Termination of a partner’s authority as among the partners to act for the partnership upon dissolution depends on whether or not the cause of the dissolution is the act, death or insolvency of a partner.

The authority of a partner ceases immediately except for purposes of winding up partnership affairs, if dissolution is not by the act, death or insolvency of a partner. If the cause of dissolution is the death, act or insolvency of a partner, authority ceases upon knowledge of the dissolution if caused by an act, or upon knowledge or notice of the death or insolvency if so caused of the partner acting. Example 1 Dissolution not by act, death, etc. Allen, Berger and Chirac are partners. As stated in the Articles of Partnership, today is the last day of the term of existence of the partnership fixed by the articles. Will any of the partners have authority to act for the partnership so as to bind the other partners tomorrow? No. The dissolution being caused not by the act, death or insolvency of a partner. The authority of a partner to bind the others cease immediately upon the dissolution, except where the act is appropriate for winding up. Example 2 Dissolution by the act, etc. Alvin, Melvin, and Calvin are partners in V Company, a trading firm. Alvin goes to Manila on a business mission. Unfortunately, on his way he dies. After Alvin’s death, Melvin, ignorant of such death, enters into a contract for the purchase of pharmaceutical drugs, on credit, to be delivered two days later. Before the delivery, the fact of Alvin’s death becomes known, and so Calvin claims that the contract of Melvin has been entered into without authority. Is Calvin legally right? No. Melvin’s authority to act is deemed to have ceased only upon his knowledge of Alvin’s death which knowledge is two days after the execution of the contract. When the act of a partner is done after the dissolution the other partners can be held liable as if there had no dissolution if the act is appropriate for winding upon notwithstanding the dissolution. The partner doing the act still retains the authority to do it. Right of partner to contribute from co-partners after dissolution

If dissolution has been caused by the act of one of the parties if the partner acting is subject to a liability to third persons, he can call in his co-partners to contribute towards this liability to the same extent as if there had been no dissolution, provided he had no knowledge of the dissolution at the time of the act. ARTICLE 1834 After dissolution, a partner can bind the partnership, except as provided in the third paragraph of this article:

By an act appropriate for winding up partnership affairs or completing transactions unfinished at dissolution; By any transaction which would bind the partnership if dissolution had not taken place, provided the other party to the transaction:

Had extended credit to the partnership prior to dissolution and had no knowledge or notice of the dissolution: or 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 d in a newspaper of general circulation in the place ( or in each place if more than one) at which the partnership 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:

Unknown as a partner to the person with whom the contract is made; and 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:

Where the partnership is dissolved because it is unlawful to carry on the business, unless the act is appropriate for winding up partnership affairs; or Where the partner has become insolvent; or Where the partner had no authority to wind up partnership affairs; except by a transaction with one who –

Had extended credit to the partnership prior to dissolution and had no knowledge or notice of his want of authority; or 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 d in the manner provided for advertising the fact of dissolution in the first paragraph, No. 2

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.

Dissolution terminates authority of partners Dissolution terminates the actual authority of a partner to act for the partnership. This authority may apparently continue as regards persons dealing with him who

know of the partnership and do not know of its dissolution. Example : Act of winding up Henry and Pen were partners in a real estate firm. Having been dissolved the partnership by expiration of the term, it became necessary to pay the creditors of the partnership. Henry and Pen decided to sell a parcel of land owned by the partnership. The act of the two in selling the land after dissolution bound the partnership for the reason that it was necessary for winding up. Persons extending credit prior to dissolution Prior to dissolution, persons who had extended credit to the partnership are entitled to notice of the dissolution, and if they have no notice of knowledge, are entitled to hold a retired partner for obligation incurred by continuing partners after the dissolution. Possibilities when firm is bound or not bound 1. when the partnership is bound to strangers; 2. when the partnership is not bound to strangers. a. a partnership liability is created when business is for winding up Example: Selling of property of firm to pay off partnership debts, mortgaging firm assets for same purposes. b. business is to complete unfinished transaction. c. completely new business with third parties considered innocent. The differences between (a) and ( b) no. 3 of the 1st paragraph are these: in (a) , the customer had previously extended credit, that is, was a previous creditor. In case of dissolution he deserves to actually know. In (b), he was not a previous creditor, if there was publication of the dissolution, it is presumed he already knows, regardless of actual knowledge or non-knowledge. Example

A, B, and C are partners,. A dies. B knows this, but still he later transacts new business with X, a business not connected with winding up, This notice of dissolution was in the paper but X did not read the notice, and when X transacted with B, X thought all the time that the firm had not yet been dissolved. If X had been a previous creditor, is the firm liable? - Yes, but later on, as among the partners, B alone will be liable, because he knew of A’s death. If X had never extended credit before, is the firm liable?

- No, because after all there had been a publication of the dissolution and it is his fault that he did not read the ment . He did not deserve special attention for after all he had never been a previous creditor of the firm.

When is the firm not bound? a. in all cases not included in our answer in comment no. 2 of this article. Example: new business with 3rd parties who are in bad faith. b. where the firm was dissolved because it was unlawful to carry on the business ( as when its objects were later declared by law to be outside the commerce of man) except, when the act is for winding upon. c. where the partner that acted in the transaction has become insolvent. d. where the partner is unauthorized to wind up except if the transaction is with customer in good faith ( as already defined or explained) It is understood that if after dissolution a stranger will represent himself as a partner although he is not one, he will be a partner by estoppel. Case JCH Service Station v. Patrikes

1944 , 181 Misc. 401 Facts: After a firm was dissolved, a partner borrowed money under the firm name from X. X knew that the firm already been dissolved. Is the firm liable? Held : No, because of X’s knowledge of the dissolution. McNeil Co. v. Hamlet 1919, 2134 Ill. App. 501 Facts: A, B and C are partners under a certain firm name. A retires. B and C continue the business. Is A liable to previous customers who transact with the new firm if the firm still uses the old firm name? Held: yes, unless A actually notifies said old customers or unless said customers actually know of his retirement.

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ARTICLE 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. In a strict sense, dissolution of a partnership must not be understood to be absolute so that at the termination of the object for which it was created the

partnership is extinguished pending the winding up of some incidents and obligations of the partnership, but the latter will be reputed as existing until the juridical relations arising out of the contract are dissolved. Example Burt, Bucks and Becks are active ostensible partners. Burt’s retirement terminates the actual authority of the three partners to impose new obligations on the partnership, except such as may be necessary to wind up the business or to complete transactions begun but not then finished. Assume that Chuck has extended credit prior to Burt’s retirement and has no knowledge of the latter’s retirement and that no notice has been communicated to Chuck by mail and otherwise, then on the ground of estoppel. If Bucks and Becks, purporting to act in behalf after partnership contract’s with Chuck, the partnership ( Brut, Bucks and Becks, tly) is liable to Chuck.

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How a partner’s liability is discharged a. the partner concerned; b. the other partners; c. the creditors If there be a novation of the old partnership debts, and such novation is done after one of the partners has retired, and without the consent of such retired partner, said partner cannot be held liable by creditors who made the novation with knowledge of the firm’s dissolution. Problem A, B, and C are partners. A dies, Is A’s estate ( separate properties) liable for his

share of the partnership obligations incurred while he was still a partner. - yes, but of course his individual creditors ( as distinguished from the firm creditors) are to be preferred. Effect of death on pending action An action for ing against a managing partner should be discontinued if he dies during the pendency of the action. The suit must be conducted in the settlement proceedings of the deceased’s estate, particularly if this is the desire of his . Thus it is wrong to just continue the action for ing and substitute the dead defendant with his heirs. ARTICLE 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. The following shall have the right wind up partnership affairs :

The partner designated in the agreement In the absence of an agreement, the partner who has not wrongfully dissolved the firm; In case all partner are dead, the legal representative of the last surviving partner provided such partner was not insolvent.

The winding up of a dissolved partnership may be done wither :

Extra- judicially by the partners themselves Judicially under the control of a competent court.

Winding up partner’s right to sell partnership property When a managing partner of the partnership has the necessary authority to liquidate its affairs under its article of co-partnership, he may sell the partnership properties even after the life of the partnership has already expired since he, as manager, is empowered to wind up the business affairs of the partnership. Manner of winding up

Judicially, under the control and direction of the proper court upon cause shown by any partner, his legal representative or his assignee, or Extra-judicially by the partners themselves without intervention of court.

Persons authorized to wind up

Partners designated by the agreement; In the absence of said agreement, all the partners who have not wrongfully dissolved the partnership. The legal representative of the last surviving partner ( when all the partners are already dead) not insolvent.

Rule if Survivor Is not a Manager If the surviving member of the firm is not the general manager or thereof, he is not required to serve as liquidator without compensation. If he liquidates the affairs upon promise of a certain compensation by the managing partners, he is naturally entitled to receive compensation.

ARTICLE 1837 When the dissolution is caused in any way, except in contravention of the partnership agreement, each partner, as against his copartners 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 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:

Each partner who has not caused dissolution wrongfully shall have:

All the rights specified in the first paragraph of this article, and The right, as against each partner who has caused the dissolution wrongfully, to damages for breach of the agreement.

The partners who have not caused the dissolution wrongfully, if they all desire to continue the business in the same name either by themselves or tly 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 to 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 of future partnership liabilities. A partner who has caused the dissolution wrongfully shall have :

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. If the business is continued under the second paragraph, No. 2, of this article, the right as against his co-partners 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 co-partners 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 goodwill of the business shall not be considered.

Two aspects of causes of dissolution a. although the partnership contract is not violated ( example; death, or arrival of term) The rights of partners are governed by the first paragraph of this article. b. because the partnership contract is violated Example Deliberate withdrawal of a partner although the period of the firm has not yet expired, thus causing damage to the firm. The rights of the partners are governed by the second paragraph of this article.) Right of Innocent partners to continue The innocent partners may continue the business ( but this time, there is really a new partnership) they can even use the same firm name if they wish to; moreover they can ask new member to , but always, the rights granted to the guilty partners are safeguarded by: 1. a bond approved by the court; 2. a payment of his interest at the time of dissolution minus damages. ( moreover, the guilty partner who is excluded will be indemnified against all

present or future partnership liabilities. This is because he no longer is a partner. Right to get cash In case of non-continuance of the business, the interest of the partner should, If he desires, be given in cash. Firm assets may be sold for this purpose. The right given to each partner, where no agreement to the contrary has been made to have his share of the surplus paid to him in cash makes certain an existing ( under the old law) uncertainty. At present ( under the old law) it is not certain whether a partner may or may not insist on a physical partition of the property remaining after 3rd persons have been paid. Rights of partners upon dissolution

Dissolution is caused without violation of the agreement; In contravention of the agreement.

Example Melo, Maki and Moto organized a partnership for fixed term of five years. If the partnership is dissolved because of the expiration of the term. Therefore, there is no violation of the agreement; hence, the right of Melo, Maki and Moto will be as follows:

Each one of the partners may have the partnership property sold to the payment of the liabilities of the firm; The surplus, after paying the liabilities, shall be given in cash to the partners.

Rights of partners who have not caused dissolution

To apply partnership properties to its liabilities and to receive in cash his share of surplus; To be indemnified for damages caused by the partner guilty of wrongful dissolution Continue their business in the same name during the agreed term of the partnership by themselves or tly with others; To possess partnership property should they decide if continue the business. Rights of parties who wrongfully caused the dissolution If the business is discontinued by the other partners, to have the property of the partnership applied to discharge its liabilities and to receive in cash his share of the surplus less damages caused by his wrongful dissolution. Supposed partners Aure, Banny, and Conan formed a partnership which will expire on the fifth year. However, before the end of the five-year term of the partnership, Conan withdrew. What are the rights of the partners Aure and Banny? The rights of Aure and Banny are : To apply partnership property to discharge its liabilities and the surplus distributed to the partners; As against Conan, the guilty partner, Aure and Banny have the right to recover damages for the breach. They may continue the business up to the end of the stipulated term of five years. If the business is continued: To have the value of his interest in the partnership at the time of the dissolution ascertained and paid in cash or secured by bond approved by court; To be released from all existing and future liabilities of the partnership.

Article 1838 Rights of partner entitle to rescind agreement The following rights may be exercised by the who has the right to rescind a partnership on the ground of fraud or misrepresentation by another partner :

Right of lien in retention of partnership property. Right to be subrogated in the place of auditors of the partnership. Right to be indemnified by the guilty partner against all liabilities of the partnership.

Rights of partner to rescind contract of partnership The contract is voidable or annullable if one is induced by fraud or misrepresentation to become a partner. If the contract is annulled, the injured partner is entitled to restitution. The fraud or misrepresentation vitiates consent. Until the partnership contract is annulled by a proper action in court, the partnership relations exist and the defrauded partner is liable for all obligation to third persons. These rights and facts are referred to Partner wrongfully excluded When a partner is excluded wrongfully, he should be considered as the innocent partner, and the others as the guilty partners. It is now said that other partners, must not only for what is due to him at the date of the dissolution but also for damages or for his share of the profits realized from the appropriation of the partnership business and good-will. It is otherwise, if the excluded partner had substantially broken the partnership agreement. Indeed he has a pecuniary interest in every existing contract that was incomplete and in the trade name of the co-partnership and assets at the time he was wrongfully expelled.

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ARTICLE 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:

To a lien on, or rights of retention of, the surplus of the partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest in partnership and for any capital or advances contributed by him; To stand, after all liabilities to third persons have been satisfied, in the place of the creditors of the partnership for any payments made by him in respect of the partnership liabilities; and

To be indemnified by the person guilty of the fraud or making the representation against all debts and liabilities of the partnership Rescission or Annulment of partnership contract a. although the law uses the term rescind, the proper technical term that should have been used is annulled, in view of the fraud or misrepresentation. b. the fraud or misrepresentation vitiates the consent whereby the contract of partnership had been entered into, it is really dolo causante. Three rights There are three (3) rights in this article without prejudice to his other rights under other legal provisions: a. right of lien or retention; b. right of subrogation; c. right of indemnification

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ARTICLE 1839 In settling s between the partners after dissolution, the following rules shall be observed, subject to any agreement to the contrary:

The assets of the partnership are:

The partnership property. The contributions of the partners necessary for the payment of all the liabilities specified in No. 2.

The liabilities of the partnership shall rank in order of payment, as follows:

Those owing to creditors other than partners; Those owing to partners other than for capital and profits, Those owing to partners in respect of capital, Those owing to partners in respect of profits.

The assets shall be applied in the order of their declaration in No. 1 of this article to the satisfaction of the liabilities. The partners shall contribute, as provided by article 1797, the amount necessary to satisfy the liabilities.

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. 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. The individual property of a deceased partner shall be liable for the contributions specified in No.4. 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. Where a partner has become insolvent or his estate is insolvent, the claims against his separate property shall rank in the following order:

Those owing to separate creditors; Those owing to partnership creditors; Those owing to partners by way of contribution.

Rules for settling s between parties After dissolution the following matters must be considered in settlement of s between partners:

Assets of partnership:

Partnership of property including goodwill; Contributions after partners necessary for the payment of all liabilities ( Art 1797)

Application of Assets :

First, those owing to partnership creditors

Those owing to partners other than for capital and profits such as loans given by the partners or advances for business expenses

Those owing for the return of the capital contributed by the partners;

The share of the profit, of any, due to each partner. In the event the assets of the partnership are insufficient any or assignee for the benefit of creditors or any person appointed by the court, shall have the right to enforce the contribution of the partners in Article 1797. If any of the partner does not pay his share of the loss, the remaining partners have to pay but they can sue the non-paying partner for indemnification. Example Order of payment of partnership liabilities Yeng, Yam and Yap are partners in a partnership which on dissolution has assets amounting P 30,000. Yeng contributed P 5,000. Yam contributed P 4,000 and Yap contributed P 6,000. The firm owes Tony the sum of P 6,000, Temy another sum of P 2,000 and partner Yeng, P 5,000. Settling partnership liabilities shall be done in the following manner:

Tony and Temy are third party creditors of the partnership. They shall be paid first in the amount of P 8,000 leaving P 22,000. Partner Yeng shall be paid the sum of P 5,000, leaving a balance of P 17,000. Afterwards, the contributions of Yeng, Yam and Yap shall be returned to them as follows: Yeng, Yam and Yap shall be returned to them: P 5,000, P 4,000 & P 6,000. The balance of P 2,000 is the surplus which shall be divided among the three partners. If no agreement is stipulated in the division of property it shall be proportionate to the capital contributions.

Assets of the Partnership a. the partnership property (including good-will) b. the contributions of the partners, which are made to pay off the partnership liabilities. Order of Payment of Firm’s liabilities a. first give to creditors ( who are strangers) otherwise, they may be prejudiced. b. then give to partners who are also creditors ( they should be placed in a subordinate position to outside creditors for otherwise, they may prefer their own interests) Example of credits owing to partners which are neither capital nor profits, are those for reimbursement of business expenses. Capital should be given ahead of profit for it is only the surplus profit over capital that should be considered as the gain or the profit of the firm. An industrial partner, who has not contributed money or property at all, is in the absence of stipulation not entitled to participate in the capital . He shares in the

profits, however. New Contributions If the partnership assets are insufficient, the other partners must contribute more money or property. Who can force these contributions? - Any assignee for the benefit of the creditors, or any person appointed by the court ( like a receiver) Said enforced contributions may be considered as partnership assets and should therefore be available to the creditors. Any partner or his legal representative ( to the extent of the amount which he has paid in excess of the share of the liability) Problem A, B, and C are partners, A died. Is A’s estate still liable the contributions needed to pay off the partnership obligations? Yes, generally, as long as the said obligations been incurred prior to his death. Preference with respect to the assets Suppose both the partnership property and the individual properties of the partners are in the possession of the court for distribution, who should be preferred? - It depends. a. regarding partnership property, partnership creditors have preference; b. regarding individual properties of the partners, the individual creditors are preferred. Partner is Insolvent a. first give to the individual or separate creditors; b. then, to the partnership creditors; c. then, those owing to the other partners by way of contributions.

Insolvency here of the partner or his estate does not necessarily mean no more money or property; it is enough that the assets are less than the liabilities. A person who alleges himself to be a partner of a deceased individual has the right to intervene of a deceased individual has the right to intervene in the settlement of the decedent’s estate, particularly in the approval of the executor’s or ’s for after all it may be that he ( the alleged partner) was indeed, a partner to whom the deceased partner owed something. s and executors, instead of opposing the intervention of interested parties, should welcome the participation of the same for their own protection. Mere intruders should not be allowed.

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ARTICLE 1840 In the following cases, creditors of the dissolved partnership are also creditors of the person or partnership continuing the business:

When any new partner is itted 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; 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 partner or the representative of the deceased partner, but without any assignment of his right in partnership property. 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; 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; 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 of the retired or deceased partner’s interest in the dissolved partnership or on 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.

Old partners, old creditors in the dissolved partnership When a dissolved partnership is continued by a former partner or partners with or with or without new partners, the old creditors are creditors of the person or partnership continuing the business. Old creditors are on a parity with the new in that they can bring suit against the new firm, levy execution on its property and share in the distribution of its assets in the event of insolvency. Example Allan, Benjie, and Dante are partners. Without liquidating partnership affairs, Errol is itted into the partnership and the business is continued. The old creditors of the original partnership of Allan, Benjie and Dante shall also be creditors of the new partnership of Allan., Benjie, Dante and Errol. If the rule is otherwise, then the old creditors shall lose their preference in the partnership assets. The liability, however, of Errol for debts contracted before his ing the partnership shall be satisfied out of partnership property only unless there is an agreement to the contrary. Right of Old Creditors to be new creditors Reason : in making creditors of the dissolved firm also creditors of the persons or partnership continuing the business: so that said creditors will not lose their preferential rights as creditors to the partnership property. Example A and B are partners. Later C was itted as member or partner and the firm’s business was continued. The creditors of the old firm continue to be creditors of the new partnership but the liability of C shall be satisfied out of partnership property only Exception, if there is a stipulation to the contrary.

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ARTICLE 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 s 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, provided by article 1840, third paragraph. Rights of retiring or legal representative of deceased partner when business is discontinued:

Have the value of the interest of the retiring partner or deceased partner in the partnership ascertained as of the date of dissolution ( i.e., date of retirement or death. To receive as an ordinary creditor an amount equal to the value of his share in the dissolved partnership with interest or at his option in lieu of interest, the profits attributable to the right of his right.

Example 1 The partnership of Ace, Ben, Ched and Ding was dissolved by reason of the death of Ding. Nevertheless, surviving partners Ace, Ben, and Ched under authority granted in the partnership contract continued the business but without settlement of the amounts between Ding’s estate and the remaining partners.

The rights of Ding’s legal representative are:

To have the value of Ding’s interest at the time of dissolution ascertained; To receive an ordinary creditor an amount equal to: the value of his interest in the dissolved partnership including interest ; the value of his interest in the dissolved partnership including the profits attributable to the use of his right in the property of the dissolved partnership.

ARTICLE 1842 The right to an of his interest shall accrue to any partner, or his legal representative as against the winding up partners or the surviving partners or the person or partnership continuing the business, at the date of dissolution, in the absence of any agreement to the contrary. Rights of the partners The right to demand an ing of partnership affairs must be directed against the winding up partners, the surviving partners and the person or partnership continuing the business. The right of a partner or the one who represents him as owner of his interest to an , i.e., to a statement of the partnership affairs, and, in due course of liquidation to a payment of the amount of his interest, may be exercised as against: The winding up partner The surviving partner; or the person or partnership continuing the business. No liquidation is necessary when there is already a settlement or agreement as to what he shall receive. This prior to the general rule that when a partnership is dissolved, a partner or his legal representative is entitled to the payment of what may be due after a liquidation.

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SUMMARY

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There is a change in the relation of the partners caused by dissolution in which the partners cease to be associated in the carrying on of the business, winding up when there is a process of settling the business or partnership affairs after dissolution; and termination when all partnership affairs are completely wound up and finally settled which signifies the demise of the partnership life. The provisions on of dissolution are clear in Article 1830 in which case any partner may cause the partnership dissolution any time without the consent of his co-partners at his sole pleasure, or for any reason which he deems sufficient by expressly withdrawing even though the partnership was entered into for a definite term or particular undertaking, dissolution , however, is a contravention of the agreement. Dissolution may be caused involuntarily when the business itself becomes unlawful. The formation of a partnership must always have a lawful object. There are many situations that may constitute valid reasons for dissolution of a partnership which are subject to dispute or difference of opinion to make a judicial dissolution necessary. This may be applied by a partner by reasons of : insanity, incapacity, misconduct and persistent breach of partnership agreement, in such a case business can be carried on only at a loss and other circumstances. The authority of a partner is not deemed terminated as it affects his co-partners, except in two instances namely: the cause of dissolution is the act of a partner and the acting partner had knowledge of such dissolution; and the cause of the dissolution is the death or insolvency of a partner and the acting partner had knowledge or notice of the death or insolvency. This aims to protect the remaining partners who might continue to act for the partnership as a going concern, not having actual knowledge of the dissolution, and discards the fiction

that everybody is presumed to have knowledge of death or insolvency. Upon dissolution of the partnership as between themselves, the powers of one partner to act and bind the others is effectively terminated, but as regards the third persons who subsequently extend credit on the knowledge that the partnership is still existing, the authority of a partner continues. The law, for the protection of innocent third persons, imposes upon partners, the duty of giving notice of the dissolution of the partnership. Dissolution of a partnership does not discharge the existing liability of a partner. Winding up of the dissolved partnership may be done judicially and extra judicially, upon the directions of the proper court upon cause shown by any partner extra judicially by the partners without court intervention: Partners dissolved by the agreement; partners who have not wrongfully dissolved the partnership; and the legal representation of the last surviving partner are authorized to wind up the affairs of the partnership. However, the deceased’s estate is not liable for any subsequent debts or losses incurred by the surviving partners who continued the business properly applied to discharge partnership liabilities, if any, depends on whether the dissolution is caused without violation of the partnership agreement, or in violation of the partnership agreement. The contract is voidable if one is induced by fraud or misrepresentation to become a partner, 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 Changes in the relation of the partners result in dissolution of the partnership. However, the rights of creditors persist in the change of hip and its business is continued by a former partner, either alone or with new partners without liquidation of partnership affairs. The creditors of the dissolved partnership becomes the creditors of the new partner or partnership continuing the business. This is to protect the rights of the old creditors to the partnership property as against the separate creditors of the partners. However, the liability of the new or incoming partners shall be satisfied out of partnership property only unless there is a stipulation to the contrary. (Art 1826) Under paragraph 1 no. 4 of Art 1840, applies only when the third person

promises to pay the debts of the partnership; otherwise, creditors of the dissolved partnership have no claim on the partnership continuing the business or its property unless the assignment can be set aside as a fraud on creditors in par. 4. Some rights of the general partners after dissolution are specific, these are: the right to demand an ing of the value of his interest accruing to any partner or his legal representative after dissolution in the absence of an agreement to the contrary; the right to a payment of his interest may be exercised; the winding up of partner; securing partner, or the person or partnership continuing the business. Liquidation is not required when there is already settlement or agreement as to what he shall receive. A partner or his legal representative is entitled to the payment of what may be due after liquidation. Review Questions Definitions Define the following and explain:

Dissolution Winding up Termination Civil Interdiction Notice of dissolution

II.

Who are the persons authorized to wind-up the affairs of the dissolved partnership?

What are the grounds for the dissolution of a partnership? What are the rights of injured partner where partnership contract is rescinded? What are the ways of winding up the dissolved partnership ?

III.

Distinguish dissolution from winding up of partnership affairs.

What are the causes of dissolution of a partnership?

Who may ask for the dissolution of a partnership?

What are the rights of the partner who did not cause wrongfully the dissolution of the partnership?

Problem Zen, Zak, Zog are partners. Later, Zog dies leaving Zen and Zak. Without Zen’s knowledge, Zak enters into a contract with Zim whereby the latter is to deliver merchandise worth P 5,000 and the dissolved partnership of Zen, Zak & Zog to pay the same, State whether the contract of Zak with Zim is binding to the partnership. Reasons.

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CHAPTER 4 LIMITED PARTNERSHIP

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In the formation of a partnership, the or partners that constitute the partnership are classified into general partners and limited partners. The general partners are those who take active part in the partnership affairs because they invest their money, and properties and manage its affairs as their liabilities are extended to their personal property, while an ission of limited partners does not involve functions and ability as the general partners do but limits their role in profit making and obligated only up to their capital contributions. This formation is asserted in the provision of : ARTICLE 1843 A limited partnership is one formed by two or more persons under the provisions of the following article, having as 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. Distinction of general partners and limited partners The general partners as explained above perform business and are personally liable to creditors up to the extent of their personal property, while limited partners or the special partners are personally liable to creditors and do not participate in the management of the affairs of the partnership. Persons in the partnership A partnership constitutes one or more general partners and one or more special or limited partners. Characteristics of limited partnership

The formation of a limited partnership is by compliance with the statutory requirements. The control of the management is by one or more general partners ; There are one or more limited partners who contribute their capital and share in the profits but do not participate in the management of the business as they are not personally liable to the creditors. The limited partners may ask for the return of their capital contributions prescribed by law. The partnership liabilities are paid from the common fund of the individual properties of the general partners.

Reason for the formation of limited partnerships The reason for the adoption of acts making provisions for limited or special partners because men in business often desire to obtain capital from others. This capital may be secured by means of ordinary loan with interest

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

Sign and swear to a certificate, which shall state –

The name of the partnership, adding thereto the word “ Limited”; The character of the business; The location of the principal place of business;

The name and place of residence of each member, general and limited partners being respectively designated; The term for which the partnership is to exist; The amount of cash and a description of and the agreed value of the other property contributed by each limited partner; The additional contributions, if any, to be made by each limited partner and the times of which or events on the happening of which they shall be made; The time, if agreed upon, when the contribution of each limited partner is to be returned; 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 and conditions of the substitution; The right, if given, of the partners to it 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; 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; and The right, if given, of a limited partner to demand and receive property other than cash in return for his contribution.

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.

Requisites of limited partnership The two essential requirements for the formation of a limited partnership: ‘1. The partners must sign and swear to a certificate of limited partnership, and ‘2. They must file for record the certificate in the Office of the Securities and Exchange Commission. These requisites must be complied to provide actual or attention to potential and interested creditors dealing with the partnership of the limited partners with limited liability. In the absence of the above-mentioned requirements, the partnership becomes a general partnership in which all its are liable as general partners. Presumption in favor of general partnership A partnership transacting business is, prima facie, a general partnership, and those seeking to avail the protection of laws permitting the creation of limited partnerships must demonstrate due compliance with the requirements of such laws. Non-Fulfillment of the Requisites If the proposed limited partnership has not conformed substantially with the requirements of this article, as when the name of not one of the general partners appear in the firm name, it is not considered a limited partnership but a general partnership. This is because a firm transacting business as a partnership is presumed to be a general partnership. Effect if only aggregate contribution is stated The law says that the contribution of each limited partner must be stated. If the aggregate sum given by two or more limited partners is given, the law has not been complied with.

Effect of Omitting the term “limited” in the firm name The law requires the firm name to have the word “Limited” if this provision is violated, the name cannot be considered the firm name of a limited partnership. ARTICLE 1845 The contributions of a limited partner may be cash or other property, but not services Limitations of a limited partner’s contribution A limited partner or special partner is limited to his capital contribution, that is, money or property, and is not allowed to contribute services, otherwise, he shall be considered general partner and industrial partner in which case, he shall not be exempted from personal liability In some situation, it may happen that unscrupulous persons designate a solvent persons as limited partners in the articles of limited partnership, and the insolvent partners as general partners thereby committing frauds because limited partners are not able for obligations of the partnership. ARTICLE 1846 The surname of a limited partner shall not appear in the partnership name unless :

It is also the surname of a general partner, or Prior to the time when the limited partner became such, the business had 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 a general partner to partnership creditors who extend credit to the partnership without actual knowledge that he is not a general partner.

Violation of the provision

A limited partner who violates this article ( Art 1846) shall be liable to partnership creditors without the rights of a general partner, however, such limited partner shall not be liable as a general partner with respect to partnership creditors with actual knowledge that he is only a limited partner.

Example

Aldo, Albert, Alex are partners. Aldo and Albert are general partners while Alex is a limited partner. Alex’s name is included in the firm name.

May Alex incur the same liabilities to third persons as Aldo and Albert?

Yes., except to creditors who have extended credit to the partnership with actual knowledge that he is only a partner.

Non-Inclusion of Name of the Limited Partner A limited partner violating this article is liable as a general partner to innocent third parties, without, however, the rights of a general partner.

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ARTICLE 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;

At the time he signed the certificate, or 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.

False statement in the certificate

Any partner whose name appears in the certificate containing false statement is held liable provided the following are present:

That at the time he signed the certificate, he had knowledge that the statement was false , he failed to have it amended or cancelled despite the fact that he had time to do so, or file a petition for its amendment; The person who was in good faith to transact business relied upon the false statement; and The said person sustained loss as a result of his reliance upon the false statement.

Example A, limited partner made contributions in the amount of P 10,000 but was erroneously recorded as P 20,000 in the certificate. B, relied in good faith on the figures reflected in the certificate. Applying the Art 1847, A is held liable to innocent party, B for the difference of P 10,000. Liability for a False Statement The person who suffers loss can sue for damages. This is the liability for a false statement.

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ARTICLE 1848 A limited partner shall not 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.

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Limited partner’s limitations in business affairs As provided by law , the acts of limited partners in the partnership affairs is to the extent of his capital contributions only. He is excluded from any active voice the control of the business affairs, otherwise, if he takes part in the management of the firm’s business, he will be liable as a general partner for the obligations of the firm. It is essential, therefore, to his exemption from liability for the debts of the firm his abstinence from participating in the transactions of the business, in fact or in name. Limited partners may not perform any act of istration with respect to the interests of the partnership, not even in the capacity of agents of the managing partners. Effect of taking part in the Control of the Business a. The following acts do not constitute taking part in the control of the business: 1. mere dealing with a customer. 2. mere consultation on one occasion with the general partners. b. The following have been held to constitute taking part in the control of the business:

1. selection of who will be the managing partners 2. supervision over a superintendent of the business of the firm. c. Participation in the control of the business makes the limited partner liable as a general partner without however, getting the latter’s rights.

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ARTICLE 1849 After the formation of a limited partnership, additional limited partners may be itted upon filing an amendment to the original certificate in accordance with the requirements of article 1865. Amendment in the certificate Whenever there are additional limited partners itted into the partnership, proper amendment to the certificate is required which must be signed and sworn to by all of the partners including the new limited partners and filed in the Securities and Exchange Commission in reference to Article 1865. Example Beck, Vic and Nick formed a limited partnership. The partners wanted to it Merck as an additional limited partner. They could it Merk provided the original certificate of limited partnership would be amended, signed and sworn to by Beck, Vick , Nick and Merck, the new partner, and filed the same with the Securities and Exchange Commission. When additional partners may be itted After the formation of a limited partnership, the firm may still it new limited partners, provided there is a proper amendment to the certificate. Effect of failure to amend If additional limited partners are taken in without proper amendment of the

certificate with the SEC, this does not necessarily mean the dissolution of the limited partnership. ARTICLE 1850 A general partner shall have all the rights and powers and be subject to all the restrictions and liabilities of a partner in a partnership without limited partners. However, without the written consent or ratification of the specific act by all the limited partners, a general partner or all of the general partners have no authority to :

Do any act in contravention of the certificate; Do any act which would make it impossible to carry on the ordinary business of the partnership; Confess a judgment against the partnership; Possess partnership property, or assign their rights in specific partnership property, for other than a partnership purpose; it a person as a general partner; it a person as a limited partner, unless the right so to do is given in the certificate; Continue the business with partnership property on the death, retirement, insanity, civil interdiction or insolvency of a general partner, unless the right to do so is given in the certificate.

Powers, rights and liabilities of general partners in limited partnership Like in an ordinary partnership, a general partner, in a limited partnership shall have all the rights and powers as he is vested with the entire control of the firm/s business and subject to all the liabilities and restrictions of a partner in a partnership without limited partners in a general partnership. The general partners have no power to bind the limited partners beyond the

latter’s investment. Neither do they have the power to act for the firm beyond the purpose and scope of the partnership Acts of istration and acts of dominion A general partner may not, however, do acts in contravention of the certificate, acts making in impossible to carry on the business, confess judgment, possess partnership property, etc. without the consent or ratification of all the limited partners, because specific acts are acts of strict dominion, not merely routinary in the ordinary conduct of the business. He may bind the partnership by any act of istration, but has no power to do the specific acts in Article 1850 In a sense the acts of strict dominion or ownership or ownership, and are not generally essential for the routine or ordinary conduct of the firm’s business. Conflicts rule governing capacity of the limited partner If a general partner in a limited partnership goes abroad, his capacity to bind the firm is governed by the law of the place where the limited partnership was formed.

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ARTICLE 1851 A limited partner shall have the same rights as a general partner to:

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; Have on demand true and full information of all things affecting the partnership, and a formal of partnership affairs whenever circumstances render it just and reasonable; and

Have dissolution and winding up by decree of court.

A limited partner shall have the right to receive a share of the profits or other compensation by way of income, and to the return of his contribution as provided in articles 1856 and 1857.

Rights of a limited partner In general, a limited partner has lesser rights than a general partner. He may not bind the partnership by means of a contract while he may exercise similar rights as the general partner. Some of limited partners’ specific rights are :

To inspect the books at a reasonable hour ; To ask true and full information affecting the partnership; To demand and require that the partnership books be kept at the principal place of business of the partnership To demand for dissolution and winding up by decree of court. To receive share of the profits or other compensation by way of income; and To receive the return of his capital contribution provided that partnership assets are in excess of all its liabilities.

ARTICLE 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. Erroneous belief to be a limited partner A mistaken belief by a person who has contributed capital in the partnership that he has become a limited partner, or he is not designated as a limited partner as when his name appears as general partner in the certificate is not liable as a general partner by reason of his exercise of the rights of a limited partner, provided: 1. That upon assuring the mistake, he immediately renounces his interest in the profits and other compensation by way of income; 2. He does not participate in the management of the business; and 3. That in the partnership name, his surname does not reflect nor appear. Example Morky, Merky, Marky and Minky entered into a contract of limited partnership. Morky and Merky as the general partners, and Mark and Minky as the limited partners. Mistakenly, the name of Marky appeared in the certificate as a general partner, but his name did not appear in the partnership name. He did not participate in the management of the firm. He exercised the rights of a limited partner. He believed that he was a limited partner. Was Marky liable as general partner? No. provided that upon knowing that he was a general partner, he promptly renounced whatever interests he had in the profits or compensation by way of income. When he becomes liable as a general partner a. unless on ascertaining the mistake, he promptly renounces his interest in the profits of the business, or other compensation by way of income; or b. unless, even if no such renouncing is made, partnership creditors are not prejudiced.

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ARTICLE 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 the restrictions of a general partner; except that, in respect to his contribution, he shall have the rights against the other which he would have had if he were not also a general partner. Dual role in the partnership In a partnership the role of a person may be a general and a limited partner at the same time provided that this fact is stated in the certificate signed, sworn to, and recorded in the Securities and Exchange Commission. As we all know, a general partner has the rights, powers that a contract of partnership clothed to its general partners and he is liable to third persons up to the extent of his separate property ( Art 1816). As regards his contributions as a limited partner, he would have the right of a limited partner insofar as the other partners are concerned. Rights His rights are those of a general partner ( hence, third parties can go against his individual properties) Exception, regarding his contribution, ( like the right to have it returned on the proper occasions) he would be considered a limited partner, with the rights of a limited partner, insofar as the other partners are concerned.) ARTICLE 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 of resulting claims against the partnership, with general creditors, a pro rate share of the assets. No limited partner shall in respect to any such claim:

Receive or hold as collateral security any partnership property, or 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 of limited partners A limited partner who is not a general partner is allowed to loan money to the firm and transact other business with the partnership and receive a pro rata share in the assets with the general creditors without the right to take part in the management of the business. Restrictions to limited partners There are some prohibitions to limited partners to perform in respect of any claim:

A limited partner may not receive partnership property as collateral security; Receive any payment, conveyance, or release from liability if it will be detrimental to the right of the third party.

Any violation of the prohibition shall mean defrauding the partnership creditors.

ARTICLE 1855 Where there are several limited partners the may agree that one or more of the limited partners shall have a priority over Other limited partners as to the return of their contributions, as to their compensation by way of income, or as to any other matter. If such an agreement is made, it shall be stated in the certificate, and in the absence of such a statement all the limited partners shall stand upon equal footing. Example Tit, Tat, and Tet are general partners while Toti is a limited partner. Toti loaned P5,000 to the partnerhip. The partnership with a total assets of P 60,000 owes Tem, a general creditor, P 75,000. In preference to the priority of payment, Tem, a general creditor must be paid first than Toti who may not receive his loan because if payment is made first to Toti it will be presumed to have been defrauded Tem. Preference for benefits When agreed by all the partners;( general and limited partners) and stated in the certificate, preference may be given to some limited partners as to their compensation by way of income, return of contributions, over some other limited partners. But in the absence of such statement in the certificate, even if there is an agreement, all the limited shall have equal treatment. Nature of the Preference a. the return of contributions; b. compensation; c. other matters.

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ARTICLE 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 of their contributions and to general partners.

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Compensation of limited partner The right of the limited partner to receive his share of the profits or compensation by way of income stipulated for in the certificate is subject to the condition that partnership assets will still be in excess of partnership liabilities after such payment. In other words, third party creditors have priority over the limited partner’s rights. To apply Article 1856, partnership assets must be in excess of partnership liabilities to 3rd persons not liabilities to partners.

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ARTICLE 1857 A limited partner shall not receive from a general partner or out of partnership property any part of his contribution until:

All liabilities of the partnership, except liabilities to general partners and to limited partners on of their contributions, have been paid or there remains property of the partnership sufficient to pay them; The consent of all is had, unless the return of the contribution may be rightfully demanded under the provisions of the second paragraph; and The certificate is cancelled or so amended as to forth the withdrawal or reduction.

Subject to the provisions of the first paragraph, a limited partner may rightfully demand the return of his contribution:

On the dissolution of a partnership; or When the date specified in the certificate of its return has arrived; or After he has given six months’ notice in writing to all other , if not time 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 , 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;

He rightfully but unsuccessfully demands the return and of his contribution; or

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.

Return of contributions to limited partner Before the contributions of a limited partner are returned the following conditions must be complied with:

All liabilities of the partnership have been paid or there are assets sufficient to pay partnership liabilities The consent of all the partners is obtained; and The certificate is cancelled or so amended as to set forth the withdrawal or reduction of the contribution.

Instances when the limited partner may demand return

When the partnership is dissolved The date specified for its return has arrived; If no term is specified, after six months’ notice in writing to all other partners.

Receipt of cash A limited partner may only receive cash when his contribution is returned even if he contributed property. He has the right to demand the return of his contribution and may demand cash

Requisites for the return of contributions The return of contribution to a limited partner may be made upon fulfilling the following conditions:

When all liabilities of the partnership have been made or if not yet paid, the assets must be sufficient to pay the liabilities. The consent of all the ( general and limited partners) has been secured, Except when the return may be demanded When the certificate is cancelled that may set forth the withdrawal of contribution.

Instances when limited partners may demand partnership dissolution

When the demand of limited partner for the return of his contribution is denied although he has a right to such return; He would be entitled for the return when the other liabilities of the partnership have not been paid or the partnership property is insufficient to cover the liabilities.

The limited partner must first seek the consent of the other partners to demand the dissolution of the partnership, and if they refuse, then he can seek dissolution of the partnership by a competent court.

Liability of a limited partner who has withdrawn Supposed a limited partner withdraws rightfully his contribution ( all conditions being fulfilled, particularly the complete solvency of the firm as of the time of

withdrawal) and the certificate is amended properly, would he still be liable to previous creditors if later on the firm becomes insolvent. - Yes, if by chance, the very next day the partnership assets are all destroyed by an earthquake, etc. it is unfair for him to keep the cash, and leave the creditors with nothing. His contribution ( even if already returned to him) is to be treated as a trust fund for the discharge of liabilities. Moreover, the sum should include the interest presumably earned. Future creditors cannot make use of the principle enunciated in the above-cited case in view of the recorded amended certificate, except of course, if the money had been wrongfully returned to the limited partner.

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ARTICLE 1858 A limited partner is liable to the partnership:

For the difference between his contribution as actually made and that stated in the certificate as having been made, and For any unpaid contribution which he agreed in the certificate to make in the future of the time and on the conditions stated in the certificate.

A limited partner holds as trustee for the partnership;

Specific property stated in the certificate as contributed by him, but which was not contributed or which has been wrongfully returned, and Money or other property wrongfully paid or conveyed to him on of his contribution.

The liabilities of a limited partner as set forth in this article can be waived or compromised only by the consent of all ; but a waiver or compromise shall not affect the right of a creditor or a partnership who extended credit or whose claim arose after the filing and before a cancellation or amendment of the certificate, to enforce such liabilities.

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.

Liability of limited partner to partnership A limited partner whose contributions 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 claims arose before the return. The liability of limited partner who is not a principal in the transaction of a partnership, except for known false statement in the certificate, is to the partnership and not to the creditors. A and B are limited partners of a partnership. In the certificate, it was stated that A contributed P18,000 when as a matter of fact he had given only P15,000. In the certificate too is a promise made by B to pay P2,000 additional contribution on Dec. 1, 1972. Should A said B make good the P3,000 and P2,000 respectively? May the liabilities in the preceding problem be waived or compromised? - Yes, but two conditions must be followed. All the other partners must agree. Innocent third party, creditors must not be prejudiced. They are innocent when their claim for extension of credit was before the cancellation or amendment of

the certificate. Problem involving liability to creditors A, a limited partner received the return of his contribution on the date stated in the certificate. It was discovered that the remaining assets were insufficient to pay two creditors, X and Y. X’s claim arose before the return; Y’s claim arose after the return . Should A be compelled to give back what he had received?- I distinguish. X’s claim should be satisfied out of what has been returned to A. X’s claim arose before the return. If there is a balance, it should be returned to A. If there is a deficit, A is not liable for this because he is only a limited partner. - Y’s claim does not have to be satisfied from what has been returned to A as contribution. His claim arose after the return. Y’s claim should be directed against the general partners.

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Unpaid contributions Since limited partner is liable for the difference between the amount of his actual contributions and the one stated actually in the certificate, he is also liable for any unpaid contribution he agreed to make at a future time. Liability as trustee Since limited partner is also considered as trustee, he is made liable for the partnership for:

Contribution by him of specific property as stated in the certificate but which in fact he had not contributed;

Specific property of the partnership which had been wrongfully returned to him; Contribution in the form of money wrongfully paid or conveyed to him ; Contribution in the form of property wrongfully paid or conveyed to him.

The liability of limited partner must not exceed the sum with interest he received ARTICLE 1859 A limited partner’s interest is assignable.

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

A assignee, who does not become a substituted limited partner, has no right to require any information or 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 return of his contribution, to which his assignor would otherwise be entitle.

A assignee shall have the right to become a substituted limited partner if all the consent thereto or if the assignor, being there unto empowered by the certificate, gives the assignee that right.

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 from the certificate.

The substitution of the assignee as a limited partner does not release the assignor from liability to the partnership under articles 1847 and 1858.

Changes in the partnership

Changes in the partnership may occur but some changes that may affect in the relation of limited partners such as: substitution of a person as a limited partner in place of an existing limited partner, or the withdrawal, death, insolvency, insanity, or civil interdiction of a limited partner, or the addition of new limited partners does not necessarily dissolve the partnership. However, the limited partner cannot withdraw his contribution until all partnership liabilities are paid.

Rights of assignee

When a limited partner assigns his interest in the partnership to an assignee, the latter is only entitled to the extent of receiving the share of the profits and other compensation by way of income or the return of contribution in which the assignor is entitled.

The assignee has no right to inspect the books of the partnership as the assignor nor may he be given right to information.

The assignee may also acquire all the rights being clothed by a limited partner

when becomes a substituted partner.

Substituted partner

It is a person itted into the partnership and given all the rights of a limited partner who has died and assigned his interest in the partnership.

Requisites to become a substituted partner

A person itted as substituted limited partner must be given consent by all the of the partnership which is empowered by the certificate, giving the substituted limited partner the right to become a limited partner. The certificate must be amended and must be ed with the Securities and Exchange Commission.

Liability of substituted partner

Except those liabilities of which the substituted limited partner does not have idea at the time he became a limited partner, he is liable for all the liabilities of his assignor and which is not ascertained from the certificate.

Hence, the assignor is not free from liability to persons who were offended by the false statement in the certificate and to creditors who extended credit whose claims arose before the substitution.

Assignment of a limited partner

May the interest of a limited partner be assigned?

-yes,

Does the assignee of the interest of the limited partner become necessarily a substitute partner?

No.

In some cases, he becomes one.

In others, he remains a mere assignee.

Problems

A, a limited partner, assigned his interest to B. In the certificate, A was expressly given the right to give the assignee the right to become a substituted limited partner. Is B now a substituted limited partner?

Not yet. He has to wait until the certificate is appropriately amended.

A, a limited partner, assigned his right to X. In the certificate A was not given the right to give his assignee the right to become a substituted limited partner. How can X acquire said right to become a substituted limited partner?

-Only if all the of the partnership so consent. If they do consent, X acquires the right to become a substituted limited partner. But is not yet one, until after the certificate is appropriately amended .

Suppose X was not given the right to become a substituted limited partner by the partners. What will be his status and his rights?

- he will be a mere assignee. He has no right:

1. to require any information or of the partnership transaction;

2. to inspect the partnership books.

But, he has the right to receive the share of the profits or other compensation by way of income, or the return of his contribution to which his assignor would otherwise be entitled.

Substituted limited partner

He is a person itted to all the right of a limited partner who has died or has assigned his interest in a partnership.

Problems

Is a substituted limited partner responsible for the liabilities of his assignor?

- yes, except those liabilities of which he was ignorant at the time he became a limited partner and which could not be ascertained from the certificate.

A, a limited partner, assigned his interest to X, who subsequently became a substituted limited partner. Is A completely relieved of all his liabilities to the partnership?

- NO. A is still liable under Art 1847 to a person who relies on a false statement in the certificate and under Art 1858 to creditors who extended credit or whose claims rose before the assignment.

Article 1860

Causes affecting dissolution of a partnership

Dissolution of a partnership may be the after effect of retirement or withdrawal, death, insolvency, insanity, or civil interdiction of a general partner ( Art 1830)

Unless there is only one limited partner in the partnership such causes do not absolutely result in its dissolution; However, the certificate must be amended as necessarily required by the provision of Article 1864, paragraph 2, No.(5), if the remaining partners continued the business under the right given in the certificate and with the consent of all the . The facts stated above are the provision of :

ARTICLE 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:

Under a right so to do stated in the certificate, or With the consent of all the .

Some causes of dissolution of a limited partnership Key word under Uniform Limited Partnership Act. DRIC 1. death 2. retirement 3. insolvency 4. civil interdiction 5. insanity of a general partner Example

A, B, C, D, and E were partners, A and B being general partners, and the rest, limited partners, A dies. Is the partnership dissolved? - Yes, unless it is continued by the remaining general partners. When may the remaining general partners continue the business? 1. if the right to do so is stated in the certificate; or 2. if all the consent. But, at any event, there should be an amendment of the certificate. Article 1861 Executor of a limited partner Upon the death of limited partner or assignor, all his rights for the purposes of settling the affairs of the limited partner shall be acquired by his executor or and the right as substituted limited partner. These rights can be availed of only by the latter when the deceased limited partner is empowered to do so in the certificate. As such, the estate of the deceased is liable for all his liabilities contracted by the partnership when he was a limited partner. This is what the provision of the rule is citing in :

ARTICLE 1861 On the death of a limited partner his executor or shall have 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. The estate of a deceased limited partner shall be liable for all his liabilities as a limited partner. Death of a limited partner This provision is under a Uniform Limited Partnership Act of the new Civil Code

A, a limited partner, while still alive contracted certain liabilities as such. Is his estate liable for them? -Yes. ( Art 1861 par 2) A, a limited partner was given the right to constitute his assignee as a substituted limited partner. On his death, may his do the same? - Yes, furthermore said shall have all the rights of a limited partner for the purpose of settling the estate of the deceased.

ARTICLE 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.

Nothing in this Chapter shall be held to deprive a limited partner of his statutory exemption.

Rights of third party of limited partner

In order for the creditor to secure payment from the limited partner, he may go

to court and ask for an order of payment from the interest of the limited partner in the partnership to satisfy any amount being claimed or unsatisfied claim. The separate property of any general partner may be redeemed by the interest so charged with consent of all the partners but not with the partnership property.

Example Brad is a limited partner of a duly organized partnership. Pete, his creditor, goes to court to demand an order charging Brad’s interest in the partnership. May the interest of Brad in the firm be redeemed with partnership property? No. The law provides that the interest of any general partner, but may not be redeemed with partnership property. Charging the interest of a limited partner This is a provision of the new Civil Code from the Uniform Limited Partnership Act. Example A is a limited partner who is indebted to X. X applies to the court to charge the interest of A interest of A in the partnership. May the interest charged be redeemed by partnership property? - No. The law says that the interest may be redeemed with the separate property of any general partner, but cannot be redeemed with partnership property.

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ARTICLE 1863 In settling s after dissolution the liabilities of the partnership shall be entitled to payment in the following order:

-Those to creditors, in the order of priority as priority by law, except those to limited partners on of their contributions, and to general partners; -Those to limited partners in respect to their share of the profits and other compensation by way of income on their contributions; -Those limited partners in respect to the capital of their contributions; -Those to general partners other than for capital and profits; -Those to general partners in respect to profits; -Those to general partners in respect to capital. 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 profits or for compensation by way of income on their contribution respectively, in proportion to the respective amounts of such claims.

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Payment of liabilities of the limited partnership a. This new provision of the new Civil Code has been sourced out from Sec 23 of the Uniform Limited Partnership Act. Notice that profits are given priority over capital. ARTICLE 1864 The certificate shall be cancelled when the partnership is dissolved or all limited partners 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 limited partner is itted; 4. A person is itted 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; or 10. The desire to make a change in any other statement in the certificate in order that it shall accurately represent the agreement among them. Example Jeff, Brian, Kim and Jay are partners. The first three are general partners while Jay is a limited partner. The agreement states that a limited partner has the right to withdraw after five years. Jay withdraws from the partnership after five years. Consequently, there is no more limited partner in the firm; hence, the certificate has to be cancelled and not merely amended. Cancellation of Certificate When the partnership is dissolved, or when all the limited partners cease to be limited partners, the certificate shall be cancelled, not merely amended. This is obvious for if there be no more limited partners, the limited partnership cannot exist as such. The writing to cancel a certificate shall be signed by all . ARTICLE 1865 The writing to amend a certificate 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; and Be signed and sworn to by all , and an amendment substituting a 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 asg limited partner.

The writing to cancel a certificate shall be signed by all .

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 the 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:

A writing in accordance with the provisions of the first or second paragraphs;

or A certified copy of the order of court in accordance with the provisions of the fourth paragraph; After the certificate is duly amended in accordance with this article, the amended certificate shall thereafter be for all purposes the certificate provided for in this Chapter.

Requisites for amending or canceling the certificate This is under Sec 25 of the Uniform Limited Partnership of the new Civil Code. Problems a. X, a limited partner, assigned his interest to Y, who thereby acquired the right to be a substituted limited partner. Aside from the others, should X and Y sign the amendment? - Yes. b. In the preceding problem, suppose X refuses to sign the amendment, may Y petition the court to order the amendment? - Yes.

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ARTICLE 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. ARTICLE 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:

The amount of the original contribution of each limited partner and the time when the contribution was made; and 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.

Provisions on Limited Partnership This is a new provision of the new Civil Code, Sec 30, of the Uniform Limited Partnership Act. On June 1, 1946, a limited partnership was formed. May it become a limited partnership under the new Civil Code? - yes, by following the conditions in Art 1867. Suppose the limited partnership in question (b) does not want to become one under the new Civil Code, what laws will govern said partnership? - the old law.

SUMMARY

To form a limited partnership requires with one or more general

partners and one or more limited partners. One or more general partners control the business and are personally liable to creditors. The reason for the adoption of acts creating provisions for limited or special partners is that men in business often desire to secure capital from others. The requirements for the formation of a limited partnership are : certificate of articles of the limited partnership stating the matters which must be signed and sworn to ; and the certificate must be filed with the office of Securities and Exchange Commission. The filing with SEC is to inform the public and potential creditors or persons dealing with the partnership of the limited liability of the limited partners. General partner is personally liable for partnership obligations while a limited partners’ liability extends to his capital contributions. When the manner of management has not been agreed upon all of the general partners have equal rights in the management whether or not the general partner has no share in the management of a limited partnership. The liability of a limited partner is not the same as that of the general partner. Understandably, a limited partner is not liable to partnership liability where he has not actually participated in the control of the business. A limited partner becomes liable as a general partner of the firm’s business if he becomes involved in the management of the firm’s business. His abstinence is essential to be exempt from liability. His bare grant of apparent control is not sufficient to make him liable as a general partner where he has not actually participated in the control of the partnership. In contemplation of Article 1848 his participation in the management of the firm does not conclude his liability as general partner but he settles its affairs’ dissolution. The creation of a limited partnership emanates from the proceedings of the partners, thus the former constitutes general partner. In addition, the word “ limited” must be contained in the name of a limited partnership. The creation of a limited partnership is a formal proceeding and not a voluntary agreement as in the case of a general partnership. Therefore, a limited partnership is formed if there has been substantial compliance in good faith with the requirements in Art 1844; otherwise, it becomes a general partnership in which case all the become liable as general partners. It cannot be constituted orally.

A limited partner shall have the same rights as a general partner to inspect and copy the partnership books and have it kept at the principal place of business; to demand true and full information of all things affecting the partnership, and ing of partnership affairs; seek dissolution and winding up by decree of court. A limited partner can be a general partner at the same time if the fact is stated /provided in the certificate of partnership, as provided in Article 1844. But a limited partner my not be an industrial partner without being a general partner in view of Article 1845 which requires the former to be a capital contributor. The return of contribution to a limited partner must be cash regardless of the nature of his contribution. There are some instances when limited partners are allowed to transact business. These are : granting of loans to the partnership; transacting other business with it; receiving a pro rata share of partnership assets with general creditors if he is not also a general partner. However, some prohibited transactions are as follows : receiving or holding as collateral security any partnership property; or receiving any payment, conveyance, or release from liability if it will prejudice the right of third persons. A limited partner shall have the right to receive a share of the profits by way of income and to the return of his contribution as provided in Art 1856 and 1857. As regards preference, the third persons always enjoy preferential rights insofar partnership assets are concerned in view of the natural tendency of the partners to give preference to each other. By agreement of all the stated in the certificate, preference may be given to some limited partners over the other limited partners: return of their contribution; compensation by way of income; or any other matter. A general partner may contribute money, property or industry to the partnership while a limited partner must contribute cash or property to the partnership but not services. A general partner cannot bind the limited partnership for he has no power beyond the limited partner’s investment. Neither do they have the power to act for firm beyond the purpose and scope of partnership. A limited partner is not a proper party to proceedings to enforce a limited partner’s right against, or liability to the partnership. A limited partner has the same rights as a general partner as provided by Article 1851. While Article 1857 provides instances when a limited partner shall not receive from a general partner or out of partnership property any part of his

contribution. A limited partner is liable to the partnership in some instances such as: for the difference between his contribution as actually made and that stated in the certificate as having been made, and for any unpaid contribution which he agreed in the certificate to make in the future of the time and on the conditions stated in the certificate. Article 1858 provides also the instances when a limited partner is significantly liable as trustee: when specific property which he had not contributed is stated in the certificate as contributed by him; wrongfully returned to him partnership property; money wrongfully paid or conveyed property to him on of his contribution. There is no prohibition for a limited partner who is considered as a mere contributor to the partnership while a general partner is prohibited from engaging in a business which is similar or of the kind of business in which the partnership is engaged, if he is a capitalist partner. The retirement, death, insolvency, insanity or insolvency of a general partner dissolves the partnership while retirement, etc. of a limited partner has no effect as the general partner, because his executor or shall have the rights of a limited partner for the purpose of selling his estate. However, the dissolved partnership may continue under the rights given in the certificate or with consent of all the in which the certificate must be amended as required by Article 1864. The certificate must be amended when additional limited partners are itted, prior to formation of a limited partnership. This certificate must be assigned and sworn to by all the partners including the new limited partners and file in the SEC. ( Art 1865) The substituted limited partner shall be liable to all the liabilities of his assignor except those which he was ignorant at the time he becomes a limited partner which cannot be ascertained from the certificate. A person may be a general and limited partner at the same time in the same partnership provided that this fact is stated in the certificate signed, sworn to, and recorded in the office of SEC. Generally, his rights and powers are those of a general partner. Hence, he is liable with his separate property to third persons. However, with respect to his contribution as a limited partner, he would

have the right of a limited partner in so far as the other partners are concerned. Unless a limited partner is also a general partner or has become liable as a general partner, he is not a proper party to proceedings by or against the partnership. A limited partner may assign his interest in the partnership to another person in which the assignee’s rights are limited to receiving the share of the profit or other compensation by way of income or the return of contribution to which the assignor is entitled. The latter has no right to require any information of partnership transactions or to inspect the partnership books, hence, the assignee acquires all the rights of the limited partner only when he becomes a substitute limited partner. The assignee may become a substituted limited partner when all the consent to the assignee becomes a substituted limited partner and upon ission of a substituted partner, the certificate must be amended and file with SEC.

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Review Questions Definitions I. Define the following and explain:

Limited partnership General partnership Substituted limited partnership Amended certificate

II.

What are the rights of a partner who is a general partner and a limited partner at the same time? In what instance or instances may the certificate of a limited partnership be amended or cancelled ? What are the requirements for amending the certificate? What are the characteristics of a limited partnership? Distinguish a general partner from a limited partner May a limited partner contribute services to the partnership ? Why?

III

D, Z, and X formed a partnership where D and Z are general partners while X is a limited partner contributing his services. What kind of partnership has been formed by D,Z, and X ?

What if X is just a contributor to the partnership? What kind of partnership has been formed by D, Z and X?

PRIVATE CORPORATIONS

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Section 1. Title of the Code - This Code shall be known as “ The Corporation Code of the Philippines.” The law governing private corporations in the Philippines popularly known as “ The Corporation Law”, is now embodied in Batas Pambansa Blg. 68 which took effect on the date of its approval on May 1, 1980. It supplants Act. 1459, as amended. The Corporation Law was enacted on March 1, 1906 during the American regime by the Philippine Commission. The Corporation Code of the Philippines is a law which: 1. Provides for the incorporation, organization, and

regulation of private corporations, both stock and non-stock, including educational and religious corporations;

2. Defines their powers and provides for their dissolution;

3. Fixes the duties and liabilities of directors or trustees and other officers thereof:

4. Declares the rights and liabilities of stockholders or ;

5. Prescribes the conditions under which corporations including foreign corporations may transact business;

6. Provides penalties for violations of the Code; and 7. Repeals all laws and parts of laws in conflict and inconsistent with the Code.

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Section 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. Corporations 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. Attributes of Private Corporations:

It is an artificial being. It is created by operation of law. It has right of succession it has the powers, attributes and properties expressly authorized by law or incident to its existence.

Private corporations as artificial being Like partnership, corporation is a separate and has a distinct personality. A corporation as the definition states is an artificial being, a person distinct and separate from the stockholders or composing it. It can sue and sued. It can own or possess property of individual or stockholders, but cannot

be held liable for personal indebtedness of its unlike in partnership. Corporations as legal entity can contract obligations like a natural person. or stockholders compose the corporation, but they are not the corporation because corporation is already a separate entity or artificial being that is created by operations of law, distinct from its . Therefore the statements above defines and classifies what a Corporation is , thus, the corporation code states in : Advantages of a corporation over partnership and other business organizations

A corporation is managed by a group of persons called the Board of Directors. In corporation, the capital is easier to raise and it attracts other persons as investors The corporation will not dissolve and transfer of interest is easier. It has an attribute of perpetual succession and a juridical personality independent from its stockholders.

Corporation construed; It is not in fact, and in reality a person, the law treats it as though it was a person, by process of fiction, or an artificial being distinct and separate from its individual stockholder. A corporation may establish its name and create goodwill along the way of its operation, therefore, it may be exposed to public which transacts business and may get a cause of action against the offender, or a person may have a cause of action against a corporation if the former is offended. Right of Succession A corporation has a capacity of continuous existence regardless of death, withdrawal, insolvency or incapacity of the individual or stockholder.

However, corporation is not immortal. The Corporation Code states that the life of the corporation is limited to the period of time stated in the articles of incorporation, not exceeding 50 years from the date of incorporation unless sooner dissolved or unless extended. The corporation has the right of succession for the term provided in the laws creating them. Transfer of ownership The ownership of the corporation is represented by its capital stock which is divided into identical units or groups of identical units called shares. Shares are represented by a certificate of stock. Its owners are called stockholders. Every stockholder has the right to transfer his shares. A right based on the inherent power of a corporation to dispose of his property. Liability of stockholders The liability of the stockholders is limited by the following: a. The owner of a fully paid stock has no liability to creditors. b. Usually, the owner of stock that has not been fully paid is liable. c. In case the corporation is insolvent to pay, to satisfy creditors the amount required to make his stock fully paid. A share of stock is considered fully paid. When the corporation has received the full par value, or if the stock is without par value, when it has received the price fixed for it on original issuance. Distinction between Corporation and Partnership Factor Partnership Corporation 1. Manner of creation voluntary agreement of created by the state

Partners in the form of a special charter o

by a general enabling law.

2. Existence or duration No time limit except, by not more than 50 years; Agreement of parties may be reduced but never extended 3. Liability to strangers May be liable with their liable only for payment private property beyond the of their subscribe contribution capital stock.

4. Transfer of interest The transferee or assignee A transfer of interest

Does not become a partner, makes the transferee a Even if interest is transferred, stock holder, even without Unless other partners consent the consent of the others. 5. Ability to bind the firm generally, partners acting on generally the stock behalf of the partnership are agents thereof: consequently they can bind both the firm and the firm and the partners 6. Mismanagement a partner can sue a partner who a stockholder cannot sue a mismanages member of the board of directors who mismanages: the action must be in the name of the corporation

7. Nationality a partnership is a national of the country under whose laws country where it was created it was incorporated except except for wartime purposes or for the acquisition of land, natural resources and the operation of public utilities in the Philippines, in which case the veil of corporate identity is pierced and thus goes to the nationality of the controlling stockholders.

8. Dissolution death, retirement, insolvency such causes do not Civil interdiction, or insanity of a dissolve a corporation Partner dissolves the firm

Rationale for the formation of Corporation

To secure capital for business purposes. To limit the degree of losses which may be sustained in a business venture under the feature of non-assessability. Non-assessability of stockholders means that if a corporation is in need of money, it may not assess stockholders for further contribution. Hence, once the shares are fully paid, stockholders have no further liability to them.

Entity theory

Since the corporation is a separate person it should be liable for its own debts, and the stockholders are only liable to the extent of the funds they have invested in the corporation.

Doctrine of Piercing the Corporate Veil

The doctrine of piercing the corporate veil is one which permits the courts to impose personal liability on the shareholders of a corporation, if the corporate form has been used to defeat the public convenience, justify wrongs, and protect fraud or crime.

The Grandfather Rule

The grandfather rule is a method by which the percentage of Filipino equity in corporation engaged in nationalized and/or partly nationalized areas of activities provided for under the Constitution and other national laws is accurately computed, and the diminution of said equity, prevented.

This rule applies by this determination:

X International Hotel

Z Properties, Inc. 65%

Filipino Stockholders 35%

Z Properties, Inc.

Foreign Equity 55%

Filipino Equity 45%

Grandfather rule

Filipino Equity 45

100 X 65 = 29.25%

Add : Percentage of Individual

Filipino Stockholder 35% 64.25%

Foreign Equity 55%

100 X 65% = 37.75%

100.00%

Advantages of a business corporation

The corporation has a legal capacity to act as a legal unit; It has continuity of existence because of its independence on the lives of those who constitute it; Its credit is strengthened by such continuity of existence; Its management is centralized in the board of directors; Its creation, management and dissolution are standardized as they are governed under one general incorporation law; the shareholders have limited liability; They are not general agents of the business; and The shares of stocks can be transferred without the consent of the other stockholders.

Disadvantages of a business corporation

The corporation is relatively complicated in formation and management; It entails relatively high cost of formation and operation; Its credit is weakened by the limited liability of the stockholders; There is ordinarily lack of personal element in view of the transferability of shares; There is a greater degree of governmental control and supervision than in any forms of business organization;

The stockholders’ voting rights have become theoretical in large corporations because of the use of proxies The stockholders have little voice in the conduct of the business Management and control are separate from ownership in large corporations.

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Section 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 the shares held are stock corporations. All other corporations are non – stock corporations. Kinds of Corporations. The following are classified as the kinds of corporations:

According to whether their hip is represented by shares of stock or not:

Stock corporation - A corporation created for the purpose of making a profit which may be distributed in the form of dividends to stockholders on the basis of their invested capital.

Non-stock corporations -They are corporations created not for profit and do not issue stock but for the public good and welfare.

According to the number of corporation who compose the same:

Corporation aggregate - A corporation consisting of more than one member or corporator.

Corporation sole. - Also called a religious corporation which consists of one member or corporator only and his successors, such as bishop, minister, head minister, pastor and other religious authority that may be designated by him.

According to whether they are for purposes of religion or not:

Ecclesiastical or religious corporation. - A corporation organized for religious purposes.

Lay corporation - One organized for a purpose other than for religion. This corporation may either be eleemosynary or civil.

Corporationsthat are created for charitable purposes or not:

Eleemosynary - A corporation established for charitable purposes.

Civil - One established for business or profit.

Corporations that are created whether for government purposes or not:

Public corporations -Corporations organized for the government of a portion of the State.

Private corporations - Corporations formed for some private purpose, benefit, or end; it may be either a stock or non-stock corporation, government-owned or controlled corporation or quasi-public corporation.

Corporationsaccording to state under the laws of which they have been created:

Foreign corporation - A Corporation formed, organized, or existing under any laws other than those of the Philippines.

Domestic corporation - A corporation incorporated under the laws of the Philippines.

According to whether they are full corporations or not;

Corporations in the true sense - One which exists by statutory authority.

Quasi-corporation. - One which exists without formal legislative grant. An exception to the general rule that a corporation can exist only by authority of law.

Corporations that are created whether the of corporations are limited to a few persons:

Open corporation - One in which the general public may become corporators or thereof.

Close corporation - A corporation whose articles of incorporation provide that :

All of the corporations’ issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than that a specified number of persons not exceeding twenty (20) All of the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this title ( XII); The corporation shall not list any stock exchange or make any public offering of any of its stock of any class.

Corporations that are created according to legal existence:

De Jure corporation - A corporation existing in fact and in law. De Facto corporation - A corporation existing in fact but not in law.

Corporation by estoppel. - One which in reality is not a corporation, either de jure or de facto, because it so defectively formed, but is considered a corporation in relation to those only who, by reason of their acts or issions, are precluded

from asserting that it is not a corporation.

According to control

Parent or holding corporation. - A corporation which is so related to another by common control of voting stock and operated as parts of a system or enterprise.

d corporations. -They are corporations related to one another by common control of voting stock and operated as parts of a system or enterprise.

Subsidiary corporation - A corporation which is related to another that a majority of its directors can be elected by such other corporations either directly or indirectly through another corporation or series of corporations.

According to organization:

Trading corporation A commercial corporation formed to engage in buying and selling.

Migratory corporation - A corporation formed under the laws of another state than that of the incorporator’s residence for the purpose of performing their business in the state of their residence or in another state or in another state than that of the state of incorporation.

Tramp corporation -A corporation chartered in one state without any intention of

doing business therein, but to carry on their business and operations entirely in other states.

Compositions of Public corporations :

Government-owned or controlled corporations or those directly created by special law or if organized under the general corporation law (B.P. Blg. 68) are owned or controlled by the government directly through a parent corporation or subsidiary, to the extent of at least a majority of its outstanding capital stock or of its outstanding voting capital stock. They may be stock or non-stock and doing government or proprietary functions. They are private corporations and not public corporations for they are not established for the government of a portion of a State. Examples: GSIS, National Power Corp., PNR, PCSO,

Essentials of a de facto corporation To constitute a group of persons as a de facto corporation, the following essential elements must be present:

existence of a law under which a corporation can be organized; an attempt in good faith to incorporate, and actual exercise of corporate powers.

Example: There were seven persons who filed the articles of incorporation with the Securities & Exchange Commission, all fees were paid, the certificate of incorporation was issued, stocks were issued, directors and officers were

elected, and business was commenced. Later, it was found out that there was infirmity in the acknowledgment of the articles of incorporation because the notary public who took the acknowledgment was not qualified to do so by main reason that his term, as notary public, had already expired. Could the corporation claim a de factor existence? Yes. Because all the essential elements of a de facto corporation were present. Where a de facto existence of a corporation is shown, it cannot be subject to a collateral attack. It means an attack on the validity of the existence of the corporation when the main issue is other than such a valid existence – as where the de facto corporation brings a suit for collection, and the defendant raises the validity of its existence as a collateral or side issue to defeat the action. “The due incorporation of any corporation claiming in good faith to be a corporation under this Act and its right to exercise corporate powers shall not be inquired into collaterally in any private suit to which the corporation may be a party, but such inquiry may be had at the suit of the Insular government of the SolicitorGeneral.” Example A is a de facto corporation. V owes A P 6,000. V fails to pay the debt. A files an action against V for collection. V files a motion to dismiss on the ground that A has no capacity to sue, it being but a mere de facto corporation. Should the motion be granted? No. The law does not permit the validity of the existence Of a de facto corporation to be inquired into or attacked collaterally except in a quo warranto ( by what authority) proceeding instituted by the state.

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Distinction between Public Corporations and Private Corporations

Public corporation is an instrumentality of government; while private

corporation is an instrumentality of individuals. Public corporation is organized for political purposes; while private corporation is organized for private purposes. Public corporation may be changed or dissolved by the state; while private corporation may not be changed or dissolved without the consent of stockholders, except in forfeiture. In Public corporation, are officers of the government; while private corporation, or stockholders are not government officers.

Section 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. Supplementary law Provisions of the Corporation Code not inconsistent with the special laws or charters and made applicable by express legal mandate or by the nature of the transactions involved are deemed supplementary law. A corporation created by a special law or charter is primarily governed by such law and suppletorily, by the provisions of the Code “ insofar as they are applicable” either because they are not inconsistent with, or are expressly made applicable by the special law. Section 5. Corporators and incorporators, stockholders and -Corporators are those who compose a corporation, whether as stockholders or . Incorporators are those stockholders or mentioned in the articles of incorporations as originally forming and composing the corporation and who are signatories thereof. Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called .

Procedures in the creation of a corporation

Promotion Incorporation Organizational and commencement of business operations

Persons composing a corporation : 1. Corporator - One of those who composes a corporation, whether stockholder or member, or both. 2. Incorporator - A member or stockholder, mentioned in the articles of incorporation as originally forming and composing the corporation, and who is a signatory thereof. 3. Stockholder - A corporator in a stock corporation. 4. Member - A corporator in a non-stock corporation. Other classes of persons composing a corporation 1. Promoter - a person who develops or takes the initiative in founding or organizing a business venture. Where there are more than one promoter involved in a venture, they are called co-promoters. A promoter is a person who undertakes to form a corporation and to produce for it the rights, instrumentalities, and capacity by which it is to carry out the purposes set forth in its charter, and to establish it as fully able to do its business. Although an agent of the incorporators, is not an agent of the corporation. 2. Subscriber A person who agrees to invest in the corporation by purchasing shares of stock. He enters into a contract defining the extent and of his commitments. He usually executes “ subscription” or “ subscription

agreements” 3. Underwriter - A person who buys shares with an intention of further distribution. An underwriter is usually a commercial entity engaged in the distribution of securities or he simply buys securities without an investment intent and for further distribution. Corporation requiring a certain percentage of the capital stock of a Filipino ownership a. Banking corporations - Minimum of 60% of the capital stock shall be owned by Filipino citizens in which may be established after July 24, 1948. b. Corporations engaged in advertising - minimum of 70% of the capital stock must be owned by Filipino citizens. c. Corporations engaged in coastwise shipping - filipino citizens should own a minimum of 60% of the capital stock. d. Corporations engaged in the pawnshop business - citizens of the Philippines should own a minimum of 70% of the voting capital stock.(P.D. 1124 Sec.8) e. Corporations engaged in retail trade 100% must be owned and managed by Filipino citizens. f. Corporations engaged in mass media - must be 100% owned and managed by Filipino citizens. g. Educational corporations - minimum of 60% of the capital should be owned by Filipino citizens. Filipino equity participating in all educational institutions, however, may be increased by Congress. h. Financing companies - minimum of 60% of the capital stock should be owned by citizens of the Philippines. i. Public utility franchise - granted only to corporations or to citizens of the Philippines at least 60% of the capital of which is owned by such citizens. j. Rural banks - 100% of the capital stocks must be owned by citizens of the Philippines.

Rights of Stockholders A stockholder is entitled to exercise all his rights such as: right to vote from the moment he subscribes to stocks of the corporation irrespective of whether or not any portion of said subscription has been paid by him to the corporation. He enjoys the right to subscribe shares, until he is declared delinquent in his subscription payments to the corporation. Proprietary rights of stockholders.

right to inspect books and record. right to check the financial statements.

c. pre-emptive right

d. right to transfer of stock

e. the right for issuance of stock certificate for fully paid shares.

f. the right to recover stocks unlawfully sold for delinquent payment of subscriptions.

Shares of stock defined It is one in which the capital stock is divided. It represents the interest or right which the owner has in the management of the corporation where he has the right to vote; a portion of the corporate earnings, if and when segregated in the form of dividends; and upon its dissolution and winding up, in the property and

assets thereof remaining after the payment of corporate debts and liabilities to creditors.

Section 6. Classification of shares - The shares of stock corporation 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 share 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 and conditions of preferred shares of stock or any series thereof; Provided, That such and conditions shall be effective upon filing of a certificate thereof with the Securities and Exchange Commission. Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided, That shares without par value may not be issued for a consideration less than the value of Five pesos ( P5.00) per shares: 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 by 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 no-voting shares in the case allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters:

Amendment of the articles of incorporation; Adoption and amendment of by-laws; Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; Incurring, creating or increasing bonded indebtedness; Increase or decrease of capital stock; Merger or consolidation of the corporation with another corporation or other corporations; Investment of corporate funds in another corporation or business in accordance with this Code; and 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. Classification of Shares Shares of stock may be : Par value Also called the maturity value or face value the amount that the issuer agrees to pay at the maturity date. Shares is an arbitrary or nominal value assigned to each such share.

No par value These are shares which are stated to have no par value. Such shares are issued for the consideration designated by the board of directors, and allocated to stated capital unless the directors or shareholders determine to allocate a portion to capital surplus. Voting Share It is generally customary to give the right to vote to the common stock and to withhold it from the preferred. It is hare with right to vote. Non-voting It is a share without right to vote. If stock is originally issued as voting stock, it cannot thereafter be deprived of the right without the consent of the holder. Common share It is a share which represents the residual ownership interest in the corporation. Holders of common shares select directors to manage the enterprise, are entitled to dividends out of the earnings of the enterprise declared by the directors, and are entitled to a per share distribution of whatever assets remain upon dissolution after satisfying or making provisions for creditors and holders of senior securities. Preferred shares (e.g. cumulative or non-cumulative; common or participating This refers to a share of stock, with a stated par value, issued by a corporation, with preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or other valid preferences stated in the articles of incorporation.

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Promotion stock or shares

It is such stock as is issued to promoters, or those in some way interested in the company, for incorporating the company, or for services rendered in launching or promoting the welfare of the company, such as advancing the fees for incorporating, advertising, attorney’s fees, surveying, etc. Shares in escrow Is a share subject to an agreement by virtue of which the share is deposited with a third person to be delivered to the stockholder or his assigns after complying with certain conditions, usually the payment of the full subscription price. Convertible share It is a share in stock which is convertible, or changeable by the stockholder from one class to another class, such as from preferred to common, at the conversion ratio, i.e., the price at which the common is to be valued as against the preferred. Except as may be restricted by the articles of incorporation, the stockholder may demand conversion at his pleasure. Founders’ shares These are stocks designed to give its holders a residual share in the profits of the company, and to facilitate a concentration of corporate control. Redeemable shares These are actually stocks issued by a corporation subject to agreement that the corporation may, within a certain period of time, require the holder of the stock to surrender his shares and accept a certain sum of money in payment for them. Treasury shares These are stocks previously issued by the corporation, fully paid for and reacquired by it by lawful means. After fixing a reasonable price for them, the board, may dispose of these shares. Unless restricted by the law or the provisions of its charter, a corporation may, therefore, issue classes of series of shares as the prospects and needs of its business may require. A corporation, however, may issue only one class or kind of share. A corporation must have at least one class of stock with voting rights.

Capital stock Capital stock is the amount fixed in the articles of incorporation, to be subscribed and paid in by the shareholders of a corporation, either in money or property, labor or services, at the organization of the corporation upon which it is to conduct its operation. Distinction between Capital and Capital Stock Capital is the actual corporate property. Capital stock is an amount and something abstract. There is an apparent daily variation in capital as there are profits that appreciate and depreciate of corporate assets Capital stock is an amount fixed and unaffected by profits and losses. Capital belongs to the corporation and capital stock when issued belongs to the stockholders and that capital may be either real or personal property but capital stock is always personal. Issuance of Authorized shares It is a practice by modern corporation to authorize additional shares over what is planned to be issued at the outset in the event additional capital is needed at a later date. Authorized shares but not issued may be issued at a later date by the board of directors without approval of the shareholders or amendment to the articles of incorporation. Certificate of Stock It is a written acknowledgment by the corporation of the interest, right and participation of a person in the management, profits, and assets of a corporation. It is a formal written evidence of the holder’s ownership of one or more shares and is a convenient instrument for the transfer of title. Distinction between certificate of stock and share of stock

A certificate of stock is tangible while share of stock is incorporeal or intangible. A certificate of stock is the written evidence of that right or interest; while a

share of stock represents the right or interest if a person in a corporation. Share of stock may be issued even if the subscription is not fully paid except in no par shares, a certificate of stock may not be issued unless the subscription is fully paid.

Par Value, Book Value and Market Value Par value The par value in the certificate of stock represents the amount of money or property contributed by the shareholder to the capital stock of the corporation. It cannot, through its patent, always be equal to the par value of the outstanding stock, the assets being constantly in a state of fluctuation as the business prospers or declines. Book value The par value does not always reflect its actual or true value or books value which may be determined by dividing the net value of the total corporate assets (capital and surplus, if any) by the number of shares issued or outstanding. Market value Par value and books value may be more or less than market value which may be defined as the price a willing seller would sell and a willing buyer would buy neither being under abnormal pressure to sell or to buy. It is affected by the law of supply and demand. Private corporations may not issue no-par value shares such as the following:

banks; insurance companies; building and loan associations;

public utility companies without approval of any of the appropriate board created to replace the Public Service Commission; and

The following shares of stock may not be issued without a stated par value;

preferred shares of any corporation; shares issued by the above-stated corporations.

Stocks such as Preferred shares are issued only with a par value, and may be given preference in the distribution of assets in liquidation and in the payment of dividends, or such other preferences as may be stated in the articles of incorporation. With the exception of treasury stocks which cannot be voted upon on any corporate matter, holders of other non-voting shares shall, nevertheless, be entitled to vote on the following corporate matters:

amendment of the articles. Adoption and amendment of the by-laws; Sale of other disposition of all or substantially all of the corporate property; Incurring, creating or increasing bonded indebtedness; Increase or decrease of capital stock; Merger or consolidation with other corporation; Investment of funds in another corporation or for a different purpose; and Corporate dissolution.

The board of directors, may fix the in the articles of incorporation the price at which no-par value shares may be issued in pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders at a meeting duly called for the purpose representing at least a majority of the outstanding capital stock. Section 7. Founder ‘s shares. - Founder’s 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-years period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission. Founders’ shares of stocks designed to give its holders a residual share in the profits of the company, and to facilitate a concentration of corporate control. These shares are issued in smaller amounts than other classes of stock, and generally carry dividend provisions that encourage the directors or founders, who are the holders of such shares, to increase the earnings of the corporation. Theses shares do not carry any stock liability nor do they have any claim on the assets of the company, in the event of dissolution or failure. Sometimes, it is the only class of stock entitled to vote. Voting power may be shared by other classes of stock if dividends on such other stock are not paid. Section 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 and conditions stated in the articles of incorporation, which and conditions must also be stated in the certificate of stock representing said shares. Redeemable share or callable share is actually a stock issued by a corporation subject to agreement that the corporation may, within may, within a certain period of time, require the holder of the stock to surrender his shares and accept certain sum of money in payment for them.

Redemption means the reacquisition of a security by the issuer pursuant to a provision in the security that specifies the on which the reacquisition may take place. A holder of a security that has been called for redemption will have a limited period thereafter to decide whether or not to exercise a conversion right, if one exists. When redeemable share issued It may be issued only when expressly provided in the articles of incorporation. However, they are deemed irredeemable in the absence of provisions on redemption of preferred shares in the articles of incorporation. Common shares are never redeemed. Redemption regardless of unrestricted retained earnings. Redeemable shares may be taken up or purchased by the corporation, upon the expiration of the period fixed, regardless of the existence of unrestricted retained earnings. The power of the corporation to acquire its own shares for the purposes stated therein is subject to the condition that there be unrestricted retained earnings in its books to cover the shares, purchased or acquired. However, the shareholder, in the case of redeemable shares, is conferred the right of a creditor to attract corporate financiers. Insolvency of corporation Regardless the existence of unrestricted retained earnings, redeemable may be redeemed, provided sufficient assets are available to cover debts and liabilities inclusive of stock. The rights of the holders of redeemable shares should be deemed subordinate to the rights of corporate creditors. Redemption may not be made where the corporation is insolvent or if such redemption would cause insolvency or inability of the corporation to meet its debts as they mature. Redeemable shares may be deprived of voting rights in the articles of incorporation, unless otherwise, provided in the Code. ( Sec.6, pars. 1,6)

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Advantages of par value shares 1. Par value shares are easy to sell as the public is more attracted to buy this kind of shares; 2. Subsequently issued shares are most unlikely to be sold at a lower price; 3. Creditors are greatly protected; and 4. Dividends that are ostensibly profits are unlikely to be distributed. Disadvantages of par value shares

The subscribers are liable to corporate creditors for their unpaid subscription; and The stated face value of the share is not an accurate criterion of its true value.

Advantages of no par value shares

No par value share are issued as fully paid and non-assessable as their price is flexible; and low-price stocks ( most no par shares are low-priced) enjoy wider distribution. Stock dividends are easy to issue as they simplify ing systems. No par value tells the true value concerning stockholders’ contributions.

Disadvantages of no par value shares

They legalize large issues of stock of property; as they conceal the money or property represented by the shares; they promote issuance of watered stock; and there is lesser protection to creditors.

Preference in the issuance of preferred shares A corporation may issue more than one class of preferred stock as to assets or as to dividends. Preferred shares may be given first preference or second preference on earnings. The rule is that preferred shares of stock enjoy the same preferences or privileges in the articles of incorporation. Preferred stockholders are not creditors of the corporation. They are investors like common stockholders, who after full payment of debts can look only to what is left . Doctrine of Equality of shares The law is the prima facie all the stockholders can hold on an equality. It may involve the creation of preferential rights, if any alteration is made in this prima facie Section 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. Treasure shares are stock previously issued by the corporation, fully paid for and reacquired by it by lawful means. Complexities created by treasury shares are within the ing concepts, thus, it is impossible that a corporation may only repurchase shares out of earned surplus. Such shares may either be kept in the corporate treasury or disposed of in any manner benefiting the corporation. It is not bound by provisions governing an original issue as regards disposition of treasury shares. Unlike the original issue, the sale of treasury stock may be made at any price acceptable to the corporation or it may even be given away as bonus stock. If the stock is sold at a price below par value, the purchase is not liable to corporate creditors for the difference between the par value of the stock and the price to be paid for it. The reason for this is that the stock was fully paid for upon original

issue and like any other stock, it may be sold at any desired price without imposing liability upon the holder. Lawfully stated, treasury shares are shares issued by a corporation, paid for in full, and later reacquired by the corporation by gift or purchase. Bonus Stock Are shares of stock given as compensation to persons significantly aiding the corporation. Bonus stock may also be given for the purpose of inducing the purchase of corporate securities. Bonus shares of stock are par value shares issued without consideration, usually in connection with the issuance of preferred or senior securities, or debt instruments. The are considered a specie of watered shares and may impose a liability on the recipient equal to the amount of par value.

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TITLE II INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Section 10. Number and qualifications of incorporators - Any number of natural persons not less than (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 a stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. Persons composing the corporation Incorporator A member or stockholder, mentioned in the articles of incorporation as originally forming and composing the corporation, and who is a signatory thereof.

Corporator One of those who compose a corporation whether stockholder or member, or both. Stockholder A corporator in a stock corporation. Member A corporator in a non-stock corporation Incorporation defined It is the act of forming a corporation. Steps in Incorporation The following are the steps in the incorporation :

The incorporators draft and execute the articles of incorporation as the person chosen as temporary treasurer while pending incorporation progresses must also execute;

An affidavit regarding the capital subscribed and paid up. Filing with the Securities and Exchange Commission of the articles of incorporation together with :

Treasurer’s affidavit disclosing at least 25% of the entire authorized shares has been subscribed and at least 25% of the subscription has been paid in cash and or property to the corporation.\ In case a special law governs the corporation such as educational institution. a

favorable recommendation of the proper government agency like Deped that such articles of incorporation is legal. Payment of filing and publication fees; and

d. Securities and Exchange Commission will issue the certificate of incorporation if all the papers filed after verification and examination, are found in order.

Number and qualifications of Incorporators The incorporators must not be less than five ( 5) but not more than fifteen (15), all of legal age, and a majority of whom are residents of the Philippines. The five to fifteen incorporators must be natural persons, cannot be incorporators of another corporation. Exception, duly established cooperatives may organize rural banks and / or subscribe to shares of stock of any rural bank. ( Sec 4 RA 720). It says, if the corporation is a cooperative , it may become an incorporator of a rural bank. ( SEC opinion 10/11/1971) A corporation may subscribe to the stocks of another corporation. The minimum number of incorporators is mandatory and a corporation cannot be legally formed by less than the prescribed number except in the case of a corporation sole. For instance, in educational corporations, their incorporators shall be governed by special laws and by the general provisions of the Code. Steps in the creation of a corporation The following are the steps in the creation and organization of a corporation, namely:

Promotion Incorporation; organizational and commencement of business operations

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Minimum stockholders or After the corporation is organized the number of stockholders may become less than the minimum number required for incorporation without affecting corporate existence unless valid grounds exist for piercing or lifting the corporate veil. Ownership by an individual The minimum requirement of incorporators is one of those provisions, however, which are regularly evaded in practice. Since the law allows a scheme by which all the shares are owned by a single individual, the latter may incorporate provided he associates with him, at least nominally the number of persons required by the law. It may be rare to know that there exists a corporation originally formed by the required number of incorporators affected by the subsequent accumulation of all the shares in the hands of one individual, unless, circumstances exist to justify the piercing of the corporate veil. Capacity to enter into contract The incorporators must have the capacity to enter into a valid contract, being contractual in nature. The articles of incorporation must be acknowledged by the incorporators before a notary public, i.e. must be under oath, in order to prevent fraud and assure genuine signatures. A married woman may be an incorporator without the need of obtaining the consent of her husband since under the law, either spouse may exercise any

legitimate profession, occupation, business or activity without the consent of the other subject to the right of the husband to object only on valid, serious, and moral grounds. Residents of the Philippines A majority of the incorporators must be residents of the Philippines; the rest may be persons who are neither residents nor citizens of the Philippines. However, enemy aliens cannot become incorporators for subjects of one country cannot lawfully contract with the subject of the country with which it is at war. It is mandatory. Citizens of the Philippines Citizens is an essential qualification for incorporators in corporations as provided by constitution and legal provisions, in which a certain percentage of the capital stock is required to be owned by Filipino citizens. Alien shareholders may be inhibited from certain activities which are exclusively reserved for Filipino citizens. Corporate form offers advantages and disadvantages to both newly incorporated organizations and going business which choose to incorporate. Creation of a separate taxable entity. As such the corporation is a means by which the sole proprietor or the partners of a going business can protect part of the income realized by the business from the individual income tax rate, if it is high. Incorporation may be disadvantageous taxwise if the income of the owner (s) is relatively law. Also, because a corporation is a separate taxable entity, a double tax is incurred – both the corporation’s earning and the income received by stockholders from the corporation are taxed. Protection from liabilities of the corporation are not personally subject to liabilities incurred by the corporation. Protection of one business from another speculative business of the same owner (s) if one or both business is incorporated. Protection of one business from another. Business with stable operations is protected from another speculative business of the same owner (s) if one or both business is incorporated.

One-Man Corporation A “one-man corporation” is a corporation entity where one person holds directly and indirectly all or substantially all of the stocks of the corporation. Guidelines in the organization of a private stock corporation The Corporation Code states that there should be five(5) or more persons not exceeding fifteen (15), all of legal age, a majority of whom are residents of the Philippines, may form a private stock corporation by filing with the Securities and Exchange Commission, articles of incorporation in any of the official languages, ( Filipino or English) in triplicate, duly signed and acknowledged by all the incorporators before a notary public. The following shall constitute the articles of incorporation:

The names of the corporation, which must contain the word “Incorporated,” Inc.” or “ Corporation”. Such name must not be identical or deceptively or confusingly similar to the firm name, business name, trade name or style of another person, firm or entity which must not be contrary to existing laws. The Commission, as a matter of policy, requires the submission, together with the articles of incorporation, of a statement signed by at least a majority of the incorporators, to the effect that they are willing to change the corporate name in the event that another person, firm or entity has a prior right to the use of an identical or a confusingly similar name; The objective for which the corporation for which the corporation is to be formed must be grouped into Primary, which must be only one, and Secondary Purposes which may be several. The place where the principal office is to be established must be within the Philippines, provided that for purposes of stockholders’ or , meeting, Metro Manila shall be considered a City or Municipality. The term of the Corporation’s existence must not exceed fifty (50) years from and after the date of incorporation. The incorporators must be natural persons and must not be less than five (5) nor more than fifteen (15),a majority of whom must be residents of the Philippines.

The names, citizenship, and residences of the incorporators must be disclosed in the articles of incorporation. Each of the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. If there are alien corporators, a certificate of such aliens showing that they have verified their alien certificates of registration and the number and dates of issue and renewal of each certificate, together with the immigrant certificate of residence of said alien incorporators and subscribers must be submitted; The names and addresses of the incorporating directors which must not be less than five (5) nor more than fifteen (15) and at least a majority of which are residents of the Philippines. The authorized capital stock, the number of shares into which it is divided, the par value of such shares, in lawful money of the Philippines, if the shares have par value; otherwise, only the number of shares need be stated; The amount subscribed by the subscribers, which must be at least 25% of the authorized capital stock. The names, address and the respective amounts subscribed and paid by them must also be stated. The total amount paid on of subscriptions except where the capital stock consists of no par value shares, in which case, the subscriptions must be fully paid. The name of the Treasurer elected by the subscriber authorized to receive for and in the name and for the benefit of the corporation all subscriptions paid or given by the subscribers. For corporations which will engage in any business reserved for Filipino citizens, the following provision shall be included:

“ No transfer of interest which will reduce that ownership of Filipino citizens to less than the required percentage of the capital shall be allowed or permitted to be recorded in the proper books. This restriction shall be printed in all the stock certificates of the incorporation.”

An affidavit of the treasurer of the corporation must be attached to the articles of

incorporation showing that at least 25% of the authorized capital stock has been subscribed and at least 25% of the subscription has been paid in cash and/or property the fair valuation of which is equal to or at least 25% of the said subscription. The paid-up capital which must not be less than five thousand pesos (P5,000.00), if the same is in cash, the sum must be deposited with a bank in the name of the proposed corporation, or in the name of the Treasurer in trust for the corporation, or in the name of the Treasurer in trust for the corporation, and in bank certificate, in accordance with the prescribed form, executed by the Treasurer of the corporation authorizing the Commission to examine and ing records to determine the existence and utilization of the paid-up capital must likewise be submitted . This letter of authority shall be binding upon the corporation even if there is a change of corporate officers. If the paid-in capital consists of property, verification of its ownership, physical existence, reasonableness of the valuation at which it is being transferred to the corporation is made by the Commission. Documents to ownership such as original/ transfer Certificate of Title, and Tax Declaration with respect to land, certificate of registration with respect to motor vehicles and motor vessels, and other documents to the ownership of the properties are required to be submitted. If any of the properties used as paid up capital is mortgaged or otherwise encumbered, written consent of the mortgage is necessary. If the transfer value of the property is higher than cost or assessed value, an appraisal report prepared by a licensed appraiser is needed.

If a single proprietorship or partnership is being converted into a corporation, a duly certified financial statements signed by an independent A are required together with a long form audit report certified by the latter. Likewise, written consent of creditors must be submitted.

A deed of assignment executed by the owner, proprietor, or partners in case of partnership, transferring the properties, as well as other assets and liabilities in favor of the corporation is required. The Deed of Assignment covering real estate properties must be presented for primary entry to the of Deeds

where the property is located. Attachment shall include also a statement of assets and liabilities in a prescribed form executed under oath by the Treasurer of the corporation. After filing of the articles of incorporation the Securities and Exchange Commission shall publish at the expense of the corporation, the assets and liabilities of the same once in a newspaper of general circulation in the locality where the corporation is domiciled, if any or in default thereof in a newspaper of general circulation in Metro Manila.

Section 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 a period 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) year prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission.

Life of a corporation The life of a corporation shall exist for the term specified in the articles of incorporation not exceeding fifty years(50), or may be reduced or extended for a period not exceeding fifty (50) years by amendment of the articles of incorporation, unless sooner legally dissolved, or unless its registration is revoked upon any of the grounds provided by law. Steps for the extension of corporate life

There must be approval by the majority vote of the corporate board for the extension of a corporate life.

There must be a written consent of at least 2/3 of the subscribed capital stock of the stockholders or by the vote of the stockholders in order to amend the articles of incorporation. A copy of the amended articles must be certified by the President, secretary and a majority of the board. The certified copy of the amendment articles should be filed with the SEC, paying the required fees.

Section 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. Capital stock requirement There is no minimum authorized capital stock required except as otherwise provided for by special law as long as the paid-up capital as required by Sec. 13 of the Corporation Code, is not less than P 5,000. This is because the requirement is arbitrary and does not provide any meaningful protection to creditors. Authorized Capital Stock, defined It is the amount fixed to be subscribed and paid or secured to be paid in by the shareholders of a corporation, either in money, or in property, labor or services, in the organization of the corporation or afterwards, and upon which it is to conduct its operations. Capital Stock requirement The minimum authorized capital stock is not set by the Corporation Code., except provided by special law as long the paid-up capital, as required by Section 13, is not less than P 5,000. Special law may require a higher paid-up capital, as in the case of commercial banks, insurance companies, and investment houses.

Section 13. Amount of capital stock to be subscribed and paid for purposes of incorporation. At least twenty-five (25%) percent of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) of the total subscriptions 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 a 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 (P5,000.00) pesos. Paid-up capital and subscription requirements Paid –up capital is the amount actually paid in money or property on of the subscribed capital stock. For purpose of incorporation, at least 25% of the subscribed capital stock must be paid in by the incorporators. The paid-in amount should, however, not be less than P 5,000. Call is now required only when there is no fixed date for payment of unpaid subscription. Thus, if there is a fixed date for subscription, the corporation may file judicial action to collect in case of failure on the part of the subscriber without the need for a previous call as judicially required.

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The 25% subscription requirement The code states that the minimum subscription should be 25% of the amount of the authorized capital stock or the aggregate value of all the shares of stock the corporation is authorized to issue. In par value stock corporations, the percentage subscription requirement shall always be based on the amount of the authorized capital stock irrespective of the class, number, and par value of the shares. The capital stock consists only of no par value shares, the 25% shall be computed on the basis of the entire number of authorized shares. Corporations whose shares have no par value have no authorized capital stock. The issue

price of no par shares need not be fixed in the articles of incorporation. The requirement as to par value shares where the capital stock is divided into par value shares and no par value shares, the 25% is based on the number of said no par value shares Subscription defined It is an offer to buy a specified number of unissued shares of a corporation. If the corporation is not yet in existence, a subscription is known as a preincorporation subscription, which is enforceable by the corporation after it has been formed and is irrevocable despite the absence of consideration or the usual elements of a contract. Subscribers are persons who agree to invest in the corporation by purchasing shares of stock. Outstanding Stock It is the amount of stock in the hands of the public. Although all outstanding stock has been issued, all issued stock is not necessarily outstanding., Only issued stock which has not been cancelled are required by the corporation as treasury stock is called outstanding stock. Section 14. Contents of articles of incorporation - All corporations organized under this Code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law:

The name of the corporation; The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are 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; The place where the principal office of the corporation is to be located, which must be within the Philippines; The term for which the corporation is to exist; The names, nationalities and residences of the incorporators; The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15); The names, nationalities and residences of the persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code; If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the 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 of the shares are without par value, such fact must be stated; If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and Such other matters as 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 subscribers showing that at least twenty-five percent (25%) of the authorized capital stock of the corporation has been subscribed, and at least twenty-five percent (25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five percent (25%) of the said subscription, such paid-up capital being not less than Five thousand pesos

(P5,000)

Documents required in the Articles of Incorporation

The following documents are needed with the Articles of Incorporation:

Treasurer’s certificates; Statement of asset and liabilities; Bank statement of money paid in for subscriptions; Letter of authority for SEC examiners to examine the bank ; in the case of banks and institutions under Central Bank supervision, insurance companies, public utilities, schools and other institutions governed by special laws, the favorable recommendation of the appropriate government agency.

The residence of a corporation is the place where its principal office is established It can be sued in that place, not in the place where its branch office is located.

Articles of Incorporation defined

It is a legal instrument executed by the incorporation of a corporation which states the name and purpose(s) of the proposed corporation (which may be or include the conduct of any lawful business) together with all other pertinent information, except as prescribed by the Corporation Code or by special law.

Domiciliary test

The nationality of a corporation is determined where the corporation was incorporated.

Control test

The control test is determined in times of war or national emergency. If the controlling stock of a corporation is owned by citizens of a particular country which is at war in the Philippines, then that corporation, although organized in the Philippines, is a foreign corporation.

Nationalized Corporation

a. 100% Filipino – owned

Retail trade Rural banks Mass media Rice and corn Security agencies

b. 60% Filipino owned

1. Public utility corporations

2. Corporations to utilize, develop or exploit natural resources; fishing licenses; geothermal energy permits

3. Beneficiaries of Philippine Overseas Shipping

4. Educational institutions

Limitations of other Corporations There are some limitations for corporations to have interest in any other corporation such as corporations engaged in agriculture which are prohibited from having interest in any other corporation organized for the purpose of engaging in agriculture. Those non-realty Philippine corporations can acquire real estate only up to the extent that the purpose for which the corporation was formed may permit; and up to the extent the corporation may require, cannot engage in buying and selling of public lands.

Section 15 Forms of Articles of Incorporation - Unless otherwise prescribed by special law, articles of incorporation of all domestic corporation shall comply substantially with the following form:

ARTICLES OF INCORPORATION

OF

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( Name of Corporation )

KNOW ALL MEN BY THESE PRESENTS:

The undersigned incorporators, all of legal age and a majority of whom are residents of the Philippines, have this day voluntarily agreed to form a (stock) (non-stock) corporation under the laws of the Republic of the Philippines

And we hereby certify:

First : That the name of said corporation shall be “____________, Inc. or Corporation”:

Second: That the purpose or purposes for which such corporation is incorporated are: (If there is more than one purpose, indicate primary and secondary purposes);

Third : That the principal office of the corporation is located in the City/Municipality of ______________ Province of ____________, Philippines;

Fourth : That the term for which the said corporation is to exist is ____________ years from and after the date of issuance of the certificate of incorporation;

Fifth : That the names, nationalities and residences of the incorporators of the corporation are as follows:

Name Nationality Residence

_________________ ____________________ __________________

_________________ ____________________ __________________

_________________ ____________________ __________________

_________________ ____________________ __________________

Sixth : That the number of directors or trustees of the corporation shall be __________; and the names, nationalities and residence of the first directors or trustees of the corporation are as follows:

Name Nationality Residence

_________________ ____________________ __________________

_________________ ____________________ __________________

_________________ ____________________ __________________

_________________ ____________________ __________________

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Seventh : That the authorized capital stock of the corporation is _________(P______) pesos in lawful money of the Philippines, divided into ______ shares with the par value of ______(P____) pesos per share. ( In case all the shares are without par value): The capital stock of the corporation is _________ shares without par value. ( In case some shares have par value and some are without par value): That the capital stock of said corporation consists of ________ shares of which _____ shares are of the par value of ) P _____) pesos each, and of which _____ shares are without par value. Eight : That at least twenty-five (25%) percent of the authorized capital stock above stated has been subscribed as follows:

Name Nationality No. of shares Amount

Subscriber Subscribed Subscribed ____________ _____________ _____________ ______________

____________ _____________ _____________ ______________

____________ _____________ _____________ ______________

____________ _____________ _____________ ______________

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Ninth : That the above-named subscribers have paid at least twenty-five (25%) percent of the total subscription as follows:

Name Nationality Residence

_________________ ____________________ __________________

_________________ ____________________ __________________

_________________ ____________________ __________________

_________________ ____________________ __________________

(Modify Nos. 8 and 9 if shares are with no par value. In case the corporation is non-stock, Nos. 7,8 and 9 of the above articles may be modified accordingly, and it is sufficient if the articles state the amount of capital or money contributed or donated by specified persons, stating the names, nationalities and residences of the contributors or donors and the respective amount given by each). Tenth : That __________________________ has been elected by the subscribers as Treasurer of the Corporation to act as such until his successor is duly elected and qualified in accordance with the by-laws, and that as such Treasurer, he has been authorized to receive for and in, the name and for the benefit of the corporation, all subscriptions (or fees) or contributions or donations paid or given by the subscribers or . Eleventh : (Corporation which will engage in any business or activity reserved for Filipino citizens shall provide the following: “ No transfer of stock or interest which will reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to be recorded in the proper books of the corporation and this restriction shall be indicated in all the stock certificates issued by the corporation.” In witness whereof we have hereunto signed these Articles of Incorporation, this _______ day of ______19___, in the City/Municipality of __, Province of ___, Republic of the Philippines. __________________ _______________________ __________________ _______________________ _________________________ ( Names and signatures of the incorporators )

Signed in the presence of : ____________________ _______________________ ( Notarial Acknowledgment )

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TREASURER’S AFFIDAVIT REPUBLIC OF THE PHILIPPINES ) CITY/MUNICIPALITY OF ______) SS PROVINCE OF _____________) I,______________________ , being duly sworn, despose and say: That I have been elected by the subscribers of the corporation as Treasurer thereof, to act as much until my successor has been duly elected and qualified in accordance with the by-laws of the corporation, and that as such Treasurer, I hereby certify under oath 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 paid, and received by me, in cash or property, in the amount of not less than P 5,000.00, in accordance with the Corporation Code. _________________________ Signature of Treasurer Subscribed and sworn to before me, a Notary Public, for and in the City/Municipality of ____, Province of _____, this___day of ___ 19_____, by ___ with Res. Cert. No. issued at _____on NOTARY PUBLIC My commission expires on

_________________, 19_____ Doc. No.________: Page No. ______ : Book No. ______: Series of 19___(7a)

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Significance of the corporation A corporation has the power of succession by its corporate name. It acquires juridical personality under the name stated in the certificate of incorporation. It is the name which identifies and distinguishes it from other corporations, firms or entities. It is authorized to transact business and therefore, essential to its existence. It is customary to use as part of the name the word “corporation” or “ incorporated” or an abbreviation of either of them to distinguish it from a partnership and other business organizations. But the character of a corporation is not necessarily determined by its name. Purposes of the corporation

A corporation may be organized only for any lawful purpose or purposes and it must not be created if some of its objectives are unlawful. The purpose (s) of the corporation must be stated clearly and with particularity in the articles of incorporation. It must be stated indefinitely, otherwise, the articles of incorporation may be rejected. The purpose(s) for which a corporation is organized, where it has more than one

stated purpose, shall state which is the primary or main purpose and which is/are the secondary or subsidiary purposes(s). Therefore, the purpose must be specified as the corporation is prohibited from investing its funds for any purpose other than the primary purpose for which it was organized unless it is approved by both its board of directors or trustees and its stockholders or . Where the purpose(s) of a corporation is more than one, must be capable of being lawfully combined. Thus, a corporation whose purpose is different from another corporation’s purpose should not carry on the business of the other at the same time. A corporation engaged in banking should not engage in trading of goods or non-banking activities such as insurance and pre-need businesses.

Incorporators or directors and trustees

The incorporating directors or trustees are those chosen by the incorporators and named in the articles of incorporation.

The names, nationalities, and residences of the incorporators must be specified in the articles of incorporation and must show that at least a majority of the incorporators are residents of the Philippines.

The number of incorporating directors or trustees is determined by the incorporators but such number must not be less than the minimum (5) nor more than the maximum (15) provided by law. The incorporating directors or trustees shall hold office until their successors are duly elected and qualified. They are intended to be replaced by the regularly elected directors or trustees who shall hold office for one year when the corporation is organized by the adoption of bylaws at the first meeting of stockholders or .

Stock subscribers

The directors elected after incorporation must be a subscriber to at least one (1) share of the capital stock of the corporation. According to Section 23 (par2), “ every director must have at least one(1) share of capital stock of the corporation of which he is director” In a stock corporation, there must be at least five (5) stockholders. Restriction for transfer of stock Corporation which is engaged in any business or activity reserved for Filipino citizens shall provide in their articles of incorporation the restriction against the transfer of stock or interest which will reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws. The articles of incorporation will not be accepted by the Securities and Exchange Commission if the required percentage of ownership has not been complied with. Section 16 Amendment of Articles of Incorporation - Unless otherwise prescribed by this Code 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 two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of two-thirds (2/3) of the if it be a non-stock corporation. The original and amended articles together shall contain all provisions 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 a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the stockholders or 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. Amendment for ’ meeting Under Sec 16, the amendment may also be effected by the written assent of the stockholders representing at least 2/3 of the outstanding capital stock of the corporation or 2/3 of its , meaning that such action need not be taken at a meeting and upon a vote. A meeting of stockholders is necessary whenever an amendment consists of extending or shortening the corporate term of the corporation. In a close corporation, if the amendment refers to any of the matters mentioned in Section 103, the same shall not be valid or effective unless approved by the required vote of the stockholders at a meeting duly called for the purpose. A mere written assent would not also be sufficient. Section 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 disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators reasonable time within which to correct or modify the objectionable portions of the articles of amendment. The following are grounds for such rejection or disapproval:

That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; That the Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is false; 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 or the Constitution.

No articles of incorporation or amendment to articles of incorporation or banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law.

Reasons for rejecting the articles of incorporation

The grounds for rejection or disapproval of the articles of incorporation or amendments by the Securities and Exchange Commission are as follows:

when the articles of incorporation does not substantially comply with the prescribed form; when the purpose(s) are patently unconstitutional, illegal, immoral or contrary to government rules and regulations; Treasurer’s affidavit is false; and when the articles of incorporation does not comply with the required percentage of Filipino stock ownership in nationalized corporations.

Section 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 is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved,

the Commission shall issue as amended certificate of incorporation under the amended name.

Corporate name A corporate name must usually: 1. contain a reference to the corporate nature of the entity (using the words “corporation”, “incorporated” ”inc.” or similar word); 2. It must not be the same as or deceptively similar to a name already in use; and 3. not imply that a corporation is engaged in a business in which a corporation may not lawfully engage in. Revocation of the certificate of registration After proper notice and hearing, the Securities and Exchange Commission, may suspend or revoke, the franchise or certificate of registration of corporations, partnerships, or associations, upon any of the grounds :

Fraudulent certificate of incorporation which makes it appear that it has paid-up capital in cash when actually it has none, the money being in fact merely borrowed and returned to the lender after incorporation; Serious misrepresentation as to what the corporation can do for the great prejudice of, or damage to, the general public; Refusal to comply with or defiance of a lawful order of the Commission restraining the commission of acts which would amount to a grave violation of its franchise. Continuous in-operation for a period of at least five years. failure to file-by laws within the required period; and failure to file required reports in appropriate forms as determined by the

Commission within the prescribed period.

Section 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 is official seal; and thereupon the incorporators, stockholders/ 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. Certificate of Incorporation The issuance of the certificate of incorporation by the Securities and Exchange Commission is the act needed to give the corporation a de jure existence. It is from the date of issuance of the certificate that corporate life begins, to last for the duration provided for in the article, unless sooner legally dissolved. Corporate Structure The Corporation Code sets the organization of all corporations from the smallest to the largest corporations. The final authority is its owner, or stockholders, Those shareholders annually for special meetings to determine major policy issues facing the corporation and to elect the board of directors, which manages the corporation on behalf of the stockholders. The corporate officers are appointed by the board of directors which consist of the president, vicepresident, secretary and treasurer, and sometimes other upper-level management as well. The power in most large corporations resides in the officers, who manage the day-to-day affairs of the corporation and who can, in many cases, control the board of directors through proxy voting and other means. Often the board of directors and the officers are referred to as management. Kinds of Franchises

Primary or corporate franchise which is the privilege of being and acting as a corporation. It belongs to the persons who compose the corporation. Secondary franchise which is the privilege granted by the State to an existing corporation to conduct a business activity like the franchise to engage in public utility business ( a certificate of public convenience) ; this franchise is owned by the corporation itself and can be conveyed by it subject to approval of the appropriate agency of the government.

Section 20. De facto corporation - The due incorporation of 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 may be made by the Solicitor General in a quo warranto proceeding. De Jure Corporation It is a corporation created in strict conformity with the mandatory statutory requirements for incorporation and whose right to exist as a corporation cannot be successfully questioned by any party even in a direct proceeding for that purpose by the State. It is a corporation claiming in good faith to be a valid corporation, with the right to exercise corporate powers. Its due incorporation and its right to exercise corporate powers shall not be inquired into collaterally. Requisites of de jure corporation:

existence of a charter or some law under which a corporation might be lawfully created; the true color of the corporation under such charter or enabling act; and a of the rights conferred by such law

Test of de facto existence The test of a de facto existence is as follows:

There exists a valid statute under which the corporation might incorporate. There has been a good faith or colorable attempt to comply with the statute; and there has been actual use of the corporate privilege.

De facto corporation It is a corporation defectively formed from a bona fide attempt to incorporate under existing laws, and which exercise corporate powers. This corporation has no legal right to corporate existence as against the state but actually exists for all practical purposes as a corporation. It is one which had not complied with all the requirements necessary to be a de jure corporation but has complied sufficiently to be accorded corporate status as against third parties although not against the State. Requisites of a de facto corporation

Existence of a valid law under which a corporation with powers is incorporated. A bona fide attempt to organize a corporation under such law; and Actual or exercise in good faith of corporate powers conferred upon it by law.

Stockholders of a de facto corporation enjoy exemption from personal liability for corporate obligations as stockholders of a de jure corporation.

Instances where de facto and de jure exist

There cannot be a corporation de facto under an unconstitutional statute for such statute is void and a void law is no law. Similarly, a corporation cannot be recognized as having a de facto existence when its purpose is prohibited by law or contrary to public policy. There cannot be a corporation for the practice of a learned profession in the absence of a law expressly permitting the organization of such a corporations.

There must be a law authorizing a de facto corporation de jure in order for de facto corporation to exist, for there cannot be a de facto corporation when there cannot be one de jure.

Attack on corporate existence A de facto corporation cannot be collaterally attacked or questioned by either the state or by private individuals. The state must bring a direct proceeding (i.e., quo warranto) against the corporation to oust it from the exercise of corporate powers usurped by it and to have it dissolved. A direct attack can only be instituted by the government through the Solicitor General by quo warranto proceedings. Collateral attack is one whereby the existence of a corporation is questioned in some incidental proceeding not provided by law for the express purpose of attacking the corporate existence. Grounds for the rule against collateral attack

It is the state’s right and authority which are attacked and usurped; and not the

individual right; The attack would result to confusion and would probably destroy the corporation if the legality of its existence is questioned in every suit to which it is a party, for then, no judgment could be rendered which would settle the question. The rule is in the interest of the public and is essential to the validity of business transactions with corporations.

Section 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 used 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, defined Estoppel is 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. If a person by a representation induces another to change his position on the faith of it, he cannot afterwards deny the truth of his representation. Corporation by estoppel This is an organization and all persons within it who assumes to act as a corporation knowing it to be without authority to do so. A group of persons representing themselves to have been organized as a corporation, and third persons, believing in said representation, transact with said group, can be sued as a corporation, and cannot later on deny that the group

is not a corporation. The stockholders or of pretended or ostensible corporation are generally estopped or prejudiced to deny its existence against creditors for the purpose of escaping liability for corporate debts or for unpaid part of a subscription to stock. Thus, the third persons who deal with such a corporation recognizing it as such and the pretended corporation itself, estopped from denying its corporate existence and raising the defense of its lack of corporate personality for the purpose of defeating a liability growing out of a contract between them and such corporation. No de facto existence of Corporation by estoppel A corporation by estoppel is neither de jure nor a de facto corporation and does not really exists, in law, but it is a mere fiction existing for the particular case. It exists only between the persons who misrepresented their status and the parties who relied on the misrepresentation. Its existence may be attacked by any third party except where the attacking party is estopped to treat the entity other than as a corporation. Section 22 Effects of non-use of corporate charter and continuous inoperation 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 a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. This provision shall not apply if the failure to organize and commence the transaction of its business 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. Non-use of Corporate charter If a corporation fails to formally organize itself and commence transaction of its business within two (2) years from the date of its incorporation, the effect is automatic dissolution of the corporation.

Failure to complete organization Partial formation of a corporation arises in the context of a suit against the officers, directors, or shareholders to hold them liable for an obligation incurred in the name of the corporation. A number of cases hold that no such personal liability is created so long as articles of incorporation were filed.

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Conditions Precedent Conditions precedent are those conditions non-compliance with which will prevent the legal existence of a corporation. Examples are:

Filing of the articles of incorporation with SEC as required by Sec 14; The issuance of the certificate of incorporation by the SEC under Sec 19; The minimum number of five (5) incorporators required by Sec 10; and The legal requirements under Sec 13 that 25% of the authorized capital stock must be subscribed and 25% paid.

Conditions subsequent are conditions to be complied with after acquiring corporate existence in order that a corporation may lawfully continue as such. Non-compliance which is mandatory may not affect corporate existence although it may be a ground for proceedings by the State to forfeit its charter. Effects of continuous in-operation Where the corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, such continuous in-operation shall be a ground for the suspension or

revocation of its corporate franchise or certificate of incorporation but notice and hearing in such case are required as provided in PD 902-A. However, if non-use of corporate charter is due to causes beyond its control as found by the SEC, the effects mentioned shall not take place. Section 23 The board of directors or trustees - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, 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 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 a director shall thereby cease to be a director. Trustees of non-stock corporation must be thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. Board of Directors defined It is a body of persons, created by the stockholders, for the purpose of directing and controlling the affairs of a corporation. Any person who is legally competent to contract can be a director, and as long as he owns at least one (1) share of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. The directors must be owners of at least one share of stock in a stock corporation or must be subsisting in non-stock corporations. If stockholders or cease to be active of stockholders, they become automatically disqualified as directors. Majority of the directors must be Philippine residents. Ownership of all the stocks by an incumbent director of a corporation will not make him (the transferee) a director of that corporation. Directors not liable for misconduct of co-directors A director of a corporation shall not be liable for the misconduct and dishonesty of his co-directors or other officers of the corporation, because a director is not

an insurer of the fidelity of agents of the corporation. However, the director may be held liable : 1; If it is shown that he neglected his duty to supervise the business with attention or to use proper care in the appointment of agents; and 2. He has connived at or has participated therein in the act or omission of his codirectors or other officers; Functions of the of the board of directors While the board of directors are charged with the management of a corporation, the of the board of directors are duty bound to perform the following functions:

As agents of the corporation As trustees of the corporation’s money ; and As occupants of a fiduciary function

They are duty-bound to perform such functions the board’s appointment, powers, etc. are governed by the articles of incorporation of the corporation The basic management functions of the of the boards of directors

Election of the president and senior officers; The control of executive compensation, pension, and retirement policies; The delegation to the president and his subordinate of authority for istrative action; the fixing of policies as to pricing, labor relations and expansion of new products;

The determination of dividend payments, financing, and capital changes; The supervision and vigilance for the welfare of the whole business.

. Corporate acts of the board of directors The corporate acts of the board of directors requiring the concurrence of a stockholders :

To increase or decrease the capital stock. To create bonded indebtedness To elect directors to the board To remove directors from the board To invest corporate funds to another business To dispose of all or substantially all of the assets of the corporation. To voluntarily dissolve the corporation To amend the articles of incorporation To declare stock or bond dividends To extend or shorten corporate term To adopt corporate by-laws

Powers to bind the corporation

In order to bind the corporation by their acts, the board of directors or trustees must act together as a body . They must meet as directors or trustees and act at a meeting at which there is quorum. Reasons The main reasons for the directors or trustees can bind the corporation only action taken at a board meeting seems to rest upon :

There must be a meeting which is necessary in order that any action may be adopted only after full discussion; and As agents of the corporation managing its affairs, directors have no power other than as a board.

In a close corporation, any action by the directors without a meeting or at a meeting improperly held, shall, unless the by-laws provide, be deemed valid or ratified in the cases mentioned in Sec 101.

Exceptions to the rule The exceptions that the board must act as a body and personally to bind the corporation are the following:

Where the directors are the sole stockholders, the contract entered into by the directors without a meeting of the board is binding upon the corporation. The corporation is similarly bound by a contract, either expressly or impliedly entered into by any corporate officer, such as the general manager, authorized by the board of directors, to bind it by contract. By ratification, the corporation is bound by a transaction in subsequent board

meetings. It may be express or implied and such ratification may relate back to the time of the contract and it is equivalent to original authority. Except on certain matters specified in Sec 35, the by-laws of a corporation may create an executive committee with authority to act on such specific matters within the competence of the board, as may be delegated to it in the by-laws of the corporation or on a majority vote of the board.

Corporate Powers Construed

As in other cases of legislative grants; powers of corporation shall be construed strictly; any ambiguity in the of the corporate charter must operate against the corporation and in favor of the public. The entire instrument shall be taken together, in determining what powers have been conferred, including provisions as expressing the final intention and purposes of the parties. Since grants of corporate franchises are intended not only for the purposes of private gain, but also to serve public interest, they should be so construed as not to defeat the purposes of their creation. The intention of the legislature should always control, it being the general rule that a thing which is within the intention of the legislature, is as much within the statute as if it were within the latter. Charters are construed in view of the circumstances, usages, and practices existing at the time they were granted and it is not the province of the court to enlarge the powers of a corporation beyond its charter limitations because circumstances have changed.

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Delegation of Powers

The general rule that the power to bind the corporation by the board of directors may be delegated is expressly or implied to officers or agents of the corporations. The provisions of by-laws or by the vote of the stockholders are vested exclusively in the board of directors or are delegated to them, cannot be delegated to subordinate officers and agents, but purely ministerial duties connected therewith may be delegated. of office of directors It is expressly provided that the elected trustees or of the board of directors shall hold office for one (1) year and until their successors are elected and qualified. The directorate holds over and continues to function until another directorate is chosen and qualified, upon failure of a quorum at any meeting of the stockholders or who would call for an election. Number composing the directors or trustees

Under the Corporation Code, the number of directors must not be less than five (5) nor more than fifteen (15) Sec 14(6), except as otherwise provided by the Code or special law. The board of trustees in an ordinary non-stock corporation, unless otherwise provided in the articles of incorporation or by-laws, may be more than fifteen (15) with the term of office of 1/3 of their number expiring every year. The articles of incorporation in a close corporation, the business of the corporation shall be managed by its stockholders rather than by a board of directors in which case no meeting of stockholders need be held to elect directors. In non-stock educational corporations, trustees, shall not be less than five (5) nor more than fifteen (15) provided that the number shall be in multiples of five with the term of office of 1/5 of their number expiring every year. There is no board of directors in a corporation sole, as it consists of only one member. The board of trustees of religious societies shall not be less than five (5) nor

more than fifteen (15)

The limitation as to the number of directors or trustees seeks to give enough representation to stockholders or of a corporation to its board while at the same avoiding that it will be too unwieldy.

Qualifications of directors

In Stock corporation

Every director must own at least one share of the capital stock. The share of stock held by the director must be ed in his name on the books of the corporations. Every director must continuously own at least a share of stock during his term, otherwise, he shall automatically cease to be a director; and A majority of the directors must be residents of the Philippines.

In Non-stock corporations

1. Trustees of non-stock corporations must be and like in stock corporations, a majority of them must be residents of the Philippines. In case of domestic banks, the General Banking Act requires that at least two-thirds of the of the board of directors must be citizens of the Philippines.

Requirements of citizenship for the share in some corporations 1. Banks and banking institutions- At least 2/3 of the of the board of directors shall be citizens of the Philippines. 2. Rural banks - Every member of the board of directors shall be citizens of the Philippines. 3. Domestic air carriers - The directing head and 2/3 or more of the board of directors and other managing officers shall be citizens of the Philippines. 4. ed investment companies - The directors must be citizens of the Philippines. 5. Private development banks - All the of the board of directors must be citizens of the Philippines. 6. Financing corporation - At least 2/3 of all of the board of directors shall be citizens of the Philippines.

Section 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 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 stockholder 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 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 candidates as he shall see fit; Provided, That the total number of votes cast by him shall not exceed the number 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 stock shall be voted. Unless

otherwise provided in the articles of incorporation or in the by-laws, 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 called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there are not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the entitled to vote.

Election of Directors/Trustees In stock corporation, election of the directors may only be done with the presence of the owners of the majority of the outstanding capital stock. This is done in person or by a representative authorized by written proxy. Election is done by ballot upon request of any voting stockholder or member, “Ballot” is actually any system of secret voting. In non-stock corporation, a similar rule applies, except that a majority of the entitled to vote is required. Methods of voting Cumulative voting is a system of voting for directors of a corporation under which each stockholder is entitled to a number of votes equal to the number of shares he owns multiplied by the number of directors to be elected. This type of voting enables minority shareholders the possibility of representation on the board of directors. A stockholder is allowed to focus his votes and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. The privilege of cumulative voting is allowed in order to give minority stockholders representation in the board of directors. A director cannot be removed without cause when voted by the minority stockholders who united in cumulative voting cannot be removed without cause.

Example: If A owns 200 shares of stock and there are five directors to be elected, he is entitled to 1,000 votes all of which he can cast in favor of any one candidate. Suppose that out of a total of 1000 shares, A and B (representing the stockholders) own 500 shares while C,D,E and F (different group of stockholders) own 200 shares. If there are five directors to be elected, A and B are entitled to 2,500 votes and C,D,E, and F, to 1,000 votes. The highest number of votes that A and B can give each of their four candidates is 700. hence, by cumulating their 1,000 votes in favor of a candidate, C,D, E, and F would be able to secure representation in the board of directors.

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Straight voting – By this method of voting, every stockholder may vote such number of shares for as many persons as there are directors to be elected. Example A owns 200 shares of stock in a corporation. If there are five directors to be chosen, A is entitled to 1,000 votes obtained by multiplying 200 by 5. Therefore, he may give each candidate for directorship 200 votes. The votes are equally distributed among the five candidates without preference. Alternative Ways on how cumulative voting is done 1. Multiply the total number of shares entitled to vote by the number of directors the corporation desired to elect; 2. Divide the number found in number 1 by one more than the total number of directors to be elected; and

Add one to the figure taken from number 2. The result will be the least number of shares that will be necessary to hold or control in order to elect the desired number of directors.

If a company has outstanding 1,000 voting shares, 15 directors are to be elected, and it desired to elect 3 out of the 15, the least number of shares that will be necessary to hold or control in order to accomplish this result will be found as follows: 1,000 x 3 + 1 = 188 1/2 15 + 1 The result can only be obtained if 189 shares are held or controlled ( it is counted as an extra share, whenever there is a fraction) Thus, the formula for determining whether a single block of shares may elect a director under cumulative voting is S + 1 D + 1 Where S equals the total number of shares voting, and D equals the number of directors to be elected. Therefore, the formula to elect N directors is NS + 1 D + 1 Advantage and disadvantage of Cumulative voting The advantages my be more democratic, that it allows minority representation and allows the election of a watchdog direction to supervise the majority’s management of the corporation.

However, the disadvantage may tend to increase partnerships and divisiveness on the board, and may bring perplexity among shareholders. Section 25 Corporation 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 and 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 ened on them by law and by the by-laws of the corporation. Unless the articles of incorporation or the by laws for 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 officers which shall require the vote of a majority of all the of the board. Directors or trustees cannot attend or vote by proxy at board meetings. Positions concurrently held by same person ` `Any two (2) or more positions may be held concurrently by the same person except as provided by Sec 25 of the Code. The law considers the positions of president and secretary or treasurer as incompatible positions or with each other due to the very nature appertaining to each office. There is no prohibition in the law against a stockholder being a director or officer of two or more corporations. The Code does not prohibit a corporate officer from occupying the same position in another corporation organized for the same purpose. Such a situation may be prohibited by special law, the articles of corporation, or the by-laws of the corporation. Powers of corporate officers Directors or trustees

- are agents of the corporation and can bind it by their acts as long as they are within their actual, apparent, or inherent authority conferred by statute, the articles of incorporation, the by-laws of the corporation, or by resolution of the board of directors. The officers are often of the board of directors. The officers chosen by the board of directors are duty-bound for the day-to-day management of the corporation. The officers are often of the board of directors. President -Before a president of a corporation occupies his position, he must be a director of the corporation, but cannot act as president and secretary or as president and treasurer at the same time. He is required by law to be a member of the board of directors or trustees. His (president) powers are conferred by the board of directors or trustees or vested in him by the by-laws. He has no power over corporate property and business than has any other director if his powers are not conferred by the bylaws of the corporation. However, some view of legal authorities, presidents of corporations are often given broad or general supervision and control of the business as chief executive officers from which is to be inferred that acts or contracts done by the president in the ordinary course of business are presumed to be duly authorized unless the contrary appears. The president shall preside at all meetings of the directors or trustees as well as of the stockholders or , unless the by-laws provide otherwise, according to law. Vice-president ` The power of the vice-president may be highlighted in the absence or vacancy that may arise from the position of the president. By virtue of his office, he has no authority to enter into contracts in behalf of the corporation. However, he is given certain executive duties by the board of directors or by-laws of the corporation. The Vice-president should become a director where the by-laws provide wherein he should take the place of the president in his absence.

Secretary - The secretary, according to law, must be a resident and a citizen of the Philippines. He is not allowed to act as president and secretary at the same time, nor may he be a director unless required by the by-laws. Generally, his duty is to keep and maintain the records and to make proper entries of the votes, resolutions and proceedings of the shareholders and directors in the management of the corporation and all other matters required to be entered on the records. He is a ministerial officer who cannot bind the corporation unless he is authorized especially7 to do so. Treasurer - The treasurer is an officer of a corporation entrusted with the authority to receive and keep the money of the corporation and to disburse them as he may be authorized. He cannot bind the corporation by his acts nor to borrow money in behalf of the corporation. He may not hold the position of the president. The treasurer is different from a comptroller who is an ant who is an officer appointed to control the financial reports of the corporation. The authority of a comptroller is limited in doing things which are usual and necessary in the performance of his duties. General Manager -The managing officer or GM has a broad powers and authority extending to third persons. He is believed and deemed to have the most control over the affairs of the corporation as he has knowledge of all its business and property , and who can act in emergencies on his own as he may be considered as a principal. Unless specifically restricted, his powers have been broadly described as coextensive with the powers of the corporation. Requisites in order to hold a board meeting

There is a body in a lawful meeting when directors or trustees are duly assembled as a board,

There exists a quorum When there is a majority of a entire board or the decision of the majority of the quorum over\whelms; That there certainties in the meeting at the place, time, and in the manner provided in the by-laws.

Quorum defined Quorum refers to the required number of persons who must legally be present at a meeting to legally transact corporate business. As a rule, a majority vote of the directors or trustees present at a meeting at which there is a quorum, is sufficient to authorize action. It is provided in the Code that unless the articles of incorporation or by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in he articles shall constitute a quorum for the transaction of corporate affairs. Breach of Duty A willful refusal by a board of director to attend a meeting is accorded by courts to be a breach of fiduciary duty. However, other courts have recognized this tactic as part of a struggle for control and have held that it should not be treated as improper. Power of stockholders The stockholders, with or without cause, may remove a director, by at least 2/3 of the outstanding capital stock of a corporation, but as general rule, the same power cannot be used to expel a director representing the minority, unless there is a good cause for removing the minority director. Section 26 Report of election of directors, trustees and officers.- Within thirty (30) days after the election of the directors, trustees and officers of the corporation, the secretary or any other officers of the corporation, shall

submit to the Securities and Exchange Commission, the names, nationalities and residences of the 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. Requirement of Sec 26 The secretary of any other officer of the corporation to submit to the Securities and Exchange Commission the names, nationalities, and residences of the directors/trustees, and officers elected, which must be done within 30 days after the meeting in which they were elected; and the heirs of the director/trustee or officer in case of the latter’s death, the secretary, or any other officer of the corporation, or the director/ trustee or officer himself, to immediately report to the Commission any death, resignation, or cessation in any manner of holding office of a director/trustee or officer. The filling of vacancies in the office of director or trustee is governed by Section 29. Section 27 Disqualification of directors, trustees or officers.- No person convicted by final judgment 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. Ground for disqualification of director Any officer or director of a corporation is disqualified by law to become an officer or director of a corporation if he is convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years or a violation of the Code as a director/trustee or officer of any corporation.

The law applies only to those offenses punishable by imprisonment for a period exceeding six (6)

Years. This does not include moral turpitude. The duration of the imprisonment is immaterial but the commission (not conviction) of the violation must have

taken place within five (5) years prior to the date of the election or appointment. Section 28 Removal of directors or trustees - Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of two thirds (2/3) of the entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders represent ting 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 entitled to vote. Should the secretary fail or 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 by any stockholder or member of the corporation g the demand. Notice of the time and place of such meeting, as well as of 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 of the right of representation to which they may be entitled under Section 24 of this Code. Requisites for removal of directors or trustees

The removal of the director or trustee may take place either at a regular meeting of the corporation or at a special meeting called for the purpose. Prior to removal there must be previous notice to the stockholders or of the corporation of the intention to propose such removal at the meeting; and

The removal must be by vote of the stockholders holding or representing twothirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation by a vote of two-thirds (2/3) of the entitled to vote.

Instances of removing the director or trustee A director or trustee may be removed by the prescribed vote of the stockholders or without cause subject to the limitation that a director or trustee cannot be removed without cause if the effect is to deprive minority stockholders or who united in cumulative voting to elect such director, of right of representation to which they may be entitled under Section 24. The vacancy created 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 the prescribed notice. However, the stockholders or who have removed a director or trustee are also given the power to choose his replacement at the same meeting. Authority of the board for removal The board of directors has no power to remove any one of its as director by reason that as officers deriving their title from the stockholders, they can be removed only by the authority which gave them power or appointed them. Vacancy left by directors The directors may be removed from office or may continue until their successors are elected , but the board may elect first the replacement directors before the reg director leaves his position. However, a director cannot resign, by reason of fiduciary nature of the position he occupies, and as part of the fraudulent scheme to prejudice the corporation or its stockholders and make a profit to his own advantage or , at an unreasonable time if the immediate consequence would be to leave the interest of the corporation without proper care and protection. A director who quits his position under circumstances which prejudice the interest of the corporation, shall restitute the loss incurred or suffered to the

corporation. A director is presumed to have abandoned his office as director of the corporation if he accepts a position in which his duties are incompatible with those as such director. There is an abandonment of position as director, when a director absents himself from all meetings for nearly a year and announced is refusal to act as an officer and stockholder. Section 29. Vacancies in the office of director or trustee - Any vacancy occurring in the board of director or trustees other than by removable by the stockholders or 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 a 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 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. Instances of Filling of vacancies A vacancy in the office of director or trustee may be filled as follows: By stockholders or 1. If the vacancy results from the removal by the stockholders or or the expiration of term; 2. If the vacancy occurs other than by removal or by expiration of term, such as death, resignation, abandonment, or disqualification, if the remaining directors or trustees do not constitute a quorum for the purpose of filling the vacancy; 3. If the vacancy may be filled by the remaining directors or trustees but the board refers matter to the stockholders or ; or 4. If the vacancy is created by reason of an increase in the number of directors or

trustees. By the of the board The least majority of them, if still constituting a quorum, are empowered to fill any vacancy occurring in the board other than by removal by the stockholders or or by expiration of term. The board has no power to fill any directorship or trusteeship by reason of an increase in the number of directors or trustees. Section 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 per 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 stockholder’s 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. Remuneration of directors Under the law, the compensation of directors or trustees is provided by the bylaws of the private corporation which is authorized to do so. In the absence of any provision in the by-laws fixing their compensation, the directors, as such, shall not receive any compensation, unless authorized by a vote of the stockholders representing at least a majority of the outstanding capital stock. The directors are not entitled to receive salary nor other compensation when they perform nothing more than the usual and ordinary duties of their office. They render services gratuitously and that the return upon their shares adequately furnishes the motives for services without compensation, even if the services rendered may be considered as extraordinary or beyond the normal scope of the director’s duties. If a director deserves compensation for such services, the same may be granted by the vote of the stockholders. But a director is entitled to be reimbursed for legitimate expenses incurred in behalf of the corporation. The total yearly compensation of directors, when granted either by the by-laws or the vote of stockholders, shall not exceed 10% of the net income before income tax of the corporation during the preceding year, even if the services are

extraordinary or beyond the normal scope of his duties. He is entitled to reimburse for legitimate expenses incurred in behalf of the corporation. Per diems - Directors are entitled to receive reasonable per diems, whether authorized by the by-laws or by the stockholders. The per diems granted to directors should not be included in their total yearly compensation for purpose of the limitation of 10%. The directors shall settle and decide the amount of per diems that shall be received by them if it has been a normal practice in the corporation. Compensation of officers Corporate officers who are not directors - The general rule that directors of a corporation are not entitled to compensation does not apply to corporate officers who are not directors. The latter do not occupy the relation of trustees to the corporation, as such do not have control of the funds and property of the corporation. There is an implied promise to pay the services of the officers who are not directors of the corporation, at a reasonable compensation even in the absence of an express contract, when they are elected or appointed to perform valuable services for the corporation under circumstances expecting for payment. The same rule applies to employees hired by the corporation. Corporate officers who are directors -It is believed that these officers who are also directors of the corporation are entitled , in addition to reasonable per diem as directors, to compensation as such corporate officers, and the amount my be fixed by mere board resolution in the absence of provision to the contrary in the by-laws and subject to the provision of Section 32. The intention of the Code is to provide them salaries as such officers. It may take in the form of salaries and fringe benefits, such as housing, hip in clubs, company cars, stock options, etc. However, compensation must not be exorbitant.

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Section 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 tly and severally for all damages resulting there from suffered by the corporation, its stockholders or 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 for the profits which otherwise would have accrued to the corporation. Scope of liability This refers to the extent of directors, trustees, or officers liabilities in the corporation. Under this section, the liability of the directors, trustees, or officers, are t and several ( in solidum). This means that either or several persons may be liable for the entire amount. A suit for damages for illegal expulsion or ouster of a corporate officer prescribes in four (4) years. However, per corporate by-laws, at the pleasure of the Board of Directors, an officer appointed may be terminated at any time. Hence, a stockholder or officer of a corporation is not personally liable for the consequences of the termination of services of its employees. Instances where directors/trustees may be held liable for damages

He is found guilty of gross negligence ( not “want of ordinary prudence” ) or bad faith in directing the affairs of the corporation; He willfully and knowingly votes to patently unlawful acts of the corporation. He obtains in conflict with his duty as such director or trustee any personal or

pecuniary interest

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Section 32. Dealing 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 following conditions are present:

That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; That the vote of such director or trustee was not necessary for the approval of the contract. That the contract is fair and reasonable under the circumstances; and 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 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.

Fiduciary relationship of directors

A fiduciary relationship is a relationship of trust and confidence, in which a person acts for another’s interest or benefit, instead of his or her own. Fiduciary relationship involves certain duties which are diligence and care, obedience, loyalty or fidelity, and the duties to for funds or property in the agent’s hands and to keep the principal informed, the duty of notice. However, in contrast with ordinary business relationships, fiduciary relationship has a sharp dealing and a lack of trust is an expected part of the game.

The interests and duties of directors are basically a matter of law within the corporation although some duties are imposed by the latter which are fiduciary in nature involving the board of directors. These duties and interests to some extent depend upon the nature of the relationship the office involved and the corporation.

In most large corporations, shareholders do not take active part in the management of the corporations nor they do attend shareholder’s meetings but through their appointed proxies . Therefore, the corporation operates relatively free from shareholders’ direction and control where in turn proxies can often elect the Board of Directors and hire management.

The key positions of the management including the president , vice-president(s), secretary, and the treasurer, are all employees who are considered agents of the corporation while the Board of Directors are considered agents of the shareholders who have a different level since they are elected by the shareholders of the corporation.

Roles of Directors

Directors have extensive duties in which their relationship is sui generic. Directors are not trustees but must be characterized with degree of care and fidelity and loyalty. They are not employees of a corporation and need not spend time on corporate affairs. They generally owe duties to the corporation as a whole rather than to individual shareholders or classes of stockholders.

Directors and management may oppose attempt whenever faced with an adverse takeover attempt in connection with tender offers.

Section 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 (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors.

Interlocking Directors and the Corporation

This section refers to the contract between two or more corporations which have interlocking directors in which some or all directors of a corporation are also directors of another corporation . Their contract is valid as long as it is fair and reasonable and there is no fraud which may give ground for violation of law.

However, the rule in section 32 of the Code applies on self-dealing directors whose stockholdings exceed 20% of the outstanding capital stock are considered substantial while on the other is merely nominal.

Example

A Corporation sold a property worth P 300,000 to B Corporation for only P 200,000, C is a board member of both corporations. The contract may not be reasonable, therefore, voidable on the ground of inequitable. However, if the contract is just and reasonable and C’s interest in A Corporation is merely nominal and in B Corporation substantial, the conditions in Section 32 must be present insofar as A Corporation is concerned, on the theory that the contract of A Corporation is with C.

But, if C’s interest in both corporations is nominal or is substantial, section 32 does not apply but the contract shall be valid only if there is no fraud and the contract is fair and reasonable under the circumstances.

Section 34. Disloyalty of a director. - Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must 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.

Prejudicial Intent of the Director

The director is guilty of disloyalty whenever he intends to acquire for himself a business gain which belongs and prejudicial to the corporation . The former should to the latter for all such gains or profits by refunding the same, notwithstanding that he risked his funds in the venture. Under Section 34, the guilty director will only be exempted from liability to the corporation if his disloyal act is ratified by the vote of the stockholders owning or representing at least 2/3 of the outstanding capital stock.

Section 35. Executive Committee. - The by-laws of a corporation may create an executive committee, composed of not less than three of the board to be appointed by the board. Said committee may act, by majority vote of all its , on such specific matter within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action for which shareholders’ approval is also required; (2) the filling of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any resolution of the board which, by its express term, is not so amenable or repealable; and (5) a distribution of cash dividends to the shareholders.

Role of Executive Committee

The board of directors generally provides oversight over general corporate matters during periods when the board of directors is not sitting. The board of directors may appoint an Executive Committee of at least three directors if authorized by the by-laws.

Such executive shall consist of at least three (3) of the board of directors appointed by the board itself. The other committee constitute executive or employees of the corporation.

The rule tells five (5) non-delegable functions that must be exercised by the full board and beyond the authority of the executive committee which is designed to prevent delegation of matters that have immediate and irrevocable effect such as dividend declaration, matters that may well become irrevocable without fast action, and matters that may cause changes of position by others that cannot be rectified. All other matters are delegable to the different committees of the board such as audit, compensation and public policy committee.

Section 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity:

To sue and be sued in its corporate name; Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; To adopt and use a corporate seal; To amend its articles of incorporation in accordance with the provisions of this Code; To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; In case of stock corporation, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to it to the corporation if it be a non-stock corporation; 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 transactions of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution;

To enter into with other corporations merger or consolidation as provided in the Code; To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes; Provided, That no corporation. Domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees and To exercise such powers as may be essential or necessary to carry out its purpose or purposes as stated in its articles of incorporation.

Concept of Corporate Powers The powers of a corporation may be into two sets:

Those powers that are specially provided by the articles of incorporation . The right to existence , the right to sue and be sued, own and sell property,to make contracts and many others that may be essential to carry out its objectives.This is an incident to corporate existence.

The power to sue and be sued

The corporation may be dragged into court litigation or the former may bring suit against the offender to protect its name. A de facto corporation may sue or be sued. After a three -(3) year winding up period, a corporation which has been dissolved ceases to exist de jure or de facto, hence, it cannot sue nor be sued.

A corporation not duly ed in accordance with law has no legal capacity to sue as such while a foreign corporation which transacts business in the Philippines without the necessary license from the Securities and Exchange Commission cannot sue in Philippine courts

A corporation since an artificial being cannot experience what a natural person experiences such as physical suffering, mental anguish, besmirched reputation, wounded feelings, moral shock, social humiliation and similar injury, may, however, sue a natural person and other artificial beings in order to preserve its good reputation or business standing, hence, it may result to awarding of moral damages in its favor.

The three classifications of corporate powers which are exercised through the Board of Directors are:

1. Express powers - These are corporate powers conferred upon the corporation by law or articles of incorporation, the Corporation Code, and by special laws.

2. Implied powers - These are corporate powers which are necessary to carry out and accomplish the purposes for which the corporation was formed.

3. Incidental powers - These are corporate powers which can be fairly inferred from the express powers, and which are inherent in all corporation as legal entities such as perpetual succession.

Incidental powers have five classifications :

1. Acts in the usual course of business - This includes, acts of borrowing money; making ordinary contracts, promissory notes, checks or bills of exchange; acquiring personal property for use and business related; acquiring lands and buildings to be used as places of business. These acts are necessary to carry out the business purposes of the corporation.

2. Acts to protect debts owing to the corporation - The corporation may do acts to protect its right such as being a creditor. It may act as a guarantor or collector of debt.

3. Embarking in a different business. - A corporation may not engage in business different from which it was created. Thus, a corporation not organized for the purpose it was organized cannot engage nor operate a business dealing in insurance nor insurance but may do isolated act of insurance in connection with some express power.

4. Acts to aid employees. - The acts of building or establishing homes, places of amusement, hospitals, for employees are within the corporate powers.

5. Acts to increase business. - The corporation in the interest of promoting business may conduct and sponsor radio or television programs or to increase its business.

Limitations on the Power of the Corporation

The Constitution states that no private corporation may hold alienable lands of public domain except by lease for a period not exceeding 25 years, renewable for not more than 25 years not to exceed 1,000 hectares in area, nor may any such

citizen hold such lands by lease in excess of 500 hectares or acquire by purchases, homestead, or grant in excess of 12 hectares. No private lands shall be transferred or conveyed except to corporations qualified or hold lands of the public domain, in cases of hereditary succession.

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Section 37. Power to extend or shorten corporate term. - A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the in case of non-stock corporation. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholders 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. Power to shorten corporate term By amending the articles of incorporation the corporate term may be extended or shortened which may be approved by the majority vote of the board of directors or trustees and ratified at a meeting of the stockholders representing at least 2/3 of the outstanding capital stock or by at least 2/3 of the in case of non-stock corporations. A voluntary dissolution of a corporation may be effected by amending the articles of incorporation to shorten the corporate term.

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Section 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 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 any 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 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 the secretary of the stockholders’ meeting, setting forth: 1. That the requirements of this section have been complied with; 2. The amount of the increase or diminution of the capital stock; 3. If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof 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 therefore authorized; 4. Any bonded indebtedness to be incurred, created or increased; 5. The actual indebtedness of the corporation on the day of the meeting; 6. The amount of stock represented at the meeting; and 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 certificates 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 filling of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transfer to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription; Provided, further, That no decrease of the capital stock shall be approved by the Commission, if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the in a meeting duly called for the purpose. Bonds issued by a corporation shall be ed with the Securities and Exchange Commission which shall have the authority to determine the sufficiency of the term thereof. Ways to increase or decrease authorized capital stock

Without increasing or decreasing the par value the number of shares authorized to be issued may be increased or decreased.

Increasing or decreasing the par value of each share without increasing or decreasing the number thereof; Increasing and decreasing both the number of shares authorized to be issued and the part value thereof.

Required minimum subscription and paid-up capital As stated in the articles of incorporation at least 25% of the authorized capital stock must be subscribed at the time of incorporation, and at least 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 a fixed date or dates, upon call for payment by the board of directors. However, according to SEC opinion, the 25% minimum paid-up capital requirement would not apply to subsequent subscription to the subscribed shares of the corporation. Importance for increasing capital stock 1. Increase of corporate assets. - For the purpose of effecting an increase in the corporate assets the following may be executed: a. Authorizing the creation of new shares to be offered and issued at a fixed valuation; or b. Without any corresponding increase in the corporate assets, by the issuance of stock dividends. 2. Stock dividends issuance. - The capital stock may be increased without any corresponding increase in the corporate assets by the issuance of stock dividends. Extent and limitations on the power of a corporation

A corporation cannot issue stock in excess of the amount limited by its articles

of incorporation; such is ultra vires and the stock is void even in the hands of a genuine purchaser for value; Under given conditions prescribed by law, a reduction or increase of the capital stock can take place.

The Corporation Code has no prohibition for a corporation to increase its authorized capital stocks even if the same has not yet been fully subscribed. Trust Deed or Trust Indenture It is a specie of mortgage given to a trustee for the purpose of securing a numerous class of creditors, such as bondholders of a corpo0ation, with power to foreclose and sell on failure of the payment of their bonds, notes or other claims. Bonds and Debentures as long-term debt instruments If notes are short-term instruments, Bonds and debentures are usually long-term debt instruments. Normally, unconditional written promises to pay a sum in money at a future date, bonds and debentures are considered negotiable instruments payable to order or bearer. They are represented by coupons which are negotiable instruments. Coupon bonds are certificates attached to them which represent the amount of interest due on the bond during its entire term. Corporate bond indebtedness It is an obligation to pay a definite sum of money at a future date at fixed rate of interest The power of a corporation to incur bonded indebtedness is expressly conferred by Section 38. In the absence of restriction, the corporation may borrow money whenever necessary in its business and may issue security or customary evidence of debt such as notes, bonds, or mortgages. Non-stock corporations may now be authorized to incur, create, or increase bonded indebtedness.

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Section 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 shareholding, 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 offering 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 rights of stockholders The new issue of shares of stock must be offered first to the stockholders who are such at the time the increase was made in proportion to their existing shareholdings, whenever the capital stock of a corporation is increased and new shares of stock are issued, and on equal with other holders of the original stocks before subscription are received from the general public. A corporation may affect the existing financial and voting rights of pre-existing shareholders, resulting in dilution of existing shareholders’ rights, by issuing new shares . Assuming A Corporation has ten shareholders, each owning 10 percent interest in dividends, assets and voting rights. If the company were to issue twenty new shares to the ten existing shareholders equally, each stockholders would have twelve shares, but each would still have a 10 percent ownership interest in dividends, assets and voting. But if the corporation issued twenty shares to two or more shareholders, the ten pre-existing shareholders would no longer have a 10 percent interest but an 8.3 percent interest, resulting in a smaller proportionate share of dividends, assets, and voting rights. The doctrine of pre-emptive rights was developed to protect shareholders from oppressive “freeze-outs” by management, designed to limit the stock rights of minority stockholders.

Pre-emptive right of stockholders is the right of the stockholders at the time of the increase of capital stock, in preference to other persons, and as between themselves, to subscribe for, or purchase, the unissued stocks in proportion to the number of shares of the original stock held by them respectively. The doctrine provides the right to subscribe and pay for their proportionate part of any new issue of securities by the corporation at the price set by the board of directors. No dilution occurs when all shareholders exercise their pre emptive rights. Limitations to the rule There are substantial limitations or exceptions to the general on modern preemptive rights: 1. Pre-emptive rights are discretionary. - This means that a corporation gets a pre-emptive right unless a specific provision excluding them appears in the articles of incorporation. Pre-emptive right of a corporation is taken only, and to the extent, they specifically designate. 2. Pre-emptive of corporations are not applicable to treasury shares ( shares that were once issued but have been reacquired by the corporation) The theory is that treasury shares which are represented by dilution has occurred and existing shareholders should have no complaint if a prior dilution is restored.

The right of pre-emption does not extend to shares issued for property, including shares of other corporations. The pre emption is based on consideration of practicability or necessity.

Pre-emptive rights extend not to authorized but unissued shares to the extent they represent part of the initial capitalization of the corporation. This is based on presumption that pre-emptive rights extend only to new issues of shares after the corporation has raised its initial capital.

Pre-emptive rights do not extend to shares of different classes unless the other class is convertible into the class held by the shareholder. Common shareholders do not have a pre-emptive right to acquire shares of preferred stock unless the latter is convertible into common. However, preferred shareholders may have a pre-emptive right to acquire new preferred shares of the same class.

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Power of the stockholders to deny pre-emptive right

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The pre-emptive right of stockholders to subscribe to all issues of shares of any class to their respective shares may be denied by the articles of incorporation. Unless so denied, the right should be granted to a holder of shares although they are of a class different from those issued although they are of a class different from those issued or disposed of. The pre-emptive right of a stockholder which is violated may institute an action to compel the corporation to give him that right. The stockholder may exercise his appraisal right under section 81(1) if the denial is by amendment of the articles of incorporation. Stockholders’ pre-emptive right as to treasury shares. The pre-emptive right of a stockholder in a close corporation extends to all stock to be issued, including re-issuance of treasury shares, whether for money or for property or personal services, or in payment of corporate debts, unless the articles of incorporation provides otherwise. Stockholders have also pre-emptive right as to treasury shares in widely held corporations in view of the use of the phrase “disposition of shares of any class.

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Section 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 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 nonstick corporation, by the vote of at least two- thirds (2/3) of the , in a stockholders’ or ’ 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 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 , 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 . Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or , 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 corporation, where there are no 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. Power to dispose of all corporate assets The power of a corporation extends to disposition of corporate assets by the action of its board of directors ed by the vote of shareholders or :

The power to sell, lease , exchange, mortgage, pledge, or otherwise dispose all of its property , assets and goodwill.

However, before the disposition of all assets takes place it must be approved by the board of directors as the vote of board of directors must be authorized by the vote of stockholders representing 2/3 of the outstanding capital stock or 2/3 of the ; and such authorization must be done at the stockholders’ meeting duly called for that purpose after written notice. Such sale shall be subject to the provisions of existing laws on illegal combinations and monopolies.

Dissenting stockholder’s appraisal right The sale or other disposition of all or substantially all of the corporate assets is an exercise of appraisal right of a dissenting stockholder, the right which would render the corporation incapable the business as going concern for which it was incorporated. However, the sale or disposition of all of the corporate assets in the ordinary course of business does not require the approval of the stockholders or and would not entitle any dissenting stockholder to exercise his appraisal right

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Section 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:

To eliminate fractional shares arising out of stock dividends; To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and To pay dissenting or withdrawing stockholder entitled to payment for their shares under the provisions of this Code.

Section 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 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 two-thirds (2/3) of the outstanding capital stock, or by at least two-thirds (2/3) of the in the case of non-stock corporations, at a stockholders’ or ’ 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 shall not be necessary. Power of a corporation to invest funds For any purpose for which a corporation was organized, a corporation may invest its funds in any other corporation or business when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least 2/3 of the outstanding capital stock, or by at least 2/3 of the in the case of non-stock corporation, at a stockholders’ or ’ meeting duly called for the purpose subject to appraisal right of any dissenting stockholder. Distinction between shareholders and bondholders

A Shareholder is a co-owner in the corporation, while a bondholder is a creditor of the corporation A shareholder may suffer losses, a bondholder will not suffer any loss unless the corporation becomes insolvent. A shareholder is entitled to profits, while a bondholder is entitled only to interest.

Power to invest funds in other corporations While a corporation was organized for lawful purposes and all its purposes must be disclosed in the articles of corporation, the power to invest funds to other corporations is limited to the primary purpose or it may invest funds other than the primary purpose to comply with the provisions of section 42 of the Code. Its purpose is subject to prohibition against certain corporations from having more than one purpose. But it may invest funds in another business as stated in the articles of incorporation without the approval of stockholders under section 42 which is incident to its primary purpose., in which case a dissenting stockholder shall have no appraisal right.

Debt Financing of a corporation By issuing debt securities : bonds, debentures, and notes, a corporation may be able to obtain additional funds. A bond is secured by some type of mortgage of lien on corporate property, while a debenture is an unsecured obligation of the corporation. A note is usually issued for a shorter term than a bond and is made payable to the payee or his order, rather than to a bearer in the case of many bonds. Corporations reserves the right to redeem debt instruments which means the corporation may call in such instruments and pay them, even before they are due. Many debt instruments require the corporation to set aside funds each year to pay off such instruments. Such instruments are called sinking funds. Some debt securities may be convertible into equity securities, at so predetermined ratio, creating both convertible bonds and convertible debentures. Third party debt and the leverage The advantage of third party loans as capital raising device from the standpoint of the shareholders revolves around the principle of leverage. Loans from third persons do not provide tax or planning benefits from the original investors. Leverage exists when the venture can earn more on each borrowed plow than the interest cost of borrowing that peso. Sources of funds for a corporation The following are sources of capital financing for a corporation: 1. Equity capital - this is a capital contributed by shareholders in exchange for shares of stock . Such loans, have many characteristics of equity capital and may be considered as equity capital for some purposes. 2. Loans from shareholders - Capital loaned by the shareholders to the corporation may be substituted for equity capital in whole or part. 3. Loans from third persons. - The capital from third persons is usually referred to as debt financing. It should be distinguished from loans by shareholder because of the significantly different economic and legal consequences of such loans.

4. Internally generated funds. - Capital generated internally from a corporation’s business through the retention of earnings, creation of reserves, sales of appreciated assets and the like is a final source of funds required by a corporation. Concept about dividends It is a payment to shareholders from or out of current or past earnings or that part or portion of the profits set aside by a corporation, declared and ordered by the directors to be paid ratably to the stockholders on demand or at a fixed time. Unrestricted retained earnings is the source of the fund for dividends and it is not part of the general mass of funds of the corporation. Payment of dividends by a corporation to a wrong party will not absolve the corporation from paying the party adjudged by the court to be the lawful owner of the stocks. The money received by a corporation from another corporation is income to the corporation. Dividends are declared by the board, but in the case of stock dividends, approval of the stockholders representing 2/3 of the outstanding capital stock is required , and in cases if unrestricted retained earnings exist. Kinds of Dividends a. Cash Dividend -one in which payment of dividend to stockholder is made in the form of cash. b. Liquidating Dividend - It is a manner of paying dividends to stockholder by distributing the assets of the corporation upon dissolution or winding up of the same. c. Composite Dividend - one in which two or more forms are used partly in cash and partly in stocks. d. Optional Dividend - One in which the stockholder has the choice as to form. e. Property Dividend - Payment of dividend in the form of property. f. Stock or Bond Dividend - payment of dividend in the form of stock or bond. Distinction between Cash Dividend and Stock Dividend

Cash dividend is declared by the Board of Directors while stock dividend is declared by the Board of Directors and approved by the stockholders representing 2/3 of all stocks outstanding and entitle to vote. In cash dividend, money is received by the stockholders in the disbursement of earnings of the corporation; while in stock dividend, there is no actual disbursement of earnings. Stock is received. In cash dividend, creditors have no claim upon it once declared; while stock dividend is subject to claims of the creditors of the corporation Cash dividend does not increase capital of the corporation; while stock dividend increases the capital of the corporation. Cash dividend is subject to tax payment; while stock dividend is exempted from the payment of income tax.

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Reasons for declaring stock dividends

there is no cash outlay when stock dividend is declared. broaden ownership of shares. provide attraction and improve the corporate image as regards credit standing. to conceal poor financial status of a corporation when demands for expansion is difficult and new cash is not available.

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Distribution in liquidation distinguished from Ordinary dividend If the distribution is in the nature of a recurring return on stock, it is an ordinary dividend. Distribution is treated as insufficient or partial liquidation and payment to the stockholder or as return to capital investment if the corporation is definitely winding up its business or decreasing its capital stock and narrowing its activities. Surplus of the corporation The corporation shall declare surplus profit in excess of requirements as dividends. The declaration is mandatory if the surplus is equal to or more than the paid-up capital, except in the following instances:

when justified by approved expansion projects; when prohibited to declare dividends by creditor; and when retention is required under existing situations.

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Section 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 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 purpose. Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except; (1) when justified by definite corporate expansion projects programs 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 circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies. Declaration of dividends The concurrence of two factors for dividend declaration is required :

Existence of unrestricted retained earnings out of which the dividends may be declared and paid. A corporate resolution of the board of directors declaring the payment of a portion or all of such retained earnings to the stockholders.

The approval of the board of directors is required for cash dividends while stock dividends are issued by resolution of the board of directors. A corporation must have sufficient number of authorized unissued shares for distribution to stockholders; otherwise, it must increase its capital stock to the extent of the corporate earnings to be declared and distributed as stock dividends.

The authority of the board of directors in the declaration of dividends The board of directors has the authority to declare dividends and determine the timing as well as their amounts. The fact, that profits or earnings have been realized in the prosecution of the corporate business does not require the director

to declare them as dividends. No court has the power to compel them to make the distribution of profits in the absence of any bad faith or abuse of discretion If in their own judgment that profits should be kept in the business. The directors are the sole judges when and how to spend corporate funds as they cannot lawfully declare dividends until the corporation pays or at least provides for the payment of its debts. Section 44. Power to enter into 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 the stockholders owing at least the majority of the outstanding capital stock, or by at least the majority of the outstanding capital stock, or by at least a majority of the 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 (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the of the board of directors of the managing corporation also constitute a majority of the of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (21/3) of the in the 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 another corporation, whether such contracts are called service contracts, operating agreements or otherwise; Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations. Power of a corporation to a management contract Section 44 apparently affirms that no corporation shall enter into a management contract with another corporation without the approval of the board of directors

and stockholders who own the majority of outstanding capital stock or at least a majority of the in the case of a non-stock corporation, of both the managing and managed corporations. The rest of the provisions state the limitations for the exercise of the power Management contract is an agreement under which a corporation delegates the management of its affairs to another corporation for a certain period of time. Section 45. Ultra vires acts of corporation - 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.

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The Principle of Ultra Vires The provision of Section 45 states that no corporation 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. Thus, a corporation must do only those acts that are within its powers. The doctrine of ultra vires was strictly construed in an attempt to restrict the influence and activity of corporations. Consequently, the doctrine of implied powers allows the corporation may acts that are not specifically authorized by the provisions of the code. Ultra vires act means simply an act which is beyond the conferred powers of a corporation or the purposes for which it is created. Normally , agent of a corporation may not escape liability for offense committed in the scope of employment by reason that such act was ultra vires. An ultra vires contract is one outside of the express or implied powers of a corporation as fixed by its charter or by the law. It is therefore, not necessarily an illegal act.

Illegal act distinguished from Ultra vires act

ultra vires act is not necessarily illegal, on the contrary, it may be lawful, moral and could be praiseworthy.

illegal act is an act inimical to law, morals, good customs, public order, or public policy, and per se illicit.

an ultra vires act may be ratified; an illegal act cannot be ratified;

an ultra vires act, if fully or partially executed can bind the parties to it; an illegal act can never be binding.

Title V By-Laws Section 46. Adoption of by-laws. - Every corporation formed under this Code, must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with 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 , in the case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or 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. 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 this Code. The Securities and Exchange Commission shall not accept for filing the bylaws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law. By-laws, defined By-laws are formal rules of internal governance adopted by corporation and for the government of its officers and of its stockholders or . It is a continuing rule for the government of the corporation and individuals composing it. Elements of valid by-laws

by-laws must be inconsistent with the Code and must not be contrary to existing law. They must not be contrary to morals and public policy. They must be generally uniform and must not be inequitable to particular individuals; not discriminatory; and must be conscionable. By-laws must not impair obligations of contract. By-laws must be consistent with the articles of incorporation.

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Section 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 :

The time and manner of calling and conducting regular or special meetings of the directors or trustees; The time and manner of calling and conducting regular or special meetings of the stockholders or ; The required quorum in meeting of stockholders or and the manner of voting therein; The form of proxies of stockholders and and the manner of voting them; The qualifications, duties and compensation of directors or trustees, officers and employees. The time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof; The manner of election or appointment and the term of office of all officers other than directors or trustees; The penalties for violation of the by-laws; In the case of stock corporations, the manner of issuing certificates; and Such other matters as may be necessary for the proper or convenient transaction of its business and affairs.

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Position of director The by-laws may validly provide for the disqualification of the position of director for engaging in any business that is in conflict with the nature of the business of a corporation. Term of office The corporation cannot provide in the by-laws for the manner of election and term of office of directors which are regulated by law.

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Section 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 of a non-stock 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 two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws; Provided; That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by –laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the 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 by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission, the same to be attached to the original

articles of incorporation and original by-laws. The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code.

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List of qualifications of by-laws upheld by the courts:

A director shall not be the immediate member of the family of any stockholder in any other firm, company, or association which competes with the subject corporation. A director shall not be directly or indirectly interested as a stockholder in any other firm, company, or association which competes with the subject corporation. A director shall not be an officer, agent, employee, attorney, or trustee in any other firm, company, or association which compete with the subject corporation. A director shall be of good moral character as an essential qualification to holding office. No person who is an attorney against the corporation in a law suit is eligible for service on the board.

Distinction between articles of incorporation and by-laws

Articles of incorporation consists the laws of the corporation, while the by-laws constitute merely rules and regulations adopted by the corporation.

Articles of incorporation is executed before incorporation , while by-laws usually, after incorporation by the stockholders or ; The filing of articles of incorporation is a condition precedent to corporate existence, while the filing of the by-laws is a condition subsequent.

Consideration for amended by-laws There is another important consideration in determining whether or not amended by-laws are reasonable. The constitution and the law prohibit combinations in restraint of trade or unfair competition. The State shall regulate or prohibit private monopolies when the public interest so requires. No combinations impairing trade or unfair competition shall be allowed. Hence, under the law. monopolies and combinations in restraint of trade are punishable.

Title VI MEETINGS

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Section 49. Kinds of meetings. - Meeting of directors, trustees, stockholders, or may be regular or special. Meetings of directors, and stockholders or

Meetings of directors or trustees may be :

1. Regular or those held by the board monthly, unless the by-laws provide otherwise; or 2. Special or those held by the board at any time upon the call of the president or as provided in the by-laws.

Meetings of stockholders or .

Regular or those held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees; or Special or those held at any time deemed necessary or as provided in the bylaws.

All meetings of directors or trustees and of the stockholders or , unless otherwise provided in the by-laws (sec 54) and subject to the provisions of section 50. The by- laws provide that instead of the President presiding at board meetings the chairman shall preside. Failure to hold a regular annual meeting does not affect the validity or continued existence of the corporation. Neither the failure to hold an annual regular meeting does not affect the incumbency of sitting directors.

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Section 50. Regular and special meetings of stockholders or . Regular meetings of stockholders or shall be held annually on a date fixed in the by-laws, 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 of records at least two (2) weeks prior to the meeting, unless a different period is required by the laws. Special meetings of stockholders or shall be held at any time deemed necessary or as provided in the by-laws; Provided, however, That at least one (1) week written notice shall be sent to all stockholders or , unless otherwise provided in the by-laws. Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange Commission, upon petition of a stockholder or member, and on the showing of good cause therefore, 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 stockholders or present have chosen one of their number as presiding officer.

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Section 51. Place and time of meetings of stockholders or . Stockholders’ or 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 this 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 , if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or of the corporation are present or duly represented at the meeting. Section 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 in the case of non-stock corporation. Section 53. Regular and special meetings of directors or trustees. - Regular meetings of the board of directors or trustees of every corporation 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 by-laws 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 one (1) day prior to the schedule meeting, unless otherwise provided by the by-laws. A director or trustee may waive this requirement, either expressly or impliedly. Section 54. Who shall preside at meetings. - The president shall preside at all

meetings of the directors or trustees as well as of the stockholders or , unless the by-laws provide otherwise.

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Notice of Meetings Written notice of regular or special meetings must be given to shareholders as provided in the by-laws. However, notice of meeting may be expressly or impliedly waived by any stockholder or member. Notice is waived by means of written document executed before, at, or after the meeting in question, in order to avoid confusions and complication that may later arise. A meeting may be called on order of the Securities and Exchange Commission upon petition of any stockholder or member thereof. Purposes of Meeting The meetings of directors and stockholders must state the purposes for which it was called. Some instances where notice of meeting should state the purpose for which it was called :

Removal of directors or trustees; Increase or decrease of capital stock; and incur, create or increase bonded indebtedness. Extension or reduction of corporate term. Ratification of a contract of the corporation with a director or trustee. Sale or other disposition of assets.

Investment of corporate fund in another corporation or business or for any other purposes. Plan of merger or consolidation. Voluntary dissolution of the corporation where no creditors are affected. Voluntary dissolution of the corporation where creditors are affected. Dissolution by shortening corporate term.

Requisites for a valid meeting

A valid meeting must be held at the proper place, at the stipulated date and at a reasonable time. A valid meeting must be called by the proper person and there must be a quorum.

Required Quorum in meetings of stockholder The corporation shall determine the required quorum in meetings of stockholders or in the by-laws for the transaction of business at such meetings. The meeting shall be adjourned in the absence of a quorum. The meeting may be held with the presence of any number of stockholders or at least two as provided by the by-laws. A quorum may be constituted customarily in the presence of the ed holders of a majority of the outstanding shares , however, a smaller number may meet and adjourn to a later date, and that at such adjourned meeting, the shareholders attending shall constitute a quorum. In case of non-stock corporations, a majority of the shall constitute a quorum, unless provided in the by-laws or Code. The basis is the total number of ed .

In the absence of express provision in the by-laws to the contrary, a majority vote, and once a quorum is present is enough to decide any question properly presented, unless a greater number of vote is required by law.

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Persons who call a meeting The call for a meeting is exercised by the person who has the power to call the meeting. The secretary of the corporation notifies the stockholders or of the meeting Notice is the writing informing the stockholders or of the meeting. The person or person designated in the by-laws have all to call stockholders’ meetings or in the absence of any stipulation or provisions in the by-laws, the meeting may be called by a director or trustee or by an officer entrusted with the management of the corporation unless provided by law. On order of the Securities and Exchange Commission, a stockholder or member may make the call whenever there is no authorized person for that purpose and for any cause. Increase and decrease of capital stock The capital stock of a corporation may be increased or decreased at a stockholder’s meeting called for the purpose where two thirds (2/3) of the outstanding capital stock shall favor such increase or decrease, after prior approval by a majority vote of the board of directors. Place and time of meetings of directors

Regular or special meetings of directors or trustees may be held anywhere in or outside the Philippines, unless the by-laws provide otherwise.

Regular meetings shall be held monthly, unless the by-laws provide otherwise, while special meetings may be held at any time upon the call of the president or as provided in the by-laws.

Notice of every meeting, whether regular or special, requires the sending of notice. However, if the articles of incorporation or by-laws specify the time of the meeting, notice of a regular meeting need not be given except when it is to be held at another place.

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Section 55. Right to vote of pledgors, mortgagors, and s. - In case of pledged or mortgaged shares 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. Executor, s, receivers, and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or without need of any written proxy. Section 56. Voting in case of t ownership of stock. - In case of shares of stock owned tly by two or more persons, in order to vote the same the consent of all the co-owners shall be necessary, unless there is a written proxy, signed by all the co-owners, authorizing one or some of them or any other person to vote such share or shares; Provided; That when the shares are owned in an “and/or” capacity by the holders thereof, any one of the t owners can vote said shares or appoint a proxy therefore. Section 57. Voting right for treasury shares. - Treasury shares shall have no voting right as long as such stock remain in the treasury. Rule on shareholders’ right to vote

There is no requirement that shareholders may be permitted to vote on matters not required to be considered by shareholders in the absence of any statute. Instances where the Code requires a specified number of votes 1. By amending the articles of incorporation - a majority of the board of directors or trustees and vote or written assent of two-thirds (2/3) of the outstanding capital stock or of the . 2. Elect directors or trustees - majority of the outstanding capital stock or of the entitled to vote. 3. By removing the directors or trustees - two-third (2/3) of the outstanding capital stock or of the entitled to vote. 4. By calling a special meeting to remove directors or trustees - a majority of the outstanding capital stock or of the entitled to vote. 5. To ratify a contract of a director/trustee or officer with corporation - two-third (2/3) of the outstanding capital stock or of the . 6. Increase or decrease the capital stock - a majority of the board of directors and two-thirds (2/3) of the outstanding capital stock. 7. Incur, create or increase bonded indebtedness - a majority of the board of directors and two-third (2/3) of the outstanding capital stock. 8. Sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of the corporate assets - a majority of the board of directors or trustees and two-third (2/3) of the outstanding capital stock or of the . 9. Invest corporate funds in another corporation or business other than primary purposes. - a majority of the board of directors or trustees and two-third (2/3) of the outstanding capital stock or of the . 10. Dissolve the corporation - a majority of the board of directors or trustees and two-third (2/3) of the outstanding capital stock or of the . Stockholders’ manner of voting

A stockholder or member may vote: 1. Directly or indirectly through a representative - a. by means of a proxy b. by a trustee under a voting trust agreement; c. by executors, s, receivers, or other legal representatives duly appointed by the court. Voting may either be straight or cumulative. Section 55, authorizes executors, s, receivers, or other legal representatives duly appointed by the court to attend and vote in behalf of the stockholders or on shares under their istration without need of written proxy.

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Section 58. Proxies. - Stockholders and may vote in person or by proxy in all meetings of stockholders or . Proxies shall be in writing, signed by the stockholder 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 meetings for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. Proxy, defined. A proxy is the grant of authority by a shareholder to someone else to vote his shares. The relationship is one of principal and agent. It may refer to the piece of paper granting the authority, to the grant of authority itself, or to the person holding the authority. Kinds of Proxies 1. General proxy - One that gives a general discretionary power of attorney to vote for directors and on all ordinary matters that may properly come up before a

regular meeting even though specific mention of them is not made in the notice of the meeting. 2. Limited proxy - One that can be revoked. Generally, proxies are revocable. 3. Irrevocable proxy - One that cannot be revoked. A proxy is irrevocable when it is coupled with an interest Distinction between Proxy and Voting trust

Proxy has no legal title while in voting trust, trustee has legal title. Proxy cannot vote when the owner of the stock is present and votes, while the opposite is true. Proxy can act only at the meeting contemplated in the agency, while voting trust carries the voting or other rights pertaining to the shares for a period not exceeding five (5) years. Proxy is revocable, unless coupled with interest, while voting trust is generally irrevocable.

Voting by mail and Proxy voting Voting by mail is allowed for non-stock corporations under Section 89 of our Corporation Code. Voting rights may be transferred by proxy, however, proxies are taken by management in order to permit them to vote the shares and elect directors in favor of the former. Requirements of proxy voting

The proxy must be in writing; The person giving it can revoke it any time;

That it will expire after a certain number of months or years from its date unless the stockholder executing the proxy indicates the length of time it is to continue in force; The term of proxy shall be for a definite period.

Revocability and Irrevocability A proxy appointment is revocable even if it is stated to be irrevocable or a consideration for the appointment is stated. The act of revocation may consist of any action inconsistent with the continued existence of the grant of authority. For a proxy appointment to be irrevocable must state that it is irrevocable; and be coupled with an interest. Examples : a pledgee-proxy who is under a valid pledge of the shares. and a person who has agreed to purchase the shares under an executory contract of sale;

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Section 59. Voting trusts. - One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any one time; Provided; That in the case of voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding five (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 and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with Securities and Exchange Commission; otherwise said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones 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 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 transfer 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 stockholder may transfer his shares to the same trustee or trustees upon the and conditions stated in the voting trust agreement, and thereupon 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 certificate as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors. The voting or trustee may vote by proxy unless the agreement provides otherwise. Powers or rights of voting trustees

The trustee shall possess the right to vote pertaining to the shares transferred and ed in his or their names subject to the and conditions of and for the period specified in the agreement. They may vote in person or by proxy unless the agreement provides. They may exercise, like the transferor, the rights of inspection of all corporate books and records.

The trustee is the legal title holder or owner of the shares transferred under the agreement.

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Voting trust agreement A voting trust agreement may be defined as an agreement in writing, whereby one or more stockholders of a stock corporation transfer his or their shares to any person or persons or to a corporation having authority to act as a trustee for the purpose of vesting in such person or persons or corporation as trustee or trustees voting or other rights pertaining to the shares for a certain period not exceeding that fixed by the Code and upon the and conditions stated in the agreement. Title to the shares is transferred to the trustee on the books of the corporation.

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Title VII STOCKS AND STOCKHOLDERS

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Section 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. Subscription, defined Subscription is an offer to buy a specified number of unissued shares of a corporation. Subscription contract It is any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed. Subscribers, defined Subscribers are persons who agree to invest in the corporation by purchasing shares of stock. Subscribers commit themselves to invest by entering into contracts defining the extent and of their investment. Subscription distinguished from purchase of shares of stock

In subscription, the subscriber has all the rights and obligations of a stockholder even though he has not fully paid the subscription, while in purchase of shares of stock, the purchaser becomes a stockholder only when he has fully paid the purchase price. Subscription does not all under the Statute of Frauds, while in purchase of shares of stock, it may fall under the Statute of Frauds. Subscription refers only to stocks issued prior to incorporation and to additional stocks issued after incorporation, while in purchase of shares of stock, it refers to issued shares of stock after incorporation.

In a stock corporation, a person may become a shareholder by subscription contract with an existing corporation for the acquisition of unissued shares. or by purchase from the corporation of treasury shares. A corporator in a stock corporation must be a stockholder.

In non-stock corporation, hip is acquired by contract with the corporation the modes of entering into which vary according to the charter and by-laws of the particular corporation.

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Section 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 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 preincorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission. Pre-incorporation, subscription A subscription from a corporation which is not yet in existence and is enforceable by the corporation after it has been formed and irrevocable despite the absence of consideration or the usual elements of a contract The irrevocability of pre-incorporation subscription contracts prevents a subscriber from speculating on the stocks of a proposed corporation. It is to the interest of each subscriber that the others are bound by their subscriptions and the new corporation should have enforceable subscriptions, as operating capital.

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Section 62. Consideration for stocks. - Stock shall not be issued for a constitution 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 :

Actual cash paid to the corporation; 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; Labor performed for or services actually rendered to the corporation; Previously incurred indebtedness by the corporation; Amounts transferred from unrestricted retained earnings to stated capital; and 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 or 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 services. The same consideration as 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 or 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 at a meeting duly called for the purpose representing at least a majority of the outstanding capital stock. Manner by which shares of stock may be issued

By subscription, before and after incorporation, to original, unissued stock; By sale of treasury stock after incorporation for money, property, or service. By subscription to new stocks, when all the original stocks have been issued and the amount of the capital stock increased; and by making a stock dividend

Sources of capital of corporation 1. Borrowings - Capital may be raised by a corporation to finance its business from loans or advances by creditors in return for which the latter get securities called bonds for long-term debts. 2. Profits and stock dividends - Corporation capital may also be raised by means of its profits or earnings which are reinvested in other businesses. It retains part of its corporate earnings by issuing stock dividends. The surplus assets after declaration of dividends is converted form part of its capital stock. 3. Funds furnished by shareholders - The corporate shares of stock are owned by shareholders and as they contribute their capital stock is issued to them. Section 63. Certificate of stock and transfer of shares. - The capital stock corporation 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 indorsed 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 so as to show 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.

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Definition and concept of certificate of stock A certificate of stock is the written acknowledgment by the corporation of the stockholders’ interest in the corporation. It can be mortgaged or pledged and is personal property. To be a stockholder does not necessary require a person to hold a certificate of stock. It is quasi-negotiable in that the title can be transferred by indorsement but is non-negotiable in that the holder takes it subject to the defense of the ed owner. It binds the corporation when the transfer is recorded in the corporate books. Transfer of shares of stock As an incident of ownership, a stockholder has an absolute and inherent right to sell and transfer his stock at will, except as may be restricted by the articles, the general law, the by-laws, or the agreement between him and the corporation. The corporation or stockholders shall have the right of first refusal, the exercise of such right should appear in the articles, in the by-laws as well as in the certificate of stock and subject to and conditions. Street Certificate and suit of stockholder A street certificate is a stock certificate endorsed by the ed holder in blank and upon its face, the transferee is entitled to demand its transfer into his name from the issuing corporation. The certificate is transferable by mere delivery when indorsed in blank. A stockholder may be sued directly by creditors to the extent of their unpaid subscriptions to the corporation.

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Section 64. Issuance of stock certificate. - 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. Stock option, defined Stock option has been defined as a privilege granted to a party to subscribe to a certain portion of the unissued capital stock of a corporation within a certain period of time and under the and conditions of the grant exercisable by the grantee at any time within the period granted. Reason for Stock issuance The purpose of stock issuance is to prevent the partial disposition of a subscription not fully paid, because if this is allowed and the subscriber then becomes delinquent in the subscription payment. The corporation may not be able to sell as many of his subscribed shares as may be necessary to cover the total amount due him. Actions by stockholders or

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Whenever a wrong or injury is done against a shareholder, the latter can institute an individual or direct suit or action in his own name against the corporation. It is therefore, an individual suit or action brought by a stockholder against the corporation for direct violation of his contractual rights. Any recovery from the suit belongs to the stockholders. Actions by a Corporation A Corporation is a distinct entity from the stockholders in respect to litigations as well as in all other matters. As a result, any wrong or injury done against the corporation gives rise to a cause of action on the part of the corporation through the board of directors and not mainly on individual stockholder.

A derivative suit is defined as one brought by one or more stockholders or in the name and on behalf of the corporation to redress wrongs committed against it or to protect or vindicate corporate rights. whenever the officials of the corporation refuse to institute an action against the offender; or are the ones to be sued or hold control of the corporation. A suit against corporate officers is considered a suit against the corporation, however, in a derivative suit filed by a stockholder, the plaintiff is suing for a wrong done to the corporation and not one to himself. The plaintiff derives his rights from the corporation and any recovery from the suit as a result of that action by the former belongs to the corporation but he would be entitled to reimbursement for the legal expenses incurred. Liabilities of stockholder

Liability for unpaid subscription to the corporation For interest on unpaid subscription To creditors on unpaid subscription of the corporation For watered stock For dividends unlawfully paid; For failure to create corporation.

Relation of stockholder to corporation 1. Corporation owns its property as a distinct entity - A corporation is a separate and distinct entity from a stockholder. Properties contributed are ed under its name as owner. Shareholders have no title to the property of the corporation nor is he a co-owner of the corporate property and even entitle to a portion of its property. 2. Stockholder relation based on contract - The relation between the corporation

and stockholder is contractual and this is constitutionally protected as it is stated that no law shall be ed impairing the obligation of contract. 3. Share not an indebtedness of corporation -A corporation is not indebted to stockholders because of the share of stock nor the latter is treated as credit to the stockholders. Stockholders are not creditors of the corporation; they are owners of the business.

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Section 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. Watered stock, defined Watered stock is a stock issued as fully paid for which the corporation has received tangible assets worth less than the par or stated value of the stock. It is generally created by an over-evaluation of the property given the corporation as consideration for stock. It may be issued by a corporation; gratuitously; for money or property less than par value; services less than par value; and in the form of dividends when no surplus profit exists. Prohibition to issue watered stock The issuance of watered stock for no value or less than its equivalent either in cash, property, shares, stock dividends, or services is prohibited by law. This is to protect persons who may become creditors and who may acquire stock of the corporation on the faith of its outstanding capital stock being fully paid.

The issuance of watered stock which is prohibited by law is the original issue of stocks but not to a subsequent transfer of such stocks by the corporation, but it would be a sale already and it would no longer be an issue. When watered stock arises Watering of stock arises when the property exchanged for the stock is intangible or when a substantial part of its is intangible. Say for example, a business which is valued at P 2 million. The corporation agrees to accept ownership of the said business for a consideration of certain number of shares of its stock. It has P500,000 worth of tangible assets including plant, inventory and equipment and the remaining value of P1,500,000 consists of goodwill. Good will is the value of the profits of a business that is in excess of a normal or basic return on the net assets exclusive of goodwill. Liability for watered stock and implications It was early viewed that the par value of issued shares as a public representation that at least that amount of equity capital had been received by the corporation. Those stockholders who received watered shares were conceivably involved in a alleged misrepresentation to creditors and might be liable to them for any consequence between the par value and the amount actually paid for shares.

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Section 66. Interest on unpaid subscription. - 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.

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Legal rate construed When the borrower borrows money for an interest, the interest is normally is paid as compensation for the use of that money. The borrower is under obligation to pay interest should there be any stipulation expressly stating for the payment in writing. It is therefore, necessary that such stipulation must be expressed in writing and such stipulation may or may not state the rate of interest. Liability for interest Subscribers of stock shall be liable to the corporation for interest from the date of subscription should the entire amount on stock subscribed has not been paid, if so required by the by-laws. The rate shall be deemed a legal rate , is not fixed by the by-laws, but if the rate of interest is fixed in the by-laws, such rate shall be paid. Section 67. Payment of balance of subscription. - Subject to the provisions of the contract of subscription, the board of directors of any stock corporation at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage of said unpaid subscriptions, in either case with interest accrued, 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 order otherwise. Manners of enforcing payment of stock subscription 1. Extra-judicial sale at public auction - This constitute permission of the corporation to put up unpaid stock for sale and dispose of it for the of delinquent subscribers.

2. Judicial action - This is a remedy requiring court action. 3. Collection from cash dividends and withholding of stock dividends - The provision of the Code that is authorized by law ( Sec 70) When delinquent stock arises When a holder of stock fails to pay the unpaid subscription or balance within 30 days from the date specified in the contract of subscription, or in the absence of a date fixed in the contract of subscription, from the date stated in the call made by the board of directors, a stock becomes delinquent. It shall be sold at public auction unless the board of directors orders otherwise. Distinction between call and assessment A Call is a pronouncement made by a corporation which is expressed in the form of a resolution of the board of directors requiring the payment of all or a certain prescribed portion of a subscriber’s stock subscription while Assessment is used with reference to paid and unpaid subscriptions.

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Section 68. Delinquency sale. - The board of directors may by resolution, order the sale of delinquent stock and shall specially 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 ed 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 ment 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 ment 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 fro such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who 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 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 ment 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. Highest bidder A Highest bidder is a person at the sale offering to pay the full amount of the balance on the subscription with the accrued interest, cost of ment and expenses of sale, for the smallest number of shares or fraction of a share. Sale of delinquent stocks The steps in the sale of delinquent stocks are as follows :

The whole or certain percentage of the unpaid subscriptions which states the date fixed for payment has been declared payable by the board of directions who es a resolution for such declaration. However, no call is necessary if the date for payment is specified in the contract of subscription. Notice of resolution is furnished to stockholders by the secretary of the

corporation. All the stocks covered by subscription shall become delinquent and be subject to sale, if the stockholders fail to pay within thirty days (30) from the date fixed in the contract of subscription or in the call made by the board, With notice to the delinquent stockholders which shall be published, the board of directors by resolution, shall order the sale of delinquent stocks, stating the amount due and the date, time, and place of sale. Many shares of the stock necessary to pay the amount due on subscription, with accrued interest, costs of ment and expenses of sale will be sold at public auction to the highest bidder for cash on the date of sale.

The corporation may purchase for itself the delinquent stock, in the absence of bidders ( or highest bidder) as the release from liability of the delinquent subscriber follows with regards to his subscription which is deemed fully paid. The purchase of delinquent stock must be made out of net income of the corporation in view of the trust fund principles.

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Section 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 pay 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 unlawfully sold stock

There should be irregularity or infirmity in the notice of sale; and

There is the presence in itself defect in the sale of the delinquent stock.

However, infirmity in the call for unpaid subscription is no longer included among the grounds for questioning the sale. Section 70. Court action to recover unpaid subscription. - Nothing in this Code shall prevent the corporation from collecting by action in a court of proper jurisdiction the amount due on any unpaid subscription, with accrued interest, costs and expenses. Section 71. Effect of delinquency. - No delinquent stock shall be voted for or be entitled to vote or to representation of any stockholders’ 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 ment, if any. Procedures in the collection of unpaid subscription

By means of call, sale at auction of delinquent shares; By ordinary court action; and By collections from cash dividends and other amounts due to the stockholder, if permitted by the by-laws, or agreed upon by him.

Cash dividends for delinquent shares Cash dividends on delinquent stocks are entitled to owners of the said delinquent stock and should be applied first to the unpaid balance on the subscription plus costs and expenses. Stock dividends due on delinquent stocks should be withheld until the delinquent stockholder has been fully paid his subscription. Effect of stock delinquency

As stockholder of delinquent stock is not deprived of all his rights except the right to be voted for or be entitled to representation at any stockholders’ meeting and as provided by the Code. And yet, he shall be entitled to receive dividends subject to the provisions of Section 43, however, delinquent stock shall be subject to delinquency sale as stated in the Code.

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Section 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. Rights of unpaid shares before delinquency The holder of delinquent shares is not considered to have violated any contract with the corporation and yet has all the rights of a stockholder which include the right to vote before the unpaid shares become delinquent. These rights of the holder commence from the time his subscription is accepted by the corporation. However, he shall be considered liable for interest on his unpaid subscription if so required by the by-laws.

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Section 73. Lost or destroyed certificates. - The following procedure shall be allowed for the issuance by a corporation of new certificate(s) of stock in lieu of those which have been lost, stolen or destroyed:

The ed owner of certificate (s) 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(s) were lost, stolen or destroyed, the number of shares represented by each certificate, the

serial number(s) and the name of the corporation which issued the same. He shall also submit such other information and evidence which he may deem necessary; After ing 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 ed owner of the certificate (s) of stock which have been lost, stolen or destroyed. The notice shall state the name of said corporation, the name of the ed owner and the serial number(s) of said certificate(s), and the number of shares represented by such certificate(s), 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(s) of stock, the right to make such contest shall be barred and said corporation shall cancel in its books the certificate(s) of stock which have been lost, stolen or destroyed and issue in lieu thereof new certificate(s) of stock, unless the ed owner files a bond or other security in lieu thereof as may be required, running for a period of one (1) year for a sum and in such form and with such sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued even before the expiration of the one (1) year period provided herein: Provided, That if a contest has been presented to said corporation or if an action is pending in court regarding the ownership of said certificate(s) of stock which have been lost, stole or destroyed, the issuance of the new certificate(s) of stock in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said certificate(s) of stock which have 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(s) of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described.

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Exoneration of a corporation The rule prescribes that except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, a corporation is not liable to any person prejudiced by the issuance of new certificate(s) of stock pursuant to the procedure described

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TITLE VIII CORPORATE BOOKS AND RECORDS

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Section 74. Books to be kept; stock transfer agent. -Every corporation shall, at its principal office, keep and carefully preserve a record of all business transactions, and minutes of all meetings of stockholders or , 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 meeting shall be open to the inspection of any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in 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, trustee, 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 pursuant to a resolution 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 his demand. Stock corporations must also keep a book to be known as the “stock and transfer book” in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection to 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 ing transfer 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 renewed 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.

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Right to inspection of books not absolute It appears that the right to inspect the books by the stockholder or member is absolute but the fact is, there are limitations on the said right:

The right should be denied on the ground that the person who demands to examine or copy vital information from the corporation books has maliciously used these excerpts through any prior examination of the records and minutes of any other corporation, and the former was not acting in good faith for a legitimate purpose in making his demand prejudicial for the corporation. The right of stockholder to demand for inspection or examination of books is governed by the jurisdiction in which the corporation was organized, that is contrary to the right where the corporation is not organized under the Philippine law. The corporation must keep its trade secrets from stockholders where a corporation is engaged in manufacturing which has a secret formula to produce its products shall kept such records or information from the reach of stockholder or member, however, the board of directors or corporation may properly adopt measures to protect such process from publicity.

Limitations on the right of stockholder or member to inspect the books

Stockholder or member has the right to make copies, abstracts and memoranda of their contents, but the former cannot be permitted to take books from the corporate office without order of the court. However, any stockholder or member has the right to receive copies of corporation’s most recent financial

statements. Any stockholder or member, director and any proper representative or attorneyin-fact, and either with or without the attendance of the director, etc., the right would be unimpaired. In general, the right of the stockholder extends to all books, papers, contracts, minutes, books or other instruments from which vital information could be obtained for the protection of his interest.

Right to examine corporate records

The right of shareholders to inspect or examine the books and records is provided for by law. It is exercisable during reasonable hours on business days. Shareholders have access to such corporate materials as stockholder minutes of meetings, financial records, meetings of board of directors, and documents which include, tax returns, contracts, and office correspondence of memoranda.

Rights of Inspection are qualified rather than absolute, under section 74 of the Code which provides, “ that it shall be a defense to any action.. 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.”

Legitimate and illegitimate purposes and Instances In the inspection of corporate records, shareholders have to prove or show that the reason for inspection of books and records constitute a “ legitimate purpose”, i.e., that the motive for the inspection related to his or her status as a shareholder. To guarantee the purpose of the stockholder or member, he may

employ attorneys and ants to aid in the examination of records, making of copies, and the like to avoid suspicion or doubts that it may be used to any personal interest in which competitors may have access for any trade secrets and information. Instances of legitimate purpose are as follow:

A legitimate purpose of a shareholder constitute a demand of shareholders’ list in order to communicate with other shareholders about matters of corporate concern, that is, to solicit proxies, to initiate a proxy contest, to publicize mismanagement, or to form a protective committee. Inspection is demanded to determine the worth of the shareholder’s holdings. A demand consisting of reasons sought for a decline in profits and to communicate with other shareholders.

Instances of illegitimate purpose are as follow :

The purpose is illegitimate when a stockholder seeks the list for the purpose of communicating one’s own personal social and political views to shareholders. It is illegitimate to have the desire to obtain trade secrets for a competitor . It is illegitimate to have idle curiosity than to have a specific purpose.

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Section 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 , the board of directors or trustees shall present to such stockholders or 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 ant. 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. Access to financial records A stockholder or member has the right to ing records which include receipts, vouchers, bills and other documents evidencing the financial condition of the corporation. A shareholder who is denied the right of inspection may seek a summary judicial order compelling the inspection. The court must order the corporation to pay the shareholder’s costs in compelling inspection unless proven that it refused inspection in good faith because it had a conscionable basis for doubt about the right of shareholder to inspect the books. The court may impose restrictions on the use of information by the shareholder and may prohibit the shareholder from disclosing it to a competitor. Financial disclosures to shareholders The Code states that within ten days (10) from a receipt of a written request of any stockholder or member to furnish the latter with its most recent financial statements, containing at a minimum 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. The financial statements shall include a statement of changes in shareholders’ equity. It is however, not dispensable that these statements be prepared by an independent A or by following accepted ing principles. If the paid-up

capital of the corporation is less than P 50,000. It need only to be certified under oath by the treasurer or any responsible officer of the corporation.

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TITLE IX

MERGER AND CONSOLIDATION

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Section 76. Plan of merger or consolidation. - Two or more corporations may merge into a single corporation which shall be one of the constituent corporation or may consolidate into a new single corporation which shall be the consolidated corporation. The board of directors or trustees of each corporations, party to the merger or consolidation, shall approve a plan of merger or consolidation setting forth the following:

The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations; The of the merger or consolidation and the mode of carrying the same into effect; 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, and Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable.

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Merger and Consolidation, defined A merger is effected upon the direct acquisition of the properties of one or more companies by another. Ordinarily, the acquiring unit takes over all assets and assumes all liabilities of the companies to be absorbed. The company taking over the properties of others retain its identity and continues operations as a larger unit; the other companies are dissolved and lose their separate identities. Upon transfer of assets and liabilities, the acquiring company makes payment for the acquisition with cash, securities of the acquiring company, or both. Such payments are to be distributed to stockholders of the companies that are to be dissolved. Merger using other definition is the absorption of one or more corporations by another existing corporation, which retains its identity and takes over the rights, privileges, franchises, and properties of the absorbed corporation s). The absorbing corporation continues its existence while the life of the other corporation(s) is/are terminated. A consolidation is effected when a corporation is specifically organized to acquire the assets and to assume the liabilities of two or more previously existing companies. A new corporation is formed, the original companies are dissolved. The newly formed company issues securities that are given in exchange for properties acquired. Stockholders of the original companies thereby become stockholders of the new unit. The new corporation may sell its stock and such proceeds acquire the net assets of the companies to be combined. of a proposed consolidation will have to be approved by the board of directors of each company that is party to the action. The proposal will also require approval by stockholders in accordance with legal provision.

Consolidation may also be defined as the union of two or more corporation to form a new corporation, having the combined rights, privileges, franchises and properties of the constituent companies, all combining to lose their corporate existence. It is described as the union of two or more corporations into a single new corporation, all the constituent corporations ceasing to exist as separate entities.

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Section 77. Stockholder’ or ’ 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 of each of such corporations at separate corporate meetings duly called for the purpose. Notice of such meetings shall be given to all stockholders or of the respective corporations, at least two (2) weeks prior to the date of the meeting, either personally or by ed 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 corporation in the case of stock corporation or at least two-thirds (2/3) of the in the 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 two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the of each of the constituent corporations. Such plan, together with any amendment, shall be considered as the agreement of merger or consolidation.

Effecting corporate or business combinations 1. Sale of assets - It may be effected by selling all or substantially all of its assets by one corporation to another. The sale is not necessarily made in the course of the dissolution of the vendor corporation. The mere sale of its properties and distribution of assets do not automatically constitute dissolution of the corporation as possession of property is not essential to corporate existence. However, if in the agreement, a new corporation expressly acquired the assets and properties , and assumed the obligations and liabilities of an old corporation which it succeeded, the former cannot excuse itself from said obligations and liabilities on the agreement that said two corporations that said two corporations are distinct and separate . Hence, the presence of merger is effected when there is a sale of the assets for stock and if followed by dissolution. 2. Lease of assets. - Unless a corporation is dissolved, its property is leased to another corporation in which a lessor receives rent income by the lessee. A lease of property does not constitute sale but the right to use the property for lease. 3. Sale of stock - Acquiring sufficient stock by a holding company fulfills the purpose of control as a parent or holding company. The corporation whose stocks are acquired is known as the subsidiary corporation. 4. Merger - as stated in its definition, it is the method where two or more corporation unite or directly acquires the property of another, thereby one remains in being, absorbing the other which disappears as a separate corporation.

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Section 78. Articles of merger or consolidation. - After the approval by the stockholders or 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:

The plan of the merger or the plan of consolidation; As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of ; and As to each corporation, the number of shares or voting for and against such plan, respectively.

Section 79. Securities and Exchange Commission’s approval and effectivity 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 no inconsistent with the provisions of this Code and existing laws, it shall issue a certificate of merger or of 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 hear. Written notice of the date, time and place of said hearing shall be given to each constituent corporation at least two (2) weeks before said hearing. The Commission shall thereafter proceed as provided in this Code. Section 80. Effects of merger or consolidation. - The merger or consolidation, as provided in the preceding sections, shall have the following effects:

The constituent corporations shall become a single corporations 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; The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation; The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code; The 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 persona, and all receivable due on whatever including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be taken and deemed to be transferred to and vested in such surviving or consolidated corporation without further act or deed; and 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 right of creditors nor any lien upon the property of any of each constituent corporations shall be impaired by such merger or consolidation.

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Articles of Merger or Consolidation, defined It refers to the instrument executed by the constituent corporation embodying the following : there is a plan or merger or consolidation; the number of shares outstanding in case of stock corporations, or of , in case of non-stock

corporation; as to each corporation, the number of shares outstanding or voting for and against such plan, respectively. Definition of Constituent Corporations - refers to the absorbed and absorbing corporation in case of merger, and to two or more corporate bodies desiring to unite or to blend to give way to the new or consolidated corporation in a consolidation. Fair Value - is the price agreeable to a willing seller and willing buyer. Leverage - refers to the advantages that may accrued to a business through the use of debt obtained from third persons in lieu of contributed capital. Leverage buy-out - A transaction, the stock of a publicly-owned company is bought out in full by a small group, usually including of the company’s management. The transaction is financed by borrowing in which the debt is to be paid out of the company’s future operations or sales of some of its assets. Going private - refers to a transaction in which public shareholders of a publicly- held corporation are compelled to accept cash for their shares while the business is continued to be owned by officers, directors, or large shareholders. Types of corporate reorganizations There are three types of reorganizations that exist ;

The first, is the sale of all or substantially all of the property and assets of one or more corporations to another corporation for shares or securities of the purchasing corporation which are distributed to the stockholders of the selling corporation as part of the same transaction. The second corporate reorganization exists when it involves the merger of the corporation. The third corporate reorganization exists when the company consolidates.

Merger or consolidation of banks is encouraged by exempting the merged or consolidated bank from the minimum requirement of at least 70% Filipinoowned voting stock that may be established, where the consolidating banks have foreign-owned voting stock at the time of consolidation, and from the application of the provisio of the Corporation Code, which limits the number of directors of a corporation.

TITLE X APPRAISAL RIGHT

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Section 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:

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; In case of sale, lese, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in this Code; and In case of merger or consolidation.

When appraisal right available The appraisal right of a stockholder is his right to demand payment of the fair value of his shares, after dissenting from a proposed corporate action, in the cases provided by law. Under section 105 of the Code, any stockholder of a close corporation may, for any reason, compel 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.

Instances when appraisal right available

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 the Corporate Code In case of merger or consolidation; In case of extension or shortening of corporate term; When in case corporate fund is diverted from a primary to a secondary purpose.

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Section 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 corporation, and the third by the two 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 retained 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. Ways to exercise right

A written demand shall be made by the dissenting stockholder on the corporation within thirty days (30) after the date on which the vote was taken for payment of the fair value of his shares; The corporation shall pay to such stockholder upon surrender of the corresponding certificate(s) of stock within ten days (10) after demanding payment for his shares if the proposed action of the corporation is enforced or effected. The stockholder shall transfer his shares to the corporation upon payment of the agreed or awarded price. Failure of the stockholder to demand within thirty days (30) period shall be deemed a waiver of his appraisal right.

Section 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 immediately be restored. Effect of right exercised

The moment the dissenting stockholder demands payment of the fair value of his shares, all rights accruing to such shares including voting and dividend rights shall be suspended; and

As agreed upon between him and the corporation, he shall be entitled to receive payment of the fair value of his shares as determined by the appraisers chosen by him.

Section 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 determined 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. Cessation of the right to payment Unless the corporation allows the dissenting stockholder who demands payment of his shares is no longer allowed to withdraw from his decision. The effect of extinguishing the withdrawing stockholder’s right to payment occurs in any of the cases as follow:

in case the corporation consents such stockholder withdraws his demand for payment. in case of abandonment and rescission by the corporation of the proposed action. in case the Securities and Exchange Commission where its approval is necessary disapproved the proposed corporate action. in case the Commission determines that such stockholder is not entitled to appraisal right.

All dividend distributions which would have accrued in favor of the stockholder’s shares shall be paid to him as his status shall be restored if any of the above cases arises, where the stockholder shall not be paid the fair value of his shares.

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Section 85. Who bears costs of appraisal. -The costs and expenses of appraisal shall be borne by the corporation, unless the fair vale 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 the 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. Liabilities to be borne Liability for costs and expenses of appraisal shall be borne by: 1. By the corporation -where the court found it justifiable by the stockholder who refused to receive payments that was filed by the dissenting stockholder who desired to recover such fair value. 2. By the dissenting stockholder - where there is an approximate similarity with the price offered by the corporation as the fair value assessed by the appraisers; and where it is found by the court to be unjustified by the same action filed by the dissenting stockholder and his refusal to accept payment. Section 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, 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 case and the transferee shall have

all the rights of a regular stockholder; and all dividend distribution which would have accrued on such shares shall be paid to the transferee.

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Notation on certificate(s) It is provided in section 86 that a stockholder is required to submit to the corporation within ten (10) days after demanding payment of his shares, the corresponding certificate (s) of stock for notation that such shares are dissenting shares. All rights accruing to such shares including voting and divided rights shall be suspended.

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TITLE XI

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NON – STOCK CORPORATIONS

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Section 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 , 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 operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. 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. Section 88. Purposes. - Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agriculture and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations. Non- stock Corporation, defined It is one where no part of its income may be distributed as dividends to its , trustees, or officers. Purpose for the formation of Non-stock corporation It is formed or organized for charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil services, or similar purposes like trade, industry, agricultural, and like chambers, or any combination thereof. Non-stock corporations are usually organized as associations, not-for-profit corporations, or foundations. An association closely resembles a partnership but is often treated as a corporation nor regulatory and tax purposes. They are rarely treated as a separate entity for liability purposes as there are few advantages to this form except simplicity Like their business counterparts, such corporations are treated as legal entities and must fulfill certain formalities before corporate status is granted by the state. The special or regular meetings, of of non-stock corporations may be held anywhere in the Philippines, not necessarily its place of principal office, with proper notice to all . This type of organization has no

immunity from suit based on contracts. Requirements of SEC for Non-stock Corporations The following requirements must be complied by a non-stock corporation before it can operate:

Book of hip which shall indicate the names, addresses and signatures of its . Required and necessary books of s, and records such as:

Cash book General journal Ledger book Minute book

All such books shall disclose the purpose for which the funds are used and manner in which they are spent. The corporation shall comply as regards its funds the following :

issuance of official receipts for all funds received. Any amount in excess of P 100.00 shall be deposited in behalf of the corporation with a reputable bank. The corporation through its treasurer shall post a bond in surety as may be approved by the board of directors.

All expenses must be ed with proper and appropriate documents and vouchers stating the purpose and nature thereof. After the annual meeting electing the new officers and of the board of directors of the corporation, within fifteen (15) days, the Secretary or any officer shall submit to the Commission, the names and addresses of the new officers and of the board of directors.

In the event such an officer or director die, resign or cease to hold office, the Secretary or any officer shall report immediately such fact to the Commission, otherwise, the said personnel shall be deemed to continue holding his position until notice of his resignation or withdrawal is received by the Commission.

ing documents for SEC The Securities and Exchange Commission requires the non-stock corporation with the articles of incorporation to submit the following ing papers :

Letter of Undertaking Modus Operandi Resolution List of

CHAPTER 1 -

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Section 89. Right to vote. - The right of the 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. Voting by mail or other similar means by of non-stock corporations may be authorized by the by-laws of non-stock corporations with the approval of, and under such conditions which may be, prescribed by, the Securities and Exchange Commission. 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. Section 90. Non-transferability of hip. - hip in a non-stock corporation, and all rights arising therefrom, are personal and nontransferable, unless the articles of incorporation or the by-laws otherwise provide. Section 91. Termination of hip. - hip shall be terminated in the manner and for the causes provided in the articles of incorporation or bylaws. Termination of hip 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.

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CHAPTER II TRUSTEES AND OFFICERS

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Section 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 onethird (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. Unless otherwise provided for in the articles of incorporation or the by-laws officers of anon-stock corporation may be directly elected by the .

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Section 93. Place of meetings. - The by-laws may provide that the of a non-stock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located: Provided, That proper notice is sent to all indicating the date, time and place of the meeting: and Provided, further, That the place of meeting shall be within the Philippines. CHAPTER III DISTRIBUTION OF ASSETS IN NON-STOCK CORPORATIONS

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Section 94. Rules for distribution. - In case of dissolution of a non-stock corporation in accordance with the provisions of this Code, its assets shall be applied and distributed as follows:

All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefore; 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.

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 pursuant to a plan of distribution adopted as provided in this Chapter.

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 or the by-laws determine the distributive rights of , or any class or classes or , or provide for distributions; and

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 as provided in this Chapter.

Section 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 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 . Such plan of distribution shall be adopted upon approval of at least two-thirds (2/3) of the having voting rights present or represented by proxy at such meeting.

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TITLE XII

CLOSE CORPORATIONS

Section 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 of 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 of the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (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 be deemed not a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation 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 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. Close Corporation, defined A close corporation has been defined as a corporation in which the stock is held in few hands, or in few families and which stock is not at all or only rarely dealt in buying or selling. Under the Code, it is one whose articles provide: a. all issued stocks shall be subject to one or more restrictions on transfer; b. that its shares shall not be held by a group of more than 20 persons. c. Any of its stock shall not be listed in any stock exchange to the public. The above corporation shall not be deemed a close corporation, if at least 2/3 of the voting stock of the above corporation is owned or controlled by another corporation which is not a close corporation. Characteristics of Close Corporations

Stockholders act as directors without need of election and therefore liable as directors; Quorum may be greater than a mere majority; Pre-emptive right extends to all stock issues; SEC settled deadlocks in the board, on written petition by any stockholder; and Stockholder may avail of his right of appraisal and withdraw

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Section 97. Articles of incorporation. - The articles of incorporation of a close corporation may provide;

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; For a classification of directors into one or more classes, each of which may be voted for and elected solely by a particular class of stock; and 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 stockholders of the corporation rather than by a board of directors, So long as this provision continues in effect:

No meeting of stockholders need be called to elect directors; Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for purposes of applying provisions of this Code; and The stockholders of the corporation shall be subject to all liabilities of directors.

The articles of incorporation may likewise provide that all officers or

employees or that specified officers, or employees shall be elected or appointed by the stockholders, instead of by the board of directors.

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Section 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 , 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. Section 99. Issuance or transfer of stock of a close corporation in breach of qualifying conditions

If stock of a close corporation is issued or transferred to any person who is not entitled under any provision of the articles of incorporation to be a holder of record of stock, and if the certificate for such stock conspicuously shows the qualifications of those 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. If the articles of incorporation of a close corporation states the number of persons, not in excess of 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.

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. 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 (i) that he is a person not eligible to be a holder of stock of the corporation, or (ii) 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 (iii) that the transfer of stock is in violation of a restriction on transfer of stock, the corporation may, at its option, refuse to the transfer of the stock in the name of the transferee. The provisions of subscription (4) shall not be applicable if the transfer of stock, even though otherwise contrary to subsections (1), (2) or (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. The tem “transfer”, as used in this section, is not limited to a transfer for value. The provisions of this section do not in any way impair any right of a transferee regarding any right to rescind the transaction or to recover under any applicable warranty, expressed or implied.

Section 100. Agreements by stockholders.

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 whether the provisions of such agreements are

contained, except those required by this Title to be embodied, in said articles of incorporation. 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 them. 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 partner among themselves. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it so related to the conduct of the business a d 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. 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.

Section 101. When board meeting is unnecessary or improperly held. Unless the by- laws provide without a meeting shall nevertheless be deemed valid if :

Before or after such action is taken, written consent thereto is signed by all the directors; or All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or

The directors are accustomed to take informal action with the expressed or implied acquiescence of all the stockholders; or All the directors have expressed or implied knowledge of the action in question and none of them makes prompt objection thereto in writing.

If a directors’ 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.

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Section 102. Pre-emptive right in close corporation. - 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 or for property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise. Section 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.

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Section 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 stockholders’ agreement; (2) canceling, altering or ening any resolution or other 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, stockholder, or other persons party to the action; (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; (5) appointing a provisional director; (6) dissolving the corporation; or (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 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.

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Section 105. Withdrawal of stockholder or dissolution of corporation - In addition and without prejudice to the 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 the 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. Right of stockholder to withdraw The stockholder may exercise the right to withdraw for any reason provided that the corporation has ample assets to pay its liabilities exclusive of capital stock. By written petition to SEC, his right to have the corporation dissolved must be founded on some legal grounds mentioned, the Commission justifying the dissolution shall order the dissolution after proper notice and hearing.

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TITLE XIII

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CHAPTER I. - EDUCATIONAL CORPORATIONS

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Section 106. Incorporation. - Educational corporations shall be governed by special laws and by the general provisions of this Code. Educational Corporation, defined It is a non- stock corporation organized to provide facilities for teaching or instruction. Such corporations normally maintains a regular faculty and curriculum and has a regular organized body of pupils or students, or attendance at the place where educational activities are carried on.

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Governing law applicable Educational corporations are governed by special laws and by the general provisions of the Corporation Code . Educational corporations are classified as special corporations and are different from an ordinary non-stock corporation formed or organized for educational purpose. Those organized as stock corporations are governed by the provisions on stock corporation as to number and term of directors.

Section 107. Pre-requisites to incorporation. - Except upon favorable recommendation of the Secretary 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. Section 108. Board of trustees. - Trustees of educational institutions organized as non-stock corporations shall not be less than five (5) nor more than fifteen (15); Provided, however, That the number of trustees shall be in multiples of five (5). Unless otherwise provided in the articles of incorporation or the by-laws, the board of trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall office for five (5) years. A majority of the trustees shall constitute a quorum for the transaction of business. The powers and authority of trustees shall be defined in the by-laws. For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock corporations. Board of Trustees 1. For non-stock educational corporations - It shall constitute not less than five (5) nor more than fifteen (15) trustees. It shall be in multiples of five (5), i.e., their number shall be five (5), ten (10), or fifteen (15); the of office of the trustees shall be staggered with one (1) year interval, unless otherwise provided in the articles of incorporation or the by-laws; trustees subsequently elected shall have a term of five (5) years; trustees elected to fill vacancies occurring before the expiration of a particular term, shall hold office only for the unexpired period; majority of the trustees shall comprise a quorum for the transaction of business; and the powers and authority of trustees shall be defined in the bylaws. 2. For stock educational corporations. - The number and term of directors shall be governed by the provisions on stock corporations. Through their articles of

incorporation or by-laws, they can designate governing boards by any name than as board of trustees.

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CHAPTER II. RELIGIOUS CORPORATIONS

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Section 109. Classes of religious corporation - 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. Section 110. Corporation sole - For the purpose of istering 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.

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Section 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:

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; 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; That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is charged with istration 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; The manner in which any vacancy occurring in the office of chief archbishop, bishop, priest, minister, rabbi, or 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; and The place where the principal office of the corporation sole is to be established and located, which place must be within the Philippines.

The articles of incorporation may include any other provision not contrary to law for the regulation of the affairs of the corporation.

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Section 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, priest, minister, rabbi or presiding elder, as the case may be, shall become a corporation sole, and all temporalities, estate and properties of the religious denomination, sect or church theretofore istered 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. Section 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 mortgage or sell real property held by it upon obtaining an order for that purpose from the Court of Fist Instance of the province where the property is situated; but before the order is issued, proof must be made to the satisfaction of the court that notice of the application for leave to mortgage or sell 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 mortgage or sell 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 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. Section 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 letter s 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 ister 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. Section 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. The declaration of dissolution shall set forth :

The name of the corporation; The reason for dissolution and winding up; The authorization for the dissolution of the corporation by the particular religious denomination, sect or church; 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 operation except for the purpose of winding up its affairs.

Religious Corporation, defined

It is a corporation composed entirely of spiritual persons and erected for the

furtherance of a religion or for perpetuating the rights of the church or for the istration of church or religious work or property.

Religious corporations may also be a religious society or order or a diocese, synod or district organization, sect or church, unless forbidden by the Constitution, rules, regulations or discipline of the religious denomination or sect to incorporate and acquire a juridical personality.

Classes of Religious Corporations

Religious corporations may be classified into:

Corporation sole - It is incorporated by one person and consists of one member or corporator only and his successors, such as bishop, chief priest or presiding elder of a church, religious denomination or society may become a corporation sole of such organization, and thereafter possess the power to ister the temporalities and properties of the organization which he heads.

Religious societies - it is incorporated by an aggregate of persons. Under section 116, any religious society or religious order, or any diocese, synod, or district organization of any religious denomination, sect or church, unless forbidden by the rules of the latter or by competent authority, may, upon consent and/or by an affirmative vote at a meeting called for the purpose, of 2/3 of its hip, incorporate for the istration or management of its temporalities, affairs and property by filing with the Securities and Exchange Commission, a verified articles of incorporation setting forth the matters in Section 116.

EleemosynaryCorporation - An eleemosynary corporation is a non-religious corporation organized for charitable purposes.

Capacity to acquire lands

A religious corporation which is not controlled by Filipinos cannot acquire lands, otherwise alien religious landholdings in this country would be revived, however, the Roman Catholic Church can acquire lands in the Philippines because the Catholic church in any country that is lawfully incorporated in their respective country, is a separate and distinct entity from the personality of the Pope or of the Holy See. Needless to say the Catholics of a Parish do not constitute a juridical person there being no provision of law for their organization as one.

Filing of Articles of Incorporation

The officiating head, the chief archbishop, bishop, chief minister or pastor of a corporation sole, must file with Securities and Exchange Commission a verified articles of incorporation setting forth the matters mentioned in section 111, in order to be a corporation sole, although it may include any other provision not contrary to law for the regulation of the affairs of the corporation. Such articles must be accompanied by a copy of the commission, certificate of election, or letter of appointment of such chief archbishop, etc. as the case may be thereafter, becoming a corporation sole, and all the temporalities, estate and properties of the religious denomination, sect or church theretofore istered by him as such chief archbishop, etc. shall be held in trust by him as a corporation sole for the sole benefit of his religious denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof.

Corporation sole acquires and alienates property

A corporation sole may purchase and hold property, real and personal, and receive bequests or gifts for its church, charitable, benevolent or educational purposes. But before it can mortgage or sell real property, authority from the Regional Trial Court must be obtained first but not that necessary where the corporation sole possesses rules which regulate the acquisition, mortgage, and selling of real estate and personal property, in which case such rules shall control.

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Section 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 two-thirds (2/3) of its hip, incorporate for the istration 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 :

That the religious society or religious order or diocese, synod, or district organization is a religious organization of some religious denomination, sect, or church; That two-thirds (2/3) of its hip have given their written consent or have voted to incorporate at a duly convened meeting of the body; That the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to incorporate is no 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; That the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the istration of its affairs, properties and estate; The place where the principal office of the corporation is to be established and located, which place must be within the Philippines; and 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).

Succession in the office The successors in office of any chief archbishop,etc. as the case may be, shall become the corporation sole on the filing with the Securities and Exchange Commission of a notarized copy of their commission, certificate of election, or letters of their commission, certificate of election, or letters of appointment. In case of vacancy in the office of chief archbishop,etc. the person or persons, as the case may be, authorized by the rules of the denomination to officiate the affairs of the corporation sole shall exercise all the powers and authority of the corporation sole during such vacancy. Laws on ownership of lands In one case involving property ownership by a corporation sole, (Republic v.IAC G.R. No, 75042,11/29/1988), states; a corporation sole by the nature of its incorporation is vested with the right to purchase and hold real estate and personal property. It need not be treated as an ordinary private corporation because whether or not it be so treated as such, the Constitutional provision involved will, nevertheless, be not applicable. Hence, as a corporation sole, the Iglesia ni Cristo: (Rep v. INC. 127 SCRA 687) is not entitled to lands under Section 48(b) of the Public Land Law, which refers only to Filipino

citizens; and (2) is disqualified under the Constitution to hold alienable public lands except by lease. In another scenario of land ownership (Reg. of Deeds v. Ung Siu Si Temple 97 Phil. 58) corporations or associations in the Philippines are allowed to acquire agricultural land or exploit natural resources must be sixty per cent controlled or owned by filipinos; thus, the Constitution demands that in the absence of capital stock, the controlling hip should be composed of Filipino citizens. The absence of capital stock in the appellant religious organization does not suffice exemption from the Constitutional prohibition, since its are foreign nationals. Life of corporation sole The term of existence of a corporation sole is not required to be stated for which it is to exist, unless otherwise provided in the articles of incorporation, a corporation sole once incorporated shall exist indefinitely unless it is dissolved. Dissolution of corporation sole The corporation sole shall be deemed dissolved, upon such approval of a verified declaration of dissolution setting forth the issues specified in section 115 of the Code, by filing voluntarily for dissolution with the Securities and Exchange Commission.

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TITLE XIV

DISSOLUTION

Section 117. Methods of dissolution. - A corporation formed or organized

under the provisions of this Code may be dissolved voluntarily or involuntarily. Section 118. Voluntary dissolution where no creditors are affected. - In case dissolution of a corporation does not prejudice the rights of any creditor having a claim against such corporation, then such 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 of at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the at a meeting to be held on the call of the directors or trustees after publishing the notice of the 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, and after sending such notice to each stockholder or member either by ed 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. Dissolution, defined Dissolution is the extinguishment of the franchise of a corporation and the termination of its corporate existence.

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Section 119. Voluntary dissolution where creditors are affected. - Where the dissolution of a corporation may prejudice the rights of any creditor, a petition for dissolution of a corporation 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 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 , at

a meeting of its stockholders or called for that purpose. If the petition is sufficient in form and substance, the Commission, by an order reciting the purpose of the petition, shall 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 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. 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 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. Section 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 or 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. 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 grounds provided by existing laws, rules and regulations. Modes of dissolving a corporation A. Voluntary dissolution a, Where no creditors are affected by the vote of the board of directors/trustees

and the stockholders/. - Dissolution of a private corporation may be effected without the necessity of going to SEC or the court if dissolution does not affect the rights of any creditor against such corporation. It is effected by mere vote of the board of directors or trustees and resolution duly adopted by the stockholders or . b. Where creditors are affected by judgment of the SEC after hearing of petition for voluntary dissolution. - A hearing is required before the SEC where dissolution of a corporation affects the right of any creditor having a claim against the corporation. The Commission may appoint a receiver to take charge of the corporate liquidation in the judgment for the dissolution. c. By shortening corporate term - A voluntary dissolution is effected if the articles of incorporation is amended to shorten the corporate term. The corporation shall be deemed dissolved without any further proceedings except its liquidation, upon the approval by the SEC of the amended articles of incorporation or the expiration of the shortened term. B. Involuntary dissolution a. Grounds are via: expiration of term provided for in the articles of incorporation; b. Violation of the Corporation Code; and c. by legislative enactment; d. failure to organize and commence business within two years from incorporation. e. by order of SEC. Voluntary Dissolution A voluntary dissolution may be effected by amending the articles to shorten corporate life, and submitting a copy to the SEC of said amendment, when the shortened term expires, the corporation is deemed dissolved without further proceedings. Section 122. Corporate liquidation. - Every corporation whose charter expire

by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence 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, said corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, , 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 stockholder, , creditors, and other 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, , creditors or other persons in interest. Upon 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 debt and liabilities. Meaning of ‘Liquidation’ Liquidation means the winding up of the affairs of the corporation by getting in its assets, settling with creditors and debtors, and apportioning the amount of profit and loss. Methods to liquidate liabilities of insolvent businesses There are four (4) different methods employed to achieve the orderly settlement of liabilities (debts) of insolvent businesses:

Liquidation by simple settlement with creditors - It is simply an agreement between the creditors that they each forbear from executing on their respective

judgments that they each forbear from implementing on their judgments for a stipulated period of time. Settlement may be done by formal composition whereby payment is more immediate although the full amount of the debt is compromised on a pro rata basis.

Assignment in favor of creditors - Assets are voluntarily assigned to a trustee, who is selected by the corporation in favor of the creditors to be liquidated and distributed by him in proportion to the various claims and in order of their priority.

Liquidation by court receivership. - The court may appoint a receiver to liquidate additional assets and turn them to creditor if a levy on debtor’s property fails to satisfy the debt and appears that there are other available assets of the debtor.

Liquidation by trustees to whom the board of directors had conveyed the assets. Assets of a liquidated corporation may be assigned to a trustee or assignee in order to make the latter the legal owner of the property, subject to the beneficial interest of the creditors, stockholders/ and other persons in interest. The trustee may sue and be sued as such in all matters connected with the liquidation.

Trust Fund Doctrine The Trust fund doctrine treats the subscribed capital as a trust fund the payment of the debts of the corporation, to which the creditors are satisfied. No part of the subscribed capital may be returned or released to the stockholder, )except by redemption), until the corporate liquidation takes place without violating the rule.

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TITLE XV

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FOREIGN CORPORATIONS

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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.

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Meaning of Foreign Corporation A foreign corporation is a corporation created by or under the laws of another country or state. Under the incorporation test, a corporation organized under the laws of the

Philippines is a domestic corporation with respect to the Philippines and a foreign corporation with reference to any other State; if organized under the laws of another country, it is domestic with reference to said country and a foreign corporation under our Corporation Code. Existence of Corporation within the State A foreign corporation exists within the jurisdiction of the state in contemplation of the law where it is created and ceases to exist when the law that created it ceases to operate. It does not mean that a corporation cannot exist in another State or country but with the latter’s express or implied consent. However, the power which is exercised by a corporation as such in another State depends for its validity upon the laws of the State in which it is exercised. However, the privilege of doing local business extended to foreign corporations may prescribe whatever conditions it deems suited to impose under which the privilege granted to foreign corporation, hence the conditions must be reasonable. Requirements to foreign corporations Under section 123 of the Corporation Code asserts that no foreign corporation shall be permitted to do or transact business in the Philippines until they have secured a license for that purpose from the Securities and Exchange Commission which requires a certificate of authority from the concerned government agency. Without license to operate in the Philippines a foreign corporation cannot do business nor maintain a suit in Philippine courts for recovery of any debt, claim or demand without such license does not make such corporation any less a juridical person. Under the present Code, the requirement of the law to foreign corporations in order to operate and be granted license to do business in the Philippines is to allow Filipino citizens and corporations to do business in its own country or state in order to meet the requirement of reciprocity, but if, on the date of the effectivity of the Code, the foreign corporation is already allowed to do business here under license even if the requirement of reciprocity is not met. The provision of the Code in Section 148, provides that such corporations are given a period of not more than two (2) years within which to comply with the law from the effectivity of the Code.

Foreign Corporation with license The foreign corporation which is authorized to do business in the Philippines under a license issued pursuant to the Code shall be bound by the and conditions of such license and the provisions of the Code. The license of the foreign corporation shall continue to have such authority under the and conditions of its license if the latter was issued before the effectivity of the Code.

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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 theretofore issued to it, shall continue to have such authority under the and conditions of its license, subject to the provisions of this 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 shall specifically set forth the following unless already stated in its articles of incorporation:

The date and term of incorporation; The address, including the street number, of the principal office of the corporation in the country or state of incorporation; 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; The place in the Philippines where the corporation intends to operate;

The specific purpose or purposes of the corporation which it 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; The names and addresses of the present directors and officers of the corporation; 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; 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; A statement of the amount actually paid it; and 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 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.

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Section 126. Issuance of a license. - Where 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 its 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 a 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 governmentowned or controlled corporations and entities, shares of stock in “ ed enterprises” as this term is defined in Republic Act No. 5186, shares of stock in domestic corporations ed in the stock exchange, or shares of stock in domestic insurance companies and banks, or any combination of these kinds of securities, in the actual market value of at least one hundred thousand pesos (P 100,000.00); 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 percent (2%) of the amount by which the licensee’s gross income for that fiscal year exceeds five million pesos( P 5,000,000.00). 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 percent (10%) 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 percent (10%) 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 making application therefore and proving 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. Reason for requiring license The reason of the law why foreign corporation must secure license to transact business in the Philippines is to “ subject the foreign corporation doing business to the jurisdiction of its courts. The object of the statute was not to prevent the foreign corporation from doing single acts, but, to prevent it from acquiring a domicile for the purpose of business without taking the necessary procedures to render it amenable to suit in the local courts.

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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.

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Resident Agent, defined A Resident Agent is an individual who must be of good moral character and of sound financial standing, residing in the Philippines, or a domestic corporation lawfully transacting business in the Philippines, designated in a written power of attorney, by a foreign corporation authorized to transact business in the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceeding against such corporation. Meaning of ‘Doing’ or ‘ Transacting Business’ The term “doing business” implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or work or exercise of some functions normally incident to, and in progressive prosecution of, the purpose and object of its organization. Doing business includes : a. soliciting order, purchases or service contracts. Concrete and specific solicitations by a foreign firm, not acting independently of the foreign firm, amounting to negotiation or fixing of the and conditions of the sales or service contracts, regardless of whether the contracts are actually reduced to writing and even if the enterprise has no office or fixed place of business in the Philippines. b. appointing a representative or distributor who is residing in the Philippines, unless said representative or distributor has an independent status; and c. Opening offices, whether called “liaison” office, agencies or branches, unless proved otherwise. 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 itted 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 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 by the Securities and Exchange Commission and that such service shall have the same force and effect as if made upon the duly authorized officers of the corporation at its home office.” Whenever such service of summons or other processes shall be made upon the Securities and Exchange Commission, it must, 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. Instances not amounting to ‘Doing Business’

Maintaining bank s;

Conducting sales through independent contractors; Holding meetings or directors or shareholders; and Maintaining or defending court actions.

How service of summons to private foreign corporations is served

Service of summons to private foreign corporations may be served upon the designated agent in accordance with law. By service on the government official designated by law, if there is no resident agent. By serving on any officer or agent of said corporation within the Philippines.

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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, save and except such only as provided for the creation, formation, organization or dissolution of corporations of such as fixed in the relations, liabilities, responsibilities, or duties of stockholders, , or officers of corporations to each other or to the corporation. Applicable laws to foreign corporations

Philippine laws. -A foreign corporation licensed to do business in the Philippines is subject to the laws of the Philippines.

Laws where a corporation was created.The following shall be governed by the laws of the State of its creation : the creation, formation, organization or dissolution of corporations; and the relations, liabilities, responsibilities, or duties of , stockholders, or officers of corporations to each other or to the corporation.

Those rights of stockholders in a foreign corporation which shall not be governed by the Philippine corporation law but by the law of the place under which such foreign corporation was incorporated such as; right to receive dividends, right to inspect corporate books, etc. relating as they are merely to the internal management of the affairs of the corporation.

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Section 130. Amendments to articles of incorporation or by-laws of foreign corporations. - Whenever the articles of incorporation or the by-laws of a foreign corporation authorized to transact business in the Philippines are amended, such foreign corporation shall, within sixty (60) days after such amendment becomes effective, file with the Securities and Exchange Commission, and in the proper cases with the appropriate government agency, a daily 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 therefore to the Securities and Exchange Commission, favorably endorsed by the appropriate

government agency in the proper cases.

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Section 132. Merger or consolidation involving a foreign corporation licenses 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 such 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 its license in accordance with this Title. Merger or Consolidation of a foreign corporation A licensed corporation must file the articles of merger or consolidation as prescribed in Section 132, if it a party to the merger or consolidation in its home country or state as permitted by the of law of incorporation, hence, if it is the absorbed corporation, a petition for withdrawal of its license as provided in Section 136(2).

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 istrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippines courts or istrative tribunals on any valid cause of action recognized under Philippine laws. Consequences on foreign corporation without license but engaged in business

It shall not be permitted to transact business in the Philippines It cannot sue, but it can be sued; Persons transacting business for it are criminally liable.

Instances when foreign corporation without license can sue

Foreign corporation can sue in isolated transactions; In an action to protect good name, good will and reputation of foreign corporation; When provided by the contract that the Philippine courts shall be the venue for controversies. When a foreign corporation applies for a license and subsequently granted thereby enabling it to sue on contracts executed before grant of license. When a foreign corporation was seeking to recover the misdelivered property; Where the unlicensed foreign corporation has a domestic corporation for a coplaintiff.

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Status of contracts perfected by unlicensed foreign corporations 1. Void contract - It would seem that such contracts are void in Article 5 of the Civil Code which provides as follows: “ Acts executed against the provisions of mandatory of prohibitory laws shall be void except when the law itself authorizes their validity.” 2. Valid contract as to innocent persons. - It has been held that such contract shall prejudice only the guilty corporation and not innocent parties who may have dealt with the said corporation in good faith” for it is unjust that the nocomplying foreign corporation and persons in its position should be freed from liability on contracts had by it by settling up its non-compliance. 3. Enforceable contract upon compliance. - Upon compliance with the law the contracts become enforceable by the foreign corporation. The penalties imposed by law for such violation and denial of our courts and other concerned bodies are tantamount means of enforcing the law.

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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 :

Failure to file its annual report or pay any fees as required by this Code; Failure to appoint and maintain a resident agent in the Philippines as required

by this Title; 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; Failure to submit to the Securities and Exchange Commission an authenticated copy of any amendment to its articles of incorporation or bylaws or of any articles of merger or consolidation within the time prescribed by this Title; A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to this Title; Failure to pay any and all taxes, impost, assessment or penalties, if any, lawfully due to the Philippines Government or any of its agencies or political subdivisions; Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license; Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines; or Any other ground as would render it unfit to transact business in the Philippines.

Effect of revocation of license

Revocation of license cannot affect the validity of contracts entered into by the foreign corporation before the revocation nor its right to maintain an action to enforce them. But contracts entered into by it after revocation are invalid and unenforceable. The effect is the same as if a license has never been granted to it. Such Foreign Corporation can no longer transact business in the Philippines nor

maintain any suit or action in any court or agency in the Philippines though it may be sued on any valid cause of action.

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Section 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 ed office in the Philippines a notice of such revocation accompanied by a copy of the certificate of revocation. Section 136. Withdrawal of foreign corporation. - 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:

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

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TITLE XVI

MISCELLANEOUS PROVISIONS

Section 137. Outstanding capital stock defined. - The term “outstanding capital stock,” as used in this Code, means, the total shares of stock issued to subscribers or stockholders whether or not fully or partially paid ( as long as there is a binding subscription agreement ), except treasury shares. Outstanding capital stock, defined Outstanding capital stock includes all shares of stock issued to subscribers or stockholders of a stock corporation which are fully paid, and even if they are unpaid or only partially paid, as long as there is binding subscription agreement between the subscriber or stockholder and the corporation. “Outstanding” refers to an obligation which is due and unpaid. It means stock in the hands of shareholders and not treasury stock. “ Capital stock” is the amount of stock fixed by a corporation’s charter to be subscribed and paid in by shareholders; it also frequently refers to the amount of stock that a corporation may issue. For the stock to be considered outstanding, the share of stock must be held by persons other than the corporation itself. Section 138. Designation of governing board. - 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 than as board of trustees. Authority given to governing boards

Section 138 covers only non-stock corporation and special corporations in which authority is given, thus, the governing board of a non-stock educational corporation may be designated as board of regents. Educational institutions may be organized as stock corporations. The authority is given to the Securities and Exchange Commission to collect and receive fees and by rules and regulations promulgated by it. The Commission is authorized to recommend to the President the revision, alteration, amendment, or adjustment of the charges and fees which by law it is authorized. Section 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. Section 140. Stock Ownership in certain corporation. - 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 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 of 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, businesses or industries to be declared vested with 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 rationalization and promotion of business and industry.

Section 141. Annual report of corporations. - Every corporations, 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 ant 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. Annual Report, defined The ‘annual report’ is the report of results of operations and financial status, which the operation issues shortly after the end of its fiscal year to its stockholders and other interested parties. It usually, contains a letter from the chief executive officer (CEO) of the corporation with his comments on the calendar or fiscal year’s operations and the corporation’s plans for the future. Some trends in the annual reports include inter alia:

detailed financial date for each product line; disclosures on section describing the company’s efforts in recognition of corporate responsibility; and complete printed edition in foreign languages

Visitorial Power of State The State has the so-called ‘visitorial power’ to examine the condition and business of private corporations. The power to exercise visitorial power belongs to the State through courts, or officers and commissions. This is in line with its objective of supervising and controlling the management of corporations. The law empowers the SEC to require corporations to submit an annual report of its operations, financial statements, and other documents, and to make rules and regulations necessary to perform its duties, particularly in the prevention of fraud

and abuses. Essential powers of the SEC These significant powers of the SEC were enumerated in the Corporation Code authored by Prof. Jose C. Campos, Jr.( former Supreme Court Associate Justice) and Prof. Maria Clara Lopez-Campos of UP College of Law as follows :

To approve or reject articles of incorporation ( Sec 17, Corp. Code) To approve by-laws and amendments thereto. ( Sec 46 & 48, Corp. Code) To approve registration and/or licensing of securities, like shares and bonds, before they can be publicly sold. To approve amendments to articles of incorporation ( Sec 20 Corp. Code) To approve increase or decrease of capital stock ( Sec. 28 Corp. Code) To punish for contempt, direct or indirect ( Sec 6 ) To issue rulings and opinions as to the proper interpretation and application of laws entrusted to it for istration. to require corporation to submit financial and other reports as it may deem necessary in the public interest or for the proper discharge of its duties. To impose fines and/or penalties for violation of the laws implemented by it, as well as its rules and regulations, its order, decisions and/or rulings. To promulgate rules and regulations as may be necessary for the proper execution of all the laws istered by it.

Section 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 Constitution 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 require the same to be made public or where such interrogatories, answers or results are necessary to be presented as evidence before any court.

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Procedures in examination The SEC is empowered to examine the books of s of the corporation to determine whether the payments on subscriptions are new and additional capital in which payment in cash comes from the stockholders and has not been loaned by the corporation to its stockholders or that after payment has been made by the stockholders, and the same has not been granted as advances or loan to the respective stockholders concerned. The SEC examines the books of s and sees to it that these payments really come from the stockholders. Payments are verified as to physical existence, ownership and fair valuation If such properties constitute payment on subscriptions , Properties may be conveyed to the corporation at cost less depreciation or its appraised value, an appraisal report is required by the SEC rendered by an independent appraiser. A certificate of title is required in order for the properties be conveyed to the corporation. And like any other property and assets of the corporation, the same may be conveyed at cost less depreciation or at its appraised value, hence, an appraisal report by an independent appraiser is needed. Payment on subscriptions consists of stock dividends in which SEC requires the certification of an independent A for financial statements attaching a long form report of the latter. On acquisition of shares, the company may only be allowed to acquire its own shares when it has unrestricted retained earnings in its books of . This is because the capital stock of the corporation is a trust fund for the benefit of its creditors. The corporation can redeem its redeemable shares for the period of its maturity, regardless of existence of retained earnings, when a corporation issues redeemable shares which are provided in its articles of incorporation.

Section 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, , directors, trustees or officers.

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Section 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 (P 1,000.00) 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 violations: Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a corporation provided in this Code.

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Penalties for violation of the Code The Code expressly provides a general penalty for violations “not otherwise specifically penalized therein”:

If the violation is committed by a creditor or trustee, officer, or stockholder or

member of a corporation, he shall be punished by fine or imprisonment, both in the discretion of the court. The corporation shall be dissolved after proceedings before SEC, if the offense is committed by the corporation without prejudice to the institution of appropriate action against the director, trustee, or officer of the corporation responsible for the violation.

Section 145. Amendment or repeal. - No right or remedy in favor of or against any corporation, its stockholders, , 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. Limitations on legislative power to amend 1. Right against impairment of obligations

- Section 145 of the Code recognizes the right against impairment of the obligations of a contract or of vested rights. 2. Right that survives dissolution of corporation. - Art XII, Sec 11, Constitution, Art III, Sec 10, survives dissolution of corporation, thus an educational institution whose charter has expired in the middle of the academic year may continue holding classes up to the end of such year where the enrollment for such classes was made prior to the date of its dissolution. 3. Right to just compensation - Without just compensation the right does not authorize the taking of private property nor it may be allowed even when there is the right to amend. Section 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. Section 147. Separability of provisions. - Should any provision of this Code or any part thereof be declared invalid or unconstitutional, the other provisions, so far as they are separable, shall remain in force. Section 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 ed by the Securities and Exchange Commission, shall be deemed to have been authorized, licensed or ed under the provisions of this Code, subject to the and conditions of its license, and shall be governed by the provisions hereof: Provided, That where 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. Application of Code Where any corporation is affected by new requirements of the Code, under Section 123 which a foreign corporation allows Filipino citizens and corporations to do business in its own country or state, said corporation shall have a period of not more than two (2) years from the effectivity of the Code within which to comply with the same, unless otherwise provided thereto. Therefore, Before the effectivity of the Code, all lawfully existing corporations including foreign corporations licensed by SEC shall be deemed licensed under the provisions of the Code.

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Section 149. Effectivity.- The Code shall take effect immediately upon its approval.

BIBLIOGRAPHY

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De Leon, Hector,Jr., The Law on Partnerships & Private Corporations, Rex Book Store, Quezon City, 2005 Edition. Paras, Edgardo, L.Jr., Corporate Law Practice & Litigation, Rex Book Store, Quezon City,1994 Edition.

Phil Law School Lectures and Notes in Civil Law( Business Organizations) 2000-2002 RES, The Civil Code of the Philippines with Special Laws, Rex Book Store, Quezon City, 1999 Edition. The Corporation Code of the Philippines Torres, Justo P.,Jr., The Law on Business Organizations, University Book Supply,Manila, 1969 Edition.

UP Law Library Compilations of Previous Bar Exams in Civil Law 1982-1999

About the Author Artemio T. Saguinsin BBT, MBA/MPA LLB He was Sr.Lecturer at Roosevelt College System teaching Business Law, and Public Fiscal istration. He also taught, Bookkeeping, Taxation, Management, Business Finance and other business -related subjects. He started in the academe as academic tutor in the ‘90s tutoring college and high school students from Manila and Quezon City. Some of his books are: Bookkeeping for Beginners with Taxation Law 2006 NBS ( now revised into Bookkeeping for Beginners) ; and Essential Legal and Business Phrases and Terminologies, 2007 CBS.

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