Partnerships and Corporations

Partnership
- Is a contract whereby two or more people bind themselves to contribute money, property,
or industry to a common fund with the intention of dividing profits
- A partnership may also be formed to practice a profession

Elements:
- A valid contract must exist
- Parties may have the legal capacity to enter into the contract, if not it is voidable
- There must be a mutual contribution of money, property, or industry to a common fund
- It must be for a lawful purpose
- It must be established for the common benefit to:
- Obtain profits and divide it amongst themselves; or
- Practice a professions

Characteristic Elements:
1. Consensual - perfect by mere consent
2. Nominate - has a name, identified by law
3. Bilateral - mutually binds all parties
4. Onerous - creates a burden on all the parties
5. Commutative - binds the parties to equivalent obligations
6. Principal - does not depend on some other contract
7. Preparatory - entered into as means to an end
- In essence, contracts of partnerships are contracts of agencies. - 1218

Test of Existence:
1. People who deny they are partners cannot be considered partners by others. - 1825
2. Joint ownership/ possession of property does not make a partnership.
3. People sharing in the gross revenue does not mean they are partners.
4. People sharing in the profits strongly indicate a partnership unless the sharing is by
reason of the relationship provided by Article 1769.

Type of Partnerships:
1. As to extent of its subject matter
a. Universal partnerships - 1777
i. A universal partnership of all present properties - 1778
ii. A universal partnership of profits - 1780
b. Particular partnership - 1783
2. As to liability of the partners
 a. General partnerships (liable even to personal assets) - 1816, 1822-24
b. Limited partnerships (liable to the extent of your investment) - 1843, chap. 4
3. As to duration - 1785
a. Partnership at will (so long as we want, we remain partners)
b. Particular with a fixed term (fixed-term or period)
4. As to legality of existence
a. De jure partnerships (partnership by law)
b. De facto partnerships (partnership not by law)
5. As to representation to others
a. Ordinary or real
b. Ostensible partnerships or partnership by estoppel
6. As to publicity
a. Secret partnership - 1775, which is void and non-existent
b. Open or notorious
7. As to purpose
a. General commercial
b. General professional

Kind of Partners:
1. Under the Civil Code
a. Capitalist - contributes money or property - 1767
b. Industrial - contributes efforts - 1789,1767
c. General - one with unlimited liability - 1816,1843
d. Limited - one with limited liability - 1843, chapter 4
e. Managing - manages the affairs of the partnership - 1800
f. Liquidating - one who winds up the partnership - 1836
i. WIND UP - The settlement of debts and liquidation of assets, done with
the goal of dissolving a partnership or corporation.
g. Partner by estoppel - not a partner but considered to be one - 1825
h. Continuing - who continues a dissolved partnership - 1840
i. Surviving - who continues a partnership dissolved by death of a partner - 1842
j. Sub-partner - one who, not being a partner, contracts the rights of a partner - 1804
2. Other Classifications
a. Ostensible - take active part in the business and publicly know - 1825
b. Secret - one who takes active part in the business but not publicly know - 1825
c. Silent - does not take active part in the business. can be known or not - 1825
d. Dormant - does not take active part in the business and is not known - 1825
e. Original - organized the partnership
f. Incoming - one who is admitted to the partnership after it’s organized -1826,1828
g. Retiring - withdraw from the partnership - 1840, 1841
 - These partners are still subject to the liabilities of a partner for the partnership liabilities.

Relations Created by a Contract of Partnership:

Obligations Created by Partnership Relations:

- The relationships in a partnership creates obligation which can be organized into three
classifications:
1. Obligations of partners to each other
2. Property rights of partners
3. Obligations of partners to third persons
- These obligations are what ensures that a partnership will continue to operate as a
legitimate business entity.

Dissolution and Winding Up:

- Dissolution: is the point in time in a partnership's existence when a partner’s relationship
changes or when one, some, or all of the partners have decided not to continue the
business together.
- At this point, the firm continues to exist and may or may not be subjected to
liquidation of winding up.
- Winding Down: is the process of settling the affairs of the partnership by liquidating the
assets and paying off all the debts, preparatory to paying off the partners.
- Only after the affairs of the partnership is wound up can it be said that the partnership is
terminated and its legal personality is extinguished.

Manners by Which Dissolution Occurs:

1. Either with or without violations of the partnership agreement.
2. It may be voluntary or involuntary.
 3. It may be done judicially or extra-judicially.
4. It may actually be a conscious act of the partners or an automatic dissolution.
- After dissolution of the partnership, wind down its operations or can continue its
operations through the remaining partners or with others. In either case, they have to
clean up their affairs taking to consideration the dissolution.

Winding Down the Partnership

- As indicated, a partnership that is dissolved can be continued by other partners either on
their own or with others in which case, no winding down occurs.
- In the event that the partnership has been decided to end with no one continuing, the
process of winding down ensues.
- Winding down the partnership means liquidating its assets and paying up its liabilities
and then distributing the remaining assets to the partners.
- The process would have the following rules:
1. The assets of the partnership is composed of:
a. The partnership properties
b. The contributions that will be made by the partners in the event the
partnership properties are not enough to pay for the debts. - 1797
2. The liabilities of the partnership, listed in the order of priority of payment are as
follows:
a. Those owed to partnership creditors;
b. Those owing to partners other than capital or profit;
c. Those owning to partners their capital contribution;
d. Finally, those owing to partners as share in profits.
3. Partnership creditors have priority of payment from partnership assets but do not
have priority over a partner’s creditor in the partners’ assets.
4. Insolvent partners’ assets are distributed in the following order:
a. First to those owing to the partner’s separate creditors;
b. Then to those owing to partnership creditors;
c. Lastly to those going to partners by way of contribution.
5. In case of a deceased partner, the estate of the said partner shall be liable for the
contributions that may be necessary to pay the partnership creditors.

Corporations
- “A corporation is an artificial being created by the operations of law, having the rights of
succession and the powers, attributes and properties expressly authorized by law or
incidental to its existence.” - Section 2

Attributes of a Corporation
- Corporations have certain traits and attributes and they are:
 a. It’s an artificial being
b. Created by operation of law
c. Having the rights of succession
d. It can only exercise the powers, attributes and properties expressly authorized by
law or incidental to its existence.
- In many ways, corporations and partnerships share common traits but they are also very
different in many other ways.

Kinds of Corporations:
- The general classifications of corporations under Sec. 3 are:
- Stock corporations or ordinary business corporations created and operated for the
purpose of making profits which may be distributed to its corporators as dividend.
The corporators are referred to as share or stockholders.
- Non-stock corporations do not issue shares of stocks and its corporators are often
referred to as members.These corporations are normally organized for activities
other than for profit like activities for public good and welfare. (charities,
religious, social, literary, scientific, civic, and political purposes)

Other Kinds of Corporations:

1. As to number of persons who compose them:
a. Corporation aggregate - composed of many people
b. Corporation sole - composed of only one - title XIII, chap 3, sec 115-132
2. As to whether they are for religious purposes or not:
a. Ecclesiastical - religious corporations - title XIII, chap 2, sec 107-114
b. Lay - organized for purposes other than religious
3. As to whether they are for charitable purposes:
a. Eleemosynary - charitable corporations
b. Civil - business corporations
4. As to state or country where it is organized
5. As to legal rights to corporate existence:
a. De Jure - existing in fact and in law
b. De Facto - existing only in fact - sec 19-21
6. As to whether they are public or not
a. Closed - one with limited membership - title XII, sec 95-105
b. Open - one open to the any person
7. As to their relation to another corporation:
a. Parent/Holding - owner of another corporation
b. Subsidiary - owned by another corporation
8. As to purpose of the corporation
9. As to they are a corporation in the true sense or limited sense:
 a. True - one which exists by statutory authority
b. Quasi - one existing without formal legislative grant, which can be:
i. Corporation by prescription - one which acquires corporate status due to
the exercise of corporate powers for an indefinite period prior.
ii. Corporate by estoppel - one in which the act incorporating is defective that
no corporation, either de jure or de facto, is created but it is considered to
be one to those who precluded from denying it. - sec 20

How Corporations are Created:

- Basis steps to incorporate normally follow this route:
1. Promotion - the gathering of parties to get them to organize a corporation.
2. Incorporation - the actual process of incorporation and registering a corporation -
sec 10
3. Formal organization and commencement of business operations - the process to
initially organize the corporations and start operation after the certificate of
incorporation is issued. - sec 22

The Process of Incorporation:

1. Drafting and execution of the articles of incorporation by the incorporators which must
include the data stated in sec. 13 and 14.
a. The rules seemingly relaxed the capitalization requirements and as such the
treasurer’s affidavit does not seem to be required anymore for applications.
2. Filing with the Securities and Exchange Commission (SEC) the articles of incorporation
together with:
a. In the case of corporations governed by special laws, an endorsement for the
creation of the corporation from the appropriate government agency and that the
articles are legal.
3. Payment of filing and publication fees - sec 175
4. If all the papers filed after verification and examination are found to be in order, the SEC
will issue the certificate of incorporation for the corporation. - sec 18
- Only after the certificate of incorporation has been issued to the corporation can the
corporation organize and begin operations as a legal entity.

Management of Corporations
- Corporations are managed by three different groups of people each responsible for
separate functions. These are:
1. The Stockholders/Members - the owners of the corporation from where
management authority emanate - title VII, sec. 59-72
2. The board of directors - the body that governs the manner by which the
corporation is run
 3. The executive board - the body that executes the mandates of the governing body.

The Stockholders/Members
- The corporators or owners of a stock corporation are called stock- or shareholders (title
vii sec. 59-72) but for non-stock corporations (title xi, sec. 86-94) they are called
members. For purposes of running the corporation, their functions are essentially the
same.
- Although they usually only meet once a year, it is during this meeting where the board of
directors and officers report to them and ask them to approve what they have done in the
past year. It is also at this time that directors are elected by the stockholders which makes
them the source of the powers that directors and officers exercise.
- How do you become a stockholder?
1. By subscription of unissued shares
2. By purchase of treasury shares
3. By transfer from shareholder, via:
a. Sale
b. Barter or exchange
c. Dacion en pago
d. Donation
e. Succession or inheritance

The Directors/Trustees
- The management of a corporation is the primary responsibility of the board of directors
or trustees whose numbers cannot exceed 15.
- Directors are required to own at least one share and are elected into office by the
stockholders during the regular meetings or a meeting called for the purpose, where a
quorum is present, for a term of 1 year or until their successors are elected and qualified
trustees may have a term not exceeding 3 years - sec 22 and 23
- 20% of the directors must be independent directors in corporations vested with public
interest.
- The executive and special committees - the by-laws of a corporation may authorize the
board to create executive or special committees composed of at least 3 directors and
delegate to them specific tasks except those which are required by law to be done by the
Board as a whole. - sec 34
- The emergency board of directors - in case of emergency, even if there is no quorum,
replacement directors can be elected by the unanimous vote of the remaining directors to
avoid irreparable losses or liability to the corporation but must notify the SEC of the
same within 3 days.

The corporate officers

 - The following are the mandated corporate officers under the Revised Corporation Code
under Sec. 24:
- The president - who must be a director
- The treasurer - who must be a resident
- The secretary - who must be a citizen and resident
- A compliance officer for corporation vested with public interest
- Such other officers as provided in the By-laws
- A person may hold 2 positions but cannot be president and treasurer or president and
secretary unless authorized by the RCC.

Meetings:
- A lot of the decisions made by a corporation is done by the stockholders and the
directors. Meetings are necessary to get the consensus of those who need to make the
decisions.
- Under the revised corporation code, meetings are now allowed to be conducted by remote
(via video conferencing or some other method of real time attendance).
- Requisites for a valid meeting: - title VI
A. It must be held at the proper place
B. It must be held at the stated date and time
C. It must be called by the proper person
D. Previous notice must have been properly given
E. There must be quorum
- If any of the above are missing, then any acts decided in the meeting shall be invalid.

Voting:
- During meetings decisions for the corporation is achieved by means of getting the
appropriate vote for the same.
- In Directors’ or trustees’ meetings, each member of the board gets one vote to
cast during such voting. The same rule applies to members of a non-stock
corporation.
- For stockholders’ in a stock corporation, stockholders can cast as many votes as
their stocks owned by the said stockholder.
- Members/stockholders can vote in person, by remot/in absentia or by proxy.
Directors/trustees can vote only in person or by remote/in absentia.

Required number of votes:

- Normally, the vote of the majority in attendance in a meeting with a quorum, be it of
Directors or Stockholders, is sufficient to approve or disapprove a given fact.
 - However, there are instances where the different number is imposed by the law to make
the vote more inclusive as the decisions are more serious and may have far reaching
consequences for the corporation.

One Person Corporations

- The law now allows a single natural person, trust, or an estate to create a corporation
called One Person Corporation.
- This allows for the simplified manner of creating and operating a corporation subject to
certain terms and conditions for the protections of the publike like:
- Appointment of nominee for the sole stockholder
- Appointment of corporate officers by the sole stockholder
- Proof of adequate funding to exempt the sole stockholder from personal liability.
- Special reportorial requirements.
 COBLAW2 VIDEO SUMMARIES

PARTNERSHIPS

Week 1: The Contract of Partnership: Defining a Partnership

- By the contract of partnership, two or more persons bind themselves to contribute

money, property, or industry to a common fund, with the intention of dividing profits
among themselves.
- Clearly tells us that a partnership is a contract
- From coblaw 1, there three elements in a contract:
- Consent
- Object or subject matter
- Cause or consideration

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

Week 2 and 3: Rights and Obligations of Partners: Duties of Partners

1. To begin and end the partnership according to agreement

- As a general rule, a partnership begins from the moment of execution of the
contract, it is possible for the partners to stipulate that the partnership may
commence at some future time, it is also to have a fixed term like 5 or 10 years.
- It is also possible to stipulate that the partnership may exist for a particular
undertaking.
- Ex. Engineers working on a building can agree that the partnership
commences upon groundbreaking and end upon completion.
- Nonetheless, it is common to see a partnership at will, this means that the
duration of the agreement depends on the willingness of the partners to remain
engaged to each other.

2. To deliver one’s promised contribution

- As a general rule, the partners must deliver their promised contribution upon
commencement of the partnership. If a partner promises to contribute money
and fails to deliver, this partner becomes a debtor, this means that they should
not only pay the sum owed but also interest and damages.
- If the contribution is property, whatever fruits pertaining to the said property
must be also delivered by the partner in delay. In any event the said partner is
obliged to preserve the property with the diligence of a good father of a family
pending delivery to the partnership.
- If a partner promises to deliver goods, the value of the contribution must be
appraised in order that a fair price shall be reflected in the partnership books.
 - If a partner promises to deliver specific and determinate things, they must be
warrant against eviction which means securing that the partnership will not be
deprived of the ownership and enjoyment of the promised thing.
- Finally if the contribution is service, we must remember that it is not possible to
compel obligation to do. But a partner’s refusal to perform may result a liability
for damages.

3. To devote time and effort in managing its business.

- As a general rule, all partners are agents of the partnership and are there for
vesseled authority to manage the business. Corollary there too, every partner is
responsible to the partnership for damages suffered by it through their fault.
- Said partner cannot compensate for those damages using the profits and
benefits that they would ordinarily earn by the partnership for his industry. At
best, this partner must exert extraordinary efforts in other activities of the
partnership to realize unusual profits in order to mitigate his liability.

4. To put the partnership interest ahead of one’s own

- A capitalist partner cannot engage in an undertaking that is similar to the
business of the partnership.
- An industrial partner cannot engage in any kind of business at all.
- These partners suffer serious consequences such as forfeiture of profits should
they give priority to their own interest over that of the partnership business.

5. To save the partnership when the situation calls for it.

- Capitalist partners are required to put in additional contributions incase of
imminent business losses to save the partnership. If ever some refuse to do so,
shall be obliged to sell his interest to the other partners. Moreover, if the
partnership assets are insufficient to pay partnership obligation, the partners are
obliged to come in and shoulder the liability.
- For instance, in case of contractual obligations, all partners are liable pro rata,
whereas obligations based on torts, all partners are liable solidarily with the
partnership.

Week 4: Limited Partnership/ Dissolution: Special Features of a Limited Partnership

10 important distinctions in a general partnership and a limited partnership

1. As to manner of creation
- As a general rule, a partnership is created by the meeting of the minds of the
partners, however, if we want to make a limited partnership, a specific
document is required and this is called a certificate of limited partnership which
must be filed through the SEC.
2. Composition
 - A general partnership is composed of two or more general partners.
- A limited partnership must have at least one general partner and at least one
limited partner.
3. Name
- A name of a partnership must indicate that it is a limited partnership. This is
done by adding limited or ltd.
- Ex. Reyes and Roces, Limited; Reyes and Roces, Ltd.
- As for general partners, there is no need to use indicative terms stating it is a
general partnership.
- Ex. Reyes and Partners; Reyes and Roces, Partners; Reyes, Roces, and
Company.
- Surnames of one or more or all partners may be used in the name but a surname
of a limited partner does not usually appear in the partnership name.
4. Contribution
- So far as contribution is concerned, a general partner may contribute money,
property or industry.
- On the other hand, a limited partner can only contribute money or property.
- Return of Contribution:
- The certificate of limited partnership may include a specific time for the
return of the contribution of the limited partner.
- The limited partner may also demand and receive such contributions in
the form of property and not in the form of cash.
- The limited partner may also demand for such return six months after
serving a notice in writing to all other partners provided that the
partnership has sufficient property to pay all partnership creditors. In
this situation the certificate of limited partnership must be amended to
indicate that the limited partner no longer participates as such.
- General partners on the other hand do not enjoy this privilege, they
receive a contributions upon dissolution and winding up after all
partnership creditors have already been fully satisfied.
5. Distribution of Profits
- Limited partners receive profits or other forms of compensation ahead of
general as long as the partnership assets are in excess of the partnership
liabilities.
- Limited partners may also have an order of priority among themselves.
- General partners do not enjoy this privilege.
6. Assignment of Interest
- The certificate of limited partnership can provide for the limited partner’s right
to assign interest and constitute the assignee as a limited partner.
- On the other hand, the assignee of a general partner does not become a
substitute general partner such assignee may receive the general partner’s share
in the profits but is given no other right in the partnership.
7. Management
- The right to manage is one of the property rights of a general partner.
- Under the principle of mutual agency, the general partners are agents of the
partnership and each other.
 - On the other hand, the limited partner has no right to manage the partnership
business, taking part in controlling the business will make the limited partner
liable to third persons just like a general partner.
8. Legal Standing
- A limited partner is not a proper part in preceding by or against the partnership.
This means that in legal cases, a limited partner cannot join the partnership as a
co-plaintiff nor can they be impeded as a co-defendant.
- On the other hand, because of the principle of mutual agency, general partners
have legal standing to join the partnership as a proper party in a legal
proceeding whether as co-plaintiff or as co-defendant.
9. Liability to Creditors
- A limited partners liability to partnership creditors is limited to the extent of
their contribution.
- Whereas a general partner is personally liable to partnership creditors over and
above their contributions.
10. Effect of Death
- Finally, the death of a general partner will dissolve the partnership.
- On the other hand. The executor or administrator of the estate of a deceased
limited partner assumes all their rights in a partnership including the right to
assign a substitute limited partner.

Can a limited partner be a general partner at the same time?

- Yes, a limited partner who is at the same time a general partner retains the privilege of
being able to demand a return of contributions whenever they want to provided that a
six month notice is given to their partners.
- However, since they are also a general partner he retains the liabilities of a general
partner in so far as third persons are concerned. In other words, unlimited liability.

CORPORATIONS

Week 5: The Corporation as Juridical Person: The Corporation Creation Story

- A corporation is an artificial being created by operation of law.

- Unlike a general partnership that can be created by mere agreement of the partners, a
corporation can only be created through a specific procedure laid down in the law.
- In most cases the law referred to above is the general incorporation law which is the
Revised Corporation Code.
- Nonetheless, the legislature may deem it appropriate to pass special laws to create
corporations for public purposes.
- A good example of this would be local government units created by special charters.
- For instance, Republic Act 7829 created the City of Pasig. Other examples include
Republic Act 3844 which created the Land Bank of the Philippines, Republic Act 1161
which created the SSS, and Presidential Decree 1869 which created PAGCOR.
- Section 13 of the Revised Corporation Code enumerates the information needed for the
 preparation of the Articles of Incorporation. Upon approval by the Securities and
Exchange Commission, the Articles of Incorporation become the charter of the
corporation.

1. Name
a. The corporation name must be distinguishable from names that are already
reserved or registered for the use of another corporation or already protected by
law.
b. The corporate name must not be contrary to existing law, rules, and regulation.
2. Purpose
a. The specific purpose for which the corporation is being formed.
b. In case of more than one stated purpose, indicate the primary and secondary
purposes.
3. Place
a. The place where the principal office of the corporation is to be located, which
must be within the Philippines.
4. Term
a. A corporation enjoys perpetual existence unless a limited term (ex. 30 years) is
specified in the Articles of Incorporation.
5. Incorporators
a. Any person, partnership, association or corporation, singly or jointly with
others but not more than fifteen in number may organize a corporation for any
lawful purpose.
b. Each incorporator of a stock corporation must own or be a subscriber to at least
one share of the capital stock.
6. Directors/Trustees
a. The names, nationalities, and residence addresses of persons who shall act as
directors or trustees until the first regular directors or trustees are duly elected.
b. Directors in a stock corporation = not more than 15
c. Trustees in a non-stock corporation = may be more than 15
7. Stockholder/Members - For a Stock Corporation, include the following:
a. Amount authorized capital stock,
b. Number of shares into which it is divided,
c. The par value of each share,
d. The names, nationalities, and residence addresses of the original subscribers of
shares, and
e. The amount subscribed and paid by the original subscribers.
 f. Example:

For a non-stock corporation, include the following:

a. The amount of its capital,
b. The names, nationalities, and residence addresses of the contributors, and
c. The amount contributed by each.

d. Example:

- Articles of Incorporation are submitted to the Securities and Exchange Commission

(SEC)
- If the commission finds that the submitted document and information are fully
compliant with the requirements of the Revised Corporation Code and other relevant
laws, it shall issue the Certificate of Incorporation.
- The corporation commences its corporate existence and juridical personality
from the date the Commission issues the Certificate of Incorporation.

Week 6: Managing the Corporation: Directors/Trustees and Officers: The Duties of Obedience,
Diligence, and Loyalty

1. Obedience
a. The duty of obedience is written is Sec 23 of the RCC which states that
directors and trustees shall perform their duties as prescribed by law, rules of
corporate governance and the by-laws of the corporation.
b. In other words, while directors and trustees have the power to manage the
affairs of the corporation, they can only do so in a lawful manner.
 c. For instance, they shall not turn a blind eye when the president reduces
operating costs by hiring workers under unfair employment contracts.
d. They should not allow the corporate treasure to hide the income of the
corporation to evade payment of taxes.
e. Sec 30 adds that directors/trustees who willfully and knowingly vote for or
ascent to patently unlawful acts of the corporation shall be liable jointly and
severely for all damages that may be suffered by the corporation by
stockholders or members and by third persons.
2. Diligence
a. The duty of diligence is likewise found in Sec. 30.
b. Directors or trustees who are guilty of gross negligence or bad faith, and
directing the affairs of the corporation are likewise liable jointly and severely
for all damages that may be suffered by the corporation by stockholders or
members or by third persons.
i. This means that the directors/trustees must make sure that their business
decisions are not arbitrary or whimsical, they must do their background
research and critical analysis before deciding particular issues. They
must always exercise prudence and sound judgement.
3. Loyalty
a. The duty of loyalty provides that directors/trustees cannot acquire any personal
or pecuniary interests in contrast to their duties as directors/trustees.
b. For example, a director must not invest in the business of a direct competitor of
the corporation.
c. Moreover, under Sec. 33, directors cannot acquire business opportunities which
should belong to the corporation. This means that a director cannot steal
corporate clients for himself. Whatever profit a director earns from stealing a
corporate client should be surrendered to the corporation even if the director
risks his own funds in the venture.
d. Finally, we must remember that the duty of loyalty likewise includes officers in
its application.
e. Under Sec. 30, a director, trustee, or officer shall not acquire or even attempt to
acquire any interest adverse to the corporation in respect of any matter which
has been resposing them in confidence.
f. Trade secrets, market positioning, and price strategies are examples of delicate
information that director’s trustees become aware of in the exercise of their
functions. They cannot use this knowledge to gain personal advantage to the
detriment of the corporation.

Week 7: Corporate Powers: Express, Implied, and Inherent Powers of the Corporation

1. Express Powers - are those that are specifically granted to the corporation either by the
law, articles of incorporation, or by-laws.
a. You can see the enumeration of express powers from Sec 35-43 of the RCC.
 i. The purpose clause of the articles of incorporation also grant express
powers to the corporation.
ii. For example, if the stated purpose of the corporation is to operate a
restaurant business, it cannot perform the real functions of a real estate
agent or a money lending institute.
2. Implied Powers
a. Are those that can be understood that is included in the express powers even if
they are not specifically stated simply because they are necessary for the
exercise or enjoyment of the express powers.
b. For example, the right to sue and be sued is an express power of the corporation
under Sec 35-A. It is implied from such power that the corporation has the
capacity to secure legal services because it can only sue or defend itself in a suit
with the assistance of a lawyer.
3. Inherent Powers
a. Are those that are incidental in the corporation as a juridical person.
b. For example, even if the power to adopt by-laws is removed from Sec. 35-E,
the corporation, being a group of persons, will always need internal rules of
organization.
c. Similarly, even if the power to adopt and use the corporate seal is removed from
Sec. 35-C, the corporation, being a juridical person, would need to have an
official symbol of its identity. Much like a natural person, who can create a
unique signature for themselves.
- Ultra Vires Acts
- Any actions the corporation that are outside its express, implied, or inherent
powers.
- Best examples are criminal acts.
- For example, tax evasion is not allowed under any law however, not all
Ultra Vires Acts are criminal in nature.
- If the officers of a corporation that operates a restaurant attempted to
engage real estate business on the side, any contract entered into
furtherance such as real estate business is an Ultra Vires Act. A
concerned stockholder may sue these officers for improper use of
corporate funds and ask the court to invalidate the real estate contracts
that they negotiated.

Week 8: Corporate By-Laws, Meetings, Books, and Records: By-Laws: The Internal Rules of
a Corporation

- Bylaws refer to the corporation's internal rule of governance.

- Adoption of By-laws
1. For convenience, By-laws may be prepared, adopted, filed, approved, and
signed by all incorporators and filed with the SEC simultaneous with the
Articles of Incorporation.
 a. Nonetheless, the by-laws may still be adopted by the corporation even
after incorporation.
2. Approved by Majority of the stockholders/members any time after
incorporation.
- Amendment of By-laws
1. By majority vote of the board of directors/trustees and the majority vote of the
stockholders/members
2. By Delegation to the board of directors/trustees by ⅔ of the
stockholders/member
- Content of Bylaws: (long enumeration in Sec 46 of the RCC)
1. Settings of the Board of Directors/Trustees
a. Regular meetings are held monthly unless the bylaws provide otherwise.
b. Special meetings may be held at any time upon the call of the president
or as provided in the bylaws.
c. These meetings may be held anywhere in the Philippines or in another
country unless provided otherwise by the bylaws.
d. Notice of special/regular meetings stating a date, time, and place of the
meeting must be sent to every director/trustee at least two days prior to
the meeting unless otherwise provided by the bylaws.
e. Directors/trustees who cannot physically attend or vote can participate
through remote communication such as video conferencing or other
alternative modes of communication that allow reasonable tools to
participate. However, directors/trustees cannot vote by proxy at board
meetings.
2. Meeting of the Stockholders/Members
a. The bylaws contain the time and manner of calling or conducting
regular/special meetings of stockholders/members.
b. Regular meetings of stockholders/members are held annually on the
date fixed in the bylaws, if there are no specific dates in the bylaws,
directors/trustees may call the annual meeting anytime after April 15th.
c. Special meetings of stockholders/members may be held whenever
provided in the bylaws or at any time deemed necessary.
d. Stockholders/members meetings whether regular/special shall be held in
the principal office of the corporation. As set forth in the article of
incorporation. If it is not practicable, it must be held within the
city/municipality of the principal office of incorporation.
3. Quorum and Voting
a. The bylaws contain required quorum in meetings and the mode and
manner in voting, unless otherwise provided in the bylaws a quorum
should consist of the stockholders/members representing majority of the
outstanding capital stock.
b. The same rule applies to meetings of directors/trustees. Majority of the
directors/trustees should constitute a quorum to transact business.
c. Every decision reached by at least the majority of such directors
constituting a quorum shall be valid as a corporate act.
i. For example, if a corporation has ten directors, you need at least
 six directors to constitute a quorum to transact business. If these
six directors need to make a decision for the corporation, you
will need at least for directors to agree.
d. The right to vote with stockholder/members may be exercised in person
or through a proxy or when the bylaws authorize, it can also done
through remote communication or in absentia.
e. Proxies are written forms signed by the stockholder/member who cannot
attend the meeting in person. This form must be submitted to the
corporate secretary within a reasonable time before the scheduled
meeting. The proxy form will only be valid for the meeting in which it
was intended unless otherwise provided by the proxy form itself. In that
case it cannot be effective for a period longer than five years.
4. Qualifications, Duties, Responsibilities, and Compensation
5. Election of Directors and Appointment of Officers
a. The bylaws also contain the time for holding the annual election of
directors.
b. The bylaws also contain the manner of election and appointment of
officers.
6. Penalties
a. The bylaws can also provide for penalties in case of violation.
7. Stock Certificates
a. The bylaws also provide the manner of issuing stock certificates.
8. Other matters
a. The bylaws usually contain a catch-all basin.
b. According to the RCC, you can include in the bylaws such other matters
as may be necessary for the proper or convenient transaction of
corporate affairs, for the promotion of good governance, and anti-graft
or corruption measures.

Week 9: Stocks and Mergers: Stocks and Stockholders

- The chatter in stocks and stockholders starts with the definition of subscription.
- It is the legal term we use to refer to the acquisition of an issued share in a
corporation. We often hear ordinary words like buying of purchasing stocks,
that's usual everyday language, however if you want to be legally precise you
must use the word subscribed if you wanna refer to the acquisition of stock
directly from the corporation.
- Issuance is from the point of view of the corporation but for subscription, it is
the individual who has the stock issued.
- On the potherhand, there is a possibility that after subscribing shares, a
stockholder will change their mind in investing in the corporation, let us say he
wanted his money back, the stockholder can offer his shares to other people
who might be interested in the corporation, this time it is appropriate to say this
 action is “buy and sell.”
- Pre-Incorporation Subscription
- The process of: in the articles of incorporation, the article where you
have to list down the name, residences, of the people subscribed in
shares of stocks.
- Interesting concept because the corporation is yet to be a juridical
person. Nonetheless, it can have dealings with other people. The
incorporators often act like promoters, convincing people to invest
money in a business proposition that is still on paper and not yet real.
- For this reason, a pre-incorporation subscription is irrevocable as a
general rule, for a period of at least six months from the date of
subscription, there is no backing out on the part of the subscriber in
order to make sure that the incorporation can proceed smoothly.
- On the other hand, such subscriber shall also be assured that the
incorporators are not running away with his money.
- Consideration for Stock
- Cash is the most common consideration for stock.
- Subscribers pay with cash however, there are other possible
considerations like property or service, note that service must already be
rendered to the corporation.
- For example, instead of paying professional fees of lawyers, you agreed
that shares of stock is payment. On the other hand, if the lawyer
promises future service for the consideration of stock, that is not
allowed. For one, future service cannot be quantified in monetary terms,
its value cannot be determined. Moreover, that involuntary servitude is
prohibited under our constitution. That means that if the lawyer refuses
to render the promised service, he cannot be compelled to do so. An
obligation to do cannot be legally enforced against you will.
- Watered Stocks
- Got their name from a deceptive practice of farmers who hail their cattle
to rivers to drink plenty of water before bringing them to the
marketplace. The amount of water consumed will add to its rate and
therefore make them more expensive.
- So watered stocks are stocks issued by the corporation despite the fact
that the subscriber has paid the consideration that is less than thep par
value of the stock. This usually happens when the consideration given is
property that is over valued.
- For example, a stockholder subscribed 1 million shares at par value of
1.00 Php per share, however, he paid for his subscription with partial
land that has a fair market value of 500,000 Php only. The shares issued
to him are watered stocks.
- What is the danger? Watered Stock violates the trust fund doctrine. Who
are liable? The subscriber, officers/directors who allowed the transaction
should also be liable. The RCC provides that such directors or officers
are liable solidarily with this stockholder.
- Trust Fund Doctrine
 - Refers to the principle that corporate assets are held as a trust
fund for the benefit of creditors and eventually stockholders. The
directors and officers have a fiduciary duty to deal with these
assets properly.
- For example, let's say that the corporation needs money and
borrows from a bank, before the bank grants the loan, it will
investigate if the corporation has sufficient assets so that the
bank can foreclose in case the loan is not paid. Going back to the
figures, when the bank examines the corporation's financial
statements, the bank will see on the credit side, stockholders
equity worth 1 Million and on the debit side an over valued
property. The bank will feel confident that there is a property
that they can foreclose.
- What if the business incurred losses and can no longer pay its
loan? The bank will try to foreclose the property and will
discover that the value is less than the declared value.
- Stock Certificates
- Issued to subscribers of stock. Full payment is necessary. The
corporation should not issue a certificate if the full value of stock
is not yet paid.
- When should the stockholder make full payment? That depends
on the subscription contract. It may provide installment
payments or it may provide that full payment should be made
after 100 days from date of subscription.
- If the contract does not provide a time fram, the board of
directors may issue a call.
- Call
- Resolution requiring payment from all stockholders who still
have remaining balances.
- If a stockholder still fails despite the “call,” all the subscribed
stock shall be delinquent and subject to sale.
- Remember that delinquent shares do not vote, they are no longer
part of the outstanding capital stock.
- Delinquency Sale
- The Board of directors shall order the sale of delinquent stock at
a particular date, time, and place. A notice of such sale shall be
sent to the delinquent stockholders and published in the
newspaper of general circulation once a week for two weeks.
- Of course, the delinquent stockholder can prevent the sale by
paying the outstanding balance plus accrued interest, cost of
advertisement in the newspaper, and all other expenses related to
the sale.
- However, if he does not make such payment on/before the date
of sale, the delinquent stock should be sold to the highest bidder
of a public auction. Should there be no bidder, the corporation
may enter its own bid and in effect, the corporation buys back its
 own shares which become treasury shares.
- Lost or Destroyed Certificate of Stock
- The certificate of stock is the evidence of ownership of stock in a
corporation. The certificate itself can be transferred by signing at
the back of the certificate and delivering it to the transferee.
- It is a negotiable instrument. That is why, the RCC provides for a
specific procedure in case a stockholder claims that their
certificate of stock is lost or destroyed. It is possible to lie or
pretend.
- Stockholders should first prepare an affidavit setting forth the
circumstances as to how it was lost, stolen or destroyed and must
be tripled and submitted to the corporation; the corporation will
verify its own records to determine if the person is really a
stockholder. The corporation will publish a notice in a
newspaper of general circulation once a week for three weeks.
There is a waiting time of 1 year, if nobody comes forward, the
corporation shall cancel the lost certificate and issue a new one
in favor of the stockholder.

Week 10: Non-Stock and Special Corporations: Non-Stock Corporations

Highlights of Non-Stock Corporations:

- Can be organized for charitable, religious, educational, professional, cultural, fraternal,
literary, scientific, social, civic service, etc. purposes.
- As such, no part of its income is distributed as dividend to its members, trustees or
officers. Any profit they obtain incidental to its operations should be used for the
furtherance of its purpose.
- As a general rule, membership in a non-stock corporation is personal and
non-transferable.
- Each member is entitled to one vote unless the rights to vote is limited, broadened or
denied in the Articles of Incorporation of the By-Laws.
- Members may vote either in person or by proxy. The bylaws may likewise authorize
voting through remote communication or in absentia.
- The numbers of trustees may be fixed in the articles or bylaws which may or may not
be more than 15. These trustees hold office for not more than 3 years unless the
successors are elected and qualified.
- Unless otherwise provided by the articles or bylaws, the officers may be directly
elected by the members.
- Meeting of members may be at any place within Philippine territory; even outside the
city/municipality where the principal place of business is located.
- Upon dissolution, the assets may be distributed by:
1. paying and satisfying all of the liabilities and obligations of the non-stock
 corporation
2. returning/transferring/conveying assets held under such conditions in
accordance with requirement;
3. transfer/convey assets received with limitations of use (only for particular
charitable purposes) to another corporation engaged in similar activities.
4. Assets not covered may be distributed to members according to articles of
incorporation of Bylaws.
5. Follow plan of distribution approved by majority of Board of trustees and
ratified by ⅔ of members with voting rights.
- Non-Stock Corporations are charitable organizations, it is very common for donors of
property to impose a condition of return if the organization stops operating.

Week 11: Close Corporations and One Person Corporation: Close Corporations

Articles of Incorporation of a closed corporation must provide:

1. Stockholders of record must not exceed 20
- If the AOI is silent as to the maximum number of stockholders that the
corporation can have in the future, then this corporation is not a closed
corporation.
2. Stocks are subject to two or more restrictions for transfer
- The extent of this restriction transfer is called right of first refusal. This means
that stockholders cannot sell their stock to other people unless offered to
existing stockholders. Everything that is more restrictive than that is not
allowed
- For example, a blanket prohibition never to sell one's shares to anybody is not
followed thus, if this blanket prohibition is what you see in the articles, it does
not have a close corporation.
3. The corporation should not list in any stock exchange or any public offering.
- Even if the corporation is not currently listed in the Philippine Stock Exchange,
if the AOI does not expressly prohibit future listings, the corporation is not a
close corporation.
- In other words, to create a close corporation must be clearly stated in the
Articles of Incorporation.

- Corporation vested with public interest cannot be incorporated as a close corporation

- For example, Banks, Insurance, Schools, Public Utilities, Mining, or Oil
companies.
- There are other matters that may be included in the AOI of a close corporation.
- Stocks can have classifications.
- For example, common a or b stocks, it may provide for qualification for owning
these stocks.
- For instance, the corporation may require that common a stocks can only be
held by blood relatives or relatives consanguinity.
- On the other hand, common b stocks may be required to be held by relatives of
affinity or marriage.
- Similarly, there can be a classification of directors,
- For example, if there are seven members, they may designate 4 directors
that may be elected from Common A stockholders and only three may
be elected from Common B stockholders.
- A greater quorum or voting requirement may also be provided in the Articles of
Incorporation.
- For instance, instead of a simple majority of 50% + 1, the corporation
may require a quorum of 75% or whatever they wish.
- The business of the close corporation may be managed by the stockholders
rather than a board of directors provided that the managing stockholders are
subject to the liabilities of directors. Stockholders may also elect or appoint
officers directly. This is because the stockholders in a close corporation are
seemingly implied, close to each other, so the law understands that if and when
they want to operate their corporation with less formality.
- Having said that, the law provides that some actions taken by the
directors of a close corporation can be valid even if no meeting was
called at all. This can happen when/before/after such that action is taken
and written consent has been signed or when all the stockholders have
knowledge of the action and does not make a prompt objection in
writing.Also when the directors are accustomed to taking into formal
action and the stockholders just keep quiet about it.
- On the other hand, it is also a possibility that because the stockholders in
a close corporation are close to each other just like members of a family,
bitter rivalry might result in a deadlock.
- A deadlock happens when the directors are so divided by the management of
the corporation's business such that the votes required by a corporate action
cannot be obtained.
- For example, the younger, more liberal members are taking one side
while the older more conservative members are taking another side on
an important corporate issue.
- If the voting turns out to be equally divided and simple majority cannot
be secured, a concerned stockholder may petition the SEC to arbitrate
the dispute. The SEC can order one stockholder to buy out a rival
stockholder.
- The SEC may also order the appointment of a provisional director.
- Provisional Director
- An impartial person who is neither a stockholder or creditor but she has
the power to vote like a regular director to allow the corporation to
move on from a deadlock.
 Week 12: Foreign Corporations: Foreign Corporations

Foreign Corporations
- Formed under laws other than Philippine Law
- Filipinos must be allowed to do business in their country
- These must both be present
- Corporation is an artificial being created by operation of law.
- In the case of Philippines corporations, they are created under the revised corporation
code.
- Since the corporation derives its life from its creator, it follows that it is recognized as a
juridical person only within the territorial jurisdiction.
- For example, if Canada recognizes and welcomes Filipino corporations in their
country, then likewise for the Philippines. This is the principle for International
Comity embedded in the definition of a foreign corporation.
- International Comity:
- Foreign corporations can transact business in the Philippines. It shall have the
right to transact provided that it obtains a license from the SEC and certificate
of authority from the respective government agency that regulates its line of
business.
- So what is required from a foreign corporation acquiring a license?
- Sec. 142 for complete list.
- Important:
- Resident Agent - the foreign corporation must provide name and
address of its resident agent. The purpose of this is to have
someone based in the country who is authorized to accept
summons in all legal preceding and all notices affecting the
corporation
- For example, if the foreign corporation is sued for
damages, the court can issue summons or subpoena.
- A resident agent may be a person or domestic
corporation. If an individual is appointed, they must be a
resident, of good moral character, and of sound financial
standing. If a domestic corporation is appointed it must
be likewise of sound financial standing, and must be
certified by the SEC to be a corporation in good standing.
- The foreign of corporation must prove that its country of origin
allows the Philippines to do business therein.
- This can be done by submitting an official certification
from their regulatory relevant government agency.
- The said certification must also state that the foreign
corporation must also be in good standing in that of the
country of origin.
- The foregin corporation should prove that they are in Sound
Financial Condition and Solvent.
- This can be done by submitting a statement under oath by
its president or by any authorized officers sending forth
 the liabilities and assets of the corporation.
- If the SEC is satisfied, the SEC will issue a license to
transact business in the Philippines.
- Within 60 days of issuance, the corporation must deposit
securities to the SEC for the benefit for its present and future
creditors.
- For example, securities are government bonds, shares of
stocks of listed, domestic corporations and similar
financial instruments.
- The foreign corporation is initially required to deposit
securities with actual market value of at least 500,000
Php. Every year the SEC may require additional
securities if the gross income exceeds 10M Php and if the
deposited are sat for reduction in market value.
- Similarly, the SEC may release part of the deposit if there
is an increase in the actual market value.
- Consequences if a foreing corporation transacts business in the
Philippines without securing a license:
- That foreign incorporation cannot sue in Philippine
courts. This means that if it gets into trouble, the foreign
corporation cannot sue.
- On the other hand, the foreign incorporation can be sued
in Philippine courts. For example, if it cheats its
employees by not giving proper salaries and benefits.
The appropriate preceding can be filed against it before
administrative agents cease, like the National Labor
Relations Commission (NLRC), in short the foreign
corporation cannot sue but it can be sued.
- The foreign corporation cannot seek remedies from
Philippine courts and administrative agencies.

ALMOST DONE! GETTING THERE! I HATE COLLEGE!