Module on Business Law 2

7/28/2019 Module on Business Law 2

1/30

MODULE COURSE SYLLABUS INBUSINESS LAW 2

Definition of law on partnership

Concept and nature of partnership; forms of partnershipcontracts; contribution of partners; conveyance of properties

Commencement of partnership; obligations of a capitalist andan industrial partner; sub-partnership and its effect; right toengage in business; right to account partners interest inpartnership property

Contractual obligations of the partnership; instances of solidaryliability; partnership by estoppel.

Distinguish dissolution, winding up and termination causes ofdissolution grounds for dissolution by decree of court; power tobind dissolved partnership; manner of winding up

Liquidation and distribution of assets, accrual of a partnersright to account; concept and nature of limited partnership

Contribution of a limited partner; liability of a limited partner;admission of a limited partner; rights of a limited partner;compensation.

Return of contribution; effect of retirement, death etc of a limitedpartner; amendment and cancellation of certificate.

Attributes of a corporation; corporate entity doctrine; piercingthe veil of corporate fiction; classification of corporation;classification of shares; term of corporate existence; contents ofarticles of incorporation; acquisition of juridical personality.

Qualification/disqualifications and election ofdirectors/trustees/corporate officers; removal ofdirectors/trustees or resignation; vacancies compensation; self-dealing and interlocking directors; powers of the corporation.

Kinds of powers of the corporation; other powers of corporation

Ultra vires acts; ratification of ultra vires act; by-laws and itsfunctions, validity of by laws and its contents, revocation of bylaws, distinguished from articles of incorporation

Subscription of shares of stocks, nature of certificate of stock;liability of stockholder for non-payment of subscription;procedures for sale of delinquent stocks, corporate books andrecords; procedure for effecting plan of merger or consolidation


2/30

Instances when appraisal right available when right to paymentceases; purpose of a non-stock corporation; distinguished fromstock corporations; close corporations; provisions in articles ofincorporation; pre-emptive right of stockholders

Educational and religious corporations; manner of dissolvingcorporations; corporate liquidation; foreign corporations;application and issuance of license; doing business in thePhilippines; sue due to isolated transactions


3/30

Instructions:

Read carefully the subject matter and at the end of each subjectyou find questions which you are to answer which will serve asyour examination and will form part of your grade. Answers tothe questions shall be submitted before the scheduled finalexamination.

CONTRACT OF PARTNERSHIP 2 or more persons bindthemselves to contribute money, property or industry to acommon fund; with the intention of dividing the profits amongthemselves.

Requisites:

1. valid contract2. contribution of money, property or industry to a

common fund3. organized for gain or profit4. lawful object or purpose; established for the common

benefit or interest of the partners.

*** mere co-ownership or co-possession) do not establish*** mere sharing of gross returns ) a partnership

Kinds of Partnership:1. universal refer to all present property or to all profits2. particular has for its object determinate things, their use

or fruits or specific undertaking or the exercise of aprofession or vocation

3. general one where all the partners are general partners,where their liabilities extend to their individual propertiesafter the assets have been exhausted.

4. limited one where at least one partner is a general partner

and the others are limited partners.

Leonine Partnership a partnership where one partner is madeliable for the losses, but is not entitled to share in the profits.Not allowed.

Kinds of Partners:1. as to liability

a. general those who can be held for partnership

obligations even to the extent of their privatepropertyb. limited n- those who cannot be held liable for

partnership obligations2. as to contribution

a. capitalist contribute money or property to commonfund

b. industrial those who contribute only their skill orindustry to the common fund


4/30

3. as to managementa. managing those who manage or administerpartnership affairsb. silent those who have no voice in the managementof partnership affairs

4. as to third personsa. ostensible those publicly known as suchb. secret those whose connection with the partner-

ship is not knownc. by estoppel those who represent themselves or

consent to another or others representing them to anyone aspartners either in an existing partnership or in one that isfictitious or apparent also known as de facto partners.

Rights of partnership:1. it has a personality separate and distinct from the partners2. it can acquire or possess property3. it can incur obligations4. it can bring actions5. it can be adjudged insolvent

Sharing of net profits is prima facie evidence that one is apartner except if such profits were received in payment:

1. as a debt by instalment or otherwise2. as wages of an employee or rent to a landlord3. as an annuity to a widow or representative of a deceased

partner4. as an interest on a loan, though the amount of payment

vary with the profits of the business5. as the consideration for the sale of a goodwill of a

business or other property by instalment or otherwise.

PRINCIPLE OF DELECTUS PERSONAE no one can becomemember of the partnership association without the consent of allthe partners.

Right of a partner to demand formal accounting of partnershipaffairs, When:

1. he is wrongfully excluded from the partnership business orpossession of its property by his co-partners

2. rights exist under the terms of any agreement

3. a partner has derived profits from any transactionconnected with the formation, conduct or liquidation of thepartnership or from any use by him of his property; or

4. whenever other circumstances render it just andreasonable

Property rights of a partner:1. rights in specific partnership property2. interest in the partnership and his share of the profits and

surplus


5/30

3. right to participate in the management only in no. 2 isassignable.

Rights of a partner in specific partnership property:1. has an equal right with other partners to possess specific

partnership property for partnership purposes2. not assignable, except in connection with the assignment

of rights of all partners in the same property3. not subject to attachment or execution except on a claim

against the partnership4. not subject to legal support.

Partnership maybe held liable to a third person for the act of oneof the partners: When:

1. contract was entered into in the name and for the accountof the partnership and under its signature and

2. such partner was authorized to act for the partnership

Effects of conveyance by partner of his interest in thepartnership:

1. conveyance of his whole interest, partnership may eitherremain or be dissolved

2. assignee does not necessarily become a partner3. assignee cannot even interfere in management or

administration of the partnership business or affairs; andassignee cannot also demand:

a. informationb. accountingc. inspection of the partnership books

Rights of Assignee:1. get whatever assignor-partner would have obtained2. avail usual remedies in case of fraud in the management

3. ask for annulment of contract of assignment if he wasinduced to join through any of the vice of consent

4. demand an accounting (only in case of dissolution)

DISSOLUTION change in the relation of the partners caused byany partner ceasing to be associated in the carrying on of thebusiness

WINDING UP process of liquidating partnership affairs

TERMINATION moment when partnership affairs were woundup.

Causes of dissolution of partnership:1. without violation of the agreement between partners;

a. by termination of the definite term or particularundertaking specified in the agreement

b. by express will of any partner, who must act in goodfaith, when no definite term or particular undertaking

is specified


6/30

c. by express will of the partners who have notassigned their interests or suffered them to becharged for their separate debts, either before orafter the termination of any specified term orparticular undertaking

d. by expulsion of any partners from the business bonafide in accordance with such power conferred by theagreement between the partners

2. in contravention of the agreement between partners wherethe circumstances do not permit a dissolution;

3. by any event which makes it unlawful for the business ofthe partnership to be carried on or for the members tocarry it on in partnership

4. when a specific thing which a partner had promised to

contribute to the partnership perishes before the deliveryin any case by the loss of the thing, when the partner whocontributed it having reserved the ownership thereof, ahsonly transferred to the partnership the use or enjoyment ofthe same; but the partnership shall not be dissolved by theloss of the thing when it occurs after the partnership hasacquired ownership

5. by death of any partner6. by insolvency of any partner or of the partnership7. by civil interdiction of any partner8. by decree of court

DISTINCTIONS

GENERAL PARTNER LIMITED PARTNER1.can be held personallyliable for partnershipobligations after allpartnership assets are

exhausted.

1.cannot be held liable

2.may participate in themanagement of partnership

2.does not

3.may contribute money,property or industry tocommon fund

3.can contribute money orproperty only

4.name may appear in the firmname

4.does not

5.there is a limitation on rightto engage in another businessor in the same kind of business

5.no such limitation

Substituted Limited Partner a person admitted to all the rights

of a limited partner who has died or has assigned his interest in


7/30

a partnership. Has all rights and powers and is subject to allrestrictions and liabilities of his assignor, except those liabilitiesof which he was ignorant at the time he became a limited partnerand which could not be ascertained from the certificate.

Order of payment in the winding up of partnership liabilities

1./general partnership -a. those owing to creditors other than partnersb. those owing to partners other than for capital and profitsc. those owing to partners in respect of capitald. those owing to partners in respect of profits

2. limited partnershipa. those to creditors in the order of priority as provided by

law, except those limited partners on account of theircontributions and to general partnersb. those to limited partners in respect to their share of theprofits and other compensation by way of income on theircontributionsc. those to limited partners in respect to the capital of theircontributionsd. those to general partners other than for capital andprofitse. those to general partners in respect to profitsf. those general partners in respect to capital

QUESTION NO. 1What are the tests or indicia to determine the existence of a

partnership?

QUESTION NO. 2Assuming that there is mutual contribution of money,

property or industry to common fund, is the receipt by a personof a share of the profits of a business conclusive evidence thathe is a partner in the business? Explain

QUESTION NO. 3a. Can a husband and wife enter into a contract of

partnership?b. A organized a limited partnership with himself as

general partner and his two friends, B and C, as

limited partners. One year later, A and B got married,and thereafter the two bought the interest of C for anominal amount. The Commissioner of InternalRevenue now maintains that the marriage of A and Band their subsequent acquisition of the interest of Cin the partnership dissolved the limited partnershipand if there was no dissolution, the fiction of juridicalpersonality of the partnership should be disregardedfor income tax purposes because the spouses haveexclusive ownership and control of the business.

Consequently, the income tax returns of A and his


8/30

wife B should have included his and his wifesindividual incomes and that of the limitedpartnership. Is this correct? Reason.

QUESTION NO. 4a. Who shall manage the partnership? Qualify your answer.

b. A, B, C and D organized a general partnership with A and B

as industrial partners and C, who contributed 30,000 to thepartners common fund, and D, who contributed 10,000 to thecommon fund as capitalist partners. A and B were bothappointed managing without any specifications of theirrespective duties. When the firm commenced business

operations, the two appointed X as accountant of the company.A year later, A decided to dismiss X. but this was opposed by B.How can the conflict between the two be resolved?

c. Suppose that in the above problem, nobody was appointedmanaging partner of the firm, how shall the conflict between Aand B resolved?

QUESTION NO. 5

A, B and C formed a general partnership with the followingcontributions to the common fund: A, 2,000; B, 4,000; C, 6,000.There was no agreement on the division of profits orapportionment of losses. After some years of businessoperations, the assets of the partnership dwindled to 3,000; sothe partners agreed to stop their loan of 12,000. Under thecircumstances, from whom can Corpuz demand satisfaction ofhis credit, and to what extent?

LAW ON CORPORATIONS

CORPORATION artificial being created by operation of lawhaving the right of succession, and the powers, attributes andproperties expressly authorized by law and incident to itsexistence.

CONCESSION THEORY juristic principle in the creation ofcorporation under which a corporation is an artificial creature

without any existence until it has received the imprimatur of thestate acting according to laws, through SEC

Theory of Corporate Enterprise or Economic Unit corporationnot merely an artificial being, but more as an aggrupation ofpersons doing business or an underlying business unitPrimary franchise - the franchise to exist as a corporation

Secondary Franchise right or privilege conferred upon existing

corporation, such as to use the streets of a municipality to lay


9/30

pipes or tracks or operate a messenger and express deliveryservice.

ATTRIBUTES OF CORPORATIONdistinct personalityperpetual successionacquisition of property, contracting obligations and bringing

of suits; andreceipt and enjoyment in common of privileges and

immunities

Doctrine of piercing the veil of corporate fiction allows thestate to disregard for certain justifiable reasons the fiction of

juridical personality for the corporation, separate and distinct

from the persons composing it.When applied:

used as a cloak to cover fraud, illegality or it results ininjustice

one corporation is mere subsidiary, instrumentality ordepartment of another corporation

corporation was used as an alter ego or business conduit forsole benefit of the stockholder

corporation is used as a shield to an end which is subversiveto justice

Classes of Corporations:as to organizers

public by state onlyprivate by private persons alone or with the state

as to functionspublic governmental and other functions; andprivate usually for profit making functions

as to governing lawpublic special lawsprivate law on private corporation(i) close corporations(ii) special corporations(iii) foreign corporations(iv) de facto corporations(v) corporations by estoppel

Corporation by Estoppel group of persons which holds itselfout as a corporation and enters into a contract with a 3 rd personson the strength of such appearance. It cannot be permitted todeny its existence in an action under said contract.

Corporation by Prescription body which though not lawfullyorganized as a corporation, has been duly recognized byimmemorial usage as a corporation, with rights and dutiesmaintainable at law.


10/30


11/30

Promoter person who undertakes to form a corporation and toproduce for it the rights, instrumentalities and capacity by whichit is to carry out the purpose set forth in its charter and toestablish it as fully able to do business.

Underwriter one who, under an agreement made beforecorporate shares are bought by the public, will, in the event ofthe publics not taking all the shares or the number mentioned inthe agreement, take the shares which the public does not take.

Pre-Incorporation Subscription contract- subscription of sharesof stock of a corporation still to be formed shall be irrevocablefor a period of at least 6 months from date of subscription,unless:

1. all of the other subscribers consent to the revocation2. the incorporation of said corporation fails to materialize

within said period or within a longer period as may bestipulated in the contract of subscription, provided thatno pre-incorporation subscription may be revoked afterthe submission of the articles of incorporation to theSEC

Limitations on the powers of Executive Committee** it cannot act on the following:

1.matters needing stockholders approval2. filling up of board vacancies3. amendment, repeal or adoption of by-laws4. amendment of irrepealable board resolution5. cash dividend declaration

Capital Stock or Legal Stock or Stated Capital the amount fixedby the corporate charter to be subscribed and paid in cash, kindor property at the organization of the corporation or afterwards

and upon which the corporation it is to conduct its operationCapital actual property or estate of the corporation whether inmoney or property

Authorized Capital Stock total amount in the charter whichmay be raised by the corporation for its operations

Share of Stock interest or right which owner has in the

management of the corporation, and its surplus profits and ondissolution in all of its assets remaining after the payment of itsdebt.

Consideration:1. cash2. property delivered to the corporation3. labor or services actually rendered4. prior corporate obligations5. amounts transferred from unrestricted retained

earning to stated capital


12/30

6. outstanding shares exchange for stocks in theevent of reclassification or conversion

Prohibition: shares of stock shall not be issued in exchange forpromissory notes or future services.

Number and Qualification of Incorporators:1. natural persons2. not less than 5 but not more than 153. of legal age4. majority must be residents of the Philippines5. each must own or subscribe to at least one share

Corporate Term: 50 years which may be subject to extension for

another 50 years by amendment of Articles.

Effects of Non-Use of Corporate Charter and Continousinoperation of a corporation:

1. Non-user for 2 years when the corporation does not fullyorganize and commence the transaction of its business orthe construction of its works within 2 years from the dateof its incorporation. Its corporate powers cease and thecorporation shll be deemed dissolved. Suspension orcancellation of corporate franchise is not automatic.

2. Non-user for 5 years when the corporation hascommenced the transaction of its business butsubsequently becomes continuously inoperative for aperiod of at least 5 years EXCEPT if reason for non-use orinoperation is beyond the control of the corporation.

Minimum Capital Required

General rule: no minimum required for capital stockExcept:

1. Domestic insurance corporations**500T capital stock; 50% subscribed and the balancepayable in 12 months

2. private development banks

**4M for class A**2M for class B**1M for class C

3. Investment Companies**paid up at least 500T

4. Savings and Loan Corporation to be fixed by the

Monetary Board but not less than 100T

5. Financing Companies:


13/30

** paid up: 2M for Metro Manila1M for Cities500T for others

Amount of Capital Stock to be subscribed and paid for purposesof corporation:

** 25% of ACS must be subscribed at time of incorporation

**25% of total subscription must be paid upon subscriptionbut must not be less than 5,000

Classification of Shares:1. preferred stock distributed always with par value and

preference is to assets after dissolution, distribution ofdividends and other preferences

2. redeemable3. treasury stock4. founders stock5. non-voting share6. common stock7. promotion stock8. escrow stock deposited with 3rd person to be delivered

to S/H or his assign after complying with certainconditions, usually payment of full subscription price

9. over-issued stock10.water stock issued as fully paid when in fact it is not11.no par value stock12.debenture charge on the net earnings and profit of the

corporation13.deferred14.stock warrant security which entitle holder the right to

subscribe to or purchase from the unissued capital stock

of a corporation in the future15.scrip = applied to certificates issued by trustee in a voting

trust16.street certificate stock certificate indorsed by the

registered holder in blank and the transferee can commandits transfer to his name from the issuing corporation. Thecertificate may be transferred by mere deliver.

Stock Certificate written acknowledgement by the corporation

of the S/Hs interest in the corporation. It is personal propertyand maybe mortgaged or pledged.

Matters where holders of non-voting shares may vote:1. amendment of Articles of Incorporation2. adoption and amendment of by-laws3. increase or decrease of bonded indebtedness4. increase or decrease of capital stock5. sale or disposition of all or substantially all of corporate

property

6. merger or consolidation of corporation


14/30

7. investments of funds in another corporation or anotherbusiness purpose

8. corporate dissolution

Trust Fund Doctrine the subscribed capital stock of thecorporation is a trust fund for the payment of debts of thecorporation which the creditors have the right to look up tosatisfy their credits. Corporation may not dissipate this and thecreditors may sue stockholders directly for the unpaidsubscription

Preemptive right of Stockholders right of S/H at the time ofissue of capital stock, in preference to other persons and asbetween themselves to subscribe for, or purchase, the unissued

stock in proportion to the number of shares of the original stockheld by them respectively.

Reacquisition by corporation of its stock:1. to eliminate fractional shares2. to compromise indebtedness arising out of unpaid

subscription3. to purchase deliquent shares4. to exercise its right of appraisal

Contents of the Articles of Incorporation1. name of corporation2. purpose/s, indicating the primary and secondary purposes3. place of principal office4. duration5. name, citizenship & residences of incorporators6. number, names, citizenship & residences of directors7. if stock corporation, amount of capital stock, number of

shares and in case of par value stock corporation, the par

value of each share8. names, residences, number of shares and amounts of

subscription of subscribers, which shall not be 25% of ACS9. names, residences and amount paid by each subscriber on

their subscription which shall not be 25% of totalsubscription

10. name of treasurer elected by subscribers11. if the corporation engages in a nationalized industry, astatement that no transfer of stock will be allowed if it will

reduce the stock ownership of Filipinos to a percentagebelow the required legal minimum

Merger one corporation absorbs the other and remain inexistence while the other is dissolved

Consolidation a new corporation is created and consolidatingcorporations are extinguished

General Rule: when one corporation buys all the shares of

another corporation, this will not operate to dissolve the other


15/30

corporation as the two corporation still maintaining theirseparate corporate entities, one will not answer for the debts ofother.

Exceptions1. if there is an express assumption of liabilities2. there is a consolidation or merger3. if the purchase was in fraud of creditors4. if the purchaser becomes a continuation of the seller

Books required to be kept

1. Book of Minutesa. minutes of S/H meetingsb. minutes of board meetings

2. Book of all business transactions3. Stocks and transfer book

Corporate Powers and Capacity1. to sue and be sued2. of succession3. to adopt and use of corporate seal4. to amend Articles5. to adopt by-laws6. for stock corporations issue and sell stocks to

subscribers and treasury stocks for non-stockcorporations admit members

7. purchase )receive ) real propertygrant ) personal propertytake ) securities anddeal ) bonds

8. to adopt a plan of merger or consolidation

9. to make reasonable donations for:a. public welfareb. hospital Prohibition: no donations toc. charitable 1. political partyd. cultural 2. candidatee. scientific 3. partisan political activityf. civicg. similar purposes

10. to establish

a. pensionb. retirement ) for the benefit of a. directorsb. trustees

c. other plans c. officersd. employees

11. other powers essential or necessary to carry out itspurposes.

Theory of General Capacity corporation is said to hold suchpowers as are not prohibited or withheld from it by general law

(everything is allowed except when prohibited).


16/30

Theory of special capacity corporation cannot exercise powersexcept those expressly or impliedly given (everything isprohibited except when allowed)

Concession Theory a group of persons wanting to create acorporations will have to execute documents and comply withrequirements set by state before being given corporatepersonality.

Repository of corporate powers unless otherwise provided bythe code, the corporate powers of all corporation shall beexercised, all business conducted and all property of suchcorporations controlled and held by the board of directors or

trustees to be elected from among the members of thecorporation, who shall hold office for one year and until theirsuccessors are elected and qualified.Except:

1. executive committee2. the corporation enters into a management contract

Remedies in case of Mismanagement:1. receivership2. injunction if the act has not yet been done3. dissolution if the abuse amounts to a ground for quo

warranto but the solicitor general refuses to act4. derivative suit or complaint filed with SEC

Corporate Officers:1. President who shall be a director2. Treasurer who may or may not be a director3. Secretary who shall be a resident and citizen of the Phil.

4. such other officers as may be provided for in the by-laws

Effects of Ultra Vires Act on:1. executed contract courts will not set aside or interfere

with such contracts2. executory contracts no enforcement even at the suit of

either party (void and unenforceable)3. part executed and part executory principle of no unjust

enrichment at expense of another shall apply

4. executory contracts apparently authorized but ultra vires the principle of estoppel shall apply

Liability of Directors1. voting or assenting, knowingly and wilfully to patently

unlawful acts of the corporation2. guilty of gross negligence or guilty of bad faith in3. directing affairs


17/30

4. acquiring interest, personal or pecuniary interest inconflict with their duty as such directors or trustees

Special Fact Doctrine director takes advantage of aninformation by virtue of his office to the disadvantage of thecorporation.

Doctrine of Corporate Opportunity if there is presented to acorporate officer or director a business opportunity which

1. corporation is financially able to undertake2. from its nature is in line with corporations business and is

of practical advantage to it3. one in which the corporation has an interest or a

reasonable expectancy

** by embracing the opportunity, the self-interest of the officeror director will be brought into conflict with that of hiscorporation, the law will not permit him to seize theopportunity

Rights of Stockholders:1. direct or indirect participation in management

a. voting rightsb. voting to remove directors

2. proprietary rightsa. right too dividendsb. appraisal rightc. issue of stock certificate for fully paid sharesd. proportionate participation in the distribution of

assets on liquidatione. transfer of stocksf. preemptive rightg. right to inspect books and record

h. right to financial statementi. right to recover stocks unlawfully sold for delinquent

payment of subscription3. remedial rights

a. individual suitb. representative suitc. derivative suit suit brought by S/H, for and in behalf

of the corporation and against any person be he alsoa S/H, director, officer or 3rd person

Requisites:1. party bringing suit should be a shareholder as of the

time of the act or transaction complained of2. he has exhausted intra-corporate remedies3. the cause of action actually devolves on the

corporation, the wrongdoing or harm having beencaused to the corporation and not to the particularstockholder bringing the suit.


18/30


19/30

a. where no creditors are affectedb. where creditors are affectedc. by shortening corporate term

2. involuntary dissolution, fora. violation of the new corporation code.b. Failure to organize and commence business within 2years from incorporationc. may be dissolved by SEC in grounds provided byexisting laws, rules and regulationsd. failure to file by-laws within 30 days from issue ofcertificate of incorporation.

Foreign Corporation corporation formed, organized or existingunder any law other than those of the Phils. And whose laws

allow Filipino citizens and corporations too do business in itsown country or state.

Engaging in Business implies a community of commercialdealings and arrangements, and contemplates to some extentthe performance of act or works or the exercise of somefunctions normally incident to and in progressive prosecutionof, the purpose and object of its organization

Suability of foreign corporations:1. foreign corporation doing business in the Philippines

a. with license: may sue and be sued in the Philippinesb. without license : cannot sue but may be sued in the

Philippines2. foreign corporation not doing business in the Philippines,

on isolated transaction may sue and be sued

CLOSE CORPORATIONS

Requirements for close corporations:1. number of stockholders not to exceed 202. restriction pre-emption in favour of the stockholder or the

corporation3. the stocks cannot be listed in the stock exchange nor

should they be publicly offered.** special type of close corporation 2/3 of the votingstocks or voting rights is owned or controlled by another

corporation which is not a close corporation

** the following cannot be a close corporationa. mining companiesb. oil companiesc. stock exchangesd. bankse. insurance companiesf. public utilityg. education institution


20/30

h. other corporations declared to be vested with publicinterest

Restrictions on transfer the restrictions in the transfer of thestocks must appear:

1. in the articles2. in the by-laws3. on the stock certificates

Preemptive right in close corporations shall extend to all stockto be issued, including reissuance of treasury share, whether formoney or property or personal services, or in payment ofcorporate debts, unless the articles of incorporation provideotherwise.

Characteristics of close corporation1. S/H act as directors without need of election and therefore

are liable as directors2. quorum may be greater than mere majority3. transfers of stocks to others, which would increase the

number of S/H to more than the maximum are invalid4. corporate situations may be binding even without a formal

board meeting, if the s/H had knowledge or ratified theinformal action of the others

5. preemptive right extends to all stock issues6. deadlocks in board are settled by the SEC, on written

petition by any S/H7. S/H may withdraw and avail of his right of appraisal

Distribution of assets on dissolution of non-stock corporations1. all its creditors shall be paid2. assets held subject to return on dissolution, shall be

delivered back to their givers

3. assets held for charitable, religious, etc. without acondition for their return on dissolution shall be conveyedto one or more organizations engaged in similar activitiesas dissolved corporations

4. all other assets shall be distributed to members asprovided for in the articles or by-laws

NON-STOCK CORPORRATIONS

** Corporation where no part of its income is distributable asdividends to:a. membersb. trusteesc. officers

** except -- at dissolutionDisposition of profits: for furtherance of purpose or purposes ofthe corporation

Conditions: necessary and proper


21/30

Purposes:a. charitableb. religiousc. educationald. professionale. culturalf. fraternalg. literaryh. scientifici. social

j. civic servicesk. similar purposes such as chambers or combinations

for:1. trade

2. industry3. agricultural

RELIGIOUS CORPORATIONS

Kinds1. corporation sole special form of corporation, usually

associated with the clergy and consists of one persononly and his successors, who are incorporated by law to

give some legal capacities and advantages2. religious societies non-stock corporation governed by aboard but with religious purposes.

QUESTION NO. 1Jose Santos owns and operates a fleet of ten buses plying

a route extending from Manila to Tarlac. He also owns a storedealing in clothing materials, shoes, etc. situated in Makati,Rizal. About 250,000 is invested in the transportation business

and 100,000 in the store. He now seeks your counsel as towhether or not it is advisable for him to incorporate thesebusinesses or to continue operating them as singleproprietorship.

1. What factors or information would y u consider relevant indealing with the problem?2. What advice would you give? State your reasons.

QUESTION NO. 2

In the complaint filed by XYZ corporation, its Presidentalleged that he suffered mental anguish, fright, socialhumiliation and serious anxiety as a result of the tortious act ofABC corporation. In its counterclaim, ABC corporation claimedto have suffered oral damages due to besmirched reputation orgoodwill.

1. May XYZ corporation recover moral damages based on theallegations in the complaint?

1. May ABC corporation recover moral damages? Givereasons for your answer.


22/30


23/30

QUESTION NO. 8

The Articles of incorporation to be registered in thesecurities and Exchange Commission contained the followingprovision:a)First Article. The name of the corporation shall be tohoMarketing Companyb) Third Article. The principal office of the corporation shall belocated in Region III, in such municipality therein as its Board ofDirectors may designate.c)Seventh Article. The capital stock of the corporation is1,000,000 (1 M), Philippine currency,

What are your comments and suggested changes to the

proposed articles?

QUESTION NO. 9

What private corporations may not issue no-par valueshares of stock and what shares of stock may not be issuedwithout a stated par value?

QUESTION NO. 10

A, B and C are shareholders of XYZ company. A has anunpaid subscription of 100,000.00. Bs share are fully paid up,while C owns only nominal but fully paid up shares and is adirector and officer. XYZ company becomes insolvent, and it isestablished that the insolvency is the result of fraudulentpractices within the company. If you were counsel for a creditorof XYZ company, would you advise legal action against A, B andC?

QUESTION NO. 11

The stockholders of People Power, Inc. (PPI) approved thefollowing two resolutions in a special stockholders meeting (i)resolution increasing the subscribed capital stock of PPI, and (ii)resolution authorizing the board of directors to issue for cashpayment the new shares from the proposed capital stockincrease in favor of outside investors who are non-stockholders.

The foregoing resolutions were approved by stockholdersrepresenting 90% of the total outstanding capital stock. The soledissenter was Jose Estrada who owned the rest (1%) of thestock.

a) Are the resolutions binding on the corporation andits stockholders, including Estrada, the dissentingstockholder?

b) What remedies, if any, are available to Estrada?


24/30


25/30

ANSWERS TO THE QUESTIONS:

1. there are always two tests which must be applied in orderto determine whether or not a partnership exists. The firsttest is to determine whether or not there is an agreementto contribute money, property or industry to commonfund, and the second test is to determine whether or notthere is an intent of the contracting parties to divide theprofits among themselves. Once it can be shown that therewas an agreement to contribute money, property orindustry to a common fund and that there was an intent todivide the profits among themselves then a partnershipcontract exists.

2. No, it is not conclusive evidence that he is a partner in thebusiness. According to the civil code, it is merely primafacie evidence that he is a partner. This inference, howevercannot be drawn if such profits are payments for thefollowing (a) debt payable by instalments or otherwise (b)wages of an employee or rent to a landlord (c) annuity to awidow or to a legal representative of a deceased partner(d) interest on a loan (e) sale of the goodwill of a businessor other property by installment or otherwise.

3. 3.a) If the partnership is a universal partnership thehusband and a wife cannot enter into such contract. Thisis because under the civil code (Art 1782) personsprohibited from making donations to each other areprohibited from entering into universal partnership.However, if the partnership in particular partnership or alimited partnership, they cannot.

3.b) The commissioner of internal revenue rest his theory

upon the opinion that a husband and a wife may notenter into a contract of general partnership because underthe civil code, which applies in the absence of expressprovision in the code, persons prohibited from makingdonations to each other are prohibited from makingdonations to each other are prohibited from entering intouniversal partnerships. It follows that the marriage ofpartners necessarily brings about the dissolution of a pre-existing partnership. What the commissioner has

evidently failed to observe is the fact that the partnershipin the case at bar is a limited and, at the same time,particular partnership and not a universal partnership,such as the one that has for its object all the presentproperty of the partners as contributed by them to thecommon fun , or else all that the partners may acquire bytheir industry or work during the existence of thepartnership.

Nor could the subsequent marriage of the partnersoperate to dissolve the partnership such marriage not

being one of the causes provided for that purpose either.


26/30

It being a basic tenet that the partnership has ajuridical personality of its own, distinct and separate fromthat of its partners, the bypassing of the existence of thelimited partnership as a taxpayer can only be done byignoring or disregarding clear statutory mandates andbasic principles of our law. The limited partnershipseparate individuality makes it possible to equate itsincome with that of the component members.

4. 4(a) The management of partnership may be vested byagreement in one or some or all of the partners, or even ina third person, either in the articles of partnership or afterthe partnership had already been constituted. If there isno agreement, it is vested in all of the partners.

4(b) If there is conflict it shall be resolved by the decisionof the majority of the managing partners, and in case of atie, it shall be decided among the partners owning thecontrolling interest. It is clear that in the instant case, thereis a tie, consequently, the matter must now be decided byC who owns the controlling interest. If he casts his vote infavor of A, X is out of a job; if he casts his vote in favor ofB, X still has job.

4(c) When the manner of management has not been upon,all the partners shall be considered agents and whateverany one of them may do alone shall bind the partnership,with out prejudice to the provisions of Art 1801.According to the provision of law, the decision of themajority shall prevail and in case of a tie, the matter shallbe decided by the partners owning the controlling interest.The conflict between A and B shall be resolved by puttingthe question to a vote of all of the partners. In case of a tie,

C, who owns the controlling interest in the partnershipshall decide.

5. since the obligation of 12,000 in the instant case is apartnership obligations arising from a contract, what isapplicable here is the rule enunciated in the civil code thatof the partners shall be liable pro rata with all theirproperty after all of the partnership assets have been

exhausted. Consequently, Corpuz may demand payment ofthe remaining 3,000 from the partnership. He can thencompel A, and demand C to pay the balance of 9,000 stillunpaid in the portion of 1 is to 2 is to 3 (1:2:3). In otherwords, A shall be liable for 1/6 of 9,000 or 1,500; B for 2/6 or1/3 of 9,000 and C for 3/6 or of 9,000 or 4,500.


27/30

CORPORATIONS:1. The factors or information I would consider as relevant in

dealing with the problem are:a. the speculative nature of each or both of the

businessesb. the amount of additional capital intended to be

invested in each or in both of the businessesc. the tax angled. the proximity of the places of operation of the

businessese. whether existing laws would allow the joinder of the

diverse purposes of the proposed corporations1.b) I will advise against the joining of the two businesses, theincorporation business and the clothing business for the

following reasons:a. under the law a corporation engaged in transportationcannot engaged in transportation cannot engage in anyother business alien to transportationb. the operation of a transportation business opens theoperator to the risk of liability to passengers injured orkilled in accidents. This liability might encroach on theinvestment in the clothing business if joined with thetransportation business.

2. XYZ corporation by reason of its being a juridical person,cannot possibly experience physical suffering, mentalanguish, fright, serious anxiety, wounded feelings, moralshock damages, because the above consequence can besuffered, inflicted or experienced by natural persons only.Hence, XYZ corporation cannot recover moral damages forthe sufferings of its president.2b) On the other hand, a corporation may have establisheda reputation of its own, and created goodwill in the course

of its business operations over the years. These are itsassets, accruing to it as a juridical person, Hence, if theyget besmirched, the corporation has a cause of actionagainst the offender.

I submit therefore, that ABC corporation may file acounterclaim for moral damages due to its besmirchedreputation and goodwill.

3. While a corporation has a personality separate and distinct

from the stockholders composing it, this veil of corporatefiction may be disregarded, and the stockholders and thecorporation considered as one person in the followinginstances:

a. when the stockholders created the corporation toevade taxes, violate laws, commit fraud, evade justobligations

b. when the corporation is owned by the stockholderand his dummies and/or the immediate members ofhis family.


28/30

4. the country where the corporation was incorporateddetermines the nationality of a corporation. This is calledas the domiciliary test.In times of war or national emergency, another test is used

the control test. Under this test, if the controlling stockof a corporation is owned by citizens of a particularcountry which is at war with the Philippines, then thatcorporation although organized in the Philippines is aforeign corporation.

Foreign corporation classified under the domiciliarytest are subject to the laws of the country of their creationon the following matters:

1. creation, formation, organization or dissolution ofcorporation

2. relations, liabilities, responsibilities and duties ofmembers, stockholders or officers of corporation toeach other or to the corporation

5. Yes, a corporation composed entirely of aliens may beorganized in the Philippines. The corporation law, ingeneral, only requires a majority of the incorporators to beresidents not necessarily citizens of the Philippines.

However, in the nationalized corporations (retail trade,agriculture, mining, transportation, shipping) no aliens orsome but not all can form the corporation depending onwhether it is totally or partially nationalized

6. a. GLOBAL can secure a lease on the land. As acorporation with a Malaysian nationality, GLOBAL cannotown the landb, Yes, GLOBAL can manage the hotel beach resort. Thereis no law prohibiting it from managing a resortc. GLOBAL may be allowed to operate restaurants within

the beach resort. This is part of the operation of the resort.

7. Neither E or F can sit as a director of the corporation.E cannot be a director because he ceased to be astockholder by the sale of all his stocks to F. A director isrequired to be owner of at least one share of stock in acorporation, and the moment he totally disposes of hisstocks, he automatically terminates his directorship.

F cannot be a director because he was not elected as such.Neither can he claim appointment as such to replace E,because he was never appointed to the position by theremaining members of the board his basis of claim beingthat he acquired all of the shares of E, a director. Theacquisition by a person of all of the stocks of an incumbentdirector of a corporation will not make him (the transferee)a director of that corporation.

8. My comments to the provisions stated above are:


29/30

a) the name of the corporation should contain the wordincorporated or corporation. The suggested change is:


30/30

Documents

Module on Business Law 2