CHAPTER 2

BRIEF HISTORY OF
PHILIPPINE CORPORATE LAW

Historical Background of Philippine Corporate Law

Sociedades Anónimas
Cuentas En Participacion
The Old Corporation Law
The Corporation Code

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HISTORICAL BACKGROUND OF PHILIPPINE CORPORATE LAW

1. Sociedades Anónimas
Prior to the arrival of the American occupying forces in the Philippine
scene, the only existing business vehicle under the Spanish colonial
administration similar to the Anglo-Saxon corporations were the sociedades
anónimas. The sociedades anónimas were introduced in Philippine jurisdiction
on 1 December 1888 with the extension to Philippine territorial application of
Articles 151 to 159 of the Spanish Code of Commerce.
Although there were similarities, such as the features of limited liability and
centralized management granted to such juridical entity, the sociedad anónima
did not exactly correspond to the notion of the corporation in English and
American law. That was particularly true with respect to matters concerning the
organization of the enterprise, the distribution of dividends, and those in which
equity intervenes for the benefit of creditors.
A sociedad anónima was considered a commercial partnership, a sort of a
corporation, “where upon the execution of the public instrument in which its
articles of agreement appear, and the contribution of funds and personal
property, becomes a juridical person—an artificial being, invisible, intangible, and
existing only in contemplation of law—with power to hold, buy, and sell property,
and to sue and be sued—a corporation—not a general copartnership nor a
limited copartnership . . . The inscribing of its articles of agreement in the
commercial register was not necessary to make it a juridical person—a
corporation. Such inscription only operated to show that it partook of the form of
a commercial corporation.”1

1
Mead v. McCullough, 21 Phil. 95,106 (1911).
 The introduction in late 1888 of the sociedades anónimas as commercial
medium of doing business did not prosper under Philippine setting, since by
1898, the American occupation had began. The American authorities lost no time
introducing into the Philippine legal system various aspects of the common law
system, especially in commercial and procedural matters, to enhance
commercial activities between the new colony and the United States.
Harden v. Benguet Consolidated Mining Co.,2 gave a vivid description on
the background on the enactment of The Corporation Law into Philippine
jurisdiction:

When the Philippine Islands passed to the sovereignty of

the United States, the attention of the Philippine Commission
was early drawn to the fact that there is no entity in Spanish
law exactly corresponding to the notion of the corporation in
English and American law; and in the Philippine Bill, approved
July 1, 1902, the Congress of the United States inserted
certain provisions, under the head of Franchise, which were
intended to control the lawmaking power in the Philippine
Islands in the matter of granting of franchises, privileges and
concessions. . . .
Under the guidance of this and certain other provisions
thus enacted by Congress, the Philippine Commission entered
upon the enactment of a general law authorizing the creation
of corporations in the Philippine Islands. This rather elaborate
piece of legislation is embodied in what is called our
Corporation Law (Act No. 1459 of the Philippine Commission).
The evident purpose of the commission was to introduce the
American corporation into the Philippine Islands as the
standard commercial entity and to hasten the day when the
sociedad anónima of the Spanish law would be obsolete. That
statute is a sort of codification of American corporate law.3

Under Section 75 of the then Corporation Law, any sociedad anónima

existing at the time of the passage of the Law was authorized at its option to
either continue doing business as such entity or to transform and be organized
under and by virtue of the provisions of the Corporation Law. In the event that it
elected to transform and re-organize under the provisions of the Corporation
Law, it was provided that the entity shall transfer all corporate interests to the
new corporation. If a stock corporation, it was authorized to issue its shares of
stock at par to the stockholders or members of the old corporation according to
their interests. The election to transform or to retain status quo was to be made
within a reasonable time from the effectivity of the Corporation Law.4

2
58 Phil. 141 (1933).
3
Ibid, at p. 145-146.
4
Benguet Consolidated Mining Co., v. Pineda, 98 Phil. 711 (1956).
 Under Section 191 of the then Corporation Law, sociedades anónimas
which did not opt to reform and organize under the Corporation Law, shall
continue to be governed by the laws that were in force prior to the passage of the
Corporation Law, particularly the provisions of the Code of Commerce on
sociedades anónimas, "in relation to their organization and method of transacting
business and to the rights of members thereof as between themselves."
Philippine jurisprudence recognized the difference between a corporation
and a sociedad anónima and did not interchange the two. In Phil. Products Co.
v. Primateria Society Anonyme Pour Le Commerce Exterieur,5 the Supreme
Court refused to apply the provisions of then Section 68 of the Corporation Law
requiring "foreign corporations" to obtain a license to do business in the
Philippines to an entity that was deemed to be a sociedad anónima.
Today, the sociedad anónima constitutes nothing more than an historical
relic under Philippine Corporate Law since no new entity can be organized and
registered as a sociedad anónima under existing laws.

2. Cuentas en Participacion
Early on, Philippine jurisprudence recognized the concept or set-up of
cuentas en participacion. Bourns v. Carman,6 described a cuentas en
participacion as a sort of an accidental partnership constituted in such a manner
that its existence was only known to those who had an interest in the same, there
being no mutual agreement between the partners, and without a corporate name
indicating to the public in some way that there were other people besides the one
who ostensibly managed and conducted the business, governed under Article
239 of the Code of Commerce.
Those who contract with the person under whose name the business of
such accidental partnership of cuentas en participacion is conducted, shall have
only a right of action against such person and not against the other persons
interested in the venture, and the latter, on the other hand, did not have any right
of action against third person who contracted with the manager unless such
manager formally transfers his right to them.7

3. The Old Corporation Law

The Corporation Law, or Act No. 1459, which was in fact the first
corporate statute in Philippine jurisdiction, became effective on 1 April 1906. It
had various piece-meal amendments during its 74-year history. It rapidly became
antiquated and not adopted to the changing times.

4. The Corporation Code

5
15 SCRA 301 (1965).
6
7 Phil. 117 (1906).
7
Ibid, at p. 120.
 The present Corporation Code, or Batas Pambansa Blg. 68, became
effective on 1 May 1980. It adopted various corporate doctrines previously
enunciated by the Supreme Court under the old Corporation Law. It clarified the
obligations of corporate directors and officers, expressed in statutory language
established principles and doctrines, and provided for a chapter on close
corporations.
The Code was enacted "to establish a new concept of business
corporations so that they are not merely entities established for private gain but
effective partners of the National Government in spreading the benefits of
capitalism for the social and economic development of the nation."8

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CORP. MANUSCRIPT\02-HISTORY OF CORPORATE LAW \\11-22-2002

8
Explanatory Note to Cabinet Bill No. 3, which became the basis for the Corporation Code
enacted by the then Interim Batasang Pambansa, and which took effect on 1 May 1980.