Commercial Law Notes
1. INSIDER TRADING
Section 27.1. It shall be unlawful for an insider
to sell or buy a security of the issuer, while in
possession of material information with respect
to the issuer or the security that is not generally
available to the public, unless:
(a) The insider proves that the information was
not gained from such relationship; or
(b) If the other party selling to or buying from
the insider (or his agent) is identified, the
insider proves:
(i) that he disclosed the information to the
other party, or
(ii) that he had reason to believe that the other
party otherwise is also in possession of the
information.
A purchase or sale of a security of the issuer
made by an insider defined in Subsection 3.8, or
such insider’s spouse or relatives by affinity or
consanguinity within the second degree,
legitimate or common-law, shall be presumed
to have been effected while in possession of
material nonpublic information if transacted
after such information came into existence but
prior to dissemination of such information to
the public and the lapse of a reasonable time
for market to absorb such
information: Provided, however, That this
presumption shall be rebutted upon a showing
by the purchaser or seller that he was aware of
the material nonpublic information at the time
of the purchase or sale.
SEC vs Interport Resources Corp., G.R. No.
135808, October 6, 2008
Facts: In 1994, the Board of Directors of IRC
approved a Memorandum of Agreement with
Ganda Holdings Berhad (GHB). Under the
Memorandum of Agreement, IRC acquired
100% or the entire capital stock of Ganda
Energy Holdings, Inc. (GEHI), which would own
and operate a 102 megawatt (MW) gas turbine
power-generating barge. The
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agreement also stipulates that GEHI would
assume a five-year power purchase contract
with National Power Corporation. In exchange,
IRC will issue to GHB 55% of the expanded
capital stock of IRC amounting to 40.88 billion
shares which had a total par value of P488.44
million.
IRC alleged that a press release announcing the
approval of the agreement was sent through
facsimile transmission to the Philippine Stock
Exchange and the SEC, but that the facsimile
machine of the SEC could not receive it. Upon
the advice of the SEC, the IRC sent the press
release the following morning.
The SEC averred that it received reports that IRC
failed to make timely public disclosures of its
negotiations with GHB and that some of its
directors, respondents herein, heavily traded
IRC shares utilizing this material insider
information.
While this case was pending in Court, Republic
Act No. 8799, otherwise known as the Securities
Regulation Code, took effect on 8 August 2000.
Section 8 of Presidential Decree No. 902-A, as
amended, which created the PED, was already
repealed as provided for in Section 76 of the
Securities Regulation Code:
SEC. 76. Repealing Clause. - The Revised
Securities Act (Batas Pambansa Blg. 178), as
amended, in its entirety, and Sections 2, 4
and 8 of Presidential Decree 902-A, as
amended, are hereby repealed. All other
laws, orders, rules and regulations, or parts
thereof, inconsistent with any provision of
this Code are hereby repealed or modified
accordingly.
Thus, under the new law, the PED has been
abolished, and the Securities Regulation Code
has taken the place of the Revised Securities
Act.
Held:
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 Commercial Law Notes
I.Sections 8, 30 and 36 of the Revised Securities
Act do not require the enactment of
implementing rules to make them binding and
effective.
In the absence of any constitutional or statutory
infirmity, which may concern Sections 30 and
36 of the Revised Securities Act, this Court
upholds these provisions as legal and binding. It
is well settled that every law has in its favor the
presumption of validity. Unless and until a
specific provision of the law is declared invalid
and unconstitutional, the same is valid and
binding for all intents and purposes. The mere
absence of implementing rules cannot
effectively invalidate provisions of law, where a
reasonable construction that will support the
law may be given.
II. The right to cross-examination is not
absolute and cannot be demanded during
investigative proceedings before the PED.
III. The Securities Regulations Code did not
repeal Sections 8, 30 and 36 of the Revised
Securities Act since said provisions were
reenacted in the new law.
In the present case, a criminal case may still be
filed against the respondents despite the
repeal, since Sections 8, 12, 26, 27 and 23 of the
Securities Regulations Code impose duties that
are substantially similar to Sections 8, 30 and 36
of the repealed Revised Securities Act.
IV. The SEC retained the jurisdiction to
investigate violations of the Revised Securities
Act, reenacted in the Securities Regulations
Code, despite the abolition of the PED.
Section 53 of the Securities Regulations Code
clearly provides that criminal complaints for
violations of rules and regulations enforced or
administered by the SEC shall be referred to the
Department of Justice (DOJ) for preliminary
investigation, while the SEC nevertheless retains
limited investigatory powers. Additionally, the
SEC may still impose the appropriate
administrative sanctions under Section 54 of
the aforementioned law. As in Morato v. Court
of Appeals, the repeal cannot deprive
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SEC of its jurisdiction to continue investigating
the case; or the regional trial court, to hear any
case which may later be filed against the
respondents.
V. The instant case has not yet prescribed.
The prescription period is interrupted by
commencing the proceedings for the
prosecution of the accused. In criminal cases,
this is accomplished by initiating the preliminary
investigation. The prosecution of offenses
punishable under the Revised Securities Act and
the Securities Regulations Code is initiated by
the filing of a complaint with the SEC or by an
investigation conducted by the SEC motu
proprio. Only after a finding of probable cause is
made by the SEC can the DOJ instigate a
preliminary investigation. Thus, the
investigation that was commenced by the SEC
in 1995, soon after it discovered the
questionable acts of the respondents,
effectively interrupted the prescription period.
Given the nature and purpose of the
investigation conducted by the SEC, which is
equivalent to the preliminary investigation
conducted by the DOJ in criminal cases, such
investigation would surely interrupt the
prescription period.
DISSENTING OPINION: JUSTICE CARPIO
This ruling of the majority violates Section 2 of
Act No. 3326 entitled An Act to Establish Periods
of Prescription for Violations Penalized by
Special Acts and Municipal Ordinances and To
Provide When Prescription Shall Begin To Run.
Section 2 provides:
Section 2. Prescription shall begin to run
from the day of the commission of the
violation of the law, and if the same be not
known at the time, from the discovery
thereof and the institution of judicial
proceedings for its investigation and
punishment.
In Zaldivia v. Reyes, Jr., the Court ruled that the
proceedings referred to in Section 2 of Act No.
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 Commercial Law Notes
3326 are judicial proceedings and not
administrative proceedings.
Indeed, Section 2 of Act No. 3326 expressly
refers to the "institution of judicial
proceedings." Contrary to the majority
opinion's claim that "a preliminary investigation
interrupts the prescriptive period," only the
institution of judicial proceedings can interrupt
the running of the prescriptive period. Thus, in
the present case, since no criminal case was
filed in any court against respondents since
1994 for violation of the Code, the prescriptive
period of twelve years under Section 1 of Act
No. 3326 has now expired.
2. VIOLATIONS OF THE SECURITIES
REGULATION CODE (RA 8799)
Baviera vs Paglinawin, G.R. No. 168380,
February 8, 2007
FACTS: SCB is a foreign banking corporation
duly licensed to engage in banking, trust, and
other fiduciary business in the Philippines.
It acted as a stock broker, soliciting from local
residents foreign securities called "GLOBAL
THIRD PARTY MUTUAL FUNDS" (GTPMF),
denominated in US dollars. These securities
were not registered with the Securities and
Exchange Commission (SEC). These were then
remitted outwardly to SCB-Hong Kong and SCB-
Singapore.
SCB’s counsel advised the bank to proceed with
the selling of the foreign securities although
unregistered with the SEC, under the guise of a
"custodianship agreement;" and should it be
questioned, it shall invoke Section 72 of the
General Banking Act (Republic Act No.337). In
sum, SCB was able to sell GTPMF securities
worth around P6 billion to some 645 investors.
The Investment Capital Association of the
Philippines (ICAP) filed with the SEC a complaint
alleging that SCB violated the Revised Securities
Act, particularly the provision
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prohibiting the selling of securities without prior
registration with the SEC; and that its actions
are potentially damaging to the local mutual
fund industry.
Petitioner filed with the DOJ a complaint for
violation of Section 8.1 of the Securities
Regulation Code against private respondents.
The DOJ dismissed petitioner’s complaint
holding that it should have been filed with the
SEC.
ISSUE: Did the DOJ commit grave abuse of
discretion in dismissing petitioner’s complaint?
RULING: NO.
SEC. 53. Investigations, Injunctions and
Prosecution of Offenses.–
53. 1. The Commission may, in its discretion,
make such investigation as it deems necessary
to determine whether any person has violated
or is about to violate any provision of this Code,
any rule, regulation or order thereunder, or any
rule of an Exchange, registered securities
association, clearing agency, other self-
regulatory organization, and may require or
permit any person to file with it a statement in
writing, under oath or otherwise, as the
Commission shall determine, as to all facts and
circumstances concerning the matter to be
investigated. The Commission may publish
information concerning any such violations and
to investigate any fact, condition, practice or
matter which it may deem necessary or proper
to aid in the enforcement of the provisions of
this Code, in the prescribing of rules and
regulations thereunder, or in securing
information to serve as a basis for
recommending further legislation concerning
the matters to which this Code
relates: Provided, however, That any person
requested or subpoenaed to produce
documents or testify in any investigation shall
simultaneously be notified in writing of the
purpose of such investigation: Provided,
further, That all criminal complaints for
violations of this Code and the implementing
rules and regulations enforced or administered
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 Commercial Law Notes
by the Commission shall be referred to the
Department of Justice for preliminary
investigation and prosecution before the
proper court: Provided, furthermore, That in
instances where the law allows independent
civil or criminal proceedings of violations arising
from the act, the Commission shall take
appropriate action to implement the
same: Provided, finally; That the investigation,
prosecution, and trial of such cases shall be
given priority.
Under the above provision, a criminal complaint
for violation of any law or rule administered by
the SEC must first be filed with the latter. If the
Commission finds that there is probable cause,
then it should refer the case to the DOJ. The
petitioner failed to comply with the foregoing
procedural requirement.
A criminal charge for violation of the Securities
Regulation Code is a specialized dispute. Hence,
it must first be referred to an administrative
agency of special competence, i.e., the SEC.
Under the doctrine of primary jurisdiction,
courts will not determine a controversy
involving a question within the jurisdiction of
the administrative tribunal, where the question
demands the exercise of sound administrative
discretion requiring the specialized knowledge
and expertise of said administrative tribunal to
determine technical and intricate matters of
fact. The Securities Regulation Code is a special
law. Its enforcement is particularly vested in the
SEC. Hence, all complaints for any violation of
the Code and its implementing rules and
regulations should be filed with the SEC. Where
the complaint is criminal in nature, the SEC shall
indorse the complaint to the DOJ for
preliminary investigation and prosecution as
provided in Section 53.1 earlier quoted.
SEC vs. Prosperity.Com, Inc.
G.R. No. 164197, Jan. 25, 2012
FACTS: Prosperity.Com, Inc. (PCI) sold
computer software and hosted websites
without providing internet service. To make a
profit, PCI devised a scheme in which,
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for the price of US$234.00 (subsequently
increased to US$294), a buyer could acquire
from it an internet website of a 15-Mega Byte
(MB) capacity. At the same time, by referring to
PCI his own down-line buyers, a first-time buyer
could earn commissions, interest in real estate
in the Philippines and in the United States, and
insurance coverage worth P50,000.00. To
benefit from this scheme, a PCI buyer must
enlist and sponsor at least two other buyers as
his own down-lines. These second tier of
buyers could in turn build up their own down-
lines. For each pair of down-lines, the buyer-
sponsor received a US$92.00 commission. But
referrals in a day by the buyer-sponsor should
not exceed 16 since the commissions due from
excess referrals inure to PCI, not to the buyer-
sponsor.
Apparently, PCI patterned its scheme from that
of Golconda Ventures, Inc. (GVI), which
company stopped operations after the
Securities and Exchange Commission (SEC)
issued a cease and desist order (CDO) against it.
As it later on turned out, the same persons who
ran the affairs of GVI directed PCI’s actual
operations.
In 2001, disgruntled elements of GVI filed a
complaint with the SEC against PCI, alleging that
the latter had taken over GVI’s operations.
After hearing, the SEC, through its Compliance
and Enforcement unit, issued a CDO against PCI.
The SEC ruled that PCI’s scheme constitutes an
Investment contract and, following the
Securities Regulations Code, it should have first
registered such contract or securities with the
SEC.
Instead of asking the SEC to lift its CDO in
accordance with Section 64.3 of Republic Act
(R.A.) 8799, PCI filed with the Court of Appeals
(CA) a petition for certiorari against the SEC.
The CA ruled that, following the Howey test,
PCI’s scheme did not constitute an investment
contract that needs registration pursuant to
R.A. 8799, hence, this petition.
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 Commercial Law Notes
ISSUE: WON PCI’s scheme constitutes an
investment contract that requires registration
under R.A. 8799.
HELD: No. The Securities Regulation Code treats
investment contracts as “securities” that have
to be registered with the SEC before they can
be distributed and sold. An investment contract
is a contract, transaction, or scheme where a
person invests his money in a common
enterprise and is led to expect profits primarily
from the efforts of others.
Of course, the United States Supreme Court,
grappling with the problem, has on several
occasions discussed the nature of investment
contracts. That court’s rulings, while not
binding in the Philippines, enjoy some degree of
persuasiveness insofar as they are logical and
consistent with the country’s best interests.
The United States Supreme Court held in
Securities and Exchange Commission v. W.J.
Howey Co. that, for an investment contract to
exist, the following elements, referred to as the
Howey test must concur: (1) a contract,
transaction, or scheme; (2) an investment of
money; (3) investment is made in a common
enterprise; (4) expectation of profits; and (5)
profits arising primarily from the efforts of
others. Thus, to sustain the SEC position in this
case, PCI’s scheme or contract with its buyers
must have all these elements.
Here, PCI’s clients do not make such
investments. They buy a product of some value
to them: an Internet website of a 15-MB
capacity. The client can use this website to
enable people to have internet access to what
he has to offer to them, say, some skin cream.
The buyers of the website do not invest money
in PCI that it could use for running some
business that would generate profits for the
investors. The price of US$234.00 is what the
buyer pays for the use of the website, a tangible
asset that PCI creates, using its computer
facilities and technical skills.
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Actually, PCI appears to be engaged in network
marketing, a scheme adopted by companies for
getting people to buy their products outside the
usual retail system where products are bought
from the store’s shelf.
The commissions, interest in real estate, and
insurance coverage worth P50,000.00 are
incentives to down-line sellers to bring in other
customers. These can hardly be regarded as
profits from investment of money under the
Howey test.
The CA is right in ruling that the last requisite in
the Howey test is lacking in the marketing
scheme that PCI has adopted. Evidently, it is
PCI that expects profit from the network
marketing of its products. PCI is correct in
saying that the US$234 it gets from its clients is
merely a consideration for the sale of the
websites that it provides.
3. GENERAL BANKING ACT - ENTRY OF
FOREIGN BANKS
PDIC vs Citibank and Bank of America
G.R. No. 170290 April 11, 2012
FACTS: In 1977, PDIC conducted an examination
of the books of account of Citibank. It
discovered that Citibank, in the course of its
banking business, received from its head office
and other foreign branches a total
of P11,923,163,908.00 in dollars, covered by
Certificates of Dollar Time Deposit that were
interest-bearing with corresponding maturity
dates. These funds were not reported to PDIC
as deposit liabilities that were subject to
assessment for insurance. As such, PDIC
assessed Citibank for deficiency in the sum
of P1,595,081.96.
Similarly, sometime in 1979, PDIC examined the
books of accounts of Bank of America which
revealed that BA received from its head office
and its other foreign branches a total
of P629,311,869.10 in dollars, covered by
Certificates of Dollar Time Deposit that were
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 Commercial Law Notes
interest-bearing with corresponding maturity
dates and lodged in their books under the
account "Due to Head
Office/Branches." Because BA also excluded
these from its deposit liabilities, PDIC wrote to
BA, seeking the remittance of P109,264.83
representing deficiency premium assessments
for dollar deposits.
In their petitions for declaratory relief, Citibank
and BA sought a declaratory judgment stating
that the money placements they received from
their head office and other foreign branches
were not deposits and did not give rise to
insurable deposit liabilities under Sections 3 and
4 of R.A. No. 3591 (the PDIC Charter) and, as a
consequence, the deficiency assessments made
by PDIC were improper and erroneous. The
cases were then consolidated.
ISSUE: Are the funds placed in the Philippine
branch by the head office and foreign branches
of Citibank and BA insurable deposits under the
PDIC Charter and, as such, are subject to
assessment for insurance premiums?
RULING: No.
A branch has no separate legal personality;
For a deposit to exist, there must be at least
two parties – a depositor and a depository –
each with a legal personality distinct from the
other. Because the respondents’ respective
head offices and their branches form only a
single legal entity, there is no creditor-debtor
relationship and the funds placed in the
Philippine branch belong to one and the same
bank. A bank cannot have a deposit with itself.
The head office of a bank and its branches are
considered as one under the eyes of the law.
While branches are treated as separate
business units for commercial and financial
reporting purposes, in the end, the head office
remains responsible and answerable for the
liabilities of its branches which are under its
supervision and control. As such, it is
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unreasonable for PDIC to require the
respondents, Citibank and BA, to insure the
money placements made by their home office
and other branches. Deposit insurance is
superfluous and entirely unnecessary when, as
in this case, the institution holding the funds
and the one which made the placements are
one and the same legal entity.
Funds not a deposit under the definition of the
PDIC Charter; Excluded from assessment
Section 3(f) of the PDIC Charter excludes from
the definition of the term "deposit" any
obligation of a bank payable at the office of the
bank located outside the Philippines:
“any obligation of a bank which is
payable at the office of the bank located
outside of the Philippines shall not be a deposit
for any of the purposes of this Act or included
as part of the total deposits or of the insured
deposits.”
CITIBANK, N.A. and INVESTORS’ FINANCE
CORPORATION, doing business under the
name and style of FNCB Finance vs. MODESTA
R. SABENIANO
G.R. No. 156132 February 6, 2007
FACTS: Respondent was a client of petitioners.
She had several deposits and market
placements with petitioners. At the same time,
respondent had outstanding loans with
petitioner Citibank, incurred at Citibank-Manila,
all of which had become due and demandable.
Despite repeated demands by petitioner
Citibank, respondent failed to pay her
outstanding loans. Thus, petitioner Citibank
used respondent’s deposits and money market
placements to off-set and liquidate her
outstanding obligations.
Respondent, however, denied having any
outstanding loans with petitioner Citibank.
Respondent instituted a complaint for
"Accounting, Sum of Money and Damages"
against petitioners.
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 Commercial Law Notes
Petitioner now contends that the term
"Citibank, N.A." used therein should be deemed
to refer to all branches of petitioner Citibank in
the Philippines and abroad; thus, giving
petitioner Citibank the authority to apply as
payment for the PNs even respondent’s dollar
accounts with Citibank-Geneva.
ISSUE: Is petitioner correct?
RULING: No.
Pertinent provisions of Republic Act No. 8791,
otherwise known as the General Banking Law of
2000, governing bank branches are reproduced
below –
SEC. 72. Transacting Business in the
Philippines. – The entry of foreign banks in
the Philippines through the establishment of
branches shall be governed by the provisions
of the Foreign Banks Liberalization Act.
The conduct of offshore banking business in
the Philippines shall be governed by the
provisions of Presidential Decree No. 1034,
otherwise known as the "Offshore Banking
System Decree."
SEC. 74. Local Branches of Foreign Banks. –
In case of a foreign bank which has more
than one (1) branch in the Philippines, all
such branches shall be treated as one (1) unit
for the purpose of this Act, and all references
to the Philippine branches of foreign banks
shall be held to refer to such units.
SEC. 75. Head Office Guarantee. – In order to
provide effective protection of the interests
of the depositors and other creditors of
Philippine branches of a foreign bank, the
head office of such branches shall fully
guarantee the prompt payment of all
liabilities of its Philippine branch.
Residents and citizens of the Philippines who
are creditors of a branch in the Philippines of
a foreign bank shall have preferential
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rights to the assets of such branch in
accordance with existing laws.
Republic Act No. 7721, otherwise known as the
Foreign Banks Liberalization Law, lays down the
policies and regulations specifically concerning
the establishment and operation of local
branches of foreign banks. Relevant provisions
of the said statute read –
Sec. 2. Modes of Entry. - The Monetary Board
may authorize foreign banks to operate in
the Philippine banking system through any of
the following modes of entry: (i) by
acquiring, purchasing or owning up to sixty
percent (60%) of the voting stock of an
existing bank; (ii) by investing in up to sixty
percent (60%) of the voting stock of a new
banking subsidiary incorporated under the
laws of the Philippines; or (iii) by establishing
branches with full banking authority:
Provided, That a foreign bank may avail itself
of only one (1) mode of entry: Provided,
further, That a foreign bank or a Philippine
corporation may own up to a sixty percent
(60%) of the voting stock of only one (1)
domestic bank or new banking subsidiary.
It is true that the afore-quoted Section 20 of the
General Banking Law of 2000 expressly states
that the bank and its branches shall be treated
as one unit. It should be pointed out, however,
that the said provision applies to a universal or
commercial bank, duly established and
organized as a Philippine corporation in
accordance with Section 8 of the same
statute, and authorized to establish branches
within or outside the Philippines.
The General Banking Law of 2000, however,
does not make the same categorical statement
as regards to foreign banks and their branches
in the Philippines. What Section 74 of the said
law provides is that in case of a foreign bank
with several branches in the country, all such
branches shall be treated as one unit. As to the
relations between the local branches of a
foreign bank and its head office, Section 75 of
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 Commercial Law Notes
the General Banking Law of 2000 and Section 5
of the Foreign Banks Liberalization Law provide
for a "Home Office Guarantee," in which the
head office of the foreign bank shall guarantee
prompt payment of all liabilities of its Philippine
branches. While the Home Office Guarantee is
in accord with the principle that these local
branches, together with its head office,
constitute but one legal entity, it does not
necessarily support the view that said principle
is true and applicable in all circumstances.
The Home Office Guarantee is included in
Philippine statutes clearly for the protection of
the interests of the depositors and other
creditors of the local branches of a foreign
bank. Since the head office of the bank is
located in another country or state, such a
guarantee is necessary so as to bring the head
office within Philippine jurisdiction, and to hold
the same answerable for the liabilities of its
Philippine branches. Hence, the principle of the
singular identity of that the local branches and
the head office of a foreign bank are more often
invoked by the clients in order to establish the
accountability of the head office for the
liabilities of its local branches.
Now the question that remains to be answered
is whether the foreign bank can use the
principle for a reverse purpose, in order to
extend the liability of a client to the foreign
bank’s Philippine branch to its head office, as
well as to its branches in other countries. Thus,
if a client obtains a loan from the foreign
bank’s Philippine branch, does it absolutely
and automatically make the client a debtor,
not just of the Philippine branch, but also of
the head office and all other branches of the
foreign bank around the world? This Court
rules in the negative.
Unlike Philippine statutes, the American
legislation explicitly defines the relations among
foreign branches of an American bank. Section
25 of the United States Federal Reserve
Act states that –
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Every national banking association operating
foreign branches shall conduct the accounts of
each foreign branch independently of the
accounts of other foreign branches established
by it and of its home office, and shall at the end
of each fiscal period transfer to its general
ledger the profit or loss accrued at each branch
as a separate item.
Contrary to petitioners’ assertion that the
accounts of Citibank-Manila and Citibank-
Geneva should be deemed as a single account
under its head office, the foregoing provision
mandates that the accounts of foreign branches
of an American bank shall be conducted
independently of each other. Since the head
office of petitioner Citibank is in the U.S.A., then
it is bound to treat its foreign branches in
accordance with the said provision. It is only at
the end of its fiscal period that the bank is
required to transfer to its general ledger the
profit or loss accrued at each branch, but still
reporting it as a separate item. It is by virtue of
this provision that the Circuit Court of Appeals
of New York declared in Pan-American Bank
and Trust Co. v. National City Bank of New York
that a branch is not merely a teller’s window; it
is a separate business entity.
4. ANTI-MONEY LAUNDERING ACT
Republic of the Philippines represented by the
AMLC v Tinga and Hon. Antonio Eugenio Jr
Following the promulgation of Agan, a series of
investigations concerning the award of the NAIA
3 contracts to PIATCO were undertaken by the
Ombudsman and the Compliance and
Investigation Staff (CIS) of petitioner AMLC.
AMLC filed an application to inquire into or
examine the deposits or investments of Alvarez
and the others. The trial court being satisfied
that there existed to believe that the deposits in
various bank accounts, details of which appear
in paragraph 1 of the application, are related to
the offense of violation of Anti-Graft and
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 Commercial Law Notes
Corrupt Practices Act now the subject of
criminal prosecution before the Sandiganbayan
as attested in the submitted information. The
CIS proceeded to inquire and examine the said
deposits.
Issue: Whether or not the subject bank inquiry
orders are valid
Held: The petition is dismissed. In order for this
Court to rule on the petition at bar which insists
on the enforceability of the said bank inquiry
orders, it is necessary for us to consider and
rule on the same question which after all is a
pure question of law.
SECTION 2. All deposits of whatever nature
with banks or banking institutions in the
Philippines including investments in bonds
issued by the Government of the
Philippines, its political subdivisions and its
instrumentalities, are hereby considered as
of an absolutely confidential nature and
may not be examined, inquired or looked
into by any person, government official,
bureau or office, except upon written
permission of the depositor, or in cases of
impeachment, or upon order of a competent
court in cases of bribery or dereliction of
duty of public officials, or in cases where the
money deposited or invested is the subject
matter of the litigation. (Emphasis supplied)
Nowhere in the legislative record cited by Lilia
Cheng does it appear that there was an
unequivocal intent to exempt from the bank
inquiry order all bank accounts opened prior to
the passage of the AMLA. There is a cited
exchange between Representatives Zamora and
Lopez where the latter confirmed to the former
that deposits are supposed to be exempted
from scrutiny or monitoring if they are already
in place as of the time the law is enacted. That
statement does indicate that transactions
already in place when the AMLA was passed are
indeed exempt from scrutiny through a bank
inquiry order, but it cannot yield any
interpretation that records of
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transactions undertaken after the enactment of
the AMLA are similarly exempt. Due to the
absence of cited authority from the legislative
record that unqualifiedly supports respondent
Lilia Cheng thesis, there is no cause for us to
sustain her interpretation of the AMLA, fatal as
it is to the anima of that law.
Prior to the enactment of the AMLA, the fact
that bank accounts or deposits were involved in
activities later on enumerated in Section 3 of
the law did not, by itself, remove such accounts
from the shelter of absolute confidentiality.
Prior to the AMLA, in order that bank accounts
could be examined, there was need to secure
either the written permission of the depositor
or a court order authorizing such examination,
assuming that they were involved in cases of
bribery or dereliction of duty of public officials,
or in a case where the money deposited or
invested was itself the subject matter of the
litigation. The passage of the AMLA stripped
another layer off the rule on absolute
confidentiality that provided a measure of
lawful protection to the account holder. For
that reason, the application of the bank inquiry
order as a means of inquiring into records of
transactions entered into prior to the passage
of the AMLA would be constitutionally infirm,
offensive as it is to the ex post facto clause.
We can hardly presume that Congress intended
to enact a self-defeating law in the first place,
and the courts are inhibited from such a
construction by the cardinal rule that a law
should be interpreted with a view to upholding
rather than destroying it.
Republic vs Cabrini, G.R. No. 154522, May 5,
2006
AMLC issued freeze orders against various bank
accounts of respondents. The frozen accounts
were previously found prima facie to be related
to the unlawful activities of the respondents.
The AMLC filed with the CA various petitions. It
invoked the jurisdiction of the CA in the belief
that the power given to the CA to issue a TRO or
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 Commercial Law Notes
writ of injunction against any freeze order
issued by the AMLC carried with it the power to
extend the effectivity of a freeze order. The CA
disagreed and dismissed the petitions.
ISSUE: which court has jurisdiction to extend
the effectivity of a freeze order?
RULING:
During the pendency of these petitions, or on
March 3, 2003, Congress enacted RA 9194 (An
Act Amending Republic Act No. 9160, Otherwise
Known as the "Anti-Money Laundering Act of
2001"). It amended Section 10 of RA 9160 as
follows:
SEC. 7. Section 10 of [RA 9160] is hereby
amended to read as follows:
SEC. 10. Freezing of Monetary Instrument or
Property. – The Court of Appeals, upon
application ex parte by the AMLC and after
determination that probable cause exists
that any monetary instrument or property is
in any way related to an unlawful activity as
defined in Sec. 3(i) hereof, may issue a
freeze order which shall be effective
immediately. The freeze order shall be for a
period of twenty (20) days unless extended
by the court.
Section 12 of RA 9194 further provides:
SEC 12. Transitory Provision. – Existing freeze
orders issued by the AMLC shall remain in
force for a period of thirty (30) days after the
effectivity of this Act, unless extended by
the Court of Appeals.
The amendment by RA 9194 of RA 9160 erased
any doubt on the jurisdiction of the CA over the
extension of freeze orders. As the law now
stands, it is solely the CA which has the
authority to issue a freeze order as well as to
extend its effectivity. It also has the exclusive
jurisdiction to extend existing freeze orders
previously issued by the AMLC vis-à-
vis accounts and deposits related to money-
laundering activities.
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CORPORATION CODE
1. PIERCING THE VEIL OF CORPORATE ENTITY
Piercing the veil of corporate fiction means
that while the corporation cannot be generally
held liable for acts or liabilities of its
stockholders or members, and vice versa
because a corporation has a personality
separate and distinct from its members or
stockholders, however, the corporate existence
is disregarded under this doctrine when the
corporation is formed or used for illegitimate
purposes, particularly, as a shield to perpetuate
fraud, defeat public convenience, justify wrong,
evade a just and valid obligation or defend a
crime.
CLAPAROLS VS. CIR
G.R. No. L-30822 July 31, 1975
Facts: A complaint for unfair labor practice was
filed by herein private respondent Allied
Workers' Association, respondent Demetrio
Garlitos and ten (10) respondent workers
against herein petitioners on account of the
dismissal of respondent workers from
petitioner Claparols Steel and Nail Plant.
The Court rendered its decision finding "Mr.
Claparols guilty of union busting and" of having
"dismissed said complainants because of their
union activities," and ordering respondents "(1)
To cease and desist from committing unfair
labor practices against their employees and
laborers; (2) To reinstate said complainants to
their former or equivalent jobs, as soon as
possible, with back wages from the date of their
dismissal up to their actual reinstatement" (p.
12, Decision; p. 27, rec.).
The Claparols Steel and Nail Plant, which ceased
operation of June 30, 1957, was succeeded by
the Claparols Steel Corporation effective the
next day, July 1, 1957 up to December 7, 1962,
when the latter finally ceased to operate.
10
 Commercial Law Notes
Workers alleged that Claparols Steel and Nail
Plant and Claparols Steel and Nail Corporation
are one and the same corporation controlled by
petitioner Claparols, with the latter corporation
succeeding the former.
Issue: Is the Claparols Steel and Nail Plant and
Claparols Steel and Nail Corporation are one
and the same corporation?
Ruling: YES. Respondent Court's findings that
indeed the Claparols Steel and Nail Plant, which
ceased operation of June 30, 1957, was
SUCCEEDED by the Claparols Steel Corporation
effective the next day, July 1, 1957 up to
December 7, 1962, when the latter finally
ceased to operate, were not disputed by
petitioners. It is very clear that the latter
corporation was a continuation and successor
of the first entity, and its emergence was
skillfully timed to avoid the financial liability
that already attached to its predecessor, the
Claparols Steel and Nail Plant. Both
predecessors and successor were owned and
controlled by the petitioner Eduardo Claparols
and there was no break in the succession and
continuity of the same business. This "avoiding-
the-liability" scheme is very patent, considering
that 90% of the subscribed shares of stocks of
the Claparols Steel Corporation (the second
corporation) was owned by respondent (herein
petitioner) Claparols himself, and all the assets
of the dissolved Claparols Steel and Nail Plant
were turned over to the emerging Claparols
Steel Corporation.
It is very obvious that the second corporation
seeks the protective shield of a corporate
fiction whose veil in the present case could, and
should, be pierced as it was deliberately and
maliciously designed to evade its financial
obligation to its employees.
It is well remembering that in Yutivo & Sons
Hardware Company vs. Court of Tax Appeals (L-
13203, Jan. 28, 1961, 1 SCRA 160), We held that
when the notion of legal entity is used to defeat
public convenience, justify wrong,
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protect fraud, or defend crime, the law will
regard the corporation as an association or
persons, or, in the case of two corporations, will
merge them into one.
In Liddel & Company, Inc. vs. Collector of
Internal Revenue (L-9687, June 30, 1961, 2 SCRA
632), this Court likewise held that where a
corporation is a dummy and serves no business
purpose and is intended only as a blind, the
corporate fiction may be ignored.
In Commissioner of Internal Revenue vs. Norton
and Harrison Company (L-17618, Aug. 31, 1964,
11 SCRA 714), We ruled that where a
corporation is merely an adjunct, business
conduit or alter ego of another corporation, the
fiction of separate and distinct corporate
entities should be disregarded.
2. COLLATERAL ATTACK; DE FACTO
CORPORATION
HALL et al. vs PICCIO,
G.R. No. L-2598 June 29, 195
FACTS: (1) on May 28, 1947, the petitioners C.
Arnold Hall and Bradley P. Hall, and the
respondents Fred Brown, Emma Brown, Hipolita
D. Chapman and Ceferino S. Abella, signed and
acknowledged in Leyte, the article of
incorporation of the Far Eastern Lumber and
Commercial Co., Inc., organized to engage in a
general lumber business to carry on as general
contractors, operators and managers, etc.
Attached to the article was an affidavit of the
treasurer stating that 23,428 shares of stock
had been subscribed and fully paid with certain
properties transferred to the corporation
described in a list appended thereto.
(2) Immediately after the execution of said
articles of incorporation, the corporation
proceeded to do business with the adoption of
by-laws and the election of its officers.
(3) On December 2, 1947, the said articles of
incorporation were filed in the office of the
11
 Commercial Law Notes
Securities and Exchange Commissioner, for the
issuance of the corresponding certificate of
incorporation.
(4) On March 22, 1948, pending action on the
articles of incorporation by the aforesaid
governmental office, the respondents Fred
Brown, Emma Brown, Hipolita D. Chapman and
Ceferino S. Abella filed before the Court of First
Instance of Leyte the civil case numbered 381,
entitled "Fred Brown et al. vs. Arnold C. Hall et
al.", alleging among other things that the Far
Eastern Lumber and Commercial Co. was an
unregistered partnership; that they wished to
have it dissolved because of bitter dissension
among the members, mismanagement and
fraud by the managers and heavy financial
losses.
(5) The defendants in the suit, namely, C. Arnold
Hall and Bradley P. Hall, filed a motion to
dismiss, contesting the court's jurisdiction and
the sufficiently of the cause of action.
(6) After hearing the parties, the Hon. Edmund
S. Piccio ordered the dissolution of the
company; and at the request of plaintiffs,
appointed of the properties thereof, upon the
filing of a P20,000 bond.
ISSUES:
1. WON the respondents Fred Brown and Emma
Brown had signed the article of incorporation
but only a partnership.
2. WON The court had no jurisdiction in civil case
No. 381 to decree the dissolution of the
company, because it being a de
facto corporation, dissolution thereof may only
be ordered in a quo warranto proceeding
instituted in accordance with section 19 of the
Corporation Law.
RULING: All the parties are informed that
the Securities and Exchange Commission has
not, so far, issued the corresponding certificate
of incorporation. All of them know, or sought to
know, that the personality of a
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corporation begins to exist only from the
moment such certificate is issued — not before
(sec. 11, Corporation Law). The complaining
associates have not represented to the others
that they were incorporated any more than the
latter had made similar representations to
them. And as nobody was led to believe
anything to his prejudice and damage, the
principle of estoppel does not apply. Obviously
this is not an instance requiring the
enforcement of contracts with the
corporation through the rule of estoppel.
The second issue above stated is
premised on the theory that, inasmuch as the
Far Eastern Lumber and Commercial Co., is a de
facto corporation, section 19 of the Corporation
Law applies, and therefore the court had not
jurisdiction to take cognizance of said civil case
number 381. Section 19 reads as follows:
The due incorporation of any corporations
claiming in good faith to be a corporation
under this Act and its right to exercise
corporate powers shall not be inquired into
collaterally in any private suit to which the
corporation may be a party, but such inquiry
may be had at the suit of the Insular
Government on information of the Attorney-
General.
There are least two reasons why this section
does not govern the situation. Not having
obtained the certificate of incorporation, the
Far Eastern Lumber and Commercial Co. — even
its stockholders — may not probably claim "in
good faith" to be a corporation.
Under our statue it is to be noted
(Corporation Law, sec. 11) that it is the
issuance of a certificate of incorporation by
the Director of the Bureau of Commerce and
Industry which calls a corporation into being.
The immunity if collateral attack is granted
to corporations "claiming in good faith to be
a corporation under this act." Such a claim is
compatible with the existence of errors and
irregularities; but not with a total or
12
 Commercial Law Notes
substantial disregard of the law. Unless
there has been an evident attempt to
comply with the law the claim to be a
corporation "under this act" could not be
made "in good faith." (Fisher on the
Philippine Law of Stock Corporations, p.
75. See also Humphreys vs. Drew, 59 Fla.,
295; 52 So., 362.)
Second, this is not a suit in which the
corporation is a party. This is a litigation
between stockholders of the alleged
corporation, for the purpose of obtaining its
dissolution. Even the existence of a de
jure corporation may be terminated in a private
suit for its dissolution between stockholders,
without the intervention of the state.
There might be room for argument on the right
of minority stockholders to sue for
dissolution;1 but that question does not affect
the court's jurisdiction, and is a matter for
decision by the judge, subject to review on
appeal. Whkch brings us to one principal reason
why this petition may not prosper, namely: the
petitioners have their remedy by appealing the
order of dissolution at the proper time.
3. CORPORATION BY ESTOPPEL
ALBERT VS. UNIVERSITY PUBLISHING CO., INC.
G.R. No. L-19118 January 30, 1965
Facts: Mariano Albert entered into a contract
with University Publishing Co., Inc. through Jose
M. Aruego, its President, whereby University
would pay plaintiff for the exclusive right to
publish his revised Commentaries on the
Revised Penal Code. The contract stipulated
that failure to pay one installment would render
the rest of the payments due. When University
failed to pay the second installment, Albert
sued for collection and won. However, upon
execution, it was found that University was not
registered with the SEC. Albert petitioned for a
writ of execution against Jose M. Aruego as the
real defendant. University opposed,
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on the ground that Aruego was not a party to
the case.
Issue: Whether the judgment may be
executed against Jose M. Aruego, supposed
President of University Publishing Co., Inc., as
the real defendant.
Ruling: The Supreme Court found that Aruego
represented a non-existent entity and induced
not only Albert but the court to believe in such
representation. Aruego, acting as
representative of such non-existent principal,
was the real party to the contract sued upon,
and thus assumed such privileges and
obligations and became personally liable for the
contract entered into or for other acts
performed as such agent.
The Supreme Court likewise held that the
doctrine of corporation by estoppel cannot be
set up against Albert since it was Aruego who
had induced him to act upon his (Aruego's)
willful representation that University had been
duly organized and was existing under the law.
4. BOARD RESPONSIBILITY ON ISSUANCE OF
WATERED STOCK
Liability of directors for watered stocks (Sec. 65)
Any director or officer of a corporation shall be
solidarily liable with the stockholder concerned
to the corporation and its creditors for the
difference between the fair value received at
the time of issuance of the stock and the par or
issued value of the same, who consented to:
a. The issuance of stocks for a
consideration less than its par or issued
value
b. The issuance of stocks for a
consideration in any form other than
cash
c. The issuance of stocks valued in excess
of its fair value
d. Or having knowledge of such issuance,
does not forthwith express his
objection in writing and file the same
with the corporate secretary.
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 Commercial Law Notes
5. VOTING TRUST AGREEMENTS
An arrangement created by one or more
stockholders for the purpose of conferring upon
a trustee or trustees the right to vote and other
rights pertaining to the shares for a period not
exceeding five (5) years at any time. The
arrangement is embodied in a document called
a voting trust agreement (VTA).
A voting trust, which is specifically required as a
condition in a loan agreement, may be for a
period exceeding five (5) years but shall
automatically expire upon full payment of the
loan.
The essence of a VTA is the separation of real
ownership and voting rights.
Requirements of a VTA
-In writing
-Notarized
-Shall specify the terms and conditions thereof
-Certified copy of such agreement shall be filed
with the corporation and with the SEC
If these requirements are not satisfied, the VTA
is ineffective and unenforceable.
Procedure
a. The certificate or certificates of stock covered
by the voting trust agreement shall be cancelled
and new ones shall be issued in the name of the
trustee or trustees stating that they are issued
pursuant to said agreement.
b. In the books of the corporation, it shall be
noted that the transfer in the name of the
trustee or trustees is made pursuant to said
voting trust agreement.
c. The trustee or trustees shall execute and
deliver to the transferors voting trust
certificates, which shall be transferable in the
same manner and with the same effect as
certificates of stock.
Right to inspect VTA
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The voting trust agreement filed with the
corporation shall be subject to examination by
any stockholder in the same manner as any
other corporate book or record. The transferor
and the trustee or trustees may exercise the
right of inspection of all corporate books and
records in accordance with the provisions of
this Code.
Any other stockholder may transfer his shares
to the same trustee or trustees upon the terms
and conditions stated in the voting trust
agreement, and thereupon shall be bound by all
the provisions of said agreement.
Restriction
No VTA shall be entered into for the purpose of
circumventing the law against monopolies and
illegal combinations in restraint of trade or used
for purposes of fraud.
Automatic expiration of rights under the VTA
Unless expressly renewed, all rights granted in a
voting trust agreement shall automatically
expire at the end of the agreed period. The
voting trust certificates as well as the
certificates of stock in the name of the trustee
or trustees shall thereby be deemed cancelled
and new certificates of stock shall be reissued in
the name of the transferors.
The voting trustee or trustees may vote by
proxy unless the agreement provides otherwise.
Purpose
-to make possible a unified control of the affairs
of the corporation and consistent policy
-to make possible for a majority group of
shareholders to dispose of a beneficial interest
in a large proportion of their shares and still
retain control of the corporation through the
voting trustee
Under the prevailing view, a voting trust should
have a legitimate business purpose to promote
14
 Commercial Law Notes
the best interests of the corporation, or even to
protect the legitimate interests of others in the
corporation.
Voting trust certificates
These certificates are issued by the trustees.
These confirm:
1. that a trustee has been constituted;
2. the extent of shares; and
3. the participation of the shareholder in
the VTA.
Status of transferee and transferor
a. Voting trustee is only a share owner vested
with apparent legal title for the sole purpose of
voting upon stocks that he does not own.
b. Transferring stockholder retains the right of
inspection of corporate books which he can
exercise concurrently with the voting trustee.
Powers and Rights of voting trustees
a. Right to vote and other rights pertaining to
the shares in their names subject to terms and
conditions of and for the period specified in the
agreement
b. Vote in person or by proxy unless agreement
provides otherwise
c. Rights of inspection of corporate books and
records
d. Legal title holder - qualified to be a director
The clear intent is that in order to be eligible as
director, what is material is the legal title to, not
the beneficial ownership of, the stock as
appearing on the books of a corporation.
Therefore, a director
who executes a voting trust agreement over all
his shares, remains only a beneficial owner, and
therefore is automatically disqualified from his
directorship.
Limitations on VTAs
a. should not exceed 5 years except if a
condition in a loan agreement, shall
automatically expire upon full payment of the
loan
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b. must not be for purposes of circumventing
the law against monopolies and illegal
combinations in
restraint of trade
c. must not be used for purposes of fraud
d. must be in writing, notarized, specify the
terms and conditions thereof
e. certified copy must be filed with corporation
and SEC otherwise unenforceable
f. agreement is subject to examination by
stockholder
g. shall automatically expire at the end of the
agreed period
h. vote in person or by proxy unless agreement
provides otherwise
i. rights of inspection of corporate books and
records
LEE vs. CA [G.R. No. 93695, February 4, 1992]
By its very nature, a voting trust agreement
results in the separation of the voting rights of a
stockholder from his other rights such as the
right to receive dividends, the right to inspect
the books of the corporation, the right to sell
certain interests in the assets of the corporation
and other rights to which a stockholder may be
entitled until the liquidation of the corporation.
However, in order to distinguish a voting trust
agreement from proxies and other voting pools
and agreements, it must pass three criteria or
tests, namely: (1) that the voting rights of the
stock are separated from the other attributes of
ownership; (2) that the voting rights granted are
intended to be irrevocable for a definite period
of time; and (3) that the principal purpose of
the grant of voting rights is to acquire voting
control of the corporation.
Under section 59 of the Corporation Code a
voting trust agreement may confer upon a
trustee not only the stockholder's voting rights
but also other rights pertaining to his shares as
long as the voting trust agreement is not
entered "for the purpose of circumventing the
law against monopolies and illegal
combinations in restraint of trade or used for
purposes of fraud." (section 59, 5th paragraph
of the Corporation Code) Thus, the traditional
15
 Commercial Law Notes
concept of a voting trust agreement primarily
intended to single out a stockholder's right to
vote from his other rights as such and made
irrevocable for a limited duration may in
practice become a legal device whereby a
transfer of the stockholder's shares is effected
subject to the specific provision of the voting
trust agreement.
The execution of a voting trust agreement,
therefore, may create a dichotomy between the
equitable or beneficial ownership of the
corporate shares of a stockholders, on the one
hand, and the legal title thereto on the other
hand.
The law simply provides that a voting trust
agreement is an agreement in writing whereby
one or more stockholders of a corporation
consent to transfer his or their shares to a
trustee in order to vest in the latter voting or
other rights pertaining to said shares for a
period not exceeding five years upon the
fulfillment of statutory conditions and such
other terms and conditions specified in the
agreement. The five year-period may be
extended in cases where the voting trust is
executed pursuant to a loan agreement
whereby the period is made contingent upon
full payment of the loan.
6. SELF-DEALING AND INTERLOCKING
DIRECTORS
Self-dealings (Sec. 32 )
A contract of the corporation with one or more
of its directors or trustees or officers is
A. Voidable, at the option of such corporation,
unless all the following conditions are present:
1. That the presence of such director or trustee
in the board meeting in which the contract was
approved was not necessary to constitute a
quorum for such meeting;
2. That the vote of such director or trustee was
not necessary for the approval of the contract;
3. That the contract is fair and reasonable under
the circumstances; and
4. That in case of an officer, the contract has
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been previously authorized by the board of
directors.
B. May be ratified by the vote of the
stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or of at
least two-thirds (2/3) of the members in a
meeting called for the purpose:
1. Where any of the first two conditions set
forth in the preceding paragraph is absent, in
the case of a contract with a director or trustee,
2. Full disclosure of the adverse interest of the
directors or trustees involved is made at such
meeting: Provided, however, That the contract
is fair and reasonable under the circumstances.
(Sec. 32.)
Interlocking Directors (Sec. 33)
An interlocking director is one who occupies a
position in 2 companies dealing with each
other.
A contract between 2 or more corporations
having interlocking directors shall not be
invalidated on that ground alone except:
1. In cases of fraud, and
2. Provided the contract is fair and
reasonable under the circumstances
Sec. 32 applies to interlocking directors insofar
as the corporations where he has nominal
interest are concerned.
1. if the interest of the interlocking
director in one corporation is
substantial (stockholdings exceeds 20%
of the outstanding capital stock) and
2. his interest in the other corporation or
corporations is merely nominal.
7. VIOLATION OF VOTING REQUIREMENTS
(2/3) ESPECIALLY ON THE EXERCISE OF
APPRAISAL RIGHTS
Appraisal right (Sec. 81.)
I. Any stockholder of a corporation shall have
the right to dissent and demand payment of the
fair value of his shares in the following
instances:
16
 Commercial Law Notes
a.) In case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or class
of shares, or of authorizing preferences in any
respect superior to those of outstanding shares
of any class, or of extending or shortening the
term of corporate existence;
b.) In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
substantially all of the corporate property and
assets as provided in the Code; and
d.) In case of merger or consolidation.
(A.) How right is exercised.( Sec. 82.)
The appraisal right may be exercised by:
A.) Who: Any stockholder who shall have voted
against the proposed corporate action
B.) How: By making a written demand on the
corporation
C.) When: Within thirty (30) days after the date
on which the vote was taken for payment of the
fair value of his shares: Provided, That failure to
make the demand within such period shall be
deemed a waiver of the appraisal right. If the
proposed corporate action is implemented or
affected, the corporation shall pay to such
stockholder, upon surrender of the certificate
or certificates of stock representing his shares,
the fair value thereof as of the day prior to the
date on which the vote was taken, excluding
any appreciation or depreciation in anticipation
of such corporate action.
IN CASE OF DISAGREEMENT: If within a period
of sixty (60) days from the date the corporate
action was approved by the stockholders, the
withdrawing stockholder and the corporation
cannot agree on the fair value of the shares:
A.) it shall be determined and appraised by
three (3) disinterested persons, one of whom
shall be named by the stockholder, another by
the corporation, and the third by the two thus
chosen.
B.) The findings of the majority of the
appraisers shall be final, and their award shall
be paid by the corporation within thirty (30)
days after such award is made: Provided, That
no payment shall be made to any
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dissenting stockholder unless the corporation
has unrestricted retained earnings in its books
to cover such payment: and Provided, further,
That upon payment by the corporation of the
agreed or awarded price, the stockholder shall
forthwith transfer his shares to the corporation.
(B.) Effect of demand and termination of right
(Sec. 83.)
RULE: From the time of demand for payment of
the fair value of a stockholder's shares until
either the abandonment of the corporate action
involved or the purchase of the said shares by
the corporation, all rights accruing to such
shares, including voting and dividend rights,
shall be suspended in accordance with the
provisions of this Code, EXCEPTION: except the
right of such stockholder to receive payment of
the fair value thereof: Provided, That if the
dissenting stockholder is not paid the value of
his shares within 30 days after the award, his
voting and dividend rights shall immediately be
restored.
(C.) When right to payment ceases. (Sec. 84)
RULE: No demand for payment under this Title
may be withdrawn
EXCEPTION: unless the corporation consents
thereto.
CASE OF BREACH: If, however, such demand for
payment is withdrawn with the consent of the
corporation, or if the proposed corporate action
is abandoned or rescinded by the corporation
or disapproved by the Securities and Exchange
Commission where such approval is necessary,
or if the Securities and Exchange Commission
determines that such stockholder is not entitled
to the appraisal right, then the right of said
stockholder to be paid the fair value of his
shares shall cease, his status as a stockholder
shall thereupon be restored, and all dividend
distributions which would have accrued on his
shares shall be paid to him.
(D.) Who bears costs of appraisal (85.)
RULE: The costs and expenses of appraisal shall
be borne by the corporation
17
 Commercial Law Notes
EXCEPTION: If the fair value ascertained by the
appraisers is approximately the same as the
price which the corporation may have offered
to pay the stockholder, in which case they shall
be borne by the latter. In the case of an action
to recover such fair value, all costs and
expenses shall be assessed against the
corporation, unless the refusal of the
stockholder to receive payment was unjustified.
(E.)Notation on certificates; rights of
transferee. (Sec. 86.)
When: Within ten (10) days after demanding
payment for his shares, a dissenting stockholder
shall submit the certificates of stock
representing his shares to the corporation for
notation thereon that such shares are
dissenting shares.
Consequence: His failure to do so shall, at the
option of the corporation, terminate his rights
under this Title. ii.) If shares represented by the
certificates bearing such notation are
transferred, and the certificates consequently
canceled, the rights of the transferor as a
dissenting stockholder under this Title shall
cease and the transferee shall have all the rights
of a regular stockholder; and all dividend
distributions which would have accrued on such
shares shall be paid to the transferee.
8. POWER OF DIRECTORS TO DECLARE
DIVIDENDS AND ENTER INTO MANAGEMENT
CONTRACTS
Power to declare dividends.
The board of directors of a stock corporation
may declare dividends out of the unrestricted
retained earnings which shall be payable in
cash, in property, or in stock to all stockholders
on the basis of outstanding stock held by them:
Provided,
• cash dividends due on delinquent stock
shall first be applied to the unpaid balance
on the subscription plus costs and
expenses,
• stock dividends shall be withheld from the
Silliman University • Via Veritas Vita • Godspeed Sillimanians
delinquent stockholder until his unpaid
subscription is fully paid:
o Provided
 , That no stock dividend
shall be issued without the
approval of stockholders
representing not less than
two-thirds (2/3) of the
outstanding capital stock at
a regular or special meeting
duly called for the purpose.
Stock corporations are prohibited from
retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital
stock,
except:
(1) when justified by definite corporate
expansion projects or programs approved by
the board of directors; or
(2) when the corporation is prohibited under
any loan agreement with any financial
institution or creditor, whether local or foreign,
from declaring dividends without its/his
consent, and such consent has not yet been
secured; or
(3) when it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the corporation,
such as when there is need for special reserve
for probable contingencies.
Steinberg v Velasco
Facts: The board of the corporation authorized
the purchase of 330 shares of capital stock of
the corporation and the declaration of
dividends at a time when the corporation was
indebted and in such a bad financial condition.
The directors relied on the face value on the
books of its A/R, which had little or no value.
Furthermore it appears that two of the
directors were permitted to resign so that they
could sell their stock to the corporation. The
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 Commercial Law Notes
corporation became insolvent, and the receiver
Steinberg sues the directors.
Held: The corporation did not have a bona fide
surplus with which dividends could be declared
and paid out. The directors did not act in GF and
were grossly ignorant of their duties. Directors
were held personally liable for causing the
corporation to purchase their own shares and
declaring dividends, which because of such
failure to take into consideration of worthless
receivables, worked to the detriment of the
creditors. The directors did not act with
diligence in taking the word of their chairman
and not making an informed decision based on
the facts then available to them and on not
relying on other documents available to them.
Creditors have the right to assume that so long
as there are outstanding debts and liabilities,
the board will not use the corporate assets to
purchase its own stock, and that it will not
declare dividends to SHs when the corporation
is insolvent
Power to enter into management contract
(Sec.44)
A corporation shall conclude a management
contract with another corporation only when
such contract shall have been approved:
a. by the board of directors, and
b. by stockholders owning at least the
majority of the outstanding capital stock, or
c. by at least a majority of the members in the
case of a non-stock corporation, of both the
managing and the managed corporation,
provided that:
1. where a stockholder or stockholders
representing the same interest of both
the managing and the managed
corporations own or control more than
one-third (1/3) of the total outstanding
capital stock entitled to vote of the
managing corporation; or
2. where a majority of the members of the
board of directors of the managing
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corporation also constitute a majority
of the members of the board of
directors of the managed corporation,
then the management contract must be
approved by the stockholders of the
managed corporation owning at least
two-thirds (2/3) of the total outstanding
capital stock entitled to vote, or by at
least two-thirds (2/3) of the members in
the case of a non-stock corporation. No
management contract shall be entered
into for a period longer than five years
for any one term.
The provisions of the next preceding paragraph
shall apply to any contract whereby a
corporation undertakes to manage or operate
all or substantially all of the business of another
corporation, whether such contracts are called
service contracts, operating agreements or
otherwise: Provided, however, That such
service contracts or operating agreements
which relate to the exploration, development,
exploitation or utilization of natural resources
may be entered into for such periods as may be
provided by the pertinent laws or regulations.
Otis & Co. v Pennsylvania Railroad Co.
Facts: Otis & Co is a SH in and among the
wholly-owned subsidiaries of the Pennsylvania
Railroad Co (PRR), which included Pennsylvania
Ohio 7 Detroit Railroads (POD). One of its
subsidiaries had an outstanding bond issuance
of $28.4M. The parent then negotiated with a
third party, Kuhn, Loeb and Co, to refinance the
bonds. The directors of POD approved a
resolution authorizing the sale of the new Series
D bonds at a best obtainable price. Bonds were
then sold to Kuhn and Loeb. Another buyer was
willing to purchase the bonds at a better price
but the directors declined. The Interstate
Commerce Commission found that the
corporation was not able to get the best price
for the sale and that other options were not
explored, that negotiations were only with one
investment house and were at “arms-length
dealing”, and that it was possible to have
greater savings.
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 Commercial Law Notes
Issue: W/N the directors are liable for failing to
exercise ordinary care and judgment in the
issuance and sale of $28M in bonds, which
resulted in alleged losses suffered by the
corporation.
Held: Business judgment rule: courts will not
interfere in matters of business judgment, in
which it is presumed that judgment—
reasonable diligence—has in fact been
exercised. A director cannot close his eyes to
what is going on about him in the conduct of
business judgment. Courts have given directors
wide latitude in the management of the affairs
of the corporation provided that the judgment
is unbiased, honest and reasonably exercised.
Negligence must be determined as of the time
of transaction. Mistakes or errors in the
exercise of honest business judgment do not
subject the officers and directors to liability for
negligence in the discharge of their appointed
duties. Directors are entrusted with the
management of the affairs of the corporation. If
in the course of management they arrive at a
decision for which there is a reasonable basis,
and they acted in GF as the result of their
independent judgment, and uninfluenced by
any other consideration than what they
honestly felt was in the best interests of the
corporation. In the present case, the SC found
that the officers and directors of the
corporations acted honestly in GF and sought to
exercise their best judgment for the best
interests of their corporation. No fraud was
present, but only a faint suggestion of BF. The
directors had the right to negotiate privately
with Kuhn and Loeb. In contracting with the
latter, the directors were not contracting with
another firm in which they were interested, nor
did the directorship or officership positions
interlock. There is no contention that fraud
existed and fraudulent acts will not be
presumed.
9. CASES ON ACTION FOR MANDAMUS TO
COMPEL A CORPORATION TO REGISTER IN ITS
BOOKS A SALE MADE BY A SUBSCRIBER
Ponce vs Alsons Cement Corporation
Silliman University • Via Veritas Vita • Godspeed Sillimanians
G.R. NO. 139802. December 10, 2002
Facts:
On 25 January 1996, Vicente C. Ponce, filed a
complaint with the SEC for mandamus and
damages against Alsons Cement Corporation
and its corporate secretary Francisco M. Giron,
Jr. In his complaint, Ponce alleged, among
others, that "the late Fausto G. Gaid was an
incorporator of Victory Cement Corporation
(VCC), having subscribed to and fully paid
239,500 shares of said corporation; that on 8
February 1968,Ponce and Fausto Gaid executed
a "Deed of Undertaking" and "Indorsement"
whereby the latter acknowledges that the
former is the owner of said shares and he was
therefore assigning/endorsing the same to
Ponce; that on 10 April 1968, VCC was renamed
Floro Cement Corporation (FCC); that on 22
October 1990, FCC was renamed Alsons Cement
Corporation (ACC); that from the time of
incorporation of VCC up to the present, no
certificates of stock corresponding to the
239,500 subscribed and fully paid shares of Gaid
were issued in the name of Fausto G. Gaid
and/or Ponce; and that despite repeated
demands, ACC and Giron refused and continue
to refuse without any justifiable reason to issue
to Ponce the certificates of stocks
corresponding to the 239,500 shares of Gaid, in
violation of Ponce's right to secure the
corresponding certificate of stock in his name.
ACC and Giron moved to dismiss. SEC Hearing
Officer Enrique L. Flores, Jr. granted the motion
to dismiss in an Order dated 29 February 1996.
Ponce appealed the Order of dismissal. On 6
January 1997, the Commission En Banc reversed
the appealed Order and directed the Hearing
Officer to proceed with the case. In ruling that a
transfer or assignment of stocks need not be
registered first before it can take cognizance of
the case to enforce Ponce's rights as a
stockholder, the Commission En Banc cited the
Supreme Court's ruling in Abejo vs. De la Cruz,
149 SCRA 654 (1987). Their motion
for reconsideration having been denied, ACC
and Giron appealed the decision of the SEC En
Banc and the resolution denying their motion
20
 Commercial Law Notes
for reconsideration to the Court of Appeals. In
its decision, the Court of Appeals held that in
the absence of any allegation that the transfer
of the shares between Gaid and Ponce was
registered in the stock and transfer book of
ACC, Ponce failed to state a cause of action.
Thus, said the appellate court, "the complaint
for mandamus should be dismissed for failure
to state a cause of action." Ponce's motion for
reconsideration was denied in a resolution
dated 10 August 1999.Ponce filed the petition
for review on certiorari.
Issue: Whether Ponce can require the corporate
secretary, Giron, to register Gaid’s shares in his
name.
A mandamus should not issue to compel the
secretary of a corporation to make a transfer of
the stock on the books of the company, unless it
affirmatively appears that he has failed or
refused so to do, upon the demand either of the
person in whose name the stock is registered, or
of some person holding a power of attorney for
that purpose from the registered owner of the
stock. There is no allegation in the petition that
the petitioner or anyone else holds a power of
attorney from the Bryan-Landon Company
authorizing a demand for the transfer of the
stock, or that the Bryan-Landon Company has
ever itself made such demand upon the Visayan
Electric Company, and in the absence of such
allegation we are not able to say that there was
such a clear indisputable duty, such a clear legal
obligation upon the respondent, as to justify
the issuance of the writ to compel him to
perform it.
Under the provisions of our statute touching
the transfer of stock (secs. 35 and 36 of Act No.
1459), the mere indorsement of stock
certificates does not in itself give to the
indorsee such a right to have a transfer of the
shares of stock on the books of the company as
will entitle him to the writ of mandamus to
compel the company and its officers to make
such transfer at his demand, because, under
such circumstances the duty, the legal
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obligation, is not so clear and indisputable as to
justify the issuance of the writ. As a general
rule and especially under the above-cited
statute, as between the corporation on the one
hand, and its shareholders and third persons on
the other, the corporation looks only to its
books for the purpose of determining who its
shareholders are, so that a mere indorsee of a
stock certificate, claiming to be the owner, will
not necessarily be recognized as such by the
corporation and its officers, in the absence of
express instructions of the registered owner to
make such transfer to the indorsee, or a power
of attorney authorizing such transfer.
Tay vs CA, G.R. No. 126891. August 5, 1998
The duty of a corporate secretary to record
transfers of stocks is ministerial. However, he
cannot be compelled to do so when the
transferee’s title to said shares has no prima
facie validity or is uncertain. More specifically, a
pledgee, prior to foreclosure and sale, does not
acquire ownership rights over the pledged
shares and thus cannot compel the corporate
secretary to record his alleged ownership of
such shares on the basis merely of the contract
of pledge. Similarly, the SEC does not acquire
jurisdiction over a dispute when a party’s claim
to being a shareholder is, on the face of the
complaint, invalid or inadequate or is otherwise
negated by the very allegations of such
complaint. Mandamus will not issue to
establish a right, but only to enforce one that is
already established.
Rural Bank of Salinas vs CA, G.R. No. 96674
June 26, 1992
The basic controversy in this case is whether or
not the respondent court erred in sustaining the
Securities and Exchange Commission when it
compelled by Mandamus the Rural Bank of
Salinas to register in its stock and transfer book
the transfer of 473 shares of stock to private
respondents. Petitioners maintain that the
Petition for Mandamus should have been
denied upon the following grounds.
21
 Commercial Law Notes
(1) Mandamus cannot be a remedy cognizable
by the Securities and Exchange Commission
when the purpose is to register certificates of
stock in the names of claimants who are not yet
stockholders of a corporation:
(2) There exist valid reasons for refusing to
register the transfer of the subject of stock,
namely:
(a) a pending controversy over the ownership of
the certificates of stock with the Regional Trial
Court;
(b) claims that the Deeds of Assignment
covering the subject certificates of stock were
fictitious and antedated; and
(c) claims on a resultant possible deprivation of
inheritance share in relation with a conflicting
claim over the subject certificates of stock.
10. LIABILITY OF CORPORATION SOLE
Section 110. For the purpose of administering
and managing, as trustee, the affairs, property
and temporalities of any religious
denomination, sect or church, a corporation
sole may be formed by the chief archbishop,
bishop, priest, minister, rabbi or other presiding
elder of such religious denomination, sect or
church. (154a)
Corporation sole – a special form of corporation
usually associated with the clergy designed to
facilitate the exercise of the functions of
ownership of the church which was registered
as property owner. It is created not only to
administer the temporalities of the church or
religious society where the corporate belongs,
but also to hold and transmit the same to his
successor in said officer. The incumbent
administrator is not the actual owner of the
land but the constituents or those that make up
the church, thus it is their nationality that has to
be taken into consideration. The corporation
sole only holds the property in trust for the
benefit of the Roman Catholic faithful.
~ Director of Land v. IAC, 146 SCRA 509 (1986),
held that a corporation sole has no
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nationality, overturned the previous doctrine
(Republic v. Villanueva, 114 SCRA 875 (1982)
and Republic v. Iglesia Ni Cristo, 127 SCRA 687
[1984]) that a corporation sole is disqualified to
acquire or hold alienable lands of the public
domain, because of the constitutional
prohibition qualifying only individuals to acquire
land of the public domain and the provision
under the Public Land Act which applied only to
Filipino citizens or natural persons. Republic v.
Iglesia ni Cristo, 127 SCRA 687 (1984); Republic
v. IAC, 168 SCRA 165 (1988).
11. CANCELLATION OF STOCKS CERTIFICATE
Tan v SEC (1992)
Alfonso Tan is owner of 400 shares in Visayan
Educational Supply Corp evidenced by
certificate No. 2. Alfonso transferred 50 shares
to Angel. Certificate No. 2 was cancelled and
Certificate No. 6 was issued to Angel and
Certificate No. 8 was issued to Alfonso.
However, Alfonso did not make the proper
endorsement and did not make delivery of
certificate no. 2. Later on, Alfonso Tan elected
to withdraw from the corporation. In exchange
for his shares, he received stocks in trade.
Certificate No. 8 was later on cancelled due to
above. After several years, Alfonso Tan filed a
case with Cebu SEC questioning the cancellation
of his stock certificates despite non-
endorsement and lack of delivery
HELD: Delivery and endorsement under Section
63 of the corporation code is not mandatory
because of the use of the word may. Delivery is
not essential where it appears that the persons
sought to be held as stockholders are officers of
the corporation and have custody of the stock
book as in this case. To hold that cancellation
of certificate of stock of Alfonso is null and void
because of lack of delivery and endorsement of
mother certificate of stock no. 2 which was
deliberately withheld is to prescribe
restrictions on the transfer of stock in violation
of corporation law
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 Commercial Law Notes
12. INVOLUNTARY DISSOLUTION
A corporation may be dissolved by the
Securities and Exchange Commission upon filing
of a verified complaint and after proper notice
and hearing on the grounds provided by existing
laws, rules and regulations (Sec. 121)
13. DEADLOCKS IN CLOSE CORPORATION
SEC has the power to arbitrate disputes in case
of deadlocks, upon written petition by any
stockholder. (Sec. 104) This includes the power
to appoint a provisional director, as well as to
dissolve the corporation.
Procedure:
1. SEC upon a stockholder’s written petition is
allowed to intervene in order to arbitrate a
dispute or deadlock in a corporation.
2. There is a dispute or deadlock as described by
this provision when the directors or
stockholders are so divided respecting the
management of the corporation that the
required votes for any corporate action cannot
be obtained, with the consequence that its
business can no longer be conducted to the
advantage of the stockholders generally.
3. The SEC in exercising arbitration powers may:
a. Cancel or alter any provision in the articles,
by laws or stockholder’s agreement;
b. Cancel, alter or enjoin any resolution or other
act of the corporation or its directors, officers
or stockholders;
c. Direct or prohibit any act of the corporation,
directors, officers, stockholders and even third
persons who are parties to the corporation
action.
d. Require purchase of shares of any
stockholders either by corporation regardless
whether availability of unrestricted retained
earnings, or by any other stockholders.
e. Appoint a provisional director
f. Dissolve the corporation
g. Grant other reliefs as the circumstances may
warrant.
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14. LIABILITY OF RECEIVER
GEORGE , O FARRELL & CIE., INC., CHINA
BANKING CORPORATION AND LEOPOLDO
KAHN vs. M. MICHELIN & CIE.
G.R. 36930 (June 30, 1933)
The appointment of a receiver by the court to
wind up the affairs of the corporation upon
petition of voluntary dissolution does not
empower the court to hear and pass on the
claims of the creditors of the corporation at first
hand. The rulings of the receiver on the validity
of claims submitted are subject to review by the
court appointing such receiver though no
appeal is taken to the latter’s ruling (8
Thompson on Corp., 718), and during the
winding up proceedings after dissolution, no
creditor will be permitted by legal process or
otherwise to acquire priority, or to enforce his
claim against the property held for distribution
as against the rights of other creditors. (5
Thompson on Corp. [2nd ed.], pages 1389, 1391,
1402, and 1403.)
MIGUEL VELASCO, assignee of The Philippine
Chemical Product Co. (Ltd.),
vs. JEAN M. POIZAT
(Receiver’s Right’s, not his liabilities)
Facts: Poizat subscribed for 20 shares (w/ a par
value of P100/share) for P2,000 of w/c he was
only able to pay P500 (25%). BOD issued a call
to Poizat. Notice of the resolution was given to
Poizat. Poizat replied that he was willing to lose
the 25% he invested because of the unreliable
position of the C. Indeed the prediction of
Poizat became true. The C became
insolvent.Velasco, as assignee of the C, sued
Poizat for the balance of his subscription.
Issue: Is Poizat liable for his proscription?
Ruling: Poizat is LB on his subscription. When
insolvency supervenes, allunpaid subscriptions
become at once due and enforceable. Also But
there is another reason why the present
plaintiff must prevail in this case, even
supposing that the failure of the directors to
23
 Commercial Law Notes
comply with the requirements of the provisions
of sections 38 to 48, inclusive, of Act No. 1459
might have been an obstacle to a recovery by
the corporation itself. That reason is this: When
insolvency supervenes upon a corporation and
the court assumes jurisdiction to wind up, all
unpaid stock subscriptions become payable on
demand, and are at once recoverable in an
action instituted by the assignee or receiver
appointed by the court. This rule apparently
had origin in a recognition of the principle that
a court of equity, having jurisdiction of the
insolvency proceedings, could, if necessary,
make the call itself, in its capacity as successor
to the powers exercised by the board of
directors of the defunct company. Later a
further rule gained recognition to the effect
that the receiver or assignee, in an action
instituted by proper authority, could himself
proceed to collect the subscription without the
necessity of any prior call whatever.
INTERNATIONAL BANKING CORPORATION vs.
PILAR CORRALES, ET AL.,
CIPRIANA GARGANTA
Fatcs: The original complaint filed in this action
sets up a claim of indebtedness amounting to
nearly P450,000. On the 10th of May, 1904, on
petition of the plaintiff corporation, W. H.
Anderson was appointed a receiver to take
possession of all the property of one of the
defendants (the Casa Comisión, a mercantile
association organized under the provisions of
the Code of Commerce) upon which plaintiff
claimed to hold a mortgage for the security of
its debt. On the same day Anderson qualified
and entered upon the discharge of his duties.
On the 18th of April, 1907, while the original
action was still pending in the court below,
Cipriana Garganta filed a so-called complaint in
interventions section 121 of the Code of Civil
Procedure, were she is alleged that the above-
mentioned receiver had used and occupied a
certain house and lot, the property of the
intervener, from the date of his appointment,
May 10, 1904, until the 30th of September,
1904, of which the rental value during
Silliman University • Via Veritas Vita • Godspeed Sillimanians
that period was not less than P470, and prayed
that the receiver be ordered to show cause why
he should not be directed to pay that amount to
the intervener out of any funds in his hands as
receiver.
The ground upon which counsel for the
intervener appears to have rested the prayer of
her complaint in intervention was that the
receiver in the performance of his duties as
receiver, made use of the house and lot of the
intervener in storing, guarding and preserving
the property entrusted to his hands, and that
she was, therefore, entitled to payment from
any funds in the hands of the receiver of a
reasonable sum for the use and occupation of
the house and lot, such sum being properly
chargeable to expenses incurred by the receiver
in the performance of the duties of his office;
and there can be no doubt that had she
established the use and occupancy by the
receiver for this purpose, she would be entitled
to recover from him a reasonable compensation
therefor. But the trial court found that the
house and lot were occupied by the Casa
Comisión itself during the period for which
compensation is demanded of the receiver;
Issue: Was the expense incident to the alleged
use and occupation by the receiver an expense
incurred by him in the performance of his duty
to guard and preserve property entrusted to
him, which was stored therein.
Ruling: Since all the property of the Casa
Comisión was in the hands of the receiver, the
intervener should have an order upon the
receiver for the payment of the proven
indebtedness of the Casa Comisión out of any
funds in his hands as receiver. In this the trial
court erred. We do not question the right of the
intervener in a proper action to reduce to
judgment her claim of indebtedness against the
Casa Comisión, and to enforce that judgment
against its property in a proper proceeding, but
she had no right, and indeed she does not
appear to have attempted to intervene in this
action for the purpose of securing an
24
 Commercial Law Notes
adjudication of her claim against her debtor,
the Casa Comisión, and thereafter to have an
order directing the payment of the claim thus
adjudicated, out of the funds in the hands of
the receiver, without regard to the priorities of
other claimants upon the same funds; the effect
of the order is to give a general unsecured
creditor a preference in the payment of his
claim over other creditors with specific lien on
the property out of which the unsecured
creditor is to be paid.
15. CANCELLATION OF LICENSE OF FOREIGN
CORPORATION
Grounds for revocation or suspension of
license, without prejudice to other grounds
provided by special laws (sec. 134):
1. Failure to file its annual report or pay any
fees as required by this Code;
2. Failure to appoint and maintain a resident
agent in the Philippines as required by this Title;
3. Failure, after change of its resident agent or
of his address, to submit to the Securities and
Exchange Commission a statement of such
change as required by this Title;
4. Failure to submit to the Securities and
Exchange Commission an authenticated copy of
any amendment to its articles of incorporation
or by-laws or of any articles of merger or
consolidation within the time prescribed by this
Title;
5. A misrepresentation of any material matter
in any application, report, affidavit or other
document submitted by such corporation
pursuant to this Title;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due to
the Philippine Government or any of its
agencies or political subdivisions;
7. Transacting business in the Philippines
outside of the purpose or purposes for which
such corporation is authorized under its license;
8. Transacting business in the Philippines as
agent of or acting for and in behalf of any
foreign corporation or entity not duly licensed
to do business in the Philippines; or
Silliman University • Via Veritas Vita • Godspeed Sillimanians
9. Any other ground as would render it unfit to
transact business in the Philippines.
16. WHAT CONSTITUTES DOING BUSINESS IN
THE PHILIPPINES
STEELCASE, INC. vs. DESIGN INTERNATIONAL
SELECTIONS, INC.
G.R. No. 171995 April 18, 2012
FACTS: Petitioner Steelcase, Inc. is a foreign
corporation existing under the laws of
Michigan, United States of America and
engaged in the manufacture of office furniture
with dealers worldwide. Respondent Design
International Selections, Inc. is a corporation
existing under Philippine Laws and engaged in
the furniture business, including the
distribution of furniture.
Steelcase and DISI orally entered into a
dealership agreement whereby Steelcase
granted DISI the right to market, sell, distribute,
install, and service its products to end-user
customers within the Philippines. The business
relationship continued smoothly until it was
terminated after the agreement was breached
with neither party admitting any fault.
Steelcase filed a complaint for sum of money
against DISI alleging, among others, that DISI
had an unpaid account of US$600,000.00.
DISI alleged that the complaint failed to state a
cause of action and to contain the required
allegations on Steelcase’s capacity to sue in the
Philippines despite the fact that it (Steelcase)
was doing business in the Philippines without
the required license to do so.
ISSUES: Whether or not Steelcase is doing
business in the Philippines without a license
HELD: No. Steelcase is an unlicensed foreign
corporation NOT doing business in the
Philippines.
25
 Commercial Law Notes
The rule that an unlicensed foreign corporations
doing business in the Philippine do not have the
capacity to sue before the local courts is well-
established. Section 133 of the Corporation
Code of the Philippines explicitly states:
Sec. 133.Doing business without a license. - No
foreign corporation transacting business in the
Philippines without a license, or its successors
or assigns, shall be permitted to maintain or
intervene in any action, suit or proceeding in
any court or administrative agency of the
Philippines; but such corporation may be sued
or proceeded against before Philippine courts
or administrative tribunals on any valid cause of
action recognized under Philippine laws.
The phrase "doing business" is clearly defined in
Section 3(d) of R.A. No. 7042 (Foreign
Investments Act of 1991), to wit:
d) The phrase "doing business" shall include
soliciting orders, service contracts, opening
offices, whether called "liaison" offices or
branches; appointing representatives or
distributors domiciled in the Philippines or
who in any calendar year stay in the country for
a period or periods totalling one hundred eighty
(180) days or more; participating in the
management, supervision or control of any
domestic business, firm, entity or corporation in
the Philippines; and any other act or acts that
imply a continuity of commercial dealings or
arrangements, and contemplate to that extent
the performance of acts or works, or the
exercise of some of the functions normally
incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of
the business organization: Provided, however,
That the phrase "doing business" shall not be
deemed to include mere investment as a
shareholder by a foreign entity in domestic
corporations duly registered to do business,
and/or the exercise of rights as such investor;
nor having a nominee director or officer to
represent its interests in such corporation; nor
appointing a representative or distributor
domiciled in the Philippines which
Silliman University • Via Veritas Vita • Godspeed Sillimanians
transacts business in its own name and for its
own account;
This definition is supplemented by its
Implementing Rules and Regulations, Rule I,
Section 1(f) which elaborates on the meaning of
the same phrase:
f. "Doing business" shall include soliciting
orders, service contracts, opening offices,
whether liaison offices or branches; appointing
representatives or distributors, operating
under full control of the foreign corporation,
domiciled in the Philippines or who in any
calendar year stay in the country for a period
totalling one hundred eighty [180] days or
more; participating in the management,
supervision or control of any domestic business,
firm, entity or corporation in the Philippines;
and any other act or acts that imply a continuity
of commercial dealings or arrangements, and
contemplate to that extent the performance of
acts or works, or the exercise of some of the
functions normally incident to and in
progressive prosecution of commercial gain or
of the purpose and object of the business
organization.
The following acts shall not be deemed "doing
business" in the Philippines:
1. Mere investment as a shareholder by a
foreign entity in domestic corporations duly
registered to do business, and/or the
exercise of rights as such investor;
2. Having a nominee director or officer to
represent its interest in such corporation;
3. Appointing a representative or
distributor domiciled in the Philippines
which transacts business in the
representative's or distributor's own name
and account;
26
 Commercial Law Notes
4. The publication of a general
advertisement through any print or
broadcast media;
5. Maintaining a stock of goods in the
Philippines solely for the purpose of having
the same processed by another entity in the
Philippines;
6. Consignment by a foreign entity of
equipment with a local company to be used
in the processing of products for export;
business in the country. From the preceding
facts, the only reasonable conclusion that can
be reached is that DISI was an independent
contractor, distributing various products of
Steelcase and of other companies, acting in its
own name and for its own account.As a result,
Steelcase cannot be considered to be doing
business in the Philippines by its act of
appointing a distributor as it falls under one of
the exceptions under R.A. No. 7042.

7. Collecting information in the Philippines;

and

8. Performing services auxiliary to an existing

isolated contract of sale which are not on a
continuing basis, such as installing in the
Philippines machinery it has manufactured
or exported to the Philippines, servicing the
same, training domestic workers to operate
it, and similar incidental services.

From the preceding citations, the appointment

of a distributor in the Philippines is not
sufficient to constitute "doing business" unless
it is under the full control of the foreign
corporation. On the other hand, if the
distributor is an independent entity which buys
and distributes products, other than those of
the foreign corporation, for its own name and
its own account, the latter cannot be
considered to be doing business in the
Philippines. It should be kept in mind that the
determination of whether a foreign corporation
is doing business in the Philippines must be
judged in light of the attendant circumstances.

In the case at bench, it is undisputed that DISI is

independently owned and managed by the
spouses Leandro and Josephine Bantug. In
addition to Steelcase products, DISI also
distributed products of other companies
including carpet tiles, relocatable walls and
theater settings.This clearly belies DISI’s
assertion that it was a mere conduit through
which Steelcase conducted its

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