COMMERCIAL LAW REVIEW NOTES

Compilation of Memory Aid, Frequently Asked Questions in the Bar, Lex

Pareto, QUAMTO and Lecture Notes
By Jaybee D. Pascua (2021)

I. INSURANCE

A. CONCEPTS OF INSURANCE

1. What is a contract of insurance?

- is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage,
or liability arising from unknown or contingent event.

2. Who may be insured? (2000 BAR)

- Anyone except a public enemy may be insured. (Sec. 7)
- A public enemy designates a nation with whom the Philippines is at war and it includes every citizen
or subject of such nation.

B. ELEMENTS OF INSURANCE

1. Elements: (PARIS)

a) The insured has INSURABLE INTEREST;

b) The insured is subject to RISK OF LOSS by the happening of the designated peril;
c) The insurer ASSUMES the risk;
d) Such assumption of risk is part of general SCHEME to distribute actual losses among a large group
of persons bearing a similar risk; and
e) In consideration of the insurer’s promise, the insured pays a PREMIUM.

- Note: if the principal object and purpose of the organization are the assumption of risk and indemnification
of loss, the business is that of insurance. But if they are merely incidental and service is the principal
purpose, the business is not insurance (Philippine Health Care Providers vs. CIR, 2009)

C. CHARACTERISTICS AND NATURE OF INSURANCE CONTRACTS

1. RISK DISTRIBUTING DEVICE – all members of a group exposed to a particular risk contribute premiums
to an insurer, and from these contributory funds are paid whatever losses occur due to the exposure to the
peril insured against

2. ALEATORY – the contract is perfected upon its perfection although occurrence of a condition or event may
later dictate the demandability of certain obligations thereunder.

3. PERSONAL CONTRACT – the law presumes that the insurer considered the personal qualifications of the
insured in approving the insurance application.

4. CONTRACT OF ADHESION – most of the terms of the contracts do not result from mutual negotiations
between the parties as they are prescribed in printed form to which the insured may adhere if he chooses to
but which cannot change.

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 5. CONSENSUAL – the contract is perfected my mere consent without the need of delivery or any other
formality.

6. CONTRACT OF INDEMNITY – except for life and accident insurance, the measure of an insurable
interest property is the extent to which the insured might be damnified by loss or injury thereof.

7. UBERRIMAE FIDEI CONTRACT – both parties must not only perform their obligations in good faith but
must avoid material concealment or misrepresentations as contract of insurance are one of utmost good
faith.

D. CLASSES

1. Marine Insurance

a) What are included in a contract of marine insurance? (Sec. 101)

- Marine Insurance includes:

1) Insurance against loss of or damage to:

i. Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, effects,

disbursements, profits, moneys, securities, choses in action, instruments of debts,
valuable papers, bottomry, and respondentia interests and all other kinds of property and
interests therein.

ii. Person or property in connection with or appertaining to a marine, inland marine, transit
or transportation insurance, including liability for loss of or damage arising out of or in
connection with the construction, repair, operation, maintenance or use of the subject
matter of such insurance.

iii. Precious stones, jewels, jewelry, precious metals, whether in course of transportation or
otherwise; and

iv. Bridges, tunnels and other instrumentalities of transportation and communication

(excluding buildings, their furniture and furnishings, fixed contents and supplies held in
storage); piers, wharves, docks and slips, and other aids to navigation and transportation,
including dry docks and marine railways, dams and appurtenant facilities for the control
of waterways.

2) Marine protection and indemnity insurance, meaning insurance against, or against legal liability
of the insured for loss, damage, or expense incident to ownership, operation, chartering,
maintenance, use, repair, or construction of any vessel, craft or instrumentality in use of ocean
or inland waterways, including liability of the insured for personal injury, illness or death or for
loss of or damage to the property of another person.

b) Who has insurable interest in a contract of marine insurance?

1) Owner if a ship
2) One who has interest in the thing from which Profits are expected to proceed
3) Charterer of a ship

c) What is the extent of the insurable interest of the owner over the following?
- The owner of the ship has insurable interest over the following:

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 1) Value of the ship – in case of the ship is chartered, the insurer shall be liable for only the part of
the loss which the insured cannot recovered from the charterer (Sec. 102)

2) Expected freightage (Sec. 105)

d) What is the extent of the insurable interest of the charterer of the ship?
- The charterer of the ship has insurable interest in it, to the extent that he is liable to be damnified by
its loss (Sec. 108)

e) Implied warranties in a contract of marine insurance (2000 BAR)

1) Seaworthiness of the ship

2) Against improper deviation
3) Where the neutrality or nationality of the ship or cargo is expressly warranted, that the ship will carry
the requisite documents to show such nationality or neutrality, and that it will not carry any
documents which cast reasonable suspicion thereon.
4) The ship shall not carry contraband especially if it is making voyage through belligerent waters.

f) When a ship is considered seaworthy (Sec. 116)

- A ship is seaworthy when reasonably fit to perform the service and to encounter the ordinary perils
of the voyage contemplated by the parties to the policy. (2008 BAR)

- 2010 BAR: There is an implied warranty in every marine insurance that the ship is seaworthy
whoever is insuring the cargo, whether it be the shipowner or not. It is the obligation of the owner of
the cargo to look for a reliable common carrier which keeps its vessel in a seaworthy condition.

g) What is deviation (Sec. 125)

- is a departure from the course of the voyage insured or an unreasonable delay in pursuing the voyage
or the commencement of an entirely different voyage.

h) When deviation is proper? (Sec. 126) (2000, 2005 BAR)

1) When caused by circumstances over which neither the master nor the owner of the ship has any
control;
2) When necessary to comply with a warranty, or to avoid a peril, whether or not the peril is insured
against;
3) When made in good faith, and upon reasonable grounds of belief in its necessity to avoid a peril; or
4) When made in good faith, for the purpose of saving human life or relieving another vessel in distress.

i) What us the effect of improper deviation? (Sec. 128) (2005 BAR)

- An insurer is not liable for any loss happening to the thing insured subsequent to an improper
deviation.

j) What is Barratry (2010 BAR)

- Barratry is any willful misconduct on the part of the master of the crew in pursuance of some
unlawful or fraudulent purpose without the consent of the owner and to the prejudice of the interest
of the owner.

k) When is the actual loss? (Sec. 132)

- An actual total loss is caused by: (1996 BAR)

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 1) A TOTAL destruction of the thing insured;
2) The IRRETRIEVABLE loss of the thing by sinking, or by being broken up;
3) Any damage to the thing which renders it VALUELESS to the owner for the purpose for which
he held it; or
4) Any other event which effectively DEPRIVES the owner of the POSSESSION, at the port of
destination, of the thing insured.

- 1996 BAR: An actual total loss is suffered where cargo, by the process of decomposition or other
chemical agency, no longer remains the same kind of thing as before. Thus, in a case the insured rice
seeds found wetted were determined to be lost and rendered valueless to the insured for planting or
seeding purposes since the wetting or contract with water had definitely activated their tendency to
germinate. (Malayan Insurance vs. CA, 1991)

l) Effect of total loss? (Sec. 137)

- Upon an actual total loss, a person insured is entitled to payment without notice of abandonment.

m) When is there constructive total loss? (Sec. 141)

- A constructive total loss is one which give person insured a right to abandon under the following
cases:

1) If more than three-fourths (¾) thereof in value is actually lost, or would have to be expended to
recover it from the peril;

2) If it is injured to such an extent as to reduce its value more than three-fourths (¾);

3) If the thing insured is a ship, and the contemplated voyage cannot be lawfully performed
without incurring either an expense to the insured of more than three-fourths (¾) the value of
the thing abandoned or a risk which a prudent man would not take under the circumstances; or

4) If the thing insured, being cargo or freightage, and the voyage cannot be performed, nor another
ship procured by the master, within a reasonable time and with reasonable diligence, to forward
the cargo, without incurring the like expense or risk mentioned in the preceding subparagraph.
But freightage cannot in any case be abandoned unless the ship is also abandoned.

n) What is abandonment in marine insurance? (Sec. 140) (2005 BAR)

- Abandonment, in marine insurance, is the act of the insured by which, after a constructive total loss,
he declares the relinquishment to the insurer of his interest in the thing insured.

- 2005 BAR: An abandonment must be made within a reasonable time after receipt of reliable
information of the loss, but where the information is doubtful character, the insured is entitled to a
reasonable time to make inquiry.

o) Effect of abandonment? (Sec. 148)

- An abandonment is equivalent to a transfer by the insured of his interest to the insurer, with all the
chances of recovery and indemnity.

2. Fire Insurance

a) What is included in fire insurance?

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 - The term fire insurance shall include insurance against loss by fire, lightning, windstorm, tornado
or earthquake and other allied risks, when such risks are covered by extension to fire insurance
policies or under separate policies. (Sec. 189)

b) When does an alteration does not affect a contract of fire insurance?

- An alteration in the use or condition of a thing insured from that to which it is limited by the
policy, which does not increase the risk, does not affect a contract of fire insurance (Sec. 171)

3. Casualty (Sec. 176)

- is an insurance covering loss or liability arising from accident or mishap, excluding certain types of
loss which by law or custom are considered as falling exclusively within the scope of other types of
insurance such as fire or marine. It includes, but is not limited to, employer’s liability insurance, motor
vehicle liability insurance, plate glass insurance, burglary and theft insurance, personal accident and
health insurance as written by non-life insurance companies, and other substantially similar kinds of
insurance.

- 1996 BAR: The liability of the insurer attaches when the liability of the insured to the third party
attaches

- 1996, 2000 BAR: The direct liability of the insurer under indemnity contract against third party
liability does not mean that the insurer can be held solidary liable with the insured. The liability of the
insurer to the third party is based on contact; that of the insured is based on tort. (Malayan Insurance
vs. CA)

- 2014 BAR: The act of depriving respondents of their motor vehicle at, or soon after the transfer of
physical possession of the movable property, constitutes theft under the insurance policy which is
compensable.

- 2014 BAR: The insurance company, subject to the limits of liability, is obligated to indemnify the
insured against theft. Said provision does not qualify as to who would commit the theft. Thus even if
the same is committed by the driver of the insured, there being no categorical declaration of exception,
the same must be covered.

4. Life (Sec. 181)

- Life insurance is insurance on human lives and insurance appertaining thereto or connected
therewith.

5. What is contract of suretyship

- is an agreement whereby a party called the surety guarantees the performance by another called the
principal obligor of an obligation or undertaking in favor of third party called the oblige.

6. Microinsurance (Sec. 187)

- is a financial product or service that meets the risk protection needs of the poor where:

a) The amount of contributions, premiums, fees or charges, computed on a daily basis, does not
exceed seven and a half percent (7.5%) of the current daily minimum wage rate for
nonagricultural workers in Metro Manila; and

b) The maximum sum of guaranteed benefits is not more than one thousand (1,000) times of the
current daily minimum wage rate for nonagricultural workers in Metro Manila.

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 7. Compulsory motor vehicle liability insurance

- refers to a contract of insurance against passenger and third-party liability for death or bodily injuries
and damage to property arising from motor vehicle accidents.

E. VARIABLE CONTRACTS

1. What is variable contracts?

- variable contract shall mean any policy or contract on either a group or on an individual basis issued
by an insurance company:
i. providing for benefits or other contractual payments or values thereunder to vary so as to
reflect investment results of any segregated portfolio of investments or of a designated
separate account
ii. in which amounts received in connection with such contracts shall have been placed and
accounted for separately and apart from other investments and accounts.

Note: It shall not be deemed to be a security or securities as defined in The Securities Act, as
amended, or in the Investment Company Act, as amended, nor subject to regulations under said Acts.

F. INSURABLE INTEREST

Basis: No contract or policy of insurance on property shall be enforceable except for the benefit of some person
having an insurable interest in the property insured. (Sec. 18)

1. Insurable Interest on Life insurance: (Sec. 10)

Every person has an insurable interest in the life and health: (2002, 2013 BAR)

a) Of himself, of his spouse and of his children;

b) Of any person on whom he depends wholly or in part for education or support, or in whom he has a
pecuniary interest;
c) Of any person under a legal obligation to him for the payment of money, or respecting property or
services, of which death or illness might delay or prevent the performance; and
d) Of any person upon whose life any estate or interest vested in him depends.

- In general, the test is whether the person is interested in the preservation of the insured life despite the
insurance.

- In paragraph “a” of Section 10, mere relationship is sufficient while the rest (par. b, c, and d) requires
pecuniary interest. Thus, the interest of the creditor over the life of the debtor ceases upon full
payment.

- 2013, 2015 BAR: Support need not be based on a legal obligation to support. With respect to spouses,
the insurable interest remains if they are separated.

- Section 11. The insured shall have the right to change the beneficiary he designated in the policy,
unless he has expressly waived this right in said policy. Notwithstanding the foregoing, in the event the
insured does not change the beneficiary during his lifetime, the designation shall be deemed
irrevocable.

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 - 2000, 2014 BAR - Insurance upon one’s life: An application for insurance on one’s own life does not
usually present an insurable interest question. In life insurance taken by a person on his own life, it is
not necessary for the beneficiary to have an insurable interest in the life insured.

2. Insurable Interest in property: (Sec. 13 & 14)

An insurable interest in property may consist in:

a) An existing interest;
b) An inchoate interest founded on an existing interest; or
c) An expectancy, coupled with an existing interest in that out of which the expectancy arises.

- TEST: In general, a person has insurable interest in the property, if he derives pecuniary benefit or
advantage from its preservation or would suffer pecuniary loss, damage or prejudice by its destruction
whether he has or has no title in, or lien upon, or possession of the property. (2000, 2014 BAR). Hence
PECUNIARY INTERET over the property is ALWAYS necessary although the interest is NOT
limited to interest of the owner.

- An heir has no insurable interest over properties that he will inherit. The execution of a last will and
testament does not vest to an heir, even a compulsory heir, insurable interest over the property that he
will inherit as stipulated in the will.

- BAR: A purchaser of goods under a perfected contract of sale already acquires interest on the property
pending the delivery.

- BAR 2010: Separate insurable interests: The mortgagor and the mortgagee have each an insurable
interest in the property mortgaged, and this is separate and distinct from each other. In case both of
them take out separate insurance policies in the same property, or some policy covering respective
interests, the same is not open to the objection that there is double insurance.

- 2000, 2014 BAR: Insurable interest in property is not necessarily an interest in property in the sense of
title, but a concern in the preservation of the property and such a relation to or connection with it as
will necessarily entail a pecuniary loss in case of its injury or destruction.

- 2009 BAR: An insurance taken out by a person on property in which he has no insurable interest is
void.

- 2000, 2001 BAR: No contract or policy of insurance on property shall be enforceable except for the
benefit of some person having an insurable interest in the property insured.

3. Insurable interest in property vs. insurable interest in life (2001, 2002, 2012 BAR)

Insurable interest in property Insurable interest in life

I.I. in property is limited to the I.I. in life is unlimited (save in life
As to extent actual value of the interest thereon. insurance affected by creditor in the
life of the debtor
In property insurance, it is In life insurance, it is ENOUGH
As to the TIME NECESSARY that the I.I. exist that the I.I. exist at the time policy
when insurable when the insurance takes effect takes effect and need not exist at
interest must exist AND the loss occurs, but need not the time of the loss.
exist in the meantime. (2012 BAR)
As to There must be a legal basis to be The expectation of the benefit to be
EXPECTATION of derived derived need not have any legal
BENEFIT to be basis
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 derived
The beneficiary must have I.I. over The beneficiary need not have I.I.
the thing insured over the life of the insured if the
As to life of the insured himself secured
BENEFICIARY’s the policy. HOWEVER, if the life
interest insurance was obtained by the
beneficiary, the latter must have I.I.
over the life of the insured.

- 1991 BAR: The perfected contract of sale, even without delivery, vests in the vendee an equitable title,
an existing interest over the goods sufficient to be the subject of insurance.

- BAR: In property insurance, the insurance code requires that the insured must have insurable interest
over the property at the time of the perfection of the contract and at the time of the loss. Seller cannot
recover because he had already sold the condominium unit at the time of the loss. Although “N” had
I.I. over the unit at the time of the inception of the policy, he did not have I.I. on the insured property at
the time of the loss. The buyer cannot also recover because he is not a party to the insurance contract.
Contract of insurance is a personal contract. The transfer of the property does not include the transfer
of the insurance policy.

- BAR: In life insurance, it is only necessary that the person who took out the insurance on the life of
another has I.I. on such life at the time the policy takes effect. He need not have I.I. thereafter. Thus,
the annulment of the marriage with the insured will not prevent the recovery on the policy.

4. Insurable interest of the mortgagor and the mortgagee over the mortgaged property

a) Mortgagor – the mortgagor of property, as owner has an I.I. to the extent of its value, even though the
mortgage debt equals such value. The reason is that the loss or destruction of the property insured
will not extinguish the mortgage debt.

b) Mortgagee – the mortgage as such has an insurable interest in the mortgaged property to the extent of
the debt secured; such interest continues until the mortgage debt is extinguished (2000 BAR)

- BAR: An insurance procured by either the mortgagor or mortgagee will not inure to the benefit of the
other. Insurance is a personal contract, and just like any other contract, it takes effect only between the
contracting parties, their heirs, successors and assignees, unless it contains a stipulation in favor of
third person.

5. Insurable interest of BENEFICIARY and ASSIGNEE of the policy

a) Property insurance – the beneficiary and the assignee must have I.I (1997 & 2001 BAR). Consent of
the insurer must be secured before the assignment.

b) Life insurance – If the insured takes the insurance on his own life, he can designate as beneficiary
anybody who does not have insurable interest (1997 & 2000 BAR). If a third person takes the policy,
the beneficiary must have I.I. In case of assignment, the assignee need not have insurable interest.

6. Sec. 24 - A transfer of interest by one of several partners, joint owners, or owners in common, who are
jointly insured, to the others, does not avoid an insurance even though it has been agreed that the
insurance shall cease upon an alienation of the thing insured.

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 7. Double Insurance & Reinsurance & Over insurance

a) Double insurance: (Sec. 95) (1999, 2005, 2012 BAR)

- A double insurance exists where the same person is insured by several insurers separately in
respect to the same subject and interest (Sec. 95)

b) Rule for payment of claims where there is over-insurance by double insurance: (Sec. 94) (1990
BAR)
i. Each insurer is bound, as between himself and the other insurers, to contribute ratably to the
loss in proportion to the amount for which he is liable under his contract.

c) Effects of Double Insurance and over insurance: (Sec. 96)

i. The insured, unless the policy otherwise provides, may claim payment from the insurers in
such order as he may select, up to the amount for which the insurers are severally liable under
their respective contracts;

ii. Where the policy under which the insured claims is a valued policy, any sum received by him
under any other policy shall be deducted from the value of the policy without regard to the
actual value of the subject matter insured;

iii. Where the policy under which the insured claims is an unvalued policy, any sum received by
him under any policy shall be deducted against the full insurable value, for any sum received
by him under any policy;

iv. Where the insured receives any sum in excess of the valuation in the case of valued policies,
or of the insurable value in the case of unvalued policies, he must hold such sum in trust for
the insurers, according to their right of contribution among themselves;

v. Each insurer is bound, as between himself and the other insurers, to contribute ratably to the
loss in proportion to the amount for which he is liable under his contract.

vi. Discovery of other insurance coverage in excess of the value of the property is a ground for
rescission. (Sec. 64f)

d) Reinsurance: (Sec. 97)

- A contract of reinsurance is one by which an insurer procures a third person to insure him
against loss or liability by reason of such original insurance.

e) In case of over insurance (Sec. 83)

- In case of an over insurance by several insurers other than life, the insured is entitled to a ratable
return of the premium, proportioned to the amount by which the aggregate sum insured in all the
policies exceeds the insurable value of the thing at risk.

f) Double insurance vs. Reinsurance

Double Insurance Reinsurance

Involves the same interest
Insurer remains in such capacity
Insured in the first contract is a party in interest in the
second contract
Subject of insurance is property
Insured has to give his consent
Insurance of different interests
Insurer becomes an insured in relation to reinsurer
Original insured has no interest in reinsurance contract
Subject of insurance is the original insurer’s risk
Consent of original insured, not necessary

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G. PERFECTION OF THE CONTRACT OF INSURANCE

- an insurance contract is a consensual contract and is therefore perfected the moment there is a meeting of
minds with respect to the object and the cause and consideration.

1. Delivery of policy

- Since the contract of insurance is consensual (and not formal or real contract) delivery of policy is not
necessary for its perfection. However, the insured has the right to demand delivery of the policy.

- An acknowledgment in a policy or contract of insurance or the receipt of premium is conclusive

evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein
that it shall not be binding until the premium is actually paid. (Sec. 79)

2. Delay in acceptance

- Mere in delay in acceptance of the insurance application will not result in a binding contract. Courts
cannot impose upon the parties a contract if they did not consent. However, in proper cases, the insurer
may be liable for tort.

- BAR: Art. 1319 provides that acceptance of an offer by letter does not bind the offerer except from the
time it came to his knowledge. In this case, KC did not receive the letter of acceptance, hence, the
contract was never perfected and the obligation of the insurer which was supposed to be covered by the
premium did not materialize.

3. When is the insurer entitled to the payment of premiums?

- An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril
insured against.

- 2007 BAR: If the check payment for the premium was received by the insurer prior to the loss or
within the credit period, the insured will be allowed to recover (South Sea Surety vs. CA, 1995)

- 2015 BAR: Cash and Carry Rule – notwithstanding any agreement to the contrary, no policy or
contract of insurance issued by an insurance company is valid and binding unless and until the
premium thereof has been paid. Exceptions:
i. case of a LIFR or an industrial life policy whenever the grace period provision applies;
ii. Where the insurer ACKNOWLEDGED in the policy or contract of insurance itself the receipt of
premium, even if premium has not been actually paid.
iii. Where the parties agreed the premium payment shall be in INSTALLMENTS and partial
payment has been made at the time of the loss;
iv. Where the insurer granted the insured a CREDIT TERM for the payment of the premium, and
loss occurs before the expiration of the term.
v. whenever the insurer is estoppel as when consistently granted a 60 to 90-day credit term for the
payment of the premiums. under the broker and agency agreements with duly licensed
intermediaries, a ninety (90)-day credit extension is given.

4. A person insured is entitled to a return of premium, as follows: (Sec. 80) (2000 BAR)

a) If no part of his interest in the thing insured be exposed to any of the perils insured against. (Sec. 80)
- Note: If a peril insured against has existed, and the insurer has been liable for any period,
however short, the insured is not entitled to return of premiums, so far as that particular risk is
concerned. (Sec. 81)

b) When the contract is voidable, and subsequently annulled under the provisions of the Civil Code; or
c) on account of the fraud or misrepresentation of the insurer, or of his agent, or

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 d) on account of facts, or the existence of which the insured was ignorant of without his fault;
e) or when by any default of the insured other than actual fraud, the insurer never incurred any liability
under the policy. (Sec. 82)

Note: A person insured is not entitled to a return of premium if the policy is annulled, rescinded or if
a claim is denied.

5. When may the insured be entitled to a proportionate return of the premium?

a) Where the insurance is made for a definite period of time and the insured surrenders his policy, to
such portion of the premium as corresponds with the unexpired time, at a pro rata rate, unless a short
period rate has been agreed upon and appears on the face of the policy, after deducting from the
whole premium any claim for loss or damage under the policy which has previously accrued:

Note: That no holder of a life insurance policy may avail himself of the privileges of this paragraph
without sufficient cause as otherwise provided by law. (Sec. 80b)

b) In case of an over insurance by several insurers other than life, the insured is entitled to a ratable
return of the premium, proportioned to the amount by which the aggregate sum insured in all the
policies exceeds the insurable value of the thing at risk. (Sec. 83)

- 2007 BAR: Recovering under an insurance contract is allowed if the cause of the loss was either the
proximate of the immediate cause as long as an excepted peril was not the proximate cause of the loss.
(Sec. 86)

- 2007, 2010 BAR: The doctrine of contributory negligence does not in any way apply to rights under a
contract of insurance, unless it is a case of willful act.

H. RESCISSION OF INSURANCE CONTRACTS

1. Concealment - a neglect to communicate that which a party knows and ought to communicate, is called a
concealment. (Sec. 26). (2014 BAR)

- Section 28. Each party to a contract of insurance must communicate to the other, in good faith, all
facts within his knowledge which are material to the contract and as to which he makes no warranty,
and which the other has not the means of ascertaining.

a) Test of Materiality (2000 BAR)

- Materiality is to be determined not by the event, but solely by the probable and reasonable
influence of the facts upon the party to whom the communication is due, in forming his estimate
of the disadvantages of the proposed contract, or in making his inquiries. (Sec. 31) (2016 BAR)

- The matters concealed or misrepresented refers to those facts occurring at or before the time of
the policy becomes effective not thereafter (2011 BAR)

b) Effects (2013, 2014 BAR)

- A concealment whether intentional or unintentional entitles the injured party to rescind a

contract of insurance. (Sec. 27)

c) Cause of Loss

- The matter concealed need not be the cause of the loss (2001 and 2016 BAR)

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 - It is well-settled that the insured need not die of the disease he had failed to disclose to the insurer.

d) Is GOOD FAITH a defense in concealment (1996 BAR)

- A concealment whether intentional or unintentional entitles the injured party to rescind a

contract of insurance. (Sec. 27)

2. Misrepresentations/omissions – It is an oral or written statement of fact or condition affecting the risk,

made by the insured to insurer, tending to induce insurer to assume risk.

a) Effects

- The injured party is entitled to RESCIND from the time when the representation becomes false.

- Section 45. If a representation is false in a material point, whether affirmative or promissory, the
injured party is entitled to rescind the contract from the time when the representation becomes
false.

- Before RA 10607, the insurer can no longer rescind the policy “when there is estoppel as in the
case where the insurer accepted premium payments despite knowledge of the ground for
rescission. However, RA 10607 deleted this provision, thereby indicating that acceptance of the
premium, will not estop the insurer from rescinding the policy on the ground of
misrepresentation.

3. Breach of warranties – it is a statement or promise set forth in the policy or by reference incorporated
therein, the untruth or nonfulfillment of which in any respect, and without reference to whether the insurer
was in fact prejudiced by such untruth or nonfulfillment, renders the policy VOIDABLE (1993 BAR)

a) Effects of Breach of warranty

- it gives the insurer the RIGHT to rescind. Exceptions: (Sec. 73)

i. LOSS occurs before the time of performance of the warranty

ii. The performance becomes UNLAWFUL
iii. The performance becomes IMPOSSIBLE

- BAR: The ICP provides that the nonfulfillment of the warranty renders the contract voidable whether
or not the insurer was in fact prejudiced.

4. Distinctions

Warranty Representation
Is a part of the contract Is a collateral inducement
Written on the policy in a valid rider or attachment Need not be written
Generally conclusively presumed to be material Should be established to be material
The fact warranted must be strictly complied with Requires only to be substantially true

5. INCONTESTABILITY CLAUSE (1996, 1997, 1998, 2012, 2013, 2014 BAR)

- After a policy of life insurance made payable on the death of the insured shall have been in force
during the lifetime of the insured for a period of two (2) years from the date of its issue or of its last
reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindable by reason of
the fraudulent concealment or misrepresentation of the insured or his agent.

- BAR SAMPLE ANSWER: Although there was material misrepresentation or concealment, the
insurer is now barred from questioning the policy of those grounds because of the incontestability

12
 clause. The policy of life insurance of Juan had been in force for a period of more than two years
from its issuance, hence, the policy has become incontestable under Sec. 48 of the Insurance Code.

I. CLAIMS SETTLEMENT AND SUBROGATION

1. What are the rules on prescription of action to claim on an insurance policy? (1996 BAR)

a) A condition, stipulation, or agreement in any policy of insurance, limiting the time for commencing
an action thereunder to a period of less than one (1) year from the time when the cause of action
accrues, is void. (Sec. 63) (BAR)
b) In the absence of stipulation or if the stipulation is void, the insured may bring an action within 10
years in case the contract is written.

2. What is subrogation

- is the substitution of one person in place of another with reference to a lawful claim or right, so that
he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its
remedies or securities.

3. What is the basis of for the right of the subrogation in a contract of insurance?

- If the plaintiff’s property has been insured, and he has received indemnity from the insurance
company for the injury or loss arising out of the wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights of the insured against the wrongdoer or the
person who has violated the contract.

4. Prescriptive period for the subrogee-insurer to file a claim against the wrongdoer based on quasi-delict?

- The prescriptive period is 4 years from the time the tort is committed against the insured by the
wrongdoer.

II. PRE-NEED CODE OF THE PHILIPPINES

RA 9829

1. Pre-need plans (Sec. 4b)

- are contracts, agreements, deeds or plans for the benefit of the planholders which provide for the
performance of future service/s, payment of monetary considerations or delivery of other benefits at
the time of actual need or agreed maturity date, as specified therein, in exchange for cash or installment
amounts with or without interest or insurance coverage and includes life, pension, education, interment
and other plans, instruments contracts or deeds as may in the future he determined by the Commission.

2. Pre-need company (Sec. 4c)

- refers to any corporation registered with the Commission and authorized/licensed to sell or offer to sell
pre-need plans. The term "pre-need company" also refers to schools, memorial chapels, banks,
nonbank financial institutions and other entities which have also been authorized/licensed to sell or
offer to sell pre-need plans insofar as their pre-need activities or business are concerned.

3. Registration of pre-need plans, when? (Sec. 14)

- Within a period of forty - five (45) days after the grant of a license to do business as a pre-need
company, and for every pre-need plan which the pre-need company intends to offer for sale to the
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 public, the pre-need company shall file with the Commission a registration statement for the sale of
pre-need plans

4. Default and termination (Sec. 23 & 24)

a) When must a planholder pay accrued installments?

- The pre-need company must provide in all contracts issued to planholders a grace period of at least
sixty (60) days within which to pay accrued installments, counted from the due date of the first
unpaid installment.

b) What is the effect of non-payment within the grace period?

- Nonpayment of a plan within the grace period shall render the plan a lapsed plan. Any payment by
the planholder after the grace period shall be reimbursed forthwith, unless the planholder duly
reinstates the plan.

c) When must the planholder reinstate the pre-need plan?

- The planholder shall be allowed a period of not less than two (2) years from the lapse of the grace
period or a longer period as provided in the contract within which to reinstate his plan. No
cancellation of plans shall be made by the issuer during such period when reinstatement may be
effected.

d) When may the pre-need company cancel the plan?

- Within thirty (30) days from the expiration of the grace period and within thirty (30) days from the
expiration of the reinstatement period, which is two (2) years from the lapse of the grace period, the
pre-need company shall give written notice to the planholder that his plan will be cancelled if not
reinstated within two (2) years. Failure to give either of the required notices shall preclude the pre-
need company from treating the plans as cancelled.

e) When may the planholder terminate his pre-need plan?

- A planholder may terminate his pre-need plan at any time by giving written notice to the issuer. A
pre-need plan shall contain a schedule of termination values to which the planholder is entitled to
upon termination.

f) When is a schedule of termination value required?

- Such schedule of termination value shall be required for all in - force pre-need plans and shall be fair,
equitable and in compliance with the Commission issuances.

g) Who shall pre-determine the termination value of the pre-need plan?

- The termination value of the pre-need plan shall be predetermined by the actuary of the pre-need
company upon application for registration of the pre-need plans with the Commission and shall be
disclosed in the contract.

5. Claims and settlement

a) What constitutes unfair claims settlement practices? (MASSS) (Sec. 25a)

- No pre-need company shall refuse, without just cause, to pay or settle claims arising under coverages
provided by its plans nor shall any such company engage in unfair claim settlement practices. Any of

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 the following acts by a pre-need company, if committed without just cause, shall constitute unfair
claims settlement practices:

(1) Knowingly misrepresenting to claimants pertinent facts or plan provisions relating to

coverages at issue;

(2) Failing to acknowledge with reasonable promptness pertinent communications with respect to
claims arising under its plan;

(3) Failing to adopt and implement reasonable standards for the prompt investigation of claims
arising under its plan;

(4) Failing to provide prompt, fair and equitable settlement of claims submitted in which liability
has become reasonably clear; or

(5) Compelling planholders to institute suits or recover amounts due under its plan by offering,
without justifiable reason, substantially less than the amounts ultimately recovered in suits
brought by them.

b) When must the proceeds of a plan be paid? (Sec. 26)

1) In the case of scheduled benefit plans, the proceeds of the plan shall be paid immediately upon
maturity of the contract, unless such proceeds are made payable in installments or as an annuity,
in which case the installments or annuities shall be paid as they become due.

2) In the case of contingent benefit plans, the benefits shall be paid by the pre-need company thirty
(30) days upon submission of all necessary documents.

c) What is the effect of the refusal or failure of a pre-need company to pay claim? (Sec. 26)

- Refusal or failure to pay the claim within fifteen (15) days from maturity or due date will entitle the
beneficiary to collect interest on the proceeds of the plan for the duration of the delay at the rate
twice the legal interest unless such failure or refusal to pay is based on the ground that the claim is
fraudulent: Provided, That the planholder has duly complied with the documentary

d) What are the consequences of default in payment of claims by the pre-need company? (Sec. 28)

- In case of any litigation for the enforcement of any pre-need plan, it shall be the duty of the
Commission to determine whether the payment of the claim of the planholder has been
unreasonably denied or withheld. If found to have unreasonably denied or withheld the claim, the
pre-need company shall be liable to pay damages, consisting of actual damages, attorney’s fees and
legal interest, to be computed from the date the claim is made until it is fully satisfied:

III. LAWS ON TRANSPORTATION AND PUBLIC UTILITIES

A. COMMON CARRIERS

1. Article 1732. Common carriers are persons, corporations, firms or associations engaged in the business of
carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their
services to the public.

- A common carrier has been defined as “one that holds itself out as ready to engage in the transportation of
goods for hire as public employment and not as a casual occupation.”

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 - Article 1732 of the Civil Code avoids any distinction between a person or an enterprise offering
transportation on regular and scheduled basis and one offering transportation service on occasional,
episodic and unscheduled basis. Neither does the law distinguish between a carrier offering its services for
the general public, that is, the general community or population and one who offers business only from a
narrow segment of the general population

- 2002 BAR: Article 1732 of the Civil Code makes no distinction between one whose principal business
activity is the carrying of persons or goods or both and one who does such carrying only as an ancillary
activity. Article 1732 does not make any distinction between a person or enterprise offering transportation
service on a regular or scheduled basis and one offering such service on an occasional, episodic or
unscheduled basis. Neither does Article 1732 distinguish between a carrier offering its services to the
general public, i.e., the general community or population, and one who offers services or solicits business
only from a narrow segment of the general population.

- Tests

a) True Test. The TRUE TESTS “for a common carrier is not the quantity or extent of the business
actually transacted, or the number and character of the conveyances used in the activity, but whether
the undertaking is a part of the activity engaged in by the carrier that he has held out to the general
public as his business or occupation.”

b) The Supreme Court declared that PKS was a common carrier because it was engaged in the business
of carrying goods for others for a fee. “The regularity of its activities in the area indicates more than
just a casual activity on its part. Neither can the concept of a common carrier change merely because
individual contracts are executed or entered into with the patrons of the carrier.”

c) It is a common carrier whether its carrying of goods is done on an irregular basis rather than on a
scheduled manner and with a limited clientele, or whether or not it has a fixed and publicly known
route, or whether or not it maintains terminals or issues tickets.

2. Article 1733. Common carriers, from the nature of their business and for reasons of public policy, are bound
to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers
transported by them, according to all the circumstances of each case.

3. Article 1734. Common carriers are responsible for the loss, destruction, or deterioration of the goods, unless
the same is due to any of the following causes only: (COOPE)

1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

2) Act of the public enemy in war, whether international or civil;
3) Act or omission of the shipper or owner of the goods;
4) The character of the goods or defects in the packing or in the containers;
5) Order or act of competent public authority.

4. Article 1735. In all cases other than those mentioned in Nos. 1, 2, 3, 4, and 5 of the preceding article, if the
goods are lost, destroyed or deteriorated, common carriers are presumed to have been at fault or to have acted
negligently, unless they prove that they observed extraordinary diligence as required in article 1733.

- Common carriers are responsible for the loss, destruction, or deterioration of the goods, unless it is
due to any of the following causes only:

a. Hijacking of the carrier does not fall among the five categories of exempting causes (1995 Bar). It
would follow therefore that the hijacking of the carrier’s vehicle must be dealt with under Article
1735 of the New Civil Code, in other word, the common carrier is presumed to be at fault or to

16
 have acted negligently unless there is proof of extraordinary diligence on the part of the common
carrier.

1) In a case, the carrier was not held liable where the goods were lost as a result of robbery
attended by grave irresistible threat, violence or force.
2) In other case, the carrier was not made liable for its failure to install window grills on its buses
to protect passengers from injuries caused by rocks hurled at the bus by lawless elements.

b. Requisites of Fortuitous Event:

1) The cause of the unforeseen and unexpected occurrence, or of the failure of the debtor to
comply with his obligation, must be independent of the human will;
2) It must be impossible to foresee the event which constitute the caso fortuito, or if it can be
foreseen, it must be impossible to avoid;
3) The occurrence must be such as to render it impossible for the debtor to fulfill his obligation in
a normal manner; and
4) The obligor (debtor) must be free from any participation in or the aggravation of the injury
resulting to the creditor.

- Fortuitous event, to be a valid defense, must be established to be the proximate cause of the
loss.

5. Article 1739. In order that the common carrier may be exempted from responsibility, the natural disaster
must have been the proximate and only cause of the loss. However, the common carrier must exercise due
diligence to prevent or minimize loss before, during and after the occurrence of flood, storm or other natural
disaster in order that the common carrier may be exempted from liability for the loss, destruction, or
deterioration of the goods.

6. Article 1740. If the common carrier negligently incurs in delay in transporting the goods, a natural disaster
shall not free such carrier from responsibility.

Effects of delay:
(1) The carrier would still be liable even if the damage was caused by fortuitous event; and
(2) The stipulation limiting the liability of the carrier is not operative.

7. Article 1745. Any of the following or similar stipulations shall be considered unreasonable, unjust and
contrary to public policy:

1) That the goods are transported at the risk of the owner or shipper;
2) That the common carrier will not be liable for any loss, destruction, or deterioration of the goods;
3) That the common carrier need not observe any diligence in the custody of the goods;
4) That the common carrier shall exercise a degree of diligence less than that of a good father of a family ,
or of a man of ordinary prudence in the vigilance over the movables transported;
5) That the common carrier shall not be responsible for the acts or omission of his or its employees;
6) That the common carrier's liability for acts committed by thieves, or of robbers who do not act with
grave or irresistible threat, violence or force, is dispensed with or diminished;
7) That the common carrier is not responsible for the loss, destruction, or deterioration of goods on
account of the defective condition of the car, vehicle, ship, airplane or other equipment used in the
contract of carriage.

8. Article 1749. A stipulation that the common carrier's liability is limited to the value of the goods appearing in
the bill of lading, unless the shipper or owner declares a greater value, is binding.

9. Article 1755. A common carrier is bound to carry the passengers safely as far as human care and foresight
can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances.
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 - Termination. Once created, the relationship will not ordinarily terminate until the passenger has, after
reaching his destination, safely alighted from the carrier’s conveyance or has had a reasonable
opportunity to leave the carrier’s premises. All persons who remain on the premises within a reasonable
time after leaving the conveyance are to be deemed passengers, and what is reasonable time or
reasonable delay within this rule is to be determined from all the circumstances, and includes reasonable
time to look after his baggage and prepare for his departure. For instance, a person, who, after alighting
from a train, walks along the station platform is considered still a passenger.

10. Article 1756. In case of death of or injuries to passengers, common carriers are presumed to have been at
fault or to have acted negligently, unless they prove that they observed extraordinary diligence as prescribed
in articles 1733 and 1755.

11. Article 1757. The responsibility of a common carrier for the safety of passengers as required in articles 1733
and 1755 cannot be dispensed with or lessened by stipulation, by the posting of notices, by statements on
tickets, or otherwise.

12. Article 1758. When a passenger is carried gratuitously, a stipulation limiting the common carrier's liability
for negligence is valid, but not for willful acts or gross negligence.

The reduction of fare does not justify any limitation of the common carrier's liability.

13. Article 1763. A common carrier is responsible for injuries suffered by a passenger on account of the willful
acts or negligence of other passengers or of strangers, if the common carrier's employees through the exercise
of the diligence of a good father of a family could have prevented or stopped the act or omission. (1997 and
2011 BAR)

- The liability of the carrier for the personal violence of its employees or agents upon its passengers
extends only to those acts which that the carrier could foresee or avoid through the exercise of the
degree of diligence required (2011 and 2012 Bar).

- The law provides a lesser degree of diligence, i.e., diligence of a good father of a family, in assessing the
existence of any culpability on the common carrier’s part.

14. Registered Owner Rule and Kabit System

- The rule in this jurisdiction is that the person who is the registered owner of a vehicle is liable for any
damages caused by the negligent operation of the vehicle although the same was already sold or
conveyed to another person at the time of the accident.
- The “kabit system” is an arrangement whereby a person who has been granted a certificate of public
convenience allows other persons who own motor vehicles to operate them under his license, sometimes
for a fee or percentage of the earnings. Although the parties to such agreement are not outrightly
penalized by law, the kabit system is invariably recognized as being contrary to public policy and
therefore void and inexistent under Art. 1409 of the Civil Code.

15. PASSENGER’S BAGGAGES

- Hand-Carried Baggage. Under this, the baggage in transit which is in the personal custody of the
passenger or his employee will be considered as necessary deposits. The common carrier shall be
responsible for the baggage as depositaries, provided that notice was given to them or its employees, and
the passenger took the necessary precaution, which the carrier has advised them relative to the care and
vigilance of their baggage (Art. 1754, NCC)(1989 Bar).

- In case of loss due to fault of the passenger the carrier will not be liable;

18
 - The act of the thief or robber, who has entered the common carrier’s vehicle is not deemed force
majeure, unless it is done with the use of arms or through an irresistible force (Art. 1754, NCC).

B. MARITIME LAW

- Maritime law is the system of laws which “particularly relates to the affairs and business of the sea, to ships,
their crews and navigation, and to marine conveyance of persons and property” (Francisco, p. 254).

1. REAL AND HYPOTHECARY NATURE OF MARITIME LAW

a. Limited Liability Rule (1978, 1982, 1985, 1989, 1991, 1994, 1997, 1998, 1999,2008, and 2011 Bar)

- The exclusively real and hypothecary nature of maritime law operates to limit the liability of the
shipowner to the value of the vessel, earned freightage, and proceeds of the insurance, if any. “NO
VESSEL, NO LIABILITY”.

b. When applicable

- The Code of Commerce sanctions the application of the doctrine in the following cases:

1) Civil liability for indemnities in favor of third persons which arise from the conduct of the
captain in the care of the goods which the vessel carried (Art. 587, Code of Commerce or
CC);
2) Civil liability arising from collisions (Art. 837, CC);
3) Unpaid wages of the captain and the crew if the vessel and its cargo are totally lost by reason
of capture or shipwreck (Art. 643, CC)

c. The exceptions bases on jurisprudence are:

1) When the injury to or death of a passenger is due either to the fault of the shipowner, or to the
concurring negligence of the shipowner and the captain;
2) When the vessel is insured (to the extent of the insurance proceeds); and
3) In Workmen’s Compensation claims
4) The limited liability rule does not apply if the carrier failed to overcome the presumption of
negligence.
5) The claim foe death benefits under the POEA-SEC (POEA Standard Employment Contract) is the
same species as the workmen’s compensation claims under the Labor Code – both of which belong
to a different realm from that of Maritime Law. Therefore, the limited liability rule does not apply
to petitioner’s liability under the POEA-SEC (Phil-Nippon Kyoei Corp, v. Gudelosao, , 2016).
6) The limited liability rule does not apply if the claim is not maritime; Examples: (i) collision of
vessels that are used for transportation of goods in rivers; or (ii) claims of the shipper against the
arrastre operator; (iii) claims of the arrastre operator against the carrier; (iv) claims for cost of
repairs made before the voyage.
7) Liability is also not limited if there is no abandonment.

2. CO-LOADING AND CABOTAGE (RA 10668)

- Republic Act No. 10668 which is the “Act Allowing Foreign Vessels to Transport and Co-Load Foreign
for Domestic Transshipment and for Other Purposes.” This is the “Cabotage” law for marine
transportation. Two important limitations imposed under the law are the transportation should involve
foreign vessels and the cargo must come from abroad or must be shipped to another country.

- A foreign vessel that is undertaking co-loading and cabotage as enumerated above is NOT considered a
common carrier and the carriage shall be governed by the COGSA.
19
 - Co-loading refers to agreements between two or more international or domestic sea carriers whereby a
sea carrier bound for a specified destination agrees to load, transport and unload the container van or
cargo of another carrier bound for the same destination.

- Allowed carriage: A foreign vessel is allowed to the following (Sec. 4):

a. Arriving from a foreign port, shall be allowed to carry a foreign cargo to its Philippine port of final
destination, after being cleared at its port of entry;
b. Arriving from a foreign port, shall be allowed to carry a foreign cargo by another foreign vessel
calling at the same port of entry to the Philippine port of final destination of such foreign cargo;
c. Departing from a Philippine port of origin through another Philippine port to its foreign port of final
destination, shall be allowed to carry a foreign cargo intended for export; and
d. Departing from a Philippine port of origin, shall be allowed to carry a foreign cargo by another
foreign vessel through a domestic transshipment port and transferred at such domestic
transshipment port to its foreign port of final destination.

Note: For purposes of this Act, an empty foreign container van going to or coming from any
Philippine port, or going to or coming from a foreign port, and being transshipped between two
(2) Philippine ports shall be allowed.

3. PROTEST

- Maritime protest is the written statement by the master of a vessel or any authorize officer, attested by
proper officer or a notary, to the effect that damages has been suffered by the ship (1997 Bar). Protest is
required under the Code of Commerce in the following case:

a. When the vessel makes an arrival under stress

b. Where the vessel is shipwrecked
c. Where the vessel has gone through a hurricane or the captain believes that the cargo has suffered
damages or averages
d. Maritime collisions (2007 BAR)

4. COLLISION

- In a collision, the vessel at fault shall indemnify the damages sustained or losses incurred and if both
vessels were at fault, each shall suffer its own damages, and both shall be solidarily liable to others.

- “Doctrine of Inscrutable Fault,” where fault if established but it cannot be determined which of the
two vessels were at fault, both shall be deemed to have been at fault (1987, 1991, and 1997 Bar).

5. GENERAL AVERAGE vs. PARTICULAR AVERAGE

- General average - This includes all damages and expenses which are deliberately caused in order to save
the vessel, its cargo, or both at the same time from real to known risk

- Requisites of General Average (1982, 1983, 2000, 2003, and 2009 Bar).
a. Common danger to ship and the cargo after it has been loaded whether during voyage or port of
loading and unloading;
b. That for the common safety, part of the vessel or the cargo or both is sacrificed deliberately;
c. That from the expenses or damages caused, follows the successful saving of the vessel and cargo; and
d. That the expenses or damages should have been incurred or inflicted after taking legal steps and
authority.

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 - Particular average - Simple or particular averages are all the expenses and damages caused to the vessel
or to her cargo which have not inured to the benefit and common profit of all the persons interested in the
vessel and her cargo.

6. CHARTER PARTY

- A charter party is a contract by which the entire ship or some principal part thereof is let by the owner or
another person for a specified period of time or use.

- There are two types of charter parties:

a. A Contract of Affreightment which involves the use of shipping space leased by the owner in part
or as a whole, to carry goods for others: Time Charter- leased for a fixed period of time; and
Voyage – for a single voyage.
b. A Charter by Demise or Bareboat – by the terms of which the whole vessel is let to the charterer
which transfers to him its entire command and possession and consequent control over its
navigation, including the master and crew who are his servants. The charterer is treated as owner
pro hac vice of the vessel. In such case, a common carrier becomes a private carrier.

7. BILL OF LADING

- It is written acknowledgment of receipt of goods and agreement to transport them to a specific place to a
person named or to his order.

- Functions of a Bill of Lading

a. Evidence of the existence of the contract of carriage of cargo (it provides its terms and conditions
including the consignee, the route, destination, freight, and other rights and obligations);
b. Commercial document (a symbol of the goods) whereby, if negotiable, ownership may be
transferred by negotiation; and
c. Receipt of cargo

8. LOANS ON BOTTOMRY AND RESPONDENTIA

- Bottomry – loan secured by the shipowner or ship agent guaranteed by the vessel itself and payable only
upon arrival of vessel at destination. This can also be secured by the captain outside the residence of the
shipowner or ship agent (1975 and 2003 Bar).

- Respondentia – loan secured by the owner of the cargo payable upon safe arrival of cargo at destination.
The shipowner, ship agent or captain cannot secure this loan.

9. PROCEDURE AND PRESCRIPTIVE PERIOD FOR CLAIMS

1) Coastwise or within the Philippines (Example: Manila to Cebu)

a. When to file a claim with carrier – condition precedent for court action.

Under Article 366 of the Code of Commerce, if goods arrived in damaged condition claim must
be filed by the shipper within the following period, otherwise recovery is barred (1984 Bar):
i. Immediately if damage is apparent; or
ii. Within 24 hours from delivery if damage is not apparent.

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 b. When to file a case in court – prescriptive period

i. Within six years, if no bill of lading has been issued; or

ii. Within 10 years, if a bill of lading has been issued or if there is a written contract (2004
Bar).

2) International carriage from foreign port to the Philippines (COGSA)

a. When to file a claim with carrier – NOT a condition precedent

i. Upon discharge of goods, if the damage is apparent, claim should be filed immediately; or
ii. If damage is not apparent, claim should be filed within three days from delivery (1975
Bar).
Note: The filing of claim is not condition precedent.

b. When to file court case – prescriptive period

- Within a period of one year form discharge (1992 and 2010 Bar).

C. SALVAGE LAWS (Act No. 2616)

1. Definition

- There is salvage where a person (or persons) picks up and conveys to a safe place a vessel or its cargo
which are beyond the control of the crew or shall have been abandoned by them (Sec. 1, SL).

- Note: However, there can also be a contract of salvage that may be voluntarily agreed upon by the
parties.

2. Requirements for Compensation

- A salvage claim or compensation may be awarded to the salvor if the following requirements are present
(1997 Bar).

1) There must be a marine peril;

2) The vessel is shipwrecked beyond the control of the crew or shall have been abandoned;
3) The service of picking up and conveying the vessel of cargo to a safe place is voluntarily rendered;
and
4) The service must have been successful in whole or in part, or that the service rendered contributed
to such success (Sec. 1 SL; Barrios v. Go Thong, 7 SCRA 535).

D. WARSAW CONVENTION (WC) (RA 9497 and RA 6235)

1. This Convention applies to international transportation by air. There is international transportation when:

a. The place of departure and the place of destination are within the territories of two contracting countries
regardless of whether or not there was a break in the transportation or transshipment; or

b. The place of departure and the place of destination are within the territory of a single contracting country
if there is an agreed stopping place within a territory subject to the sovereignty, mandate or authority of
another power, even though the power is not a party to the Convention.

2. Transportation by air

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 - The period during which the baggage of goods are in the charge of the carrier, whether in airport or on
board an aircraft, or in the case of landing outside an airport, in any place whatsoever.

a. It does not cover any transportation by land, by sea, or by river performed outside an airport.
b. If transportation takes place in the performance of a contract for transportation by air, for the
purpose of loading, delivery, or transshipment any damage is presumed, subject to proof to the
contrary, to have been the result of an event which took place during the transportation by air.

3. Tort Liability

- The Warsaw Convention does not provide for an exclusive enumeration of instances when the carrier is
liable. It does not provide for an absolute limit of liability and it does not preclude the application of the
Civil Code and other pertinent local laws. Hence a complaint for quasi-delict can still be filed even the
filing is beyond the prescriptive period of four years under the Civil Code.

4. Notice of Claim and Prescriptive Period

a. Notice of Claim/Complaint. This is MANDATORY or a CONDITION PRECEDENT - the complaint

or notice of claims must be filed with the international carrier.

1) Baggage – within three days from receipt;

2) Baggage – in case of delay of delivery, within 14 days from the time the baggage was placed at
the disposal of the passenger; and
3) Goods – seven days from delivery.

b. Prescription of Action. The case must be filed in court within:

1) Two years from receipt in case of an action for damage to passenger baggage;
2) If the action is for tort including for humiliation at the hands of the airline employees, the case
may be filed within four years.

E. PUBLIC SERVICE ACT

1. What conditions must concur in the grant of Certificate of Public Convenience (and necessity)?

a. The grantee must be a citizen of the Philippines or a corporation or entity 60% of which is owned by
such citizens;
b. The grantee must have sufficient financial capability to undertake the service; and
c. The service will promote public interest and convenience in a proper and suitable manner.

2. Is a Certificate of Public Convenience property in the hands of the holder thereof?

- A certificate of a public convenience is a mere license or a privilege and being neither a franchise nor a
contract, it confers no vested or property right or interest on the holder. However, in its purely private
aspect, it has value and may be considered property that can be levied upon.

3. Prior or old operator rule

- To carry out the purpose and intent for which the Public Service Commission was created, the law
contemplates that the first licensee will be protected in his investment and will not be subjected to
ruinous competition.

4. Franchise

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 - Is a legislative franchise necessary before a public utility can be allowed to secure a certificate of
public convenience?

There is no need to qualify the answer. NO, if there is no statute requiring the same, but YES, if
the pertinent law requires such legislative franchise. Although the trend is to delegate the legislative
power to authorize the operation of legislative authorities, there are laws that still require legislative
franchises. For example, the governing law (P.D. No. 576-A) requires a franchise for the operation of the
radio and television stations, hence, such law must be followed and a franchise must be so acquired.

5. Public Utility

- A “public utility” is a service or business engaged in regularly supplying the public with some
commodity or service of public consequence.

6. Foreign equity in public utilities

- Voting Control Test and Beneficial Ownership Test should be applied. Full beneficial ownership of 60%
of the outstanding capital stock and 60% of the voting shares are both required.

IV. BUSINESS ORGANIZATION

PARTNERSHIP

REVISED CORPORATION CODE

Corporation and Partnership are distinguished as follows:

CORPORATION PARTNERSHIP
Manner of creation created by law created by agreement
No. of Incorporators generally requires a minimum of 5 and requires a minimum of 2
a maximum of 15 incorporators. The
exception is a corporation sole
Commencement of commences to have existence upon the commences to have existence upon
Existence issuance of a certificate of agreement
incorporation
Powers that may be can only exercise powers allowed by can exercise powers not contrary to law
exercised law or public policy.
Management managed by a board managed by the managing partner
Succession enjoys the right of succession does not
Personal Liability stockholders do not have personal liable beyond what they have contributed
liability beyond the value of their
shares
Transferability of one's interest in a corporation is it requires consent of the other partners
Interest transferable without consent of the
stockholders
Disolution cannot be dissolved without the can be dissolved without the consent of
consent of the state the state

- Section 11, of Revised Corporation Code, RA 11232

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 SEC. 11. Corporate Term. – A corporation shall have perpetual existence unless its articles of
incorporation provides otherwise.

Corporations with certificates of incorporation issued prior to the effectivity of this Code, and
which continue to exist, shall have perpetual existence, unless the corporation, upon a vote of its
stockholders representing a majority of its outstanding capital stock, notifies the Commission that it
elects to retain its specific corporate term pursuant to its articles of incorporation: Provided, That any
change in the corporate term under this section is without prejudice to the appraisal right of dissenting
stockholders in accordance with the provisions of this Code.

A corporate term for a specific period may be extended or shortened by amending the
articles of incorporation: Provided, That no extension may be made earlier than three (3) years prior
to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension
as may be determined by the Commission: Provided, further, That such extension of the corporate term
shall take effect only on the day following the original or subsequent expiry date(s).

A corporation whose term has expired may apply for a revival of its corporate existence,
together with all the rights and privileges under its certificate of incorporation and subject to all of its
duties, debts and liabilities existing prior to its revival. Upon approval by the Commission, the
corporation shall be deemed revived and a certificate of revival of corporate existence shall be issued,
giving it perpetual existence, unless its application for revival provides otherwise.

No application for revival of certificate of incorporation of banks, banking and quasi-banking

institutions, preneed, insurance and trust companies, non-stock savings and loan associations
(NSSLAs), pawnshops, corporations engaged in money service business, and other financial
intermediaries shall be approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency

A. CORPORATION DEFINED

The law defines a corporation as an artificial being created by operation of law having the right of succession and
the powers, attributes and properties expressly authorized by law or incident to its existence.

THE ATTRIBUTES OF A CORPORATION

1. created by operation of law

- When a corporation is said to be created by operation of law, it means that it cannot come into existence
without the consent or any grant of authority from the sovereign government.

- The grant of authority by the sovereign government is a concession. Thus the concept known as the
“Concession Theory ” or Government Paternity Theory" or the "Franchise Theory".

2. it is an artificial being

- The corporation is said to be an artificial being that is invisible and intangible, it is said to exist only in
contemplation of law.

- The corporation as a juridical person has a personality separate and distinct from the persons composing
it

a. DOCTRINE OF SEPARATE JURIDICAL PERSONALITY

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 - This doctrine holds that a corporation is a juridical entity with legal personality separate and
distinct from those acting for and in its behalf and in general, from the people comprising it.

B. DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION

- It also known as the Doctrine of Disregarding the Fiction of Corporate Entity or Corporate
Alter Ego Doctrine.
- It is an exception to the Doctrine of Separate Juridical Personality because the application of
the doctrine seeks to hold the stockholder or members of the corporation personally liable for
corporate obligations.
- Before piercing, determine if it is a corporate obligation.

C. EFFECT OF PIERCING THE VEIL OF CORPORATE FICTION

1) The corporation will be treated merely as an association or collection or persons undertaking

business as a group and the stockholders or members will be considered as a corporation, that
is, liability will attach personally directly to the officers and stockholders
2) Where there are two corporations, they will be merged into one, one being merely regarded as
the instrumentality, agency, conduit, or adjunct of the other
3) The corporation continues for other legitimate objectives, the corporate character not
necessarily abrogated.

D. GROUNDS FOR PIERCING THE VEIL

1) If the fiction is used to perpetrate fraud (fraud test)

2) The complete control of one corporate entity to another which perpetuated the wrong is the
proximate cause of the injury (control test)
3) If a certain corporation is only an adjunct or an extension of the personality of the corporation
(alter ego or instrumentality test)
4) If the fiction is pierced to make the stockholders liable for the obligation of the corporation
(objective test)

E. TESTS TO DETERMINE APPLICABILITY

1) EQUITY CASES
- when the corporation is used to defeat public convenience as when the corporate fiction
is used as a vehicle for the evasion of an existing obligation. The convenience is the
creation of a separate and distinct person from the stockholder or members to facilitate
the transaction of business.

2) CONTROL TEST
- In fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or
defend a crime

3) ALTER EGO CASES

- Where a corporation is merely a farce since it is mere alter ego or business conduit of a
person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or an adjunct of
another corporation.

4) OBJECTIVE TEST
- Where the end result in piercing the veil is to make the stockholders liable for debts and
obligations of the corporation.

F. RESIDENCE OF A CORPORATION

26
 - The residence of a corporation is ordinarily the place of incorporation. For venue purposes, a
domestic corporation is a resident of a particular province, city or municipality.

g. NATIONALITY OF A CORPORATION – As a general rule, nationality is determined by place

of incorporation.

- The “control test” as a means of determining nationality looks at the nationality of the
stockholders or members of the corporation. Under the above-quoted SEC Rules, there are two
cases in determining the nationality of the Investee Corporation. The first case is the ‘liberal
rule’, later coined by the SEC as the Control Test in its 30 May 1990 Opinion, and pertains to
the portion in said Paragraph 7 of the 1967 SEC Rules which states, ‘(s)hares belonging to
corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens
shall be considered as of Philippine nationality.’ Under the liberal Control Test, there is no
need to further trace the ownership of the 60% (or more) Filipino stockholdings of the
Investing Corporation since a corporation which is at least 60% Filipino-owned is considered
as Filipino.

- The “grandfather test” as a means of determining nationality looks at the percentage of

foreign holdings in a corporation which is a stockholder in a Filipino corporation to determine
whether or not the percentage requirement of Filipino ownership has been met. The second
case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said
Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage of Filipino ownership
in the corporation or partnership is less than 60%, only the number of shares corresponding to
such percentage shall be counted as of Philippine nationality." Under the Strict Rule or
Grandfather Rule Proper, the combined totals in the Investing Corporation and the Investee
Corporation must be traced (i.e., "grandfathered") to determine the total percentage of Filipino
ownership.

- Look at the business where it is engaged in – fully-nationalized of partially nationalized

- If fully-nationalized, nationality and ownership of OCS
- If partially-nationalized, at least 60% of the OCS must be owned by Filipino nationals

GAMBOA V. TEVES

- The ruling in Gamboa v. Teves (652 SCRA 690, June 28, 2011) prescribes that in determining
the meaning of the term “capital” as prescribed in Section 11, Article XII, National Economy
and Patrimony of the Constitution it is deemed to refer to shares of stock that can vote in the
election of directors of the corporation.

ROY VS SEC, G.R. NO. 207246 (2017)

- The Gamboa Decision already held, in no uncertain terms, that what the Constitution requires
is "[fJull [and legal] beneficial ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights x x x must rest in the hands of Filipino nationals x
x x." And, precisely that is what SEC-MC No. 8 provides, viz.: "x x x For purposes of
determining compliance [with the constitutional or statutory ownership], the required
percentage of Filipino ownership shall be applied to BOTH (a) the total number of outstanding
shares of stock entitled to vote in the election of directors; AND (b) the total number of
outstanding shares of stock, whether or not entitled to vote x x x."

- This case validated the SEC-MC No. 8.

H. CRIMES

27
 - As a rule, no criminal action can lie against a corporation. A corporation cannot commit
felonies as provided for in the Revised Penal Code because artificial beings are incapable of
intent, nor can it actually perform an overt act.
- Hence, the court acquitted the president of a corporation who signed a trust receipt as the law
prevailing prior to the enactment of the Trust Receipts Law did not provide for the existence
of corporate criminal liability.

I. MORAL DAMAGES

- The latest is Filipinas Broadcasting Network, Inc. vs. Ago Medical and Educational Center
where it was held that Article 221 of the the Civil Code allows the recovery of moral damages
on cases of libel, slander or any other form of defamation without qualification as to whether
the plaintiff is a natural or juridical person. While the court may allow the grant of moral
damages to corporations, it is not automatically granted; there ’must be proof of the existence
of actual basis of the damage and its causal relation to the defendant's acts.

3. It only has the power, attributes and property expressly allowed by law or incident to its existence

- Corporations can only exercise those expressly authorized by law, can be implied or are necessary to
carry out its purposes, such as acts in the usual course of business or incidental to its existence because
they attach to a corporation upon its creation and said to be inherent such as the right of succession or to
sue. Natural persons or partnerships, on the other hand can exercise or perform any act provided it is not
contrary to law. The reason being that corporations owe their existence to the state, while natural persons
or partnerships.

4. It has the right of succession

KINDS OF CORPORATIONS

1. A stock corporation is one whose capital stock is divided into shares and are authorized to distribute to the
holders of such shares dividends or allotments of the surplus profits on the basis of the shares held.

2. A non-stock corporation is one where no part of its income is distributable as dividends to its members,
trustees or officers, and when any profit is obtained as an incident of its operations shall, whenever necessary
or proper be used for the furtherance of the purpose/s for which the corporation was organized.

- DIFFERENCES BETWEEN STOCK AND NON-STOCK CORPORATIONS

STOCK NON-STOCK
Existence of Has capital stock divided into No capital stock.
capital stock shares Its capital is in the form of contributions or
donations.
Purpose Organized for profit. Not organized for profit.
Distribution of Through dividends Not distributed.
profit Any profits earned is used for the furtherance of
the purpose/s for which it was organized.
Number of Not less than 5 but not more Not less than 5 and may be more than 15 except
directors or than 15. non-stock educational institutions, max of 15
trustees Except corporation sole and trustees
banks (in case of merger and
consolidation which can have
a maximum of 21 directors
Term of office of 1 year until their successors Subject to the provisions of AOI and by-laws, 3
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 directors are elected and qualified,
subject to the provisions of
AOI and by-laws
years on a staggered basis
It may have any number of trustees as fixed in the
Articles of Incorporation or By-law from the
ranks of its membership.

The term of the original trustees is such that 1/3

of their number shall serve for a year, the second
1/3 for two years and the third 1/3 for three years

Trustees subsequently elected shall then serve for

a term of three years. Trustees elected to fill
vacancies, shall only serve for the unexpired
portion.
Election of By the BOD The members elect corporate officers, unless
officers otherwise provided by Articles of Incorporation
or By-Laws.

Place of meeting SH’s meeting shall be held in
city or municipality where the
principal office is located or at
the principal office
Right to vote SH can resort to cumulative
voting
Only preferred and
redeemable shares can be
denied the right to vote subject
to some exceptions.
May be held at any place outside the principal
place of business of the corporation
Provided, there be notice of the date, time, and
place and should always be in the Philippines.
No cumulative voting unless allowed by the AOI
Right to vote may be limited, broadened or denied
by the AOI or by-laws.
Unless so provided, each member is entitled to
one vote.

Voting of directors may be
made only through general
voting. Regional and district
voting of directors are not
allowed.
In exercising the right, he may vote by proxy and
also by mail or other similar means as authorized
by the Articles of Incorporation or By-Laws with
the approval of and under conditions prescribed
by the SEC

Regional and district voting of trustees are

allowed.
Transferability of Shares may be transferred Membership is personal in character and is not
shares/Membersh with or without consent of the transferable unless allowed by the AOI or by-laws
ip corporation
Right to expel SH may be expelled only for Membership shall be terminated in the manner
members grounds provided by law and for the causes provided in the AOI or by-laws

Note that courts have no power to strip

membership as it constitutes an unwarranted and
undue interference with the right of a corporation
to determine its membership.

Termination of membership carries with it all

rights to property and other privileges unless the
By-Laws provide otherwise. Note that admission
is an expressly granted power in the Corporation
Code.
Distribution of Assets of stock corporation Assets of non-stock corporation shall be
Assets in case of shall be distributed in the distributed in the following order:
dissolution following order:
1. Payment of claims of creditors
29
 1. Payment of claims of 2. Assets held on condition of return or subject to
creditors who are not limitation of use shall be returned, transferred or
stockholders (based on conveyed.
preference of credit) 3. Distribution to member based on distributive
2. Payment of claims of SHs rights stated in AOI or by-laws
as creditors In case of default, distribution pursuant to Plan of
3. Residual balance is Distribution of Assets.
distributed
proportionately to
preferred shares, if any,
then to common stock.

3. NON-STOCK CORPORATIONS

- A non-stock corporation cannot amend its Articles of Incorporation and convert itself into a stock
corporation as the members are not entitled to share in the profits of the corporation as all present and
future profits belong to the corporation.

- CONVERSION: By converting to a stock corporation it will be deemed to have distributed corporate

assets among members without a prior dissolution. On the other hand, if it were a stock corporation at
the onset, it may be converted to a non-stock corporation as the corporation is not distributing assets
without dissolution, but rather, they are waiving their rights to any profits/dividends.

- DISTRIBUTION OF ASSETS UPON DISSOLUTION of a non-stock corporation

a. Liabilities and obligations of the corporation shall be paid, satisfied or discharged, or adequate
provisions made thereof;
b. Assets held under a condition requiring return, transfer, conveyance and which condition occurs by
reason of dissolution shall be returned, transferred, and conveyed;
c. Assets received and held by the corporation subject to limitations permitting use only for charitable,
religious, benevolent, educational or similar purposes, but not subject to return, transfer or
reconveyance by reason of dissolution shall be transferred to corporations undertaking similar
activities pursuant to the plan of dissolution;
d. Other assets shall be distributed in accordance with the Articles of Incorporation or By-Laws
determining the distributive rights of its members or as provided;
e. In any other case, assets shall be distributed to such persons, societies or organizations whether
organized for profit or not as provided in the plan of distribution.

- The plan of distribution must be consistent with the distribution rules above-outlined. This plan is
adopted pursuant to a majority vote of the Board of Trustees, then submitted for the affirmative vote of
2/3 of the members having voting rights at a regular or special meeting, prior notice having been given.

4. DE JURE VS DE FACTO

a. DE JURE - A de jure corporation is one that is considered as a legally constituted corporation, having
fully complied with all the requirements of law.

b. DE FACTO – A de facto corporation is one that is so defectively created as not be a de jure corporation,
but nevertheless is the result of bona fide attempt to incorporate under existing statutory authority
coupled with the exercise of the corporate powers and is recognized by the courts as such upon grounds
of public policy in all proceedings, except upon a direct attack by the state questioning its corporate
existence.

1) REQUISITES OF A DE FACTO CORPORATION

30
 a) There is a valid law under which the corporation may be recognized.
b) There is a bona fide attempt in good faith to incorporate
c) There is an actual valid exercise of corporate powers.

- In general, a de facto corporation is deemed to have substantial legal existence except as against
the state.

- Consequently it has the same corporate power and liabilities like a de jure corporation. It is
obliged to pay taxes. Contracts that are entered into are valid and binding. It is allowed to bring
suit.

- A de facto corporation can be a de jure corporation; a de facto can be corporation by estoppel; and
a corporation by estoppel can be de jure.

- Its existence is not open to a collateral attack. The only way by which is can be attacked is by way
of quo warranto proceedings to determine the right to the use or exercise of a franchise or office
and to oust the holder from his enjoyment of the same.

- Quo warranto proceeding is initiated by the Solicitor General because:

(a) it is the state's right or authority that is usurped

(b) it would produce endless confusion if it's existence is questioned in every suit that it is a
party to
(c) it is in the public interest to maintain the validity of the business transactions entered into
with de facto corporations.

c. Difference between De Jure and De Facto

DE FACTO
One which actually exists for all practical
purposes as a corporation but which has no
legal right to corporate existence as against
the state.
There is a colorable compliance with the
requirements of the law creating the
corporation.
Can be attacked directly but not collaterally.
Stockholders enjoy exemption from corporate liability for corporate obligations.
DE JURE
One created in strict or substantial conformity
with the mandatory statutory requirements for
incorporation.
There is substantial compliance with the
requirements of the law creating the corporation.
Its right to exist as a corporation cannot be
successfully attacked or questioned by any party
even in direct proceeding for that purpose by the
state.

5. CORPORATION BY ESTOPPEL - A corporation by estoppel arises when the persons assume to act as a
corporation knowing it to be without authority to do so; in this case said persons shall be liable as general
partners for debts, liabilities and damages and it cannot, as a defense, neither can one dealing with it, resist
performance. Hence, one who assumes an obligation to an ostensible corporation as such cannot resist
performance thereof on the ground that there was in fact no corporation.

6. CORPORATION BY PRESCRIPTION- A corporation by prescription is one that is not formally

organized as such but has been duly recognized for a substantial length of time as a corporation with rights
and duties that are enforceable under the law. In the Philippines, the Roman Catholic Church is recognized as
such.
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7. NUMBER AND QUALIFICATIONS OF INCORPORATORS

- The required number and qualification of Incorporators are:

a. 5 but not more than 15 persons, except when it is a corporation sole
b. Capacity to enter into a contract, the act of forming a corporation being a contractual in nature.
Further, the articles must be acknowledged to secure the state against the possibility of a fictitious
name to be subscribed and to furnish proof of signatures.
c. A majority must be residents of the Philippines. It is a mandatory requirement because the business
is to be conducted in the Philippines.
d. They must own or subscribe to at least one share of stock.

CLASSIFICATIONS OF SHARES

1. COMMON vs PREFERRED SHARES

a. COMMON SHARES
- entitled to a pro-rata division of profits
- If shares are classified as common, they may or may not have par value except when it is a bank,
trust company, insurance company, public utility, building or loan association.

b. PREFERRED SHARES
- are given preference in the distribution of assets, dividends or other privileges, provided such are
not in violation of the Corporation Code or do not have a right greater than corporate creditors.

- Such preferences must appear in the Articles.

- Such preferences are decided by the board, as it may be authorized to fix terms and conditions,
which shall be effective only upon filing of the appropriate certificate with the SEC.

- If the shares are classified as preferred, it should always have par value. The certificate must state
the issued value.

- if the par value is 1 peso per share but was sold at 10 pesos, there is a profit or surplus of 9 pesos
which can be declared for dividend.

- It may be deprived of voting rights, together with redeemable shares but if so, there must be
class/series which shall have full voting rights or in addition, even if voting rights are not enjoyed,
holders of such shares shall still vote in the following instances:

i. merger/consolidation
ii. amendment of articles
iii. Sale, lease, exchange, pledge or other disposition of all or substantially all of corporate
property
iv. increase/decrease of corporate bonded indebtedness
v. increase/decrease of corporate capital stock
vi. investment in another Corporation or business, and
vii. dissolution
viii. adoption or amendment of by laws

- If shares are without par value, they:

a. are considered fully paid and none assessable, meaning the stockholder is no longer liable to the
corporation
b. cannot be issued for less than P5.00

32
 c. entire consideration is treated as capital, thus not available for dividends

2. WITH PAR VS NO PAR VALUE

A. WITH PAR VALUE

- referring to a fixed minimum issue price stated in the articles and the certificate
- ALWAYS WITH PAR - bank, trust company, insurance company, public utility, building or loan
association.

B. WITH NO PAR VALUE

- referring to the absence of any stated value in the articles and the certificate.

3. FOUNDERS’ SHARE, (PREFERRED SHARES)

- are classified in the Articles as having been given certain rights or privileges not enjoyed by others.
- Provided, if the exclusive right to vote and be voted for in the election of the Board of Directors, it
should be for a limited period not exceeding 5 years subject to SEC approval.

4. REDEEMABLE SHARES

- Corporation may issue redeemable shares when expressly allowed by the Articles.
- Redeemable shares may be purchased and taken up by the Corporation upon the expiration of a fix
period, regardless of the existence of unrestricted retained earnings and such other terms and conditions
stated in the articles and the certificate of stock.
- Note though that they hold the power that the Supreme Court has held in the case of Republic Planters
Ban v. Agana, Sr. that the Corporation after redemption, must have sufficient assets in its books to
cover debts and liabilities inclusive of capital stock.
- Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will
cause insolvency or inability of the corporation to meet its debts as they mature.

5. TREASURY SHARES

- are shares that have been issued and paid for but subsequently reacquired by purchase, redemption,
donation or any other lawful means.
- It may again be disposed of for a reasonable price as determined by the board.
- Note that its acquisition must always be funded by surplus profits, otherwise it violates the TRUST
FUND DOCTRINE as capital is impaired.

What are the rules on non-voting shares?

- Preferred shares may be deprived of voting rights, together with redeemable shares but if so,
there must be a class/series which shall have full voting rights.

6. NON-VOTING SHARES MAY VOTE

- Nevertheless, even if voting rights are not enjoyed, holders of such shares shall still vote in the following
instances:

a. amendment of articles
b. adoption or amendment of by laws
c. sale, lease, exchange, pledge or other disposition of all or substantially all of corporate property
d. increase/decrease of corporate bonded indebtedness
e. increase/decrease of capital stock
f. merger/consolidation
g. investment in another corporation or business, and
h. dissolution

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AMENDMENT OF ARTICLES OF INCORPORATION

1. GENERAL RULE:

- Amendments may take place by a majority vote of the board, and 2/3 vote or written assent of
stockholders or members. The original and amended articles are then submitted to the SEC with
underscoring, duly certified by corporate secretary (except corporation sole) and majority of the
directors that it has been duly approved by the required vote and in case of corporations that are
regulated by another government agency, a favorable recommendation must be submitted likewise. The
rule that allows written assent does not apply when the object of the amendment is to extend or shorten
the term or increase or decrease capital stock.

2. NON-AMENDABLE ITEMS

a. Names of incorporators;
b. Names of original subscribers to the capital stock of the corporation and their subscribed and paid up
capital;
c. Names of the original directors;
d. Treasurer elected by the original subscribers;
e. Members who contributed to the initial capital of the non-stock corporation; and
f. Witnesses to and acknowledgement of the articles.

3. COMMENCEMENT OF CORPORATE EXISTENCE

A. REGISTRATION AND ISSUANCE OF CERTIFICATE OF INCORPORATION

- A corporation commences to have existence from the issuance by the SEC of a certificate of
incorporation under its official seal. The effect of which is to constitute its stockholders or
members and their successors as a BODY POLITIC and CORPORATE under the name and for the
term stated in the articles.
- It is said to have been given de jure existence or can be said to be incorporated.
- The exception is a Corporation Sole, which is deemed incorporated upon filing of its Articles

B. WHAT MUST A CORPORATION DO AFTER INCORPORATION?

- A corporation has to formally organize and commence transaction of business within 2 years from
date of incorporation. If it fails to do so, its corporate powers cease and it is deemed dissolved.
- If it commences, but becomes continuously inoperative for 5 years, the same is ground for
suspension or revocation of the certificate.

4. CORPORATE MANAGEMENT

- THREE LEVELS OF CONTROL IN THE CORPORATE HIERARCHY

a. The board - which Dicker means corporate policy and prescribes the manner of general
management of its business activities. Towards this end, the law provides that all corporate
powers of all corporations formed under it shall be exercised, all business conducted and all
property held by a board of directors or trustees.

b. The corporate officers – are charged with the mandate to execute the decisions of the board and
who, oftentimes, determine the best manner by which the business is to be run. They are tasked
to carry out the policies laid down by the board, the AOI, and the by-laws.

34
 c. The stockholders or members - who are considered as having residual power over fundamental
corporate changes as they are required by law to give their assent by the exercise of the right to
vote.

5. DOCTRINE OF CENTRALIZED MANAGEMENT

- States that all corporate powers shall be exercised, all business conducted and all property held by a
Board of Directors or Trustees. It is the board which determines corporate policy and prescribes the
manner of general management of its business activities.

6. THREE INSTANCES WHERE DOCTRINE DOES NOT APPLY

- In case of delegation to the EXECOM duly authorized in the by-laws

- Authorization pursuant to a contracted manager, which may be an individual, a partnership, or a
corporation
- In case of close corporations, the stockholders may manage the business of the corporation instead of a
board, if stated in the AOI

7. BUSINESS JUDGMENT RULE

- States that questions of policy or management are left solely to the honest decision of officers or
directors of a corporation and the courts or the SEC cannot interfere unless the acts are so
unconscionable and oppressive so as to amount to a wanton destruction of the rights of the minority or
the directors are in bad faith or committed gross negligence.

8. QUALIFICATIONS OF THE BOARD

a. He must own at least 1 share or at least it should be listed in his name as owner, if it is a non-stock
corporation, he must be a member;
- Ownership is absolutely necessary upon the assumption to the office of an elected director. Hence,
a person can be elected even if he does not own the stock at the time of election. If he is not a
stockholder, he may be considered an ex-officio member without voting rights in the board.
- A pledgee/mortgagee on the other hand cannot be elected. She may not be a stockholder for the
present time but upon assumption of office, it is absolutely necessary that he must own at least one
share of stock.

b. Every director/trustee must continuously own at least a share during his term or be a member;
c. A majority must be residents of the Philippines as the business primarily undertaken in the Philippines;
d. He must not have been convicted by final judgment of an offense punishable by a period in excess of 6
years or a violation of the code, committed within a period of 5 years prior to the date of election;
e. Be a Filipino citizen in the instances required by law;
- Example: corporation engaged in mass media is required to be 100% owned and managed by
Filipinos; transportation 60/60 but 100 Filipino management

f. Such other qualifications as may be prescribed in the By-laws.

- While no age requirement has been provided by law, a stipulation allowing a minor to be elected as
a member of the board is not some corporate practice as they have limited capacity to act. It has
also been said that since incorporators are required to be of legal age, the same requirement should
be applied to subsequent directors.

9. DISQUALIFICATIONS OF THE BOARD

a. Conviction by final judgment of an offense punishable by imprisonment exceeding 6 years

35
 b. Violation of the corporation code committed within 5 years prior to his election or appointment

10. DIFFERENT METHODS OF VOTING OF BOD

a. STRAIGHT VOTING – every stockholder may vote such number of shares for as many persons as
there are directors to be elected
b. CUMULATIVE VOTING FOR 1 CANDIDATE – a stockholder is allowed to concentrate his votes
and give one candidate as many votes as the number of directors to be elected multiplied by the number
of his shares shall equal
c. CUMULATIVE VOTING BY DISTRIBUTION – a stockholder may cumulate his shares by
multiplying the number of his shares by the number of directors to be elected and distribute the same
among as many candidates as he shall see fit.

11. INDEPENDENT DIRECTORS:

- An independent director is a person who, apart from his fees and shareholdings, is independent of
management and free from any business or other relationship which could, or reasonably perceived to
interfere with his exercise of independent judgment in carrying out his responsibilities as a director.

- Independent directors should always attend board meetings. Unless otherwise provided in the by-laws,
their absence shall not affect the quorum requirement. However, the Board may, to promote
transparency, require the presence of at least one independent director in all its meetings.

a. QUALIFICATIONS

1) He must not have any personality, financial, or professional ties with the corporation, its
affiliates, and subsidiaries that may adversely affect his ability to act objectively.
2) He must not have been employed in an executive capacity by the corporation, related to
companies or any of its substantial shareholders within the last five years.
3) He must not engaged in any transaction with the corporation, good companies or any of its
substantial shareholders, other than those conducted at arm’s length and are immaterial or
insignificant.
4) Ownership of at least one share - An independent director must not own more than 2% of the
shares of the company and/or covered companies or any of its substantial shareholders as per
RA 8799. Object is to minimize the incidence of front of and conduct can the board and is
meant to call attention the deviations from the path of good corporate governance.
5) College graduate or has engaged or exposed to business of the corporation for not less than
five years, and
6) A person of integrity, probity and must be hard-working.

b. WHERE INDEPENDENT DIRECTORS REQUIRED

1) Issuers of registered securities to the public - requires at least 2 independent directors or 20%
of the board, whichever is lesser.
2) In a bank - requires at least 2.
3) A stock or securities exchange - requires at least 3, and the president must be an independent
director.
4) Finance companies, investment houses, brokers, investment companies, pre-need companies
and subsidiaries of foreign corporations operating and are listed in the Philippine Stock
Exchange - requires at least 1.

12. REMOVAL OF DIRECTORS

a. It must take place at the regular meeting of the corporation or special meeting called for that purpose;

36
 b. There must be previous notice to stockholders or members of the intention to propose such removal. The
notice must be specific and in writing, by publication or sending of a copy of the notice; and,
c. The removal is affected by 2/3 vote of capital stock / members entitled to vote except that a director
elected by cumulative voting cannot be removed as it deprives the minority stockholders or members of
their representation.

- Any special meeting for the removal of directors is to be called by the Secretary on order of the
President or upon written demand of stockholders representing at least a majority of the outstanding
capital stock or of the members.
- If the Secretary, refuses, does not exist, or fails to give notice, the call for a meeting may be addressed
directly to stockholders or members by the stockholders or members signing the demand.
- The election of new directors may take place in the same meeting. In close corporations, when its
articles provide that it be managed by the stockholders.

13. HOW VACANCIES FILLED

a. Vacancies are filled by the stockholders or members if the cause is:

i. removal;
ii. expiration;
iii. other causes when the remaining members of the board do not constitute a quorum or leaves the
filling up of the vacancy to them;
iv. when there is an increase in the number of directors/trustees.

b. A vacancy can also be filled by the board if the cause of the vacancy is not removal or expiration and the
remaining members still constitute a quorum. This can only be exercised by the board if they acting
within their term.

- Should a vacancy arise due to causes other than removal or expiration, it may be filled by the board
by majority vote of the remaining directors if still constituting a quorum. Otherwise, the vacancy
should be filled by the stockholders or members in a regular or special meeting, the stockholder or
member so designated or elected shall only serve the unexpired portion of the term.

14. DELEGATION OF CORPORATE POWERS

GENERALLY, the exercise of corporate powers can be delegated.

EXCEPTIONS:

a. Power rests only with stockholders / members

b. Effect of delegation is to cede entire supervision/ control over the corporation
c. When the by-laws or authorization for an act restricts the delegation.
- A valid delegation can take place when the Corporation, acting through board and by resolution,
designates a particular person/s or entity to exercise specific corporate power subject to the above
stated limitations or when an executive committee has been created by and under the provisions
of the by-laws.

15. EXECUTIVE COMMITTEE

- The committee is a body composed of no less than 3 members of the board to whom corporate powers
are delegated to assure prompt and speedy action and solution without the necessity of board meetings
and manages the corporation between meetings of the board. It may act by majority vote on such matters
that are within the competence of the board as may be delegated to it in the by-laws or on majority vote
of the board.

16. FORMAL ORGANIZATION

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 - Immediately after the election, the directors of the corporation must formally organize, by the election of
a president, who shall be the director, a treasurer, who may or may not be a director, a secretary who
must be a resident and citizen of the Philippines and such others as may be provided for in the by-laws.

- Any person may hold concurrent positions except that of the President-Secretary or President-Treasurer.

- An appointive or elected public official cannot serve as a corporate officer of any private bank except
when the service is incidental to the financial assistance provided by the government or a GOCC to the
bank or unless otherwise provided.

BY-LAWS NOT STATED IN THE BY-LAWS

Can be removed by the board Subject to rules on regular employees
Intra-corporate disputes – special commercial NLRC
courts

17. HOW CORPORATE POWERS EXERCISED

- Corporate powers are exercised and performed by the board through meetings.

- This so because it must act as a body and a decision must always be reached after affording opportunity
for consultation.

- In addition, directors or trustees have the power to act other than as a board.

- The exceptions are:

a) directors happened to be the only stockholders
b) act is undertaken by someone authorized by the board
c) stockholders wave the necessity of having a meeting
d) when there is an executive committee
e) when the Corporation enters into a management contract
f) when the act is ratified at a subsequent meeting.

THREEFOLD DUTIES OF DIRECTORS (Diligent, Loyal, Obedient)

1. They must be DILIGENT.

- Compliance with the duty of diligence requires the exercise of reasonable care, prudence, and equate
knowledge and skill.
- This duty is specifically imposed by the Corporation Code, when it provides that: directors or trustee
who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are
guilty of gross negligence in directing its affairs shall be liable jointly and severally with all damages
resulting therefrom suffered by the corporation, its stockholders or members and other persons.
- Corollary to this duty of diligence is the protection afforded to directors under the “BUSINESS
JUDGMENT RULE”. If in the course of management, they arrive at the decision for which there is a
reasonable basis and they acted in good faith, as the result of their independent judgment, and
uninfluenced by any consideration, other than what they believe to be for the best interests of the
Corporation, it is not the function of the court to say that it should have acted differently and to charge
the directors for any loss or expenditures incurred.

2. They must be LOYAL to be keeping the interest of the corporation above personal motives.

- Compliance with this duty requires that the director act in a manner characterized by transparency,
accountability and fairness.

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 - The basic principle to be observed is that a director should not use his position to make profit or to
acquire benefit or take advantage for himself and/or his related interests.

a. SELF-DEALING DIRECTORS

GENERAL RULE:

- A contract between a self-dealing director and a corporation is voidable at the option of the
Corporation.

- Notwithstanding, the contract shall be valid when:

a) presence of the director/trustee in the board meeting in which the contract was approved
was not necessary to constitute a quorum;
b) his vote is not necessary to approve the contract;
c) that the contract is fair and reasonable under the circumstances. In the case of an
officer, the contract has previously approved by the board.

- If however, conditions (a) and (b) are absent, the contract may be ratified by 2/3 vote of the
outstanding capital stock in the meeting duly called for such purpose with full disclosure of
the adverse interest being made at the meeting and that the contract is nevertheless fair and
reasonable. Note that there is no requirement that the corporation suffers damage.

b. INTERLOCKING DIRECTORS

GENERAL RULE:

- Contract between corporations with interlocking directors is valid as long as there is no

fraud and the contract is fair and reasonable.

EXCEPTION:

- Voidable at the option of the corporation if a director's interest in one corporation is

substantial in his interest in the other corporation/s is nominal. The contract shall be subject
to the provisions of Section 32 insofar as the Corporation/s where he has a nominal share
as it is as if the Corporation is transacting with the self-dealing director. Shareholdings in
excess of 20% of the outstanding capital stock shall be considered substantial.

c. DISLOYAL DIRECTORS

i. DOCTRINE OF CORPORATE OPPORTUNITY (SEC 34)

- When a director is disloyal by virtue of his office, he acquires for himself a business
opportunity which should belong to the corporation, thereby obtaining profit, he must
account for it by refunding the same to the corporation, even if the director risked his
own funds in the venture, unless, his act is rectified by a vote of the stockholders
owning or representing 2/3 of outstanding capital stock.

II. THE PROVISION DOES NOT APPLY IF:

1. he acts in good faith,

2. the Corporation is unable to undertake the opportunity or the same is not essential to
the corporation

III. DISTINGUISHING BETWEEN SECTION 31 AND SECTION 34

39
 SECTION 31 SECTION 34
Liability of directors, trustees, or officers Disloyalty of a director
(1) He willfully and knowingly votes or assents to He acquires for himself a business opportunity
patently unlawful acts of the corporation; which should belong to the corporation.
(2) He is guilty of gross negligence (not mere "want
of ordinary prudence" or bad
faith in directing the affairs of the corporation; and
(3) He acquires any personal or pecuniary interest
in conflict with his duty as such director or trustee.
The erring board members or officers He must account for it by refunding the same to
shall be held jointly and severally (or solidarily) the corporation, even if the director risked his
liable for all damages resulting therefrom suffered own funds in the venture.
by the corporation, its stockholders or members, or
other persons.
It speaks of the acquisition of any personal or It speaks of a violation of the general trust that
pecuniary interest in conflict with his duty in is reposed on a director.
respect to a matter reposed in him in confidence as
to which equity imposes a disability to deal in his
own behalf, he shall be liable as trustee and must
account for all the profits that would have
otherwise accrued to the Corporation.
What is violated is the trust specifically reposed.
Thus there is no ratification. Rectified by a vote of the stockholders owning
or representing 2/3 of outstanding capital stock

3. They must be OBEDIENT by keeping within the powers of the corporation.

- The duty of obedience simply means that directors are bound to observe the limits of their authority.
- This means that the board must keep within the powers of the institution as prescribed in the articles of
incorporation, by-laws, and existing laws, rules and regulations.
- The above principle is embodied in the concept of ULTRA VIRES which is pronounced in the
Corporation code that: No corporation under this Code shall possess or exercise any corporate powers
except those conferred by this Code or by its articles of incorporation and except such as are necessary
or incidental to the exercise of the powers so conferred.

PERSONAL/SOLIDARY LIABILITIES OF A DIRECTOR

1. Willfully and knowingly assents or votes about the unlawful act of the Corporation
2. Guilty of gross negligence or bad faith in directing the affairs of the Corporation.
Example is illegal dismissal of employees when attended by bad faith or malice, where they would be
solidarily liable with the Corporation.
3. Acquisition of any personal or backing any interest in conflict with his duty in respect of matter
reposed in him in confidence,
4. Consents to the issuance of watered stocks or having knowledge of the issuance of watered stock does
not quantify the corporate secretary in writing of the fact of issuance
5. Agrees to be personally liable
6. Made liable by specific provision of law

CORPORATE POWERS

1. The power to EXTEND OR SHORTEN the corporate term

- It is undertaken by a majority vote of the board and vote of 2/3 of the stockholders holding the
corporation's outstanding capital stock or members at the meeting, of which they were given notice
addressed to them at the given address as shown in the books of the corporation deposited at the post
office or delivered personally.
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 - In case of an extension, a stockholder is allowed to exercise his appraisal right. This is also allowed
when the term is shortened.

2. Power to INCREASE OR DECREASE capital stock, incur create or increase corporate bonded
indebtedness

- Approved by a majority vote of the board of directors and, at a stockholders' meeting duly called for the
purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the
capital stock, or the incurring, creating or increasing of any bonded indebtedness.

a) PRE-EMPTIVE RIGHTS

- referring to the right to subscribe on issues or disposition of shares in proportion by stockholders

shareholdings

- The reason for its allowance is to preserve a stockholders unaltered and unimpaired influence in the
corporation. It does not apply to shares originally unsubscribed or undisposed.

GENERAL RULE: preemptive rights exist

EXCEPTION: maybe restricted when denied by the articles or an amendment thereto

- If the preemptive right is offered but not exercised, it does not follow that it will be offered to other
stockholders. If restricted by an amendment, a stockholder may exercise his appraisal right.

b) PRE-EMPTIVE RIGHTS NOT AVAILABLE

i. when the shares are issued in compliance with laws requiring stock offerings or minimum stock
ownership
ii. when the shares are issued in good faith with approval of stockholders representing 2/3 of the
outstanding capital stock in exchange for property needed for corporate purposes or
iii. when the shares are issued in good faith in payment of a previously contracted debt

3. The power to cause the sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of corporate assets

- It is undertaken by a majority vote of the board and 2/3 vote of stockholders or members, written
notice having been given.

- In case of dissent, the right of appraisal maybe exercised.

a) NELL DOCTRINE

GENERAL RULE:

- Where one corporation sells or otherwise transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the transferor.

EXCEPTIONS:

i. where the purchaser expressly or impliedly agrees to assume such debts;

ii. where the transaction amounts to a consolidation or merger of the corporations;

41
 iii. where the purchasing corporation is merely a continuation of the selling corporation; and
iv. where the transaction is entered into fraudulently in order to escape liability for such debts
(Edward J. Nell Company v. Pacific Farms, Inc., 1965)

4. The power to acquire its own shares

- It can only be undertaken if it is for a legitimate corporate purpose/s provided that it has unrestricted
retained earnings.

a. CONDITIONS
i. Capital is not impaired
ii. There must be unrestricted retained earnings
iii. For a legitimate and proper purpose
iv. Corporation is in good faith and without prejudice to the stockholders’ rights
v. Condition of corporate affairs where if absent the conditions, there is a violation of the Trust
Fund Doctrine.

b. TRUST FUND DOCTRINE

- holds that the assets of the corporation as represented by its capital are trust funds that are to
be maintained unimpaired and to be used by the corporation to pay its creditors and that no
distribution of the same can be made without provisions for the payment of corporate debt.

- The subscribed capital stock of the corporation is a trust fund for the payment of the debts of
the corporation which the creditors have the right to look up to satisfy their credits, and
which the corporation may not dissipate.

c. EXCEPTIONS
i. Reduction of the authorized capital stock;
ii. Purchase of redeemable shares;
iii. Dissolution and eventual liquidation.

5. The power to INVEST its funds in another corporation or business

- Can be undertaken by a majority vote of the board and 2/3 vote of stockholders or members.
- The investment contemplated by the provision is an investment in another corporation or business or for
any other purpose other than stated as its primary purpose.
- If the investment is reasonably necessary to accomplish its purpose as stated in the articles, stockholder
or member’s approval is not necessary.
- In case of dissent, the right of appraisal may be exercised.

6. A stock corporation has the power to declare DIVIDENDS.

a. GENERAL RULE: Only stockholders are entitled to a dividend as it is an incident of stock ownership.

B. EXCEPTION: When it is made to be about the stockholder on record at the specified date. If so, it is the
seller who is entitled to the dividend, except when there is a contrary stipulation. The rule also applies to
other unrecorded dispositions.

c. NATURE: DISCRETIONARY

- The board may declare dividends out of unrestricted retained earnings or total assets less liabilities
and total capital, payable in cash, in property or in stock on the basis of outstanding stock held by
them. The basis is the total subscription.

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 - Provided, however, that any cash dividend due on delinquent stock shall first be applied to the unpaid
balance, costs, and expenses or if it be a stock dividend, it is withheld until the unpaid subscription is
paid.

d. MANDATORY

- When its surplus profits are in excess of 100% of paid in capital stock.

e. NOT MANDATORY or WITHHELD IF:

i. justified by definite corporate expansion projects or programs approved by the board

ii. prohibited by a loan agreement with any financial institution or creditor from declaring dividends
without its consent is not yet obtained
iii. shown that such retention is necessary under special circumstances obtaining in the corporation, as
there is a need for a special reserve for probable contingencies

f. KINDS OF DIVIDENDS

a) cash dividend
- the treatment of property dividend is as if it were a cash dividend
b) stock dividend

g. Difference between Cash Dividend and Stock Dividend

CASH DIVIDEND STOCK DIVIDEND

cash dividend is a disbursement of accumulated earnings
causes assets to diminish
when declared becomes property of the stockholder
does not increase capital
the declaration of a cash dividend creates a corporate debt
declared by the board
stock dividend is not a disbursement
process assets to increase
still part of capital and can still be reached by creditors
increases capital
does not create the debt
declared by the board with stockholders concurrence

h. CASH DIVIDEND DECLARATION

Cash dividends require only approval of the board of directors.

i. STOCK DIVIDEND DECLARATION

- Stock dividends are issued by resolution of the board of directors and approval of the resolution by
the stockholders representing 2/3 of the outstanding capital stock at meeting duly called for the
purpose.
- For the declaration of stock dividends, a corporation must have also a sufficient number of authorized
unissued shares for distribution to stockholders; otherwise, it must increase its capital stock to the
extent of the corporate earnings to be declared and distributed as stock dividends.

7. The power to enter into a MANAGEMENT CONTRACT

- 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.

a. REQUIRED VOTE:

43
 Such contract shall have been approved by the board of directors and by the stockholders representing
majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-
stock corporation, of both the managing and managed corporation, at a meeting duly called for the
purpose.

b. EXCEPTION in two cases:

(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;

(2) or where a majority of the members of the board of directors of the managing corporation also
constitute a majority of the members of the board of directors of the managed corporation (this
situation applies to non-stock corporation)

c. REQUIRED VOTE IN THESE CASES:

- 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.

d. LIMITATIONS ON MANAGEMENT CONTRACTS

ULTRA VIRES ACTS

- Refers to an act outside or beyond express, implied, and incidental corporate powers.
- are acts that are in violation of the code as it provides that: no corporation shall possess or exercise
corporate powers except those conferred by the code, its articles and except as such are necessary
or incidental to the exercise of the powers conferred. Corporate Powers can either be express or
implied (necessary to accomplish what is express).
- UV Acts can be legal or illegal.
- It can be ratified only if it is legal.

e. TYPES OF UVA

i. Acts done beyond the powers of the corporation (thru BOD)

II. UVA by corporate officers
iii. Acts or contracts which are per se illegal as being contrary to law

f. CONSEQUENCES OF ULTRA VIRES ACTS

If the contract entered into by the corporation is ULTRA VIRES, the following applies:

i. if merely executory on both sides, it cannot be enforced by either

ii. If fully performed, neither party can set it aside; can bind the parties if wholly or partly executed
iii. if performed on one side, recovery is allowed as retention of benefits without performance cannot
be allowed

g. RATIFICATION

- A rectification is possible provided the act is LEGAL.

- If ultra vires in part only and if separable, it is valid as to the part not ultra vires and invalid as to
the other part.
- If the act is not divisible, the act shall be entirely ultra vires.

h. APPLICABILITY OF ULTRA VIRES DOCTRINE

44
 ULTRA VIRES ILLEGAL ACTS
Lawfulness Not necessarily unlawful, but outside Unlawful; against law, morals, public
the powers of the corporation policy, and public order
Enforceability Merely voidable and may be Cannot be validated
enforced by performance,
ratification, or estoppel
Ratification Can be ratified Cannot be ratified
Binding Effect Can bind the parties if wholly or Cannot bind the parties
partly executed

i. EXAMPLES OF ULTRA VIRES ACTS

- An increase in excess of the amount stated in the articles is ultra vires as there must be an
amendment of the articles and a reduction / increase of the capital stock can only decrease in the
manner provided for by law.

ADOPTION OF BY-LAWS

1. BY-LAWS
- The rules of action adopted by a corporation for its internal government and for the government of its
stockholders or members and those having the direction, management and control of its affairs in
relation to the corporation and among themselves.

2. Before Incorporation

- It is to be approved and signed by all incorporators and filed simultaneously with the articles

3. After incorporation

- Within a month after receipt of the certificate of incorporation.

- By-laws are adopted by the affirmative vote of stockholders or members representing a majority of the
outstanding capital stock or its members.
- It is to be signed by stockholders or members and is kept in the principal office subject to inspection.

4. BINDING EFFECT OF BY-LAWS

- By-laws cannot bind or affect 3rd persons that deal with the corporation unless they have full knowledge
of the pertinent portion of the by-laws affecting their transaction. This is by virtue of the PRINCIPLE
OF APPARENT AUTHORITY or Ostensible Authority.

5. DOCTRINE OF APPARENT AUTHORITY

- otherwise known as Doctrine of Ostensible Authority

- By the Doctrine of Apparent Authority, the corporation will be estopped from denying the agent’s
authority if it knowingly permits one of its officers or any other agent to act within the scope of an
apparent authority and it holds him out to the public as possessing the power to do those acts.
- “When in the usual course of business of the corporation, an officer or agent is held out by such
corporation, or has been permitted to act for it in such way as to justify third persons who deal with him
in assuming that he is doing an act or making a contract within the scope of his authority, the corporation
is bound thereby even though such officer or agent does not have the actual authority to do such act or
make such contract.

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6. AMENDMENTS TO THE BY-LAWS

- It can be undertaken by a majority vote of the Board and majority vote of stockholders or members in a
meeting duly called for that purpose.

- By vote of the Board, if the power to amend has been delegated by 2/3 vote of the outstanding capital
stock or members.

- Provided that the delegated authority may be revoked by majority vote of stockholders or members at a
regular or special meeting. Note the omission of the place at a meeting duly called for the purpose.

- The amendment is then attached to the original by-laws in the office of the corporation and a copy
thereof duly certified under oath by the secretary and a majority of the Board is filed with the SEC. It is
effective upon issuance by SEC of a certification that it is not inconsistent with the Code.

7. DIFFERENCE BETWEEN BY-LAWS and AOI

BY-LAWS
By-laws provide rules or regulations
By-laws are usually executed after incorporation
The filing of By-laws is a condition
ARTICLES
Articles is the fundamental law
Articles executed before incorporation
The filing of Articles is a condition precedent to
incorporation
In case, of a conflict between the Articles and the By-
laws, the former shall prevail as the Code provides that
the contents of the latter shall be subject to the contents
of the former. Hence, if the articles provide for a definite
number of directors, a contrary provision in the By-laws
must yield to the stated number in the articles

MEETINGS

1. KINDS
a. Special
b. Regular

2. WHEN HELD

- Regular meetings of stockholders/members are held annually on the date fixed in the By-Laws or any
date in April as determined by the Board and special meetings are held at anytime as deemed necessary
or as fixed in the By-Laws.
- Regular meetings of directors/trustees are held monthly unless otherwise provided and their special
meetings are held at anytime upon call of the president.

3. NOTICE REQUIREMENTS

- Regular meetings of stockholders/members require 2 week notice, while special meetings require 1 week
notice, unless the By- Laws provide otherwise.
- Regular meetings of directors/trustees require one day notice unless otherwise provided.
- Notice can however be impliedly or expressly waived.

4. WHERE MEETING IS TO BE HELD

- Stockholders/members are to be held in the city or municipality where the principal office is located.
- Board meetings can be held anywhere in or outside of the Philippines unless the By-laws provide
otherwise.

5. WHO PRESIDES
46
 - In all instances, the president presides unless otherwise provided.
- Where the meeting is called by a stockholder or a member upon showing of good cause to the SEC, the
stockholder or member is allowed to preside until a presiding officer is elected.

6. WHO CALLS

- Person designated in the By-Laws - director/ trustee or officer entrusted with managing petitioning
stockholder or member, in cases of removal, the corporate secretary or a stockholder or member in
proper instances

7. VALIDITY OF ACTIONS
- In stockholder or member consisting of a majority of the business so transacted shall be corporation
meetings, there being an outstanding capital stock valid within the powers
- Even if meeting is improperly called or held within the powers of the corporation and all stock holders
or members are present or by their representatives
- Note the following instances when only a majority is required of stockholders or members:

a. election of the members of the Board

b. removal of directors or trustees
c. approval of management contracts
d. adopt by laws/amend/or repeal or revoke power delegated to the Board
e. fix issued price of no par value shares
f. fixing compensation of directors

- In directors or trustees meetings, there being a quorum, all acts are valid. But if not undertaken in a duly
convened meeting, they are generally invalid but may be ratified.

8. WHY MEETINGS NECESSARY

- Meetings are necessary because corporate powers are vested in the Board or stockholders or members as
a body and not as individuals.
- It serves as protection and assurance to stockholders or members as it affords them an opportunity to be
heard and to discuss, the matter at hand and vote thereon.

9. REQUISITES OF A VALID MEETING OF STOCKHOLDERS OR MEMBERS

a. Held at the proper place

b. Held at the stated date and time or at a reasonable time thereafter
c. Called by the proper person
d. Previous notice must be given
e. There must be quorum.

10. REQUISITES OF A VALID BOARD MEETING

a. Meeting of the directors/trustees should be assembled as board. (Directors/trustees cannot attend or vote
by proxy as their personal judgment is required)
b. Presence of a required quorum
c. Decision is reached by a majority vote of the quorum or by an entire board as required by law
d. Meet at the time, place and manner provided in the by-laws.

11. QUORUM

a. GENERAL RULE: a majority of the directors/trustees as stated in the articles of incorporation shall
constitute a quorum.

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 - The formula for determining the majority is one half plus one of the entire numbers of
directors/trustees notwithstanding the existence of vacancies in the board.

b. EXCEPTION: What is provided in the by-laws but may only provide the increase of a quorum but not
the decrease.
- A quorum once established is not broken by the subsequent withdrawal of one or a part of a faction
of those present, unless the transaction requires the affirmative vote of a greater proportion.

12. WHEN ARE MEETINGS NOT NECESSARY

- The instances when meetings are not necessary are:

a. when a corporation amends its articles and written assents is sufficient

b. when there is an agreement to be bound despite the absence of a meeting
c. when the Articles of a close corporation allows directors to take action without a meeting

13. CAN MEETINGS BE POSTPONED

- As a rule, meetings may be postponed but annual meetings be postponed if the purpose is to extend the
term of office of directors or trustees.

14. COMPENSATION FOR ATTENDING STOCKHOLDER OR MEMBER MEETINGS

- They are not entitled payment for attending meetings as they are exercising a right of rendering a service.
Note that Section 47(5) only allows compensation for directors, trustees or officers.

15. HOW ARE MATTERS TAKEN UP IN MEETINGS PUT INTO FORMAL FORM

- They are formalized by the exercise of the right to vote

16. WHO ARE ENTITLED TO VOTE

- Stockholder or members are entitled to vote as it is through the exercise of the right to vote that they are
able to participate in management
- Although not stockholders, the following may exercise the right to vote:

a. Pledgees or mortgagees when they are given the right and such is recorded in the books of the
corporation
b. Executors, administrators, receivers and other legal representatives appointed by the Court
c. heirs of the stockholder who have executed a judicial or extra-judicial settlement, registered with
the Registry of Deeds upon presentation of the settlement to the corporate secretary.

17. WHO ARE NOT ENTITLED TO VOTE

- The right to vote cannot be exercised if the:

a. shares are delinquent

b. shares are non-voting, unless the matter to be voted upon allows them to vote
c. when the shares are in the treasury shares

18. MANNER OF VOTING

- The right to vote may be exercised in person or by proxy

19. PROXY

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 - A proxy is a formal authorization given by the holder of the stock who has the right to vote, or by a
member, to another person to exercise the voting right of former.
- In another sense, it can also refer to the person who was authorized.
- The right to vote by proxy cannot be exercised in board meetings.
- The right to appoint a proxy cannot be denied to stockholders in a stock corporation. In a non-stock
corporation, it can be denied to members.

a. REQUISITES OF A VALID PROXY

1) it must be in writing and signed by the stockholder or member

2) filed before the scheduled meeting with the corporate secretary
3) it should not be valid and effective for a period of 5 years at any one time
4) it is valid only for the meeting for which it is intended unless otherwise provided.

- The By-laws may provide for other requisites.

- The board cannot prescribe other formalities besides that provided by the Code if the By-laws
does not so provide. Absent such provisions, compliance with what is prescribed by the Code is
sufficient.
- As when absent a requirement in the By-laws as to notarization, the proxy is valid as the Code
only requires it to be written.

b. PRESENCE OF SEVERAL PROXIES

- The number of proxies may be limited by the By-laws.

- When a proxy is given to two or more persons, they must agree on the vote unless the proxy provides
otherwise or discriminates. If there is no agreement, the majority will prevail.
- As regards several proxies:
(a) last proxy revokes all previous proxies
(b) if undated - date of postmark if mailed, or time of presentation if not mailed
- When the stockholder intends to designate several proxies, the number of shares of stock represented
by each proxy must be specifically indicated in the proxy form.

c. REVOCATION OF PROXY

- A revocation of the proxy can be done expressly or impliedly, by writing, orally or by conduct, with
notice or without at anytime EXCEPT if coupled with an interest, referring to an instance where the
proxy giver has incurred liability and is looking at the grant of the right to vote to another as a means
of reimbursement or indemnity.

20. PROXY SOLICITATION

- is an action to secure the right to vote of so much a number of shares to ensure the approval of a
proposed corporate action/s.

- The proxy solicitation rules shall apply to:

a. an issuer which has sold a class of its securities pursuant to a registration

b. an issuer with a class of securities listed for trading on an exchange
c. an issuer with assets of at least PHP 50,000,000.00 or such amount as the Commission may
prescribe, and having 200 or more holders each having at least 100 shares of a class of its equity
securities.

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 - PURPOSE: to provide shareholders with appropriate information to permit an intelligent decision on
whether to permit their shares to be voted as solicited for a particular matter at a forthcoming
stockholders meeting.

21. VOTING TRUST AGREEMENT

- A voting trust agreement is an agreement in writing whereby one or more stockholders of a stock
corporation transfers their share to any person/s or corporation having authority to act as a trustee or
the purpose of vesting in such person voting or other rights pertaining to the shares for a certain
period not exceeding that fixed in the Code and upon terms and conditions stated in the agreement.

- The statute does not apply to agreements whereby stockholders agree to bind themselves to each
other as shall vote their shares. These are called pooling agreements generally a stockholder
exercises wide liberality in voting and his motives, while for personal profit, are not objectionable or
may be determined by whims or caprices, so long as he does not violate a duty owed to other
stockholders.

a. LIMITATIONS APPLYING TO VOTING TRUST AGREEMENTS

1) it should not be executed for a period not exceeding 5 years except if executed as a condition for
a loan, in which case it should expire upon payment
2) it should not be executed to circumvent the law against monopolies and illegal combinations in
restraint of trade or used for purposes of fraud, such as fixing prices or a merger/consolidation to
create a monopoly

b. REQUIREMENTS

1) must be in writing, notarized 'containing and specifying all terms and conditions
2) it should be filed with the SEC, otherwise it is ineffective or unenforceable
3) it should be subject to examination
4) It should automatically expire at the end of the agreed period.

c. SOME USES OF VOTING TRUST AGREEMENTS

- a concentrate stockholder control in one or few persons, who primarily through the election of
directors can control corporate affairs utilized by founders or incorporators to retain control.
- If a voting trust agreement is validly executed, the shares of the trustor are cancelled and new
ones are issued to the trustee and noted in the corporate books that the transfer is pursuant to a
voting trust agreement.
- The trustee then delivers or executes voting trust certificates, which are transferable like shares,
to evidence the trustors' ownership and right to dividends.
- Both the shares and voting trust certificates are then cancelled upon the expiration of the term
and new certificates are issued to the trustor.

d. VOTING TRUSTEE SHALL THEN BE ALLOWED TO:

1) possess the right to vote

2) exercise the right to vote in person or by proxy
3) has the right of inspection
4) since he is the legal bidder, he can be elected as a director

e. DISTINCTION BETWEEN PROXY AND A VOTING TRUST AGREEMENT

PROXY VOTING TRUST AGREEMENT

proxy has no legal title a voting trustee has legal title
the proxy is generally revocable a voting trust generally is not revocable
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 proxy can only act at a specified meeting unless it is a trustee Is not so limited
continuing
proxy can only vote if stockholder or member is not a trustee votes nevertheless
present
a proxy is usually shorter in duration than a voting trust
a proxy, as a rule, cannot further delegate his authority a voting trustee can appoint a proxy
a proxy is an agent of the shareholder a voting trustee votes in his own name

STOCKS AND STOCKHOLDERS

1. ACQUISITION OF STOCKS

- A person may become a stockholder of a corporation by acquiring a share through a purchase from the
corporation or other shareholders.
- The purchase from the corporation is primarily effected by means of a subscription contract if the object
are unissued shares.

2. THE DOCTRINE OF EQUALITY OF SHARES

- holds that where the articles of incorporation do not provide for any distinction of the shares of stock, all
shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and
are also subject to the same liabilities.

3. KINDS OF SUBSCRIPTION CONTRACTS:

a. Pre-incorporation subscription
- or one entered into before incorporation.
- It constitutes a binding contract among the subscribers.
- It is irrevocable for a period of at least 6 months, counted from the date of subscription because
there is a need to ensure that the corporation shall have capital to undertake the business for which
it was created.
- The irrevocable nature of the contract shall stand unless:
1) all subscribers consent to the revocation or
2) the corporation fails to materialize within the period for such period fixed in the contract.
- However, no pre-incorporation subscription/contract can be revoked if the Articles have already
been submitted to the SEC.

b. Post-incorporation subscription

- or one entered into after the incorporation for the acquisition of unissued stock.

- It shall be deemed a subscription notwithstanding the fact that the parties refer to it as a purchase or
some other contract.

- The subscriber becomes a stockholder upon acceptance by the corporation of the subscriber's offer
or by the subscriber of the corporation's offer even though he has not paid for his shares unless:

1) the subscription agreement otherwise provides, or

2) when there is a constitutional, statutory, or charter provision to the contrary, or
3) except in instances of increase in authorized capital stock.

4. CONSIDERATION FOR SHARES OF STOCK

- Shares are paid for by or any combination of:

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 a. Property - tangible or intangible, actually received by the corporation and necessary or convenient
for its use and lawful purpose at a fair valuation equal to par or issued value
- Where the consideration is other than actual cash, or consists of intangible property such as
patents or copyrights, the valuation must be determined by the incorporators or the Board
subject to approval by the SEC.

b. Actual cash
c. Previously incurred indebtedness
d. Amounts transferred from unrestricted retained earnings to stated capital
e. Labor performed or services actually rendered
- Shares cannot be issued in exchange for promissory notes or future services because they are
supposed to and are intended to represent a value received by the corporation to form part of
its capital.

f. Outstanding shares exchanged for stocks in the event of a reclassification or conversion.

5. WHEN PAYMENT FOR SHARES MUST BE MADE

a. Date fixed in the subscription contract

b. Upon call

- A call is the act of the board in declaring due and payable unpaid subscriptions in full or such
percentage, in either case, with accrued interest, counted from date of subscription, if so required
by the By-laws and at the rate fixed thereon.
- The purpose of the call is to fix the period of payment but is not necessary if the corporation is
insolvent or payment is provided for in the contract.
- If there is a need for payment, a call is justified by such even before date agreed for payment.

6. REQUISITES OF A VALID CALL

a. made in the manner provided by law, it requires a resolution and notice

b. it must be made by the board
c. operate uniformly among all shareholders

- If no payment is made 30 days after due date or after the date stated in the call, the shares shall be
considered to be delinquent.

7. DELINQUENT SHARES

a. they shall not be voted for or be entitled to vote or representation at a shareholders meeting
b. no rights may be exercised, except the right to receive dividends.

- This situation will obtain until the amount due, interest and expenses are paid.
- Any cash dividend due on delinquent stock shall first be applied to the unpaid balance, costs, and
expenses or if it be a stock dividend, it is withheld until the unpaid subscription is paid.
- If the subscriber is not anymore delinquent, he is restored to all the rights of a shareholder.

8. REMEDIES TO ENFORCE A DELINQUENCY

a. JUDICIAL ACTION

- A corporation may collect the unpaid subscription by judicial action.

- However, absent any date for payment in the subscription contract, a call is still necessary.

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 b. DELINQUENCY SALE

- Requirements:

1) RESOLUTION by the Board ordering the sale of delinquent stocks, specifying the amount due,
interest, and the date, time, place which shall not be less than 30 days nor more than 60 days from
the date of delinquency.

2) HIGHEST BIDDER - At the auction sale, the winning bidder shall be the one who shall pay the
full amount of the balance and all expenses for the least number of shares. Note that there is no
deficiency because the winning bid cannot be less than the amount due. (The law is trying to
protect the shareholders to recover his shares.)
 If there is no bidder at the auction sale, the corporation may purchase the shares using
unrestricted retained earnings.
 Note that the highest bidder's bid may be rejected by the Board as in a public auction sale, the
corporation is not making an offer to sell but rather the purchaser is offering to buy.

9. RECOVERY

a. There is a defect or irregularity in the notice of sale (date or bid)

b. There is a defect or irregularity in the sale itself.

- Provided, the party bringing the action pays to the person holding the stock the sum paid, plus legal
interest from date of sale and the action is brought within six months from date of sale.

10. STOCK CERTIFICATES

- A stock certificate is the written instrument signed by the proper officer of a corporation stating or
acknowledging that the person named therein is the owner of a designated number of shares of stock. It
is

11. NATURE OF STOCK CERTIFICATES

a. Stock certificates are in the nature of personal property.

b. Stock certificates are transferable. They can be limited but cannot be said to be “non-transferable”.
c. The nature of a certificate of stock is that it is a prima facie proof that the stock described therein is valid
and genuine in the absence of an evidence to the contrary.

12. UNCERTIFICATED SHARE

- is a subscription duly recorded and paid in the corporate books but has no corresponding certificate of
stock yet issued.

13. FORMAL REQUIREMENTS FOR THE ISSUANCE OF A STOCK CERTIFICATE:

a. signed by the president or vice-president

b. countersigned by the corporate secretary or assistant secretary
c. sealed with the corporate seal
d. issued in accordance with the by-laws

14. WATERED STOCK

- is stock issued not in exchange for its equivalent in cash, property, shares of stock dividends or services.

- Includes stock that is issued:

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 a. without consideration
b. as fully paid when the corporation receives a sum less than par or issued value
c. for a consideration other than cash, the fair valuation of which is less than par or issued value
d. as stock dividend without sufficient returned earnings or surplus

- The director or officer consenting or having knowledge, and does not express that same in writing
and files it with the corporate secretary shall be solidarily liable with the shareholder to the corporation
and its creditors for the difference between the fair value received at the time of issuance and its actual
par or issued value.

- Why? Trust Fund Doctrine - There is liability because a party giving credit to a corporation is entitled
to rely upon its ostensible capitalization as the basis for the credit given. Thus if watered stock is issued,
the ostensible capital is in excess of real assets, thereby he recover less.

- Only originally issued stock may be watered, as a subsequent transfer in a sale, the provision says
issuance.

- A subsequent increase in value will not eliminate the "water", as the last paragraph of Section 65 states
that the point of reckoning of liability is issuance.

15. TRANSFER OF STOCK CERTIFICATES

- Transfers may be effected by delivery and endorsement.

A. REQUIREMENTS FOR VALID TRASFER OF STOCKS

- If represented by a certificate, the following must be strictly complied with:

1) Endorsement by the owner and his agent
2) Delivery of the certificate
3) Must be recorded in the books of the corporation to be valid against 3 rd persons and the
corporation.
- What is to be recorded are the names of the transferor and transferee, date, number of
shares and number of the certificate.
- It must be recorded by the corporate secretary or the designated stock and transfer agent, if
one has been appointed. Otherwise, it is invalid.

- If not represented by a certificate (such as when the certificate has not been issued or when for some
reason is not in the possession of the stockholder):
1) By means of deed of assignment
2) Such is duly recorded in the books of the corporation

- If the By-laws do not provide otherwise delivery and sale may also be through another document but
an endorsement is a mandatory requirement.

- If what is transferred is a subscription, the corporation must consent by resolution because the
transfer constitutes a novation requiring the consent of the creditor.

b. The registration of transfer is essential to:

1) enable the corporation to know at all times who its shareholders are as mutual rights and obligation
exists between them
2) afford the corporation a right or opportunity to object or refuse consent to a transfer in case it has
3) avoid a fictitious or fraudulent transfer.

c. An unregistered transfer is:

54
 1) valid between transferor and transferee
2) invalid against the corporation except if notice is given
3) invalid against corporate creditors when the veil of corporation fiction is pierced or there is liability
for watered stocks
4) invalid against creditors of transferors
5) transferor has the right to vote and be voted upon until challenged
6) transferor can collect the dividends

- Since the law did not prescribe a period within which registration of transfer should be effected,
the action to enforce the right does not accrue until a demand is made and such is refused. Hence,
an action for mandamus can be made even after 24 years.

16. SALE OF SHARES

Partially Sale allowed Valid only between the Transferee cannot compel the corporation
paid shares parties to record the transfer of shares in its
books even though he has no knowledge
that the shares are not fully paid.
Portion of Sale not allowed Not binding SH is still liable for the balance
shares not
fully paid
Shares not Sale allowed Valid only between the Transferee cannot compel the corporation
fully paid parties to record the transfer of shares in its
books even though he has no knowledge
that the shares are not fully paid.
Fully paid Sale allowed Valid as long as the Need to be recorded in the books
shares requisites of a valid transfer
are present

a. CONDITIONS FOR THE VALIDITY OF RESTRICTIONS ON THE RIGHT TO TRANSFER

SHARES

1) Such restrictions must appear in the articles of incorporation and in the by-laws, as well as in the
certificate of stock; otherwise, they shall not be binding on any purchaser thereof in good faith;
2) It must be printed at the back of the certificate of stock;
3) They shall not be more onerous than granting the existing stockholders or the corporation the option
to purchase the shares of the transferring stockholders with such reasonable terms, conditions or
period stated therein.

- Thus, a restriction fixing the purchase price very much below the fair market value of the shares may be
invalid. Also invalid is a prohibition against transfer of stock without the prior consent of the board of
directors or of the other stockholders.

17. LOST CERTIFICATES

- The procedure tor the procurement of lost or replacements certificates are:

a. The registered owner or legal representative shall file an affidavit in triplicate setting forth

1) circumstances of the loss, theft, or destruction

2) number of shares, number of certificate and name of the corporation
3) such other matter or evidence he may deem if necessary

b. Upon verification of the affidavit and books, the corporation shall cause notice of loss to be
published at shareholder's expense for 3 consecutive weeks, stating the specifics of loss and that 1
year from date of publication, should no contest be presented, it will cancel and issue new
certificates.
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 c. The publication requirement can be dispensed with if the shareholder files a bond or surety good for
1 year and satisfactory to the board.

d. Provided, in any case, if contest or suit is brought/presented, the issuance of the certificate shall be
suspended until a final decision of the court or determination of ownership is made.

e. Except in case of fraud, bad faith or negligence of the corporation, no action can be brought against
a corporation for issuing a certificate/s pursuant to the procedure laid down by law.

RIGHTS OF STOCKHOLDERS

- Under the Corporation Code, stockholders exercise and enjoy the following rights

1. right to attend and vote at meetings

2. elect or remove directors
3. approve corporate acts
4. adopt amend by-laws
5. compel the calling of a meeting
6. issuance of a stock certificate
7. receive dividends
8. receive property upon dissolution
9. transfer stock
10. pre-emption
11. inspection of books
12. secure financial statements
13. recover stock at delinquency if unlawfully sold
14. enter into voting trust agreements
15. exercise the right of appraisal
16. participate in dissolution
17. bring derivative suits

- A summary of rights can be had as, follows:

1. right to dividends
2. right to participate in management
3. right to share in corporate property upon dissolution

- Note that a subscriber cannot exercise the right to demand the issuance of a stock certificate.

DERIVATIVE SUIT

- Is one brought by one or more stockholder/s or member in the name of the corporation and in its behalf to
redress wrongs committed against it or to protect or vindicate corporate rights whenever the officials of the
corporation refuse to sue, are the ones to be sued or hold control of the corporation.
- In a derivative suit, the wrong is inflicted directly on the corporation and indirectly upon the stockholders.
- It is an available remedy in cases where the officers are over compensated or there is a refusal to take action
without sufficient explanation.

REQUISITES of a DERIVATIVE SUIT:

a. There must be an existing cause of action
b. That demand to sue has been made, unless demand is useless
c. That he must have been a stockholder or member at the time the act was committed unless it be continuing
d. action is brought in the corporate name
e. no appraisal rights are available for activity complained of and that it is not a nuisance or harassment suit
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 f. The shareholder is a nominal party; the real party in interest is the corporation. It is an indispensable party.
g. The number of shares held is of no consequence. What is required is that the party bringing suit is a
shareholder without regard to the number of shares held.
h. he has tried to exhaust intra-corporate remedies

STOCKHOLDER'S INDIVIDUAL SUIT

- Is an action brought by a stockholder against the corporation for direct violation of his contractual rights as
such individual stockholder, such as the right to vote, the right to share in the declared dividends, the right to
inspect corporate books and records and similar other examples.
- It is an action brought in the name of the shareholder.
- When a wrong is directly inflicted against a shareholder, the latter can maintain an individual or direct suit in
his own name against the corporation.

REPRESENTATIVE SUIT
- When a wrong is committed against a group of stockholders, a stockholder may bring a suit in behalf of
himself and all other stockholders who are similarly situated.
- It is a kind of class action. Which saves the persons involved in the action substantial time and money.
- A representative suit is also the method used by minority stockholders to compel the declaration of dividends.

- NOTE: To determine the kind of suit, determine first the cause of action or whose right is going to be
asserted, or whose right has been violated?

PRIMARY OBLIGATIONS OF A STOCKHOLDER

a. Obligation to pay the corporation the consideration for his subscription, including interest
when required;
b. Obligation to pay the creditors of the corporation to the extent of their subscription, or
beyond, in case the doctrine of piercing the veil of corporate fiction is applicable

POWERS EXPRESSLY RESERVED BY LAW TO STOCKHOLDERS OR MEMBERS

a. removal of directors or trustees
b. grant of compensation, other than for per diems, to directors
c. rectification of acts of self-dealing directors or trustees, interlocking directors, disloyal directors
d. litigation of power to amend by laws
e. calling off a meeting, upon good cause, when no person is authorized to call it
f. management of the close corporation

PERCENTAGE VOTING REQUIREMENTS FOR STOCKHOLDERS OR MEMBERS

- The required vote is usually 2/3 of the outstanding capital stock.

MAJORITY VOTE OF STOCKHOLDERS OR MEMBERS

a. election of members of the Board
b. removal of directors or trustees
c. approval of management contracts
d. adoption of by-laws/ its amendment or repeal and to revoke power of amendment delegated to the
Board
e. fix issue price of no par value shares
f. fixing compensation of directors.

CORPORATE BOOKS

1. RIGHT TO INSPECT

- All books are available for inspection at reasonable hours on business days, and in cases of records other
than the stock and transfer book, a demand in writing for excerpts can be made.

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 1. VALID DEFENSE AGAINST PARTY SEEKING INFORMATION OR INSPECTION

1. He has improperly used any information served in a prior examination even of another corporation.
2. Not acting in good faith/ BAD FAITH and purpose is not legitimate.

- requesting party who is not a stockholder or member of record, or is a competitor, director, officer,
controlling stockholder or otherwise represents the interests of a competitor shall have no right to
inspect or demand reproduction of corporate records. (Sec. 73, RCC)

- Any stockholder who shall abuse the rights granted under this section shall be penalized under Section
158 of this Code, without prejudice to the provisions of Republic Act No. 8293, otherwise known as
the “Intellectual Property Code of the Philippines”, as amended, and Republic Act No. 10173,
otherwise known as the “Data Privacy Act of 2012”. (Sec. 73, RCC)

MERGERS and CONSOLIDATIONS

A. WHAT ARE MERGERS?

- Mergers refer to the absorption of one corporation by another, which is called the “surviving corporation.
- A+B = A/B (surviving corp)

B. WHAT ARE CONSOLIDATIONS?

- Consolidations refer to the combination of two or more corporations to form a new corporation called the
consolidated corporation.
- A+B = C (consolidated corp)

C. DISTINGUISH MERGER FROM CONSOLIDATION

MERGER CONSOLIDATION
refers to the absorption of one refers to the combination of two or
corporation by another, which is more corporations to form a new
called the “surviving corporation corporation called the
consolidated corporation
All of the constituent corporations All consolidated corporations are
involved are dissolved except one. dissolved without exception.
No new corporation is created. A new corporation emerges.
The surviving corporation acquires All assets, liabilities, and capital
all the assets, liabilities, and capital stock of all consolidated
stock of all constituent corporations. corporations are transferred to the
new corporation.

D. PROCEDURE FOR A MERGER OR CONSOLIDATION

1. PLAN OF MERGER OR CONSOLIDATION - The Board of each corporation shall execute a plan of
merger or consolidation (Sec. 75, RCC)

2. Upon approval by a majority vote of each of the Boards, the plan of merger/consolidation shall be submitted to
the stockholders of each of the corporations at separate meetings duly called, notice of which having been
given at least 21 days prior to the date of the meeting, personally or by registered mail. (Sec. 76, RCC)

- The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital
stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the members in
the case of nonstock corporations shall be necessary for the approval of such plan.
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 - Any dissenting stockholder may exercise the right of appraisal in accordance with this Code: Provided,
That if after the approval by the stockholders of such plan, the board of directors decides to abandon the
plan, the right of appraisal shall be extinguished.

3. Any amendment of the plan shall be subject to the same procedure.

4. ARTICLES OF MERGER OR CONSOLIDATION - After approval, the Articles of Merger/Consolidation

will be executed by each of the constituent corporations signed by the President or Vice President, certified by
the Corporate Secretary or Assistant Corporate Secretary (Sec. 77, RCC)

5. EFFECTIVITY - Articles of Merger/Consolidation signed and certified shall be submitted to the SEC for
approval together with a favorable recommendation in cases of banks, building and loan associations, trust
companies, insurance companies, public utilities and educational institutions. (Sec. 78, RCC)

- The effectivity of the merger/consolidation is upon the issuance by the SEC of a certificate of
merger/consolidation.

E. EFFECTS OF A MERGER OR CONSOLIDATION (Sec. 79, RCC)

1. The constituent corporations shall become a single corporation which becomes the surviving corporation in
case of a merger, and the consolidated corporation in case of a consolidation.

2. The separate existence of the constituent corporations shall cease, except that of the surviving or
consolidated corporation.
- No need for liquidation because there is transfer of assets and liabilities.

3. The surviving or consolidated corporation shall possess all the rights, privileges, immunities and powers and
shall be subject to all duties and liabilities of a corporation organized under the corporation code.

4. The surviving or consolidated corporation shall thereupon and thereafter possess:

a) all the rights, privileges franchises of each of the constituent corporations and
b) all property, real or personal, and all receivables due on whatever account including subscriptions of
shares and other choses in action and all and every interest of or belonging or due to each constituent
corporation.

- These shall be deemed automatically transferred and vested, in the surviving / consolidated corporation
without further act or deed.

5. The surviving or consolidated corporation shall:

a) Be responsible and liable for all liabilities and obligations of each of the constituent corporations in the
same manner as the surviving or consolidated corporation had itself incurred the liability or obligation.
b) Any pending claim, action or proceeding brought by or against the constituent corporations may be
prosecuted by or against the consolidated or surviving corporation as the case may be.
c) The rights of creditors or liens upon property of any of the constituent corporations shall not be
impaired by the merger or consolidation.

F. TRANSFER OF EMPLOYEES

 The employees of the dissolved corporation shall be assumed by the surviving corporation. Their tenure
should be treated as having started when they started with the dissolved corporation.

G. DISTINGUISH MERGER OR CONSOLIDATION FROM SALE OF ASSETS

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 MERGER OR CONSOLIDATION
In a merger or consolidation, there is no
contract of sale.
There is automatic assumption of
liabilities.
there is continuance of the enterprise
SALE OF ASSETS
In a sale of assets, a sale is always involved.
Generally the buyer is not liable except when
(a) he expressly/impliedly assumes liability
(b) in a de facto merger or consolidation
(c) where the purchasing corporation is merely
a continuation of the selling corporation
that eventually dissolves itself
(d) where the transaction is fraudulently
entered into to avoid liability for debts.
a liquidation is usually contemplated

title to assets is transferred by virtue of title is transferred by virtue of contract

law
one or all the constituent corporation/s there is no dissolution by the selling corporation
are dissolved

RIGHT OF APPRAISAL

− It is the right of stockholder to demand payment of the fair value of its shares after dissenting from a proposed
corporate action involving a fundamental change in the corporation in the cases provided for by law.

A. AVAILABLE WHEN? (Sec. 80, RCC)

1. Sale, lease, exchange, transfer, mortgage, pledge or disposition of all or substantially all of corporate assets
or property
2. Articles are amended and such has the effect of changing or restricting the rights of a shareholder or a class
of shares or authorizing preferences in any respect superior to those outstanding shares of any class
3. Mergers/consolidations
4. Extending or shortening the corporate term
5. A stockholder in a close corporation for any reason may compel the said corporation to allow the exercise of
his appraisal rights.
6. Investment by the corporation in another corporation or business other than its primary purpose

B. HOW IS IT EXERCISED ( Sec. 81, RCC)

1. The dissenting stockholder who votes against a proposed corporate action may exercise the
right of appraisal by making a written demand on the corporation for the payment of the
fair value of shares held within thirty (30) days from the date on which the vote was taken

- If no demand is made within 30 days, he is deemed to have waived the exercise of the right.

2. The stockholder must submit his certificate of stock within 10 days for notation that such
shares are dissenting shares (all the shares on record, hindi patingitingi).

- If the certificate is not submitted for notation within 10 days, the corporation may consider the exercise of
the right terminated at its option.

3. SEC. 82. Effect of Demand and Termination of Right. - Upon a demand, all rights
accruing to the share are suspended including voting rights including voting and dividend
rights, except the right of such stockholder to receive payment of the fair value thereof.

- Only the right to receive the fair value is not suspended.

- If there is no payment within 30 days after the award, he is restored to all his rights.

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 - However, the exercise of the right after demand is made, shall cease if: (Sec. 83, RCC)

(a) stockholder withdraws his demand and the corporation consents

(b) proposed action is abandoned or rescinded
(c) SEC disapproves the action, if its approval is necessary
(d) SEC determines that the stockholder is not entitled to the exercise of the right, in the effect is that he is
restored to all rights and accrued dividends are paid to him.

4. The corporation then pays the stockholder the fair value upon surrender of the certificate.

- The value paid is the value as of the day prior to the date on which the vote is taken, excluding any
depreciation or appreciation in anticipation of the corporate action.

- A transfer pending exercise of the right of appraisal shall cause the rights of the transferor as a dissenting
stockholder to cease and the transferee shall have all the rights of stockholder including the dividends
which would have accrued to the shares as by so buying, it indicates his desire to be a stockholder.

- If the right of appraisal is denied, the remedy is to sell your shares to someone who will not dissent to
such corporate action.

- If there is no payment within 30 days after the award, he is restored to all his rights.

- Provided, in all cases: (Sec. 81, RCC)

(a) no payment can be made if the corporation has no unrestricted retained earnings, and

(b) that the shareholder shall forthwith transfer his shares to the corporation

CLOSE CORPORATION

A close corporation is a corporation whose articles provide that:

1. All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record
by not more than a specified of persons not to exceed 20.

2. All issued stock of all classes shall be subject to one or more specified restrictions on transfer
permitted in this title.

ANY RESTRICTION CAN BE PUT PROVIDED:

a. the restriction must appear in the articles of incorporation/by-laws as well as the certificate
of stock, otherwise it is not binding on a purchaser in good faith

b. it or they should not be more onerous than that granting the existing stockholders or the
corporation the option to purchase the shares with such reasonable terms, conditions or
periods stated therein.

- If at the end/expiration of the period, a stockholder/s or the corporation falls to exercise the option to
purchase, the transferring stockholder may sell his shares to any third person. Example: fixing a price
below actual/market value, prescribing a longer holding period or a transfer without consent of the board.

3. The corporation must not list in any stock exchange or make any public offering of any of its stock of any
class.

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 A. CHARACTERISTICS OF A CLOSE CORPORATION
1. Stockholders may act as directors without need of election, however, they shall assume all obligations and
liabilities of directors.
2. It may have a greater quorum requirement.
3. Pre-emptive rights extend to all stock issues, even treasury shares.
4. A stockholder may withdraw and avail of his right of appraisal

B. CAN A CORPORATION BE STOCKHOLDER OF A CLOSE CORPORATION?

- YES as long as it does not own 2/3 of the voting stock or voting rights of the close corporation.
- Except if 2/3 of its voting stock or voting rights is owned or controlled by another corporation which is
not a close corporation within the meaning of the Code, the corporation shall not be deemed a close
corporation.

C. NO CLOSE CORPORATION
1. Mining
2. stock exchange
3. banks
4. insurance
5. public utility
6. educational corporations
7. are otherwise vested with public interest

D. DISTINGUISH CLOSE CORPORATION FROM ORDINARY STOCK CORPORATION

CLOSE CORPORATION ORDINARY STOCK

CORPORATION
there is a limitation on none exists
shareholders
there are restrictions of transfer No restrictions
there are qualifications that may qualifications are not normally
be imposed for shareholders imposed
a public offering of shares is there can be a public offering of
prohibited shares
may be managed by shareholders always managed by a board

 Distinguished from a "closely held corporation" referring to the number of shareholders at a particular
time, indicating that they are few in number or a corporation whose shares are owned by a relatively small
number of shareholders.

E. ARTICLES OF INCORPORATION OF A CLOSE CORPORATION

In addition to what is required by Section 14 of the Code, the Articles of Incorporation of a close corporation may
provide for:
1. Classification of shares or rights and the qualifications for owning or holding them and restrictions on
their transfer
2. Classification of directors into one or more classes, each of which may be voted for or elected solely by a
particular class of stock
3. Greater quorum or voting requirements for stockholder or board meeting
4. Provide that the corporation's business shall be managed by the stockholder rather than the board as long
as:
a) no meetings of stockholders are necessary to be called to elect directors
b) unless the context clearly requires otherwise, stockholders shall be deemed directors for the
purpose of applying the provisions of the code
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 c) stockholders and the corporation shall be subject to all liabilities of director
5. May provide that all officers or employees or that specified officers shall be elected or appointed by
stockholders instead of the Board.

- Note that the term of directors for a close corporation is 1 year as it is a stock corporation, while those in
non-stock corporations will have a term of 3 years and in an educational corporation the term is for 5
years.

F. PRE-EMPTIVE RIGHTS in a close corporation

- In a close corporation, pre-emptive rights extend to all stock issued, including a re-issuance of treasury
shares, whether for money, property, personal services or in payment of corporate debts unless the
Articles otherwise provide.

G. RIGHT OF FIRST REFUSAL in a close corporation

- In close corporations, restrictions reasonably protecting existing stockholders in their interests by giving
them or the corporation the option to purchase stock offered for sale, or the right of first refusal in case of
sale of stock at a given reasonable date before disposing of them to third persons are lawful as promotive
of good management and sound business enterprise.

H. DEADLOCKS

WHEN DOES IT OCCUR?

 Deadlocks occur if directors or stockholders are so divided regarding the management of the corporation's
business and affairs that the necessary vote cannot be obtained, the consequence of which is that the
business and affairs of the corporation can no longer be conducted to the advantage of stockholders.

WHO RESOLVE DEADLOCKS?

 Deadlocks are resolved by the SEC.

 The petition to resolve a deadlock is initiated by written petition by any stockholder notwithstanding any
contrary provision in the article or by-laws or agreements.

I. WITHDRAWAL OR DISSOLUTION

- Without prejudice to other remedies, a stockholder may for any reason compel the corporation to purchase
his shares at their fair market value, which shall not be less than the par or issued value when the
corporation has sufficient assets to cover debts and liabilities, elusive of capital stock.

ONE PERSON CORPORATION

− A One Person Corporation is a corporation with a single stockholder

− SEC. 120. Display of Corporate Name. – A One Person Corporation shall indicate the letters “OPC” either
below or at the end of its corporate name.

A. WHO MAY FORM ONE PERSON CORPORATION (OPC? (Sec. 116, RCC)

- only a natural person, trust, or an estate may form a OPC.

- A natural person who is licensed to exercise a profession may not organize as a OPC for the purpose of
exercising such profession except as otherwise provided under special laws.

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 - Banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed companies, and non-
chartered government-owned and -controlled corporations may not incorporate as OPC

B. CAPITALIZATION (Sec. 117, RCC)

- OPC shall not be required to have a minimum authorized capital stock except as otherwise provided by
special law.

C. ARTICLES OF INCORPORATION AND BY-LAWS (Secs. 118-119, RCC)

- OPC shall file articles of incorporation in accordance with the requirements under Section 14 of this
Code. It shall likewise substantially contain the following:

(a) If the single stockholder is a trust or an estate, the name, nationality, and residence of the trustee,
administrator, executor, guardian, conservator, custodian, or other person exercising fiduciary duties
together with the proof of such authority to act on behalf of the trust or estate; and

(b) Name, nationality, residence of the nominee and alternate nominee, and the extent, coverage and
limitation of the authority.

- The OPC is not required to submit and file corporate bylaws.

D. OFFICERS (Secs. 121 and 123)

1. Director and President - The single stockholder shall be the sole director and president of the OPC (Sec.
121).

2. Treasurer - within fifteen (15) days from the issuance of its certificate of incorporation, the One Person
Corporation shall appoint a treasurer, corporate secretary, and other officers as it may deem necessary,
and notify the Commission thereof within five (5) days from appointment.

- A single stockholder who is likewise the self-appointed treasurer of the corporation shall:
a. give a bond to the Commission in such a sum as may be required: and
b. undertake in writing to faithfully administer the One Person Corporation’s funds to be received as
treasurer, and to disburse and invest the same according to the articles of incorporation as approved by
the Commission. The bond shall be renewed every two (2) years or as often as may be required.

3. Corporate Secretary - The single stockholder may not be appointed as the corporate secretary.

- The single stockholder may not be appointed as the corporate secretary.

- SEC. 123. Special Functions of the Corporate Secretary. – In addition to the functions designated by
the One Person Corporation, the corporate secretary shall:

(a) Be responsible for maintaining the minutes book and/or records of the corporation;

(b) Notify the nominee or alternate nominee of the death or incapacity of the single stockholder, which
notice shall be given no later than five (5) days from such occurrence;

(b) Notify the Commission of the death of the single stockholder within five (5) days from such
occurrence and stating in such notice the names, residence addresses, and contact details of all known
legal heirs; and

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 (d) Call the nominee or alternate nominee and the known legal heirs to a meeting and advise the legal
heirs with regard to, among others, the election of a new director, amendment of the articles of
incorporation, and other ancillary and/or consequential matters.

E. NOMINEE AND ALTERNATE NOMINEE

1. SEC. 124. Nominee and Alternate Nominee. – The single stockholder shall designate a nominee and an
alternate nominee who shall, in the event of the single stockholder’s death or incapacity, take the place of
the single stockholder as director and shall manage the corporation’s affairs.

The written consent of the nominee and alternate nominee shall be attached to the application for
incorporation. Such consent may be withdrawn in writing any time before the death or incapacity of the
single stockholder.

2. SEC. 125. Term of Nominee and Alternate Nominee. – When the incapacity of the single stockholder is
temporary, the nominee shall sit as director and manage the affairs of the One Person Corporation until the
stockholder, by self determination, regains the capacity to assume such duties.

In case of death or permanent incapacity of the single stockholder, the nominee shall sit as director and
manage the affairs of the One Person Corporation until the legal heirs of the single stockholder have been
lawfully determined, and the heirs have designated one of them or have agreed that the estate shall be the
single stockholder of the One Person Corporation.

The alternate nominee shall sit as director and manage the One Person Corporation in case of the
nominee’s inability, incapacity, death, or refusal to discharge the functions as director and manager of the
corporation, and only for the same term and under the same conditions applicable to the nominee.

3. SEC. 126. Change of Nominee or Alternate Nominee. – The single stockholder may, at any time, change its
nominee and alternate nominee by submitting to the Commission the names of the new nominees and their
corresponding written consent. For this purpose, the articles of incorporation need not be amended.

F. LIABILITY OF SINGLE SHAREHOLDER (Sec. 130, RCC)

- A sole shareholder claiming limited liability has the burden of affirmatively showing that the
corporation was adequately financed. Where the single stockholder cannot prove that the property of the
One Person Corporation is independent of the stockholder’s personal property, the stockholder shall be
jointly and severally liable for the debts and other liabilities of the One Person Corporation.

- Limited liability is applicable in OPC.. If the creditor/obligee ask for the solidary liablility of the single
stock holder (SSH), SSH must discharge his burden that the OPC is adequately financed. Only then If
SSH cannot discharged, he will be solidarily liable with the OPC.

- The principles of piercing the corporate veil applies with equal force to One Person Corporations as with
other corporations.

- Limited liability is not the same as piercing the veil. Limited liability poses the burden of showing that
the OPC is adequately financed while piercing the veil poses the grounds of perpetuate fraud, justify
wrong and defeat justice and burden is no longer applicable. But these principles have the same effect.

G. CONVERSION (Secs. 127-129, RCC)

1. SEC. 131. Conversion from an Ordinary Corporation to a One Person Corporation. – When a single
stockholder acquires all the stocks of an ordinary stock corporation, the latter may apply for conversion
into a One Person Corporation, subject to the submission of such documents as the Commission may
require. If the application for conversion is approved, the Commission shall issue a certificate of filing of

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 amended articles of incorporation reflecting the conversion. The One Person Corporation converted from an
ordinary stock corporation shall succeed the latter and be legally responsible for all the latter’s outstanding
liabilities as of the date of conversion.

2. SEC. 132. Conversion from a One Person Corporation to an Ordinary Stock Corporation . – A One
Person Corporation may be converted into an ordinary stock corporation after due notice to the Commission
of such fact and of the circumstances leading to the conversion, and after compliance with all other
requirements for stock corporations under this Code and applicable rules.

In case of death of the single stockholder, the nominee or alternate nominee shall transfer the shares to
the duly designated legal heir or estate within seven (7) days from receipt of either an affidavit of heirship or
self-adjudication executed by a sole heir, or any other legal document declaring the legal heirs of the single
stockholder and notify the Commission of the transfer. Within sixty (60) days from the transfer of the shares,
the legal heirs shall notify the Commission of their decision to either wind up and dissolve the One Person
Corporation or convert it into an ordinary stock corporation.

The ordinary stock corporation converted from a One Person Corporation shall succeed the latter and
be legally responsible for all the latter’s outstanding liabilities as of the date of conversion.

DISTINCTION BETWEEN CONVERSION FROM OSC to OPC and OPC to OSC

- The conversion from Ordinary Stock Corporation (OSC) to OPC the qualification is when a single
stockholder acquires all the stocks of an OSC. Whereas, the conversion from OPC to OSC, is for
whatever reason.

SPECIAL CORPORATIONS

KINDS:
1

EDUCATIONAL CORPORATIONS
 Are stock or non-stock corporations organized to provide facilities for teaching or instruction and are
governed by special laws and by general provisions of the code.

RELIGIOUS CORPORATIONS
 Are corporations incorporated by one or more persons and are classified as either a corporation sole or
religious society and is to be governed by this chapter and generally by other provisions governing non
stock corporations.

A CORPORATION SOLE is one formed by the archbishop, bishop, priest, minister, rabbi, or other presiding
elder of a religious denomination, sector, or church for the purpose of administering and managing as trustee the
affairs, property, and temporalities or money revenues of such religious denomination, sect, or church.

A RELIGIOUS SOCIETY is the same as a corporation sole as far as purposes are concerned but incorporation is
brought about by 2/3 vote 5 or written consent of its members, who then file its articles with the SEC, verified by
affidavit of the presiding elder, secretary, clerk or member stating that:
(a) that the society is a religious organization of some religious denomination, sect or church
(b) that 2/3 of its members have given their written consent or vote to incorporate at a duly convened
meeting of the body
(c), that its incorporation is not forbidden by competent authority or by constitution, rules, regulations
or discipline of the religious denomination, sect or church to which it belongs
(d) that its purpose is to manage or administer its affairs, properties or estate
(e) location of its principal office which must be in the Philippines

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 (f) names, nationalities and residences of the trustees elected to serve the first year or such other
period as prescribed, which board must not be less than 5 nor more than 15

FOREIGN CORPORATIONS
- A foreign corporation is one formed or organized or existing under any laws other than the Philippines
whose laws allow Filipino citizens and corporations to do business in its own country or state.
- These corporations can transact business after it has obtained a license and a certificate of authority from
the appropriate government agency.
- Corporations already doing business in the Philippines with licenses can continue operating but must
comply with the provisions of the Code within 2 years.

SERVICE OF SUMMONS ON A FOREIGN CORPORATION

 The rules on service of summons on a foreign corporation are:
 On the resident agent - Note if made on another while it has a resident agent, the summon is
inefficacious. It is also exclusive.
 On the SEC - if the corporation ceases to do business or there is no resident agent
 Any of its officers or agents in the Philippines - if the foreign corporation has neglected or refused to
appoint a resident agent.
 If the foreign corporation is not doing business, service may be made upon any agent, as provided for
by the 1997 Rules on Civil Procedure.

NECESSITY OF A LICENSE
 The purpose of the law in requiring that a foreign corporation doing business in the Philippines to be
licensed is to subject it to the jurisdiction of the courts.
 OBJECTIVES:
1. To place the foreign corporations under the jurisdiction of the court
2. To place them in the same footing as domestic corporation
3. To protect the public in dealing with the said corporation

 TRANSACTION OF BUSINESS only for the purpose for which the corporation was issued a license.

 Upon the grant of a license, foreign corporations can now transact business. A license is no longer absolutely
necessary. It matters only when access to the court is the issue.

 If it is without a license, it can still transact business but the difference is that if it is transacting business with
a license it is permitted to maintain or intervene in any action suit or proceeding in any court or administrative
agency with the Philippines, otherwise it cannot maintain suit but may be proceeded against before Philippine
courts on any valid cause of action.

 Therefore if the foreign corporations is:

(a) transacting business with a license, it has access
(b) not transacting business and has no license, it has access
(c) transacting business without a license, it has no access
(d) transacting business without license but subject qualifications/exceptions, it has access.

WHAT CONSTITUTES DOING BUSINESS

THREE TESTS TO DETERMINE

1. Continuity test – doing business implies a continuity of commercial dealings and arrangements, and
contemplates to some extent the performance of acts or works or the exercise of some functions normally
incident to and in progressive prosecution of, the purpose and object of its organization;
2. Subsequent test – a foreign corporation is doing business in the country if it is continuing the body or
substance of the enterprise of business for which it was organized; and

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 3. Contract test – whether the contracts entered into by the foreign corporation, or by an agent acting under
the control and direction of the foreign corporation, are consummated in the Philippines

 Transacting business is not determined by number of transactions or volume. A single act is not merely
incidental or casual but is of such a character as to distinctly indicate a purpose to do other business in the state
or the performance of act/s for which it was created.
 The volume or amount of business is not entirely determinative of whether it is transacting business or not.

DOING BUSINESS CAN THUS BE INFERRED FROM:

(a) continuous business acts or transactions
(b) isolated transaction or business act if an inference can be drawn or of such a character as distinctly to
indicate a purpose or the part of the foreign corporations to do business and to make the state the base of its
operations for the conduct of its ordinary business.

BETTER DETERMINATION – an intent to make the Philippines as base of the corporation.

EXCEPTIONS
UNLICENSED FOREIGN CORPORATION HAS THE CAPACITY TO SUE
If it is not transacting or doing business in the Philippines, it can sue under:

1. The isolated business transaction rule

ISOLATED BUSINESS TRANSACTION
- When the foreign corporation is suing to seek redress for an isolated business transaction, which is a
transaction or a series of transactions set apart from the common business of a foreign enterprise in the sense
that there is no intention to engage in the progressive pursuit of the object/purpose of the business
organization.
- This is an exception as it is not the intention of the law to favor a domestic corporation who later on repudiate
obligations on account of the foreign corporation's lack of a license.

REQUISITES FOR ITS APPLICATION ARE:

(a) It must disclose that it is not doing business in the Philippines and is suing under the Isolated
Business Transaction Rule
(b) It must prove its juridical personality as a foreign corporation
(c) It must name its duly authorized representatives or resident agent.

2. A cause of action that is independent of any business transaction

3. A cause of action that arises out of a business transaction that is not entered into in the Philippines
 The foreign corporation is suing to enforce a right not arising out of business transaction with a party in
the Philippines. Example: failure of a shipping corporation to deliver goods shipped by the foreign
corporation or an insurer-subrogee sues to recover from a Philippine carrier for the amounts paid to an
insured
4. A cause of action to protect its name, reputation or goodwill subject to the rule on reciprocity under the
IPR.
 The foreign corporation is suing to protect its name, reputation and goodwill. If the foreign corporations
are well known through products bearing its corporate and trade names, it has a legal right to maintain an
action and it is also allowed by treaties to which the Philippines is a party to.

TO HOLD IT LIABLE FOR ACTS AND OMISSIONS

 That notwithstanding the above-situations, the Supreme Court has ruled:

“That the contract that is entered into is not void ab initio. Thus, when a foreign corporation which is
doing business without a license contracts with a third party, any defect will subsequently be cured if it
obtains a license to transact business.”

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  If a foreign corporation is doing business In the Philippines without a license, the move of the defendant
to dismiss the complaint that said foreign corporation filed might still be neutralized by invoking the
doctrine of estoppel.
 The Supreme Court adopted the in pari delicto rule holding that no remedy could be afforded to the parties
because of their presumptive knowledge that the transaction was tainted with illegality.

AMENDMENTS OF THE ARTICLES OR BY-LAWS

 Amendments are to be governed by the laws of the country of incorporation but it must within 60 days
after the effectivity of the amendment filed with the SEC and appropriate government agency, a duly
authenticated copy of the Articles or By-Laws clearly underscoring the changes, duly certified by the
authorized official of the state of incorporation, the filing thereof shall not of itself enlarge or alter the
purpose for which foreign corporation was granted a license.
 If so enlarged or amended it must obtain an amended licensed or if it changes its corporate name by
submitting an application with the SEC favorably enclosed by the appropriate regulating agency.

RULES TO OBSERVE WHEN SUING A FOREIGN CORPORATION OR VICE VERSA

GENERAL RULE:
Only foreign corporations that have been issued a license to operate a business in the Philippines have the
personality to sue.
 The burden of proof to show that it is a foreign corporation transacting business or suing under any of the
exceptions is: on the foreign corporations by affirmatively pleading such fact.
 The defendant must specifically deny the allegation of a foreign corporation's capacity to sue.
 Proof of doing business is not necessary before jurisdiction is acquired.
 For purposes of suit, a foreign corporation is a resident of the Philippines on account of their being found
and operating in the Philippines.

EXCEPTION:
A party is estopped to challenge the personality of a foreign corporation to sue, even if it has no license, after
having acknowledged the same by entering to a contract with it.

 An unlicensed foreign corporation doing business in the country cannot maintain any action but it can be
sued.

PRINCIPLES GOVERNING A FOREIGN CORPORATION’S RIGHT TO SUE

1. if it does business without a license, it cannot sue before Philippine courts
2. if it is not doing business, it needs no license to sue before Philippine courts on an isolated business
transaction or on a cause of action entirely independent of any business transaction or to protect its name,
reputation or goodwill
3. if it does business with the required license, it can sue before Philippine courts on any transaction

TOP-WELD MANUFACTURING, INC. VS. ECED, S.A., 138 SCRA 118 [1985]
- A party to a contract in pari delicto with a foreign corporation doing business in the Philippines without a
license is not entitled to relief from the latter. Thus, where a contract entered into by a Philippine corporation
with a foreign corporation for the manufacture and marketing of the latter's products is illegal for failure to
secure a prior license from the Board of Investments (under R.A. No. 5455.), the former cannot ask the court
to prohibit the foreign corporation from terminating the contract and giving the production and distributorship
rights to another. The parties are charged with knowledge of existing law at the time they enter into a contract
and at the time it is to become operative. Moreover, a person is presumed to be knowledgeable about his own
State law than his alien or foreign contemporary.

DISSOLUTION

DEFINITION
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 - Dissolution is the extinguishment of its franchise to be a corporation at the termination of its corporate
existence.

MODES OF DISSOLUTION
1. VOLUNTARY
a) where no creditors are affected;

- INITIATED: by majority of the Board and a resolution adopted by the outstanding capital stock
or members at a meeting to be held upon call of the Board after publishing notice of the time,
place and object for 3 consecutive weeks in a newspaper of general circulation and notice to a
shareholder or member given by registered mail or delivered personally 30 days prior to the
meeting.
- A copy of the Resolution is then certified by a majority of the Board, countersigned by the
secretary submitted to the SEC.
- TAKE EFFECT: upon issuance by the SEC of a Certificate of

b) where creditors are affected; and

- INITIATED: by the filing of a petition with the SEC, signed by a majority of the Board or other
officers having management, verified by President, Secretary or one of its directors or trustees.
- The petition will set forth:
(a) all claims and demands against it
(b) that dissolution was resolved upon the affirmative vote of 2/3 of outstanding capital stock or
members at a duly called meeting.
- If the SEC finds the petition to be in proper form, an order will be issued fixing date on or before
which objections may be made, which date shall not be less than 30 days nor more than 60 days
after the entry of the order.
- Publication will also be required once a week for 3 weeks and posted in 3 public places.
- 5 days after the date fixed, the SEC will try all issues, objections and if all material allegations are
true.
- TAKE EFFECT: upon judgment directing disposition of assets and payment of debts, and if
required, appoint a receiver

c) by shortening of the corporate term.

- INITIATED: by a majority vote of the Board and subject to the affirmative vote of 2/3 of the
outstanding capital stock or members, followed by the submission to the SEC of the amended
articles duly certified by the secretary and a majority of the Board together with an affidavit of
publication.
- TAKE EFFECT: upon expiration of the shortened term without further proceedings

2. INVOLUNTARILY
a) expiration of the corporate term;
b) non-user;
c) continuous inoperation for a period of at least 5 years;
d) legislative action; and
e) SEC action in cases of violation of the Code.

- It is undertaken by the SEC upon the filing by a real party in interest of a verified complaint, after proper
notice or bearing on the following grounds or instances contemplated by law

GROUNDS FOR INVOLUNTARY DISSOLUTION

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 1. Expiration of the term provided in the Articles of Incorporation.
Note that this can be voluntary if the corporation will dissolve upon expiration.
2. Legislative enactment as the enactment of laws carry with it the power to amend or repeal but is limited
by the non-impairment clause of the Constitution.
3. Failure to formally organize and commence transaction of business within 2 years from date of
incorporation or continuous inoperation for 5 consecutive years
4. Dissolution by judicial decree

POWER OF A SHAREHOLDER TO BRING ABOUT DISSOLUTION

GENERAL RULE - a shareholder cannot, sue to demand dissolution unless they are unable to obtain redress and
protection for their rights or violations warrant quo warranto proceedings.

EFFECTS OF DISSOLUTION
1. legal title to corporate property is vested in shareholders
2. corporation ceases as a body politic to continue the business for which it was organized
3. it cannot be revived
4. dissolution does not, by itself imply the diminution or extinguishment of rights
5. upon expiration of the winding up period of 3 years, the corporation ceases, it can no longer sue or be
sued

LIQUIDATION
- This is the 2nd phase of dissolution.
- It pertains to the winding up of the affairs of the corporation by reducing its assets in money, settling with
creditors, and apportioning the amount of profit and loss.
- During liquidation, a corporation continues to exist as a body corporate for the purpose of prosecuting and
defending suits by or against it, enable it to settle and close its affairs, enable it to dispose of and convey
property and distribute assets but it should not be for the purpose of continuing the business.
- A corporation is allowed a 3 year period to enable it to close its business, collect from debtors and settle
with creditors.

METHODS OF LIQUIDATION
1. By the corporation itself
2. By a management committee or a rehabilitation receiver
3. By a trustee within a 3-year period, where the property is conveyed to the trustee holding the same in trust
for the benefit of shareholders, members, creditors and other interested parties
4. By liquidation after three years
- Note that receivers or trustees can act as such beyond the statutory 3 year period of liquidation.
The last appointed receiver shall be the one responsible at the end of the 3-year period.
- Pending suits upon expiration of the 3 year period may still be prosecuted by the handling lawyer
who will then be constituted as a trustee for such purpose.

DISTRIBUTION OF ASSETS IN A STOCK CORPORATION

The preference will apply only if assets are insufficient to pay the claims. It is as follows:

(a) creditors
(b) shareholders, members, directors, officers who are also creditors
(c) shareholders in proportion to shareholdings in the absence of a contrary provision.

 If the shares are divided into classes, preferred shareholders before common shareholders.
 Shareholders may get more than the fair market value. If assets are just enough, they get the par value or
issued value, or less if the assets are insufficient.
 If creditors or shareholders cannot be found, the assets will be escheated in favor of the municipality or
city where the assets are found.

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KINDS OF CORPORATE INSOLVENCY

1. actual insolvency, i.e., the corporation’s assets are not enough to cover its liabilities; and
2. technical insolvency defined under Sec. 3-12, i.e., the corporation has enough assets but it foresees its inability
to pay its obligation for more than one year.
- SEC supervision over corporations
- In the case of United Church of Christ in the Philippines, Inc. v. Bradford United Church of Christ, Inc.,
674 SCRA 92, it was held that the SEC shall have absolute jurisdiction, supervision and control over all
corporations. Even with their religious nature, the SEC may exercise jurisdiction over them in matters that
are legal and corporate.

Rehabilitation
In the case of San Jose Timber Corporation v. SEC, 667 SCRA 13, rehabilitation was defined as “restoration of the
debtor to a position of successful operation and solvency.”

A successful rehabilitation depends on 2 factors:

1. positive change in the business fortunes of the debtor, and
2. the willingness of the creditors and shareholders to arrive at a compromise agreement on
repayment and the extent of dilution.

INTRACORPRATE DISPUTES:
- controversies arising out of intra-corporate or partnership relations, between and among stockholders,
members, or associations between any or all of them and the corporation, partnership or association of which
they are stockholders, members, or association respectively between such corporation, connected with the
regulation of the internal affairs of the corporation.

REQUIREMENTS:
1. the plaintiff must be a stockholder or member at the time the acts or transactions subject of the action
occurred;
2. he exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all
remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires;
3. No appraisal rights are available for the act or acts complained of; and
4. The suit is not a nuisance or harassment suit.

JURISDICTION
Jurisdiction to hear an intra-corporate dispute is determined by:
(a) the status of the relationship between the parties, and
(b) nature of the question that is the subject of the controversy.

 If the controversy involves the contractual rights and obligations of the parties/stockholders and not the
enforcement of rights and obligations under the Corporation Code, jurisdiction belongs to the regular
courts.

DISPUTE WITH AN INTRA-CORPORATE RELATIONSHIP WITHIN THE JURISDICTION OF THE

NLRC
 In the case of Cosare v. Broadcom Asia, Inc, G.R. No. 201298, February 5, 2014, the NLRC was held to
have jurisdiction over the dismissal of an AVP for Sales, who was also a stockholder, as he is not a
corporate officer whose dismissal is cognizable by the RTC.
 A corporate officer was defined as one who meets the following:
1. the creation of the position is under the corporation’s charter or by-laws; and
2. the election of the officer is by the directors or the stockholders.

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CORPORATE ACTS WHICH REQUIRE THE VOTES OF BOD/BOT AND STOCKHOLDERS OR
MEMBERS

MAJORITY VOTE OF THE BOD

1. Vacancies in BOD if not due to removal, expiration of the term or increase of the number of directors
2. Power to acquire own shares
3. Power to declare dividends
4. Election of officers
5. Fixing the issued price of no-par value shares

MAJORITY VOTE OF THE SH

1. Fixing of compensation of directors
2. Adoption of by-laws
3. Fixing the issued price of no-par value shares
4. Election of directors or trustees

MAJORITY VOTE OF THE BOD AND MAJORITY OF SH

1. Amendment or repeal of by-laws or adoption of new by-laws
2. Management contract

MAJORITY VOTE OF THE BOD AND 2/3 OF SH

1. Amendment of AOI
2. Dissolution of corporation - Voluntary
3. Adoption of plan or distribution of assets of non-stock corporation
4. Merger or consolidation
5. Lease, sale, exchange, mortgage, pledge, or dispose of all or substantially all of the corporate assets
6. Increase or decrease of capital stock
7. Incur, create, or increase bonded indebtedness
8. Investment of corporate funds in another corporation or for any business or for any other purpose other
than primary purpose
9. Extension or shortening of corporate term
10. Stock dividends’ Issuance

SH REPRESENTING 2/3 OF OCS

1. Denial of pre-emptive right
2. Delegation of the power to amend, repeal, or adopt new by-laws to BOD
3. Incorporation of religious societies
4. Removal of directors or trustees
5. Ratification of act of disloyal director
6. Ratification of contract of self-dealing directors

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 V. SECURITIES

A. Purpose

- To protect the public from unscrupulous promoters who stake business or venture claims which have
really no basis and sell shares or interests therein to investors.

B. Definition of securities and investment contracts

- Securities" are shares, participation or interests in a corporation or in a commercial enterprise or profit-

making venture and evidenced by a certificate, contract, instruments, whether written or electronic in
character. It includes:

a. Shares of stocks, bonds, debentures, notes evidences of indebtedness, asset-backed securities;

b. Investment contracts, certificates of interest or participation in a profit sharing agreement, certifies
of deposit for a future subscription;
c. Fractional undivided interests in oil, gas or other mineral rights;
d. Derivatives like option and warrants;
e. Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or
similar instruments
f. Proprietary or nonproprietary membership certificates in corporations; and
g. Other instruments as may in the future be determined by the Commission.

- Investment contracts – means a contract, transaction or scheme (collectively “contract”) whereby a

person invests his money in a common enterprise and is led to expect profits primarily from the efforts
of others.

C. Kinds of securities

1. Exempt securities

a. Any security issued or guaranteed by the Government of the Philippines, or by any political
subdivision or agency thereof, or by any person controlled or supervised by, and acting as an
instrumentality of said Government.
b. Any security issued or guaranteed by the government of any country with which the Philippines
maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis
of reciprocity: Provided, That the Commission may require compliance with the form and content
for disclosures the Commission may prescribe.
c. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper
adjudicatory body.
d. Any security or its derivatives the sale or transfer of which, by law, is under the supervision and
regulation of the Office of the Insurance Commission, Housing and Land Use Rule Regulatory
Board, or the Bureau of Internal Revenue.
e. Any security issued by a bank except its own shares of stock.

2. Exempt transactions

a. At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in

insolvency or bankruptcy.
b. By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder selling of
offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding

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 the provision of this Code, to liquidate a bonafide debt, a security pledged in good faith as security
for such debt.
c. An isolated transaction in which any security is sold, offered for sale, subscription or delivery by
the owner therefore, or by his representative for the owner’s account, such sale or offer for sale or
offer for sale, subscription or delivery not being made in the course of repeated and successive
transaction of a like character by such owner, or on his account by such representative and such
owner or representative not being the underwriter of such security.
d. The distribution by a corporation actively engaged in the business authorized by its articles of
incorporation, of securities to its stockholders or other security holders as a stock dividend or other
distribution out of surplus.
e. The sale of capital stock of a corporation to its own stockholders exclusively, where no commission
or other remuneration is paid or given directly or indirectly in connection with the sale of such
capital stock.
f. The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property,
when the entire mortgage together with all the bonds or notes secured thereby are sold to a single
purchaser at a single sale.
g. The issue and delivery of any security in exchange for any other security of the same issuer
pursuant to a right of conversion entitling the holder of the security surrendered in exchange to
make such conversion.
h. Broker’s transaction, executed upon customer’s orders, on any registered Exchange or other trading
market.
i. Subscriptions for shares of the capitals stocks of a corporation prior to the incorporation thereof or
in pursuance of an increase in its authorized capital stocks under the Corporation Code, when no
expense is incurred, or no commission, compensation or remuneration is paid or given in
connection with the sale or disposition of such securities, and only when the purpose for soliciting,
giving or taking of such subscription is to comply with the requirements of such law as to the
percentage of the capital stock of a corporation which should be subscribed before it can be
registered and duly incorporated, or its authorized, capital increase.
j. The exchange of securities by the issuer with the existing security holders exclusively, where no
commission or other remuneration is paid or given directly or indirectly for soliciting such
exchange.
k. The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any
twelve-month period.
l. The sale of securities to any number of the following qualified buyers:
i. Bank;
ii. Registered investment house;
iii. Insurance company;
iv. Pension fund or retirement plan maintained by the Government of the Philippines or any
political subdivision thereof or manage by a bank or other persons authorized by the
Bangko Sentral to engage in trust functions;
v. Investment company or;
vi. Such other person as the Commission may rule by determine as qualified buyers, on the
basis of such factors as financial sophistication, net worth, knowledge, and experience in
financial and business matters, or amount of assets under management.

D. Procedure for registration of securities (Sec. 8)

- SRC requires the filing with and approval. by the SEC of registration statement regarding registration of
securities.

- Prohibitions: If the registration statement is not filed and approved the following are prohibited:
a. Sale of securities in the Philippines
b. Offer to sell or distribute securities within the Philippines
c. Dissemination of information relating to an offering of securities.

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 - Duty to make information available: Prior to sale, information on the securities, in such form and with
such substance as the SEC may prescribe, shall be made available to each prospective purchaser.

- However, the sale of securities to less than twenty (20) investors during twelve month period is exempt
transaction under the SRC.

E. Prohibitions on fraud, manipulation, and insider trading

1. Short sales – includes the following:

a. any sale of security which the seller does not own; or

b. any sale which is consummated by the delivery of a security borrowed by or for the account of the
seller with the commitment of the seller or securities borrower to return or deliver said securities or
their equivalent to the lender on a determined or determinable future time

- There is NO absolute prohibition on short sale except in the following instances:

a. Directors, officers or principal shareholder of a corporation cannot make short sale in
securities of the corporation in which he is a director, officer or principal shareholder;
b. Whenever the SEC, motu proprio or upon recommendation of the SEC, prohibits short sale.

2. Short swing transaction – is a transaction where a person buys securities and sells or disposes of the
same within the period of six months.

3. Insider trading (1995, 2013 BAR)

- Insider means: (D-GIRL)

a. the issuer
b. director or officer or a person controlling to the issuer;
c. person whose relationship or former relationship to the issuer gives or gave him access to
material information about the issuer or the security that is not generally available to the
public;
d. a government employee or director or officer of an exchange, clearing agency and/or self-
regulatory organization who has access to material information about an issuer or security that
is not generally available to the public;
e. or person who learns such information by communication from any of the forgoing insiders.

- 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: (2008, 2012 BAR)
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 (ii) that the 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 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 non-public 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 the market to absorb such information.

F. Manipulation of security prices (Sec. 24)

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 - Manipulation of Security Prices; Devices and Practices. – It shall be unlawful for any person acting for
himself or through a dealer or broker, directly or indirectly:

a. To create a false or misleading appearance of active trading in any listed security traded in an
Exchange of any other trading market (hereafter referred to purposes of this Chapter as
"Exchange"):

i. By effecting any transaction in such security which involves no change in the beneficial
ownership thereof;
ii. By entering an order or orders for the purchase or sale of such security with the knowledge
that a simultaneous order or orders of substantially the same size, time and price, for the sale
or purchase of any such security, has or will be entered by or for the same or different
parties; or
iii. By performing similar act where there is no change in beneficial ownership.

b. To affect, alone or with others, a securities or transactions in securities that: (I) Raises their price to
induce the purchase of a security, whether of the same or a different class of the same issuer or of
controlling, controlled, or commonly controlled company by others; or (iii) Creates active trading
to induce such a purchase or sale through manipulative devices such as marking the close, painting
the tape, squeezing the float, hype and dump, boiler room operations and such other similar
devices.

c. To circulate or disseminate information that the price of any security listed in an Exchange will or
is likely to rise or fall because of manipulative market operations of any one or more persons
conducted for the purpose of raising or depressing the price of the security for the purpose of
inducing the purpose of sale of such security.

d. To make false or misleading statement with respect to any material fact, which he knew or had
reasonable ground to believe was so false or misleading, for the purpose of inducing the purchase
or sale of any security listed or traded in an Exchange.

e. To effect, either alone or others, any series of transactions for the purchase and/or sale of any
security traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of such
security; unless otherwise allowed by this Code or by rules of the Commission.

G. Protection of shareholder interests

1. Tender offer rule (2002, 2010, 2012 BAR)

- means a publicly announced intention by a person acting alone or in concert with other persons to
acquire equity securities of a public company.

- Tender offer is in place to protect minority shareholder against any scheme that dilutes the share
value of their investments. It gives the minority shareholders the change to exit the company under
reasonable terms, giving them the opportunity to sell their shares at the same price as those of the
majority shareholders.

2. Rules on proxy solicitation (Sec. 20)

- Proxies must be issued and proxy solicitation must be made in accordance with rules and
regulations to be issued by the Commission.

- Proxies must be in writing, signed by the stockholder or his duly authorized representative and file
before the scheduled meeting with the corporate secretary.

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 - Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is
intended. No proxy shall be valid only for the meting for which it is intended. No proxy shall be
valid and effective for a period longer than five (5) years at one time.

- No broker or dealer shall give any proxy, consent or any authorization, in respect of any security
carried for the account of the customer, to a person other than the customer, without written
authorization of such customer.

- A broker or dealer who holds or acquire the proxy for at least ten percent (10%) or such percentage
as the commission may prescribe of the outstanding share of such issuer, shall submit a report
identifying the beneficial owner of ten days after such acquisition, for its own account or customer,
to the issuer of security, to the exchange where the security is traded and to the Commission.

3. Disclosure rule

- In approving the registration of the securities, the SEC is not only concerned with the requirement
that full disclosure of information is given to the public. The SEC is also concerned with the merit
of the securities themselves and the issuer.

VI. BANKING

A. THE NEW CENTRAL BANK ACT

- The primary objective of the Bangko Sentral are: (1998, 2015 BAR)

1. To maintain price stability conducive to a balanced and sustainable growth of the economy and
employment.
2. It shall also promote and maintain monetary stability and the convertibility of the peso.
3. To provide policy directions in the areas of money, banking and credit with supervision over the
operations of banks and with regulatory powers over the operations of finance companies and non-
bank financial institutions performing quasi-banking institutions.

- The Bangko Sentral shall have supervision over and conduct regular or special examinations of banking
institutions and quasi-banks, including their subsidiaries and affiliates engaged in allied activities.

- BSP handles banks in distress through conservatorship, receivership, closure and liquidation. (2009, 2006,
2015 BAR)

1. Conservatorship – it is a tool for restoring the viability of banks and quasi-banks. It consists of
carrying out a package of administrative, organizational, financial and or other measure to address
the state of continuing inability or unwillingness to maintain a condition of liquidity deemed
adequate to protect the interest of depositors and creditors.

2. Receivership – it is a proceeding wherein the Monetary Board may summarily and without need for
prior hearing forbid a bank or quasi-bank from doing business in the Philippines and designate a
receiver.

Conservator Receiver
Is appointed for a period not exceeding 1 year Is appointed to manage a bank or quasi-bank
period, to take charge of the assets, liabilities that is unable to pay its liabilities in the ordinary
and the management of a bank or quasi-bank in course of business. The main purpose is to

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 a state of continuing inability or unwillingness recommend the rehabilitation or liquidation of
to maintain a condition of liquidity deemed the bank.
adequate to protect the interest of the depositors
and creditors

- The Monetary Board may appoint a receiver when it finds that a bank or quasi-bank: (1997 BAR)

1. Has notified the Bangko Sentral or publicly announced a Unilateral closure; or

2. Has been dormant for at least 60 days or in any manner has suspended the payment of its deposit /
deposit substitute liabilities; or
3. Is unable to Pay its liabilities as they become due in the ordinary course of business;
4. Has insufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities; or
5. Cannot continue in business without involving probable losses to its depositors or creditors; or
6. Has willfully violated a cease and desist order under Section 37 of this Act that has become final,
involving acts or transactions which amount to fraud or a dissipation of the assets of the institution.
7. Bank notifies the Bangko Sentral or publicly announces a bank Holiday or in any matter suspends the
payment the payment of its deposit liabilities continuously for more than 30 days.
8. Has persisted in conducting its business in an Unsafe or unsound manner.

- Whenever a bank is ordered closed by Monetary Board, the PDIC shall be designated as receiver and it shall
proceed with the takeover and liquidation of the closed bank, Banks closed by the Monetary Board shall no
longer be rehabilitated.

The order of the Board may be questioned by a petition for certiorari under Rules of Court by the
stockholder of record representing the majority of the capital stock within 10 days from receipt by the Board
of Directors of MPBC of the order directing receivership, liquidation or conservatorship. (2009 BAR)

During the receivership, the assets and the properties of the corporation are being gathered for the
conversion into cash in preparation for the distribution to its creditors. Granting new loans and accepting
deposits would constitute doing business for the bank in the ordinary course of business which is contrary to
the purpose and the nature of receivership proceedings. (2009 BAR)

- Quasi-banking institutions closed and placed under receivership may be rehabilitated or liquidated. In no
case shall the bank reopened and permitted to resume banking business after being placed under liquidation.

- No director or officer of any bank shall a directly or directly, for himself or as the representative or agent of
other:

1. Borrow from such bank;

2. Shall he become a guarantor, endorser or surety for loans from such bank to others, or
3. In any manner be an obligor or incur any contractual liability to the bank except with the written
approval of the majority

- Sec. 52. All notes and coins issued by the BSO are fully guaranteed by the RP and shall be legal tender in
the Philippines all debts both public and private. However, unless otherwise fixed by the Monetary Board,
coins shall be legal tender in amounts not exceeding P50.00 for denominations 25 centavos and above,
and in amounts not exceeding P20 pesos for denominations of 10 centavos. (2000 BAR)

B. LAW ON SECRECY OF BANK DEPOSITS (RA No. 1405)

- The purpose of RA 1405 are to:

1. Give encouragement to the people to deposit their money in banking institutions; and

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 2. Discourage private hoarding so that the same may be properly utilize by banks in authorized loans to
assist in the economic development of the country.

- 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.

- Under RA No. 1405, deposits may be examined, inquired or looked into: (2000, 2001, 2004, 2005, 2006,
2015 BAR)

1. When it is made in the course of a special or general examination of a bank and is specifically
authorized by the Monetary Board;
2. When it is made by an independent Auditor hired by the bank to conduct its regular audit for audit
purposes only for the exclusive use of the bank;
3. Upon written Permission of the depositor;
4. In cases of Impeachment; or
5. Upon order of a competent court in a proper cases by the Anti-Money Laundering council where
there is probable cause of money laundering and in some instances even without court order.
6. Upon inquiry by the CIR for the purpose of determining the net estate of a deceased depositor.
7. Upon order or competent court or tribunal in cases involving wealth under the Anti-graft and Corrupt
Practices Act.
8. Upon order of a competent court in cases:
a. of Bribery or dereliction of duty of public officials; and
b. Where the money deposited or invested is the subject matter of the Litigation.

- Foreign currency deposits may be examined, inquired or looked into: (2015 BAR)
1. Upon written permission of the depositor
2. Upon order of a competent court or in proper cases by the AMLC where there is probable cause of
money laundering;

- The prohibition against examination of or inquiry into a bank deposit does not preclude its being garnished
to insure satisfaction of a judgment. There is no real inquiry to such a case, and if the existence of the
deposit is disclosed, the disclosure is purely incidental to the execution process. (2009 BAR)

- The investigation by the Ombudsman is not considered as a pending litigation thus examination of records
and documents is prohibited. (Marquez vs. Desierto, 2001)

C. GENERAL BANKING LAW OF 2000 (RA No. 8791)

- Single borrower’s limit (SBL) – the total amount of loans, credit accommodations and guarantees that may
be extended by a bank to any person, partnership, association, corporation or other entity shall at no time
exceed 25% of the net worth of such bank. Loans and other credit accommodations as well as deposits and
usual guarantees by a bank to any other bank, shall be subject to the 25% limit or P100 million, whichever
is higher. (2002 and 2015 BAR)

- The single borrower’s limit does not apply to the following cases:
1. In cases when the Monetary Board may otherwise prescribe for reasons of national interest
2. Deposits of rural banks with government-owned or controlled financial institutions like the LBP,
DBP and PNB; and
3. In municipalities and cities where there are no government banks, the deposits of Rural Banks/Coop
Banks in private banks in said areas shall not be subject to the SBL.

- The SBL shall exclude loans, other credit accommodations:

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 1. Secured by obligations of the BSP or the Philippine Government;
2. Fully guaranteed by the Government as to the payment of principal and interest;
3. Covered by Assignment of deposits maintained in the lending bank and held in the Philippines;
4. Under letters or credit tot eh extent covered by Margin deposits; and
5. Which the Monetary Board may specify as non-risk items.

- No Directors, Officers, Stockholders, and their related interest (DOSRI), for himself or as the representative
or agent of others: (2002, 2006 BAR)

1. Borrow from such bank;

2. Become a guarantor, indorser or surety for loans from such banks to others; or
3. In any manner be an obligor or incur any contractual liability to the bank.

- The restricted transactions of a bank with DOSRI is allowed with the written approval of the majority of all
the directors of the banks, excluding the director concerned. However, such written approval shall not be
required for loans, other credit accommodations and advances granted to officers under a fringe benefit plan
approved by the Bangko Sentral.
- Sec. 70 Prohibited Transactions after bank becomes insolvent. Any director or officer of any bank declared
insolvent or placed under receivership by the monetary board who: (2000, 2007 BAR)

1. Refuses to turn over the bank’s records and assets to the designated receivers;
2. Tampers with bank records;
3. Appropriated for himself or another part destroys or causes the misappropriation and destruction of
the bank’s assets.
4. Receives or permits or causes to be received in said bank any deposit, collection of loans and/or
receivables;
5. Pays out or permits or causes to be paid out any funds of said bank; or
6. Transfers or permits or causes to be transferred any securities or property of said bank.

The appointment of receiver operates to suspend the authority of the bank and of its directors and officers
over its property and effects, such authority being reposed in the receiver.

D. PHILIPPINE DEPOSIT INSURANCE CORPORATION ACT

- The PDIC, shall, as a basic policy, promote and safeguard the interests of the depositing public by providing
insurance coverage on all insured deposits and helping maintain a sound and stable banking system.

- The following are the primary functions of the PDIC:

1. The act as a depositor insurer
2. To acts as a co-regulator of the banks
3. To act as the receiver, liquidator of closed banks.

- Covers all three types of deposit: Demand or current, savings and time deposits.

- The term insured deposit means the amount due to any boda fide depositor for legitimate deposits in an
insured bank net of any obligation of the depositor to the insured bank as of date of closure, but not to
exceed Php500,000.00

- Unless otherwise waived by the Corporation, if the depositor in the closed bank shall fail to claim his
insured deposits with the corporation within 2 years from actual takeover of the closed bank by the receiver,
or does not enforce his claim filed with the PDIC within 2 years after the 2-year period to file a claim as
mentioned hereinabove, all rights of the depositor against the PDIC with respect to insured deposit shall be
barred.

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 - The trust account and the money market placements are not including the insured deposits.

- The following are the roles of the of the PDIC with respect to handling banks in distress:

1. Closure and takeover – Upon the designation of the PDIC as receiver of closed bank, it shall serve a
notice of closure to the highest-ranking officer of the bank present in the bank premises, or in the
absence of such officer, post notice of closure in the bank premises or on its main entrance.

The closure of the bank shall be deemed effective upon the service of the notice of closure.
Thereaftehr the receiver shall takeover the bank and exercise the powers of the receiver provided in
the PDIC Law.

2. Conservatorship – the PDIC may be designated as a conservator.

3. Receivership – The Monetary Board may designate the PDIC as receiver of the banking institution
and shall authorized to:

a. The receiver is authorized to adopt and implement, without need of consent of the stockholders,
board of directors, creditors or depositors of the closed bank, any or a combination of the following
modes of liquidation:(1) Conventional liquidation; and (2) Purchase of assets and/or assumption of
liabilities.
b. Represent and act for and on behalf of the closed bank;
c. Gather and take charge of all the assets, records and affairs of the closed bank, and administer the
same for the benefit of its creditors;
d. Convert the assets of the closed bank to cash or other forms of liquid assets, as far as practicable;
e. Bring suits to enforce liabilities of the directors, officers, employees, agents of the closed bank and
other entities related or connected to the closed bank or to collect, recover, and preserve all assets,
including assets over which the bank has equitable interest;
f. Appoint or hire persons or entities of recognized competence in banking, finance, asset management
or remedial management, as its deputies, assistants or agents, to perform such powers and functions
of the Corporation as receiver of the closed bank, or assist in the performance thereof;
g. Appoint or hire persons or entities of recognized competence in forensic and fraud investigations;
h. Pay accrued utilities, rentals and salaries of personnel of the closed bank for a period not exceeding
three (3) months, from available funds of the closed bank;
i. Collect loans and other claims of the closed bank and for this purpose, modify, compromise or
restructure the terms and conditions of such loans or claims as may be deemed advantageous to the
interests of the creditors of the closed bank;
j. Hire or retain private counsel as may be necessary;
k. Borrow or obtain a loan, or mortgage, pledge or encumber any asset of the closed bank, when
necessary to preserve or prevent dissipation of the assets, or to redeem foreclosed assets of the closed
bank, or to minimize losses to its depositors and creditors;
l. If the stipulated interest rate on deposits is unusually high compared with prevailing applicable
interest rates, the Corporation as receiver, may exercise such powers which may include a reduction
of the interest rate to a reasonable rate: Provided, That any modifications or reductions shall apply
only to earned and unpaid interest;
m. Utilize available funds of the bank, including funds generated by the receiver from the conversion of
assets to pay for reasonable costs and expenses incurred for the preservation of the assets, and
liquidation of, the closed bank, without need for approval of the liquidation court;
n. Charge reasonable fees for the liquidation of the bank from the assets of the bank: Provided, That
payment of these fees, including any unpaid advances under the immediately preceding paragraph,
shall be subject to approval by the liquidation court;
o. Distribute the available assets of the closed bank, in cash or in kind, to its creditors in accordance
with the Rules on Concurrence and Preference of Credits under the Civil Code or other laws;
p. Dispose records of the closed bank that are no longer needed in the liquidation in accordance with
guidelines set by the PDIC Board of Directors, notwithstanding the laws on archival period and
disposal of records; and
q. Exercise such other powers as are inherent and necessary for the effective discharge of the duties of
the Corporation as receive

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 4. Liquidation – Whenever a bank is ordered closed by the Monetary Board, the PDIC shall be
designated as receiver and it shall proceed with the takeover and liquidation of the closed bank.

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 VII. INTELLECTUAL PROPERTY CODE

A. PATENTS

1. Patentable Invention (2005 BAR)

- refers to any technical solution of a problem in any field of human activity which is new, involves an
inventive step and is industrially applicable shall be patentable. It may be, or may relate to, a product, or
process, or an improvement of any of the foregoing. (Sec. 21)

- Requisites: (2005 BAR)

a) technical solution of a problem in any field of human activity

b) It must be a novel invention (new)

 Novel – that which does not form part of the prior art (Sec. 23)
 Prior art: (Sec 24)
i. that which has been made available to the public anywhere in the world before the filing
date or the priority date of application
ii. that which forms part of an application whether for a patent, utility model, or industrial
design registration, effective in the Philippines. Provided, That the applicant or the
inventor identified in both applications are not one and the same and the contents of the
application rules and the filing date of prior art is earlier.

c) involves inventive step – an invention involves an inventive step if, having regard to prior art, it is
not obvious to a person skilled in the art at the time of the filing date or priority date of the
application claiming the invention (Sec. 26)

d) industrially applicable – an invention that can be produced and used in any industry (Sec. 27)

2. Non-Patentable Invention (Sec. 22) (2006 BAR)

a) Discoveries, scientific theories and mathematical methods,

- Note PBQ (in view of Covid-19 vaccine): In the case of drugs and medicines, there is no
inventive step and no patentable invention if the invention results from:
i. mere discovery of a new form or new property of a known substance which does not
result in the enhancement of the known efficacy of that substance,
ii. mere discovery of any new property or new use for a known substance, or
iii. mere use of a known process unless such known process results in a new product that
employs at least one new reactant.

b) Schemes, rules and methods of performing mental acts, playing games or doing business, and
programs for computers;

c) Methods for treatment of the human or animal body by surgery or therapy and diagnostic methods
practiced on the human or animal body. (2011 BAR)

d) Plant varieties or animal breeds or essentially biological process for the production of plants or
animals. This provision shall not apply to micro-organisms and non-biological and microbiological
processes.

e) Aesthetic creations; and

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 f) Anything which is contrary to public order or morality.

3. Persons entitled to right. (Sec. 28)

a) The right to a patent belongs to the inventor, his heirs, or assigns. (2012 BAR)
b) When two (2) or more persons have jointly made an invention, the right to a patent shall belong to
them jointly.
c) First to File Rule. - If two (2) or more persons have made the invention separately and independently
of each other, the right to the patent shall belong to the person who filed an application for such
invention, or where two or more applications are filed for the same invention, to the applicant who has
the earliest filing date or, the earliest priority date. (Sec. 29)

4. First to File Rule (Sec. 29) 2005 BAR

- If two or more persons have made the invention separately and independently of each other, the right
to the patent shall belong to the person who filed an application for such invention, or where two or
more applications are filed for the same invention, to the applicant who has the earliest filing date or,
the earliest priority date.

5. Inventions Created Pursuant to a Commission. (Sec. 30)

a) The person who commissions the work shall own the patent, unless otherwise provided in the contract.
(2005 BAR)
b) In case the employee made the invention in the course of his employment contract, the patent shall
belong to:
i. The employee, if the inventive activity is not a part of his regular duties even if the employee
uses the time, facilities and materials of the employer.
ii. The employer, if the invention is the result of the performance of his regularly-assigned
duties, unless there is an agreement, express or implied, to the contrary.

6. Rights Conferred by Patent. - A patent shall confer on its owner the following exclusive rights: (Sec. 71)
(2010 BAR)

a) Where the subject matter of a patent is a product, to restrain, prohibit and prevent any unauthorized
person or entity from making, using, offering for sale, selling or importing that product;

b) Where the subject matter of a patent is a process, to restrain, prevent or prohibit any unauthorized
person or entity from using the process, and from manufacturing, dealing in, using, selling or offering
for sale, or importing any product obtained directly or indirectly from such process.

c) Patent owners shall also have the right to assign, or transfer by succession the patent, and to conclude
licensing contracts for the same.

7. Limitations of Patent Rights. – The following acts are not prohibited (Sec. 72)

a) Owner’s consent: Using a patented product which has been put on the market in the Philippines by the
owner of the product, or with his express consent, insofar as such use is performed after that product
has been so put on the said market.

b) Parallel importation: Importation of drugs and medicines by a government agency or by any third
party. Private parties must secure a license to import from BFAD. However, parallel importation for

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 other patented products is not allowed without the authority of the owner and may constitute
infringement.

c) Non-commercial: Where the act is done privately and on a non-commercial scale or for a non-
commercial purpose. Condition: The act does not significantly prejudice the economic interests of the
owner of the patent;

d) Experimental use: Where the act consists of making or using exclusively for experimental use of the
invention for scientific purposes or educational purposes and such other activities directly related to
such scientific or educational experimental use;

e) Drugs and medicines: Where the act includes testing, using, making or selling the invention including
any data related thereto, solely for purposes reasonably related to the development and submission of
information and issuance of approvals by government regulatory agencies required under any law of
the Philippines or of another country that regulates the manufacture, construction, use or sale of any
product.

f) Medicine Individual Preparation: Where the act consists of the preparation for individual cases, in a
pharmacy or by a medical professional, of a medicine in accordance with a medical prescription or acts
concerning the medicine so prepared; and

g) Patent Exhaustion: The exclusive right of the patent owner is exhausted after the first authorized sale,
meaning, the purchaser may thereafter use, repair and resell the product. However, the purchaser may
not reconstruct the product from the parts of the products that were already used.

8. Term of patent – The term of patent is 20 years from the filing of application (Sec. 54)

9. Grant of Patent. (Sec. 50) (1992 BAR)

- BAR: The issuance of letter patent creates a presumption which yields only to clear ang cogent
evidence that the patentee was the original and first inventor. The burden of proving want of novelty is
on him who avers it and the burden is heavy one which is met only by clear and satisfactory proof
which overcomes every reasonable doubt. (Manzano vs. CA)

10. Remedies of the True and Actual Inventor. (Sec. 68) (1993, 2005 BAR)

- If a person, who was deprived of the patent without his consent or through fraud is declared by final
court order or decision to be the true and actual inventor, the court shall order for his substitution as
patentee, or at the option of the true inventor, cancel the patent, and award actual and other damages in
his favor if warranted by the circumstances.

11. Infringement

- The making, using, offering for sale, selling, or importing a patented product or a product obtained
directly or indirectly from a patented process, or the use of a patented process without the authorization
of the patentee constitutes patent infringement.

- In case of infringement, the patentee shall have the exclusive right to:

a) Restrain the unauthorized entity from making, using offering for sale, selling or importing the
product;
b) to prevent or prohibit the use of the process or from selling, or offering for sale or importing
product obtained from the process
c) recover DAMAGES in a civil action for infringement which can be equivalent to royalty or aa
amount that does not exceed 3 times the amount of the actual damages.
d) to ask the court to order that the infringing products or goods be destroyed

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 - Steps in determining the presence of infringement:

a) Determine if there is LITERAL INFRINGEMENT (LI). If there is LI, the defendant is liable

 LI. There is infringement of patent under this test if one makes, uses or sell an item that contains
all the elements of the patent claim. This test is satisfied in either of the following:

i. Exactness rule: The item that is being sold, made or used conforms exactly to the
patent claim of another;

ii. Addition rule: One makes, uses or sell an item that has all the elements of the patent
claim of another plus other elements.

b) 2015 BAR: If there is no LI, then the DOCTRINE OF EQUIVALENTS (DE) should be applied

 The DE provides that an infringement also takes place when a device appropriates a prior
invention by incorporating its innovative concept and, although with some modification and
change, performs substantially the same function in substantial the same way to achieve
substantially the same result. In other words, the principle or mode of operation must be the
same or substantially the same.

- Defenses in Action for Infringement. - In an action for infringement, the defendant, in addition to
other defenses available to him, may show the invalidity of the patent, or any claim thereof, on any of
the grounds on which a petition of cancellation can be brought under Section 61 hereof. (Sec. 81)

12. Cancellation of Patents. (Sec. 61) (1993 BAR)

- Any interested person may, upon payment of the required fee, petition to cancel the patent or any claim
thereof, or parts of the claim, on any of the following grounds:

a) That what is claimed as the invention is not new or patentable;

b) That the patent does not disclose the invention in a manner sufficiently clear and complete for it
to be carried out by any person skilled in the art; or
c) That the patent is contrary to public order or morality.

13. Compulsory Licensing

- Compulsory License” is a license issued by the Director General of the Intellectual Property Office to
exploit a patented invention without the permission of the patent holder, either by manufacture or
through parallel importation;

- Grounds:

a) National emergency or other circumstances of extreme urgency;

b) Where the public interest, in particular, national security, nutrition, health or the development of
other vital sectors of the national economy as determined by the appropriate agency of the
Government, so requires; or

c) Where a judicial or administrative body has determined that the manner of exploitation by the
owner of the patent or his licensee is anti-competitive; or

d) In case of public non-commercial use of the patent by the patentee, without satisfactory reason;

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 e) If the patented invention is not being worked in the Philippines on a commercial scale, although
capable of being worked, without satisfactory reason: Provided, That the importation of the
patented article shall constitute working or using the patent. and

f) Where the demand for patented drugs and medicines is not being met to an adequate extent and
on reasonable terms, as determined by the Secretary of the Department of Health.

- Requirement for the issuance of compulsory licensing: (Sec. 95) - The license will only be granted
after the petitioner has made efforts to obtain authorization from the patent owner on reasonable
commercial terms and conditions but such efforts have not been successful within a reasonable period
of time. Effort to obtain authorization is not required in the following instances:

a) Where the petition for compulsory license seeks to remedy a practice determined after judicial or
administrative process to be anti-competitive;
b) In situations of national emergency or other circumstances of extreme urgency;
c) In cases of public non-commercial use; and
d) In cases where the demand for the patented drugs and medicines in the Philippines is not being
met to an adequate extent and on reasonable terms, as determined by the Secretary of the
Department of Health.

14. Voluntary License and Technology Transfer Arrangements (2010 BAR)

- Technology transfer arrangement - refers to contracts or agreements involving the transfer of

systematic knowledge for the manufacture of a product, the application of a process, or rendering of a
service including management contracts; and the transfer, assignment or licensing of all forms of
intellectual property rights, including licensing of computer software except computer software developed
for mass market. It is in the nature of a Voluntary License Contract.

- Prohibited Clauses. - Provisions that are adverse effect on competition and trade: (Sec. 87)

a) Those which impose upon the licensee the obligation to acquire from a specific source capital goods,
intermediate products, raw materials, and other technologies, or of permanently employing personnel
indicated by the licensor;
b) Those pursuant to which the licensor reserves the right to fix the sale or resale prices of the products
manufactured on the basis of the license;
c) Those that contain restrictions regarding the volume and structure of production;
d) Those that prohibit the use of competitive technologies in a non-exclusive technology transfer
agreement;
e) Those that establish a full or partial purchase option in favor of the licensor;
f) Those that obligate the licensee to transfer for free to the licensor the inventions or improvements
that may be obtained through the use of the licensed technology;
g) Those that require payment of royalties to the owners of patents for patents which are not used;
h) Those that prohibit the licensee to export the licensed product unless justified for the protection of the
legitimate interest of the licensor such as exports to countries where exclusive licenses to
manufacture and/or distribute the licensed product(s) have already been granted;
i) Those which restrict the use of the technology supplied after the expiration of the technology transfer
arrangement, except in cases of early termination of the technology transfer arrangement due to
reason(s) attributable to the licensee;
j) Those which require payments for patents and other industrial property rights after their expiration,
termination arrangement;
k) Those which require that the technology recipient shall not contest the validity of any of the patents
of the technology supplier;
l) Those which restrict the research and development activities of the licensee designed to absorb and
adapt the transferred technology to local conditions or to initiate research and development programs
in connection with new products, processes or equipment;

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 m) Those which prevent the licensee from adapting the imported technology to local conditions, or
introducing innovation to it, as long as it does not impair the quality standards prescribed by the
licensor;
n) Those which exempt the licensor for liability for non-fulfilment of his responsibilities under the
technology transfer arrangement and/or liability arising from third party suits brought about by the
use of the licensed product or the licensed technology; and

- Mandatory Provisions. - The following provisions shall be included in voluntary license contracts: (Sec.
88) (2010 BAR)

a) That the laws of the Philippines shall govern the interpretation of the same and in the event of
litigation, the venue shall be the proper court in the place where the licensee has its principal office;
b) Continued access to improvements in techniques and processes related to the technology shall be
made available during the period of the technology transfer arrangement;
c) In the event the technology transfer arrangement shall provide for arbitration, the Procedure of
Arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the United Nations
Commission on International Trade Law (UNCITRAL) or the Rules of Conciliation and Arbitration
of the International Chamber of Commerce (ICC) shall apply and the venue of arbitration shall be the
Philippines or any neutral country; and
d) The Philippine taxes on all payments relating to the technology transfer arrangement shall be borne
by the licensor.

B. TRADEMARK

1. Trademark – means any visible sign capable of distinguishing the goods (trademark) or services (service
mark) of an enterprise and shall include a stamped or marked container of goods.

2. Trade name – means the name or designation identifying or distinguishing an enterprise

3. Collective mark – means any visible sign designated as such in the application for registration and capable
of distinguishing the origin or any other common characteristic, including the quality of goods or services of
different enterprises which use the sign under the control of the registered owner of the collective mark

4. Certificates of Registration. (Sec. 138) (1994 BAR)

- A certificate of registration of a mark shall be prima facie evidence of the validity of the registration,
the registrant’s ownership of the mark, and of the registrant’s exclusive right to use the same in
connection with the goods or services and those that are related thereto specified in the certificate.

- 1994 BAR: The certificate of registration confers upon the trademark owner the exclusive right to use
its own symbol only to those goods specified in the certificates, subject to conditions and limitations
stated therein. Thus, the exclusive right of the petitioner in this case to use the trademark CANON is
limited to the products covered by its certificate of registration, but cannot cover other types of
products. Undoubtedly, paints, chemicals, toner, and dyestuff are unrelated to sandals. (Canon vs. CA)

5. Use of Indications by Third Parties for Purposes Other than those for which the Mark is Used . (Sec.
148) (1991 BAR)

- Registration of the mark shall not confer on the registered owner the right to preclude third parties
from using bona fide their names, addresses, pseudonyms, a geographical name, or exact indications
concerning the kind, quality, quantity, destination, value, place of origin, or time of production or of
supply, of their goods or services: Provided, That such use is confined to the purposes of mere
identification or information and cannot mislead the public as to the source of the goods or services.

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 - 1991 BAR: Use of trademark by a person for a product in which the other party does NOT deal, the
use of the same trademark cannot be objected to. It will only be prohibited if the goods are related, that
is, they belong to the same class or have the same descriptive property. (Canon vs. CA)

6. How Marks are Acquired (Sec. 122)

- The rights in a mark shall be acquired through registration with the IPO

- Registration is necessary before can file an action for infringement

- Actual use:

a) Prior use in the Philippines is NOT required before registration (1985 BAR)

b) However, there must be actual use after registration. The registrant shall file a declaration of
actual use of the mark with evidence to that effect within 3 years from the filing date of
application otherwise it may be cancelled. (Sec. 142 & 151) The registrant is required to file a
declaration of actual use and evidence to that effect, or shall show valid reasons for non-use
within one year from the fifth anniversary date of registration (Sec. 145)

c) It is also provided that a certificate of registration of a mark shall be prima facie evidence of the
validity of the registration, the registrant’s ownership of the mark, and of the registrant’s
exclusive right to use the same in connection with the goods or services and those that are related
thereto specified in the certificate. (Sec. 138) (1994 and 2015 BAR)
 The cert. of registration confers upon the trademark owner the exclusive right to use its
own symbol only to those goods specified in the certificates, subject to the conditions
and limitations stated therein. Thus, the exclusive right of petitioner in this case to use
the trademark CANON is limited to the products covered by its cert. of registration, but
cannot cover other types of products. Undoubtedly, paints, chemicals, toner and dyestuff
are unrelated to sandals (Canon vs. CA)

 2015 BAR: Since the petitioner owns trademark as evidence by its actual and continuous
use prior to the defendant, it is one entitled to the registration of the trademark. The fact
that the defendant was the first to use the mark in the Philippines will not matter. The
petitioner’s prior actual use of the trademark even in another country bars the defendant
from applying the registration of the same trademark.

d) Registration is also not important to protect the goodwill that identifies in the mind of the public
the goods he manufactures or deals in. (Sec. 168.1)

e) Registration of a mark is NOT necessary for purposes of filing a case for unfair competition or
false designation of origin. (Sec. 168.2 and 169). Unfair competition is present when:
i. there is passing off of a product format of another;
ii. giving of goods or service the appearance of goods of another.

7. Marks that cannot be registered. (Sec. 123) (2005, 1990 BAR)

a) Consists of immoral, deceptive or scandalous matter, or matter which may disparage or falsely suggest
a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into
contempt or disrepute;

b) Consists of the flag or coat of arms or other insignia of the Philippines or any of its political
subdivisions, or of any foreign nation, or any simulation thereof;

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 c) Consists of a name, portrait or signature identifying a particular living individual except by his written
consent, or the name, signature, or portrait of a deceased President of the Philippines, during the life of
his widow, if any, except by written consent of the widow;

d) Is identical with a registered mark belonging to a different proprietor or a mark with an earlier filing or
priority date, in respect of: (i) The same goods or services, or (ii) Closely related goods or services, or
(iii) If it nearly resembles such a mark as to be likely to deceive or cause confusion;

e) Generic terms for goods or services;

f) Descriptive marks including characteristics of goods like quality or quantity (1990 BAR)

g) Customary sign in everyday language

h) Color by itself; and

i) Shapes

8. Limitations

a) Doctrine of Secondary Meaning. – A generic or descriptive mark may later acquire the characteristic of
DISTINCTIVENESS and can later be registered if acquires a meaning which is different from its
ordinary connotation. For this to happen, there must be exclusive and continuous use for a period of at
least 5 years.

b) Arbitrary Use – generic and descriptive terms may also be registered as trademarks if they are used in
an arbitrary or fanciful manner. (ex. “Papa” for ketchup)

9. Internationally well-known marks

- The persons may question the mark, include persons whose internationally well-known mark, whether
or not registered, is identical with or confusingly similar to or constitutes a translation of a mark that is
sought to be registered or is actually registered (2005 BAR)

- There is also protection for internationally known marks registered in the Philippines for goods that are
not similar with respect to which registration is applied for.

- Note: The SC ruled that foreign marks that are not registered are still accorded protection against
infringement and / or unfair competition under the Paris Convention and Nice Convention.

- Note (important): In the case of internationally “well-known” marks, it is expressly provided under
the IPC that other persons or entities cannot use the internationally ‘well-known” mark even for
unrelated goods.

10. Rights conferred (Sec. 147) (2005 BAR)

a) The right to the exclusive use of the mark for one’s own goods or services
b) To PREVENT others from the use of the same mark for identical goods or services in the course of
trade;
c) The right to the exclusive use of one’s already registered mark even for goods or services into which
one’s venture expands, if used by the others for dissimilar products is likely to damage the business
interests of the first venturer.

11. Use of indications by the third parties for purposes other than those for which the mark is used. (Sec.
188) (2016 BAR)

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 - Use of trademark by a person for a product in which the other party does not deal, the use of the same
trademark cannot be objected to. It will only be prohibited if the goods are related, that is, they belong
to the same class or have the same descriptive property.(Canon vs. CA)

12. Infringement (2009, 2014, 2015 BAR)

- Infringement; how committed (Sec. 155). - Any person who shall, without the consent of the owner of
the registered mark:

a) Use in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark
or the same container or a dominant feature thereof in connection with the sale, offering for sale,
distribution, advertising of any goods or services including other preparatory steps necessary to
carry out the sale of any goods or services on or in connection with which such use is likely to
cause confusion, or to cause mistake, or to deceive; or

b) Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature thereof
and apply such reproduction, counterfeit, copy or colorable imitation to labels, signs, prints,
packages, wrappers, receptacles or advertisements intended to be used in commerce upon or in
connection with the sale, offering for sale, distribution, or advertising of goods or services on or
in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive,
shall be liable in a civil action for infringement by the registrant for the remedies hereinafter set
forth:

Note: That the infringement takes place at the moment any of the acts stated are committed
regardless of whether there is actual sale of goods or services using the infringing material.

- Elements of infringement:

a. The trademark being infringed is registered in the Intellectual Property Office; however, in
infringement of trade name, the same need not be registered;

b. The trademark or trade name is reproduced, counterfeited, copied, or colorably imitated by the
infringer;

c. The infringing mark or trade name is used in connection with the sale, offering for sale, or
advertising of any goods, business or services; or the infringing mark or trade name is applied to
labels, signs, prints, packages, wrappers, receptacles or advertisements intended to be used upon
or in connection with such goods, business or services;

d. The use or application of the infringing mark or trade name is likely to cause confusion or mistake
or to deceive purchasers or others as to the goods or services themselves or as to the source or
origin of such goods or services or the identity of such business; and

e. It is without the consent of the trademark or trade name owner or the assignee thereof.

- Tests to determine infringement:

a) Dominancy test – focuses on the similarity of the PREVALENT features of the competing
trademarks which might cause confusion or deception, and thus infringement. If the competing
trademark contains the MAIN, ESSENTIAL or DOMINANT (MED) features of another, and
confusion or deception is likely to result, infringement takes place. The question is whether the
use of the marks involved is likely to cause confusion or mistake in the mind of the public or
deceive the purchasers. (1996, 2014 BAR)

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 The question at issue in cases of infringement of trademarks is whether the use of the
marks involved would be likely to cause confusion or mistakes in the mind of the public or
deceive the purchasers (Amigo vs. Cluett, 2001)

Ex.: “McJoy” and “Big Mac” infringe the trademark of Mcdonald’s and latter’s dominant feature
is “Mc” or “Mac”

b) Holistic test – requires that the ENTIRETY of the marks in question be considered resolving
confusing similarity. Comparison of the words is not the only determining factor. The trademark
in their entirely as they appear in their respective labels or hang tags must also be considered in
relation to the goods to which they are attached. The DISCERNING EYE of the observer must
focus not only on the predominant words but also on the features appearing in both labels in order
that he may draw his conclusion whether one is confusingly similar to the other.

c) Aural effects/ Idem Sonans Rule – in dominancy test, what are taken into account are signs, color,
design, peculiar shape or name or some special easily remembered earmarks of the brand that
readily attracts and catches the attention of the ordinary consumer. In addition, the aural effects of
the words and letters contained in the marks should be considered in determining the issue of
confusing similarity.

Ex.: Dermaline is confusingly similar to Dermalin; Nanny is confusingly similar to NAN. Nan is
the prevalent feature.

- Use of Identical marks not Necessarily Prohibited. The use of identical mark does not by itself, lead to a
legal conclusion that there is trademark infringement if they are NOT used for identical, similar or related
goods (1991 BAR)
a) Registration of the trademark “SHELL” for cigarettes was allowed although there is prior
registrant for gasoline and petroleum products. (Shell vs. CA, 1979)
b) The registration of the trademark CANNON was allowed for sandals despite the prior registration
of the same for paints, chemical products, toner and dyestuff (Canon vs. CA, 2000)

13. Unfair competition (Sec. 168)

- This involves employing deception or any other means contrary to good fait by which a person passes
off his goods or business or services for those of one who has already established goodwill thereto.

- Essential ELEMENTS of unfair competition with respect to GOODS are: (2010 BAR):

a) Confusing similarity in the general appearance of the goods; and

b) Fraud or intent to deceive the public and defraud a competitor.

- TEST of unfair competition: whether the facts of the defendant have the intent of deceiving or are
calculated to deceive the ordinary buyer making his purchases under the ordinary conditions of the
particular trade to which the controversy relates.

14. Distinguish infringement of trademark from unfair competition (Sec. 168)

Infringement of Trademark Unfair competition

There is unauthorized use of trademark
It is not necessary to establish fraudulent intent
Registration of trademark is necessary for the
filing of an action of infringement
Involves the passing off of one’s goods as those
of another and giving one’s goods the
appearance that of another
Necessary to establish fraudulent intent
Prior Registration of trademark is NOT
necessary in unfair competition

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C. COPYRIGHT

1. Definitions (Sec. 171)

- Copyright – right over literary and artistic works which are original intellectual creations in the literary
and artistic domain protected from the MOMENT of CREATION.

- Author - is the natural person who has created the work.

- Collective work - is a work which has been created by two (2) or more natural persons at the initiative
and under the direction of another with the understanding that it will be disclosed by the latter under
his own name and that contributing natural persons will not be identified.

- Joint work - is a work prepared by two or more authors with the intention that their contributions be
merged into separable or interdependent parts of a unitary whole, i.e., medical textbook that is jointly
authored by 2 or more experts.

- Work of applied art - is an artistic creation with utilitarian functions or incorporated in a useful article,
whether made by hand or produced on an industrial scale;

2. When rights over copyrights are conferred? (Sec. 172)

- 1995, 2007, 2008 BAR: Rights over copyrights are conferred from the moment of creation. The work
is deemed created if something original is expressed in a fixed manner.

- 1997, 1998 BAR: Infringement could be committed from the moment the defendant copies the
copyrighted material. The right subsists from the moment of creation.

3. Who owns the copyright (Sec. 178, 1995, 2004, 2008, 2009, 2010, 2013 BAR)

a) One creator – creator, his heirs, or assigns owns the copyright

b) Joint authorship - the co-authors shall be the original owners of the copyright and in the absence of
agreement, their rights shall be governed by the rules on co-ownership.

Exception: If, however, a work of joint authorship consists of parts that can be used separately and the
author of each part can be identified, the author of each part shall be the original owner of the
copyright in the part that he has created;

c) In the case of work created by an author during and in the course of his employment - the copyright
shall belong to:
i. The employee, if the creation of the object of copyright is not a part of his regular duties even
if the employee uses the time, facilities and materials of the employer.
ii. The employer, if the work is the result of the performance of his regularly-assigned duties,
unless there is an agreement, express or implied, to the contrary.

d) Commissioned work – the person who so commissioned the work shall have ownership of the work,
but the copyright thereto shall remain with the creator, unless there is a written stipulation to the
contrary;

e) Audiovisual work – the copyright shall belong to the producer, the author of the scenario, the
composer of the music, the film director, and the author of the work so adapted. However, subject to
contrary or other stipulations among the creators, the producer shall exercise the copyright to an extent
required for the exhibition of the work in any manner, except for the right to collect performing license
fees for the performance of musical compositions, with or without words, which are incorporated into
the work; and

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 4. Copyrightable objects

Literary and Artistic Works

a) Books, pamphlets, articles and other writings;

b) Periodicals and newspapers;
c) Lectures, sermons, addresses, dissertations prepared for oral delivery, whether or not reduced in
writing or other material form. (2010 BAR)
d) Letters – this includes electronic messages and sms messages (2007 BAR)
e) Dramatic or dramatico-musical compositions; choreographic works or entertainment in dumb shows;
f) Musical compositions, with or without words;
g) Works of drawing, painting, architecture, sculpture, engraving, lithography or other works of art;
models or designs for works of art (2013 BAR)
h) Original ornamental designs or models for articles of manufacture, whether or not registrable as an
industrial design, and other works of applied art;
i) Illustrations, maps, plans, sketches, charts and three-dimensional works relative to geography,
topography, architecture or science;
j) Drawings or plastic works of a scientific or technical character;
k) Photographic works including works produced by a process analogous to photography; lantern slides;
l) Audiovisual works and cinematographic works and works produced by a process analogous to
cinematography or any process for making audio-visual recordings;
m) Pictorial illustrations and advertisements;
n) Computer programs; and
o) Other literary, scholarly, scientific and artistic works.

Derivative Works

a) Dramatizations, translations, adaptations, abridgments, arrangements, and other alterations of literary

or artistic works; and

b) Collections of literary, scholarly or artistic works, and compilations of data and other materials which
are original by reason of the selection or coordination or arrangement of their contents.

5. Rights of Authors (Sec. 177) (1995 and 2008 BAR)

a) Economic Rights - economic rights shall consist of the exclusive right to carry out, authorize or
prevent the following acts:

i. Reproduction of the work or substantial portion of the work;

ii. Dramatization, translation, adaptation, abridgment, arrangement or other transformation of the
work;
iii. The first public distribution of the original and each copy of the work by sale or other forms of
transfer of ownership;
iv. Rental of the original or a copy of an audiovisual or cinematographic work, a work embodied
in a sound recording, a computer program, a compilation of data and other materials or a
musical work in graphic form, irrespective of the ownership of the original or the copy which
is the subject of the rental;
v. Public display of the original or a copy of the work;
vi. Public performance of the work; and
vii. Other communication to the public of the work.

b) Moral Rights

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 i. To require that the authorship of the works be attributed to him, in particular, the right that his
name, as far as practicable, be indicated in a prominent way on the copies, and in connection
with the public use of his work; (2008 BAR)
ii. To make any alterations of his work prior to, or to withhold it from publication;
iii. To object to any distortion, mutilation or other modification of, or other derogatory action in
relation to, his work which would be prejudicial to his honor or reputation; and
iv. To restrain the use of his name with respect to any work not of his own creation or in a
distorted version of his work.

6. Fair use (Sec. 185) (1998 & 2014 BAR)

- Fair use is a privilege to use the copyrighted material in a reasonable manner without the consent of the
copyright owner or as copying the theme or ideas rather than their expression. The fair use of a
copyrighted work for criticism, comment, news reporting, teaching including multiple copies for
classroom use, scholarship, research, and similar purposes is not an infringement of copyright.

- 2014 BAR: The factors to be considered in determining whether the use made of a work is fair use
shall include:

a) The purpose and character of the use, including whether such use if a commercial nature or is
for non-profit educational purposes;
b) The nature of the copyrighted work;
c) The amount and substantially of the portion used in relation to the copyrighted work as a whole;
and
d) The effect of the use upon the potential marked for or value of the copyrighted work.

7. Infringement

a) How made – When there is piracy or substantial reproduction. If so much is taken that the value of the
original work is substantially diminished or the labors of the original author are substantially and to an
injurious extent appropriated by another.

b) A person infringes a right protected under this Act when one (1977, 1980, 1994 BAR):
i. Directly commits an infringement
ii. Benefits from the infringing activity of another person who commits an infringement if the
person benefiting has been given notice of the infringing activity and has the right and ability
to control the activities of the other person.
iii. With knowledge of infringing activity, induces, causes or materially contributes to the
infringing conduct of another.

c) Remedies:

i. Injunction to prevent infringement

ii. Action for damages which should be filed within 4 years
iii. Criminal case

8. Limitations on Copyright / Acts that to do NOT infringe copyright (Sec. 184)

a) The recitation or performance of a work, once it has been lawfully made accessible to the public, if done
privately and free of charge or if made strictly for a charitable or religious institution or society; (1994
BAR)
b) The making of quotations from a published work if they are compatible with fair use and only to the
extent justified for the purpose, including quotations from newspaper articles and periodicals in the form
of press summaries: Provided, That the source and the name of the author, if appearing on the work, are
mentioned;

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 c) The reproduction or communication to the public by mass media of articles on current political, social,
economic, scientific or religious topic, lectures, addresses and other works of the same nature, which are
delivered in public if such use is for information purposes and has not been expressly reserved:
Provided, That the source is clearly indicated;
d) The reproduction and communication to the public of literary, scientific or artistic works as part of
reports of current events by means of photography, cinematography or broadcasting to the extent
necessary for the purpose;
e) The inclusion of a work in a publication, broadcast, or other communication to the public, sound
recording or film, if such inclusion is made by way of illustration for teaching purposes and is
compatible with fair use: Provided, That the source and the name of the author, if appearing in the work,
are mentioned;
f) The recording made in schools, universities, or educational institutions of a work included in a broadcast
for the use of such schools, universities or educational institutions: Provided, That such recording must
be deleted within a reasonable period after they were first broadcast: Provided, further, That such
recording may not be made from audiovisual works which are part of the general cinema repertoire of
feature films except for brief excerpts of the work;
g) The making of ephemeral recordings by a broadcasting organization by means of its own facilities and
for use in its own broadcast;
h) The use made of a work by or under the direction or control of the Government, by the National Library
or by educational, scientific or professional institutions where such use is in the public interest and is
compatible with fair use;
i) The public performance or the communication to the public of a work, in a place where no admission fee
is charged in respect of such public performance or communication, by a club or institution for
charitable or educational purpose only, whose aim is not profit making, subject to such other limitations
as may be provided in the Regulations;
j) Public display of the original or a copy of the work not made by means of a film, slide, television image
or otherwise on screen or by means of any other device or process: Provided, That either the work has
been published, or, that the original or the copy displayed has been sold, given away or otherwise
transferred to another person by the author or his successor in title; and
k) Any use made of a work for the purpose of any judicial proceedings or for the giving of professional
advice by a legal practitioner. (2006 BAR)

VIII. SPECIAL LAWS

A. SECURED TRANSACTIONS

I. PERSONAL PROPERTY SECURITY ACT (RA 11057)

- This Act shall apply to all transactions of any form that secure an obligation with movable collateral,
except interest in aircrafts subject to RA 9497, and interests in ships subject to PD 1521.

1. Definitions and Scope

2. Asset-specific rules
3. Perfection of security interests
4. Registration
5. Priority of security interests
6. Registration
7. Priority of security interests
8. Tangible assets; intangible assets
9. Enforcement of Security interests
10. Prior interests and transitional period

1. Who is a “grantor” under the Personal Property Security Act?

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 a. The person who grants a security interest in collateral to secure its own obligation or that of another
person;
b. A buyer or other transferee of a collateral that acquires its right subject to a security interest;
c. A transferor in an outright transfer of an accounts receivable; or
d. A lessee of goods (R.A. 11057, Sec. 3 (c)).

2. What is a “Security Interest”?

- Security Interest is a property right in collateral that secures payment or other performance of an
obligation, regardless of whether the parties have denominated it as a security interest, and regardless of
the type of asset, the status of the grantor or secured creditor, or the nature of the secured obligation;
including the right of a buyer of accounts receivable and a lessor under an operating lease for not less
than one (1) year (RA 11057, Sec. 3 (i)).

3. What happens to the security interest in case the collateral is disposed of?

- A security interest shall continue in collateral notwithstanding sale, lease, license, exchange, or other
disposition of the collateral (RA 11057, Sec.9).

- Exceptions to the continuity of security interest:

a. If the party obtains the collateral, in the ordinary course of business, in good faith, he shall take the
movable property free of the security interest.

Note: No such good faith shall exist if the security interest in the movable property was registered
prior to his obtaining the property (RA. 11057, Sec. 21).

b. If agreed upon by the parties (RA 11057, Sec. 9).

4. Who is a “secured creditor”?

- A secured creditor is a person that has a security interest. For the purposes of registration and priority
only, it includes a buyer of account receivable and a lessor of goods under an operating lease for not less
than one (1) year (RA 11057, Sec. 3 (j)).

5. What are the specific rules governing interest over future property?

a. A security agreement may provide for the creation of a security interest in future property or after-
acquired assets, but the security interest in that property is created only when the grantor acquires
rights in it or the power to encumber it;
b. A security agreement may provide that a security interest in a tangible asset that is transformed into a
product extends to the product. A security interest that extends to a product is limited to the value of
the encumbered asset immediately before it became part of the product;
c. A security agreement may provide that a security interest in a tangible asset extends to its replacement.
A security interest that extends to a replacement is limited to the value of the encumbered asset
immediately before it was replaced (IRR of RA No. 11057, Sec. 3.05).

6. What are the specific rules governing security interest over proceeds and commingle funds?

a. A security interest in personal property shall extend to its identifiable or traceable proceeds;

b. Where proceeds in the form of funds credited to a deposit account or money are commingled with
other funds or money;

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 i. The security interest shall extend to the commingled money or funds, notwithstanding that the
proceeds have ceased to be identifiable, to the extent they remain traceable.
ii. The security interest in the commingled funds or money shall be limited to the amount of the
proceeds immediately before they were commingled; and
iii. The security interest shall be limited to the lowest amount of the commingled funds or money
between the time when the proceeds where commingled and the time the security interest is
claimed, if the balance credited or the amount of commingled funds or money is less than the
amount of proceeds immediately before commingling (RA No. 11057, Sec. 8).

7. What are the specific rules governing security interest over tangible assets commingled in a mass?

a. A security interest in a tangible asset that is commingled in a mass extends to the mass.
b. A security interest that extends to a mass is limited to the same proportion of the mass as the quantity of
the encumbered asset bore to the quantity of the entire mass immediately after the commingling (IRR of
RA No. 11057, Sec. 3.07).

8. How is security interest created?

- A security is created by a security agreement (RA 11057, Sec. 5).

9. What is a “security agreement”?

- The security agreement is the written contract signed by the parties that states the terms and conditions
of the agreement, including the description of the collateral (RA No. 11057, Sec. 6).

10. When does a security interest become effective against third parties?

- A security interest becomes effective against third parties the moment it is perfected (RA 11057, Sec. 11
(b)).

11. When is a security interest perfected?

a. It has been created, and

b. The secured creditor has taken one of the following actions (RA 11057, Sec. 11):
i. Registration of a notice with the Registry;
ii. Possession of the collateral by the secured creditor;
iii. Control of investment property and deposit account (RA 11057, Sec. 12).

12. What are the special rules on priority for security interest in a deposit account and /or investment property?

a. A security interest in a deposit account with respect to which the secured creditor is the deposit-taking
institution or the intermediary shall have priority over a competing security interest perfected by any
method.
b. A security interest in a deposit account or investment property that is perfected by a control agreement
shall have priority over a competing security interest except a security interest of deposit- taking
institution or the intermediary.
c. The order of priority among competing security interests in a deposit account or investment property
that were perfected by the conclusion of control agreements shall be determined on the basis of the
time of conclusion of control agreements.
d. Any rights to set-off that the deposit-taking institution may have against a grantor’s right to payment of
funds credited to a deposit account shall have a priority over a security interest in the deposit account.

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 e. A security interest in a security certificate perfected by the secured creditor’s possession of the
certificate shall have priority over a competing security interest perfected by registration of a notice in
the Registry.
f. A security interest in electronic securities not held with an intermediary perfected by a notation of the
security interests in the books maintained for that purpose by or on behalf of the issuer shall have
priority over a security interest in the same securities perfected by any other method.
g. A security interest in electronic securities not held with an intermediary perfected by the conclusion of
a control agreement shall have priority over a security interest in the same securities perfected by
registration of a notice in the Registry.
h. The order of priority among completing security interest in electronic securities not held with an
intermediary perfected by the conclusion of control agreements is determined on the basis of the time
of conclusion of the control agreements (RA 11057, Sec. 18).

13. How is security interest enforced?

a. By expedited repossession (RA 11057, Sec. 47);

b. By recovery in special cases (RA 11057, Sec. 48);
c. By disposition (RA 11057, Sec. 49);
d. By retention of the collateral (RA 11057, Sec. 54).

14. What are the rules for expedited repossession by the secured creditor of the collateral?

a. Repossession without judicial process:

i. The secured creditor may take possession of the collateral without judicial process if the
security arrangement so stipulates: Provided, that possession can be taken without a breach of
the peace.
ii. If the collateral is a fixture, the secured creditor, if it has priority over all owners and
mortgagees, may remove the fixture from the real property to which is affixed without judicial
process. The secured creditor shall exercise due care in removing the fixture.

b. Repossession with judicial process – If the assured creditor cannot take possession of collateral
without the breach of the peace, he may proceed as follows:

i. The secured creditor shall be entitled to an expedited hearing upon application for an order
granting the secured creditor possession of the collateral.
ii. The secured creditor shall provide the debtor, grantor, and, if the collateral is a fixture, any
real estate mortgagee, a copy of the application, including all supporting documents and
evidence for the order granting the secured creditor possession of the collateral; and
iii. The secured creditor is entitled to an order granting possession of the collateral upon the court
finding that a default has occurred under the security agreement and that the secured creditor
has a right to take possession of the collateral.

Note: Breach of the peace includes entering the private residence of the grantor
without permission, resorting to physical violence or intimidation, or being accompanied by a
law enforcement officer when taking possession of confronting the grantor (RA 11057, Sec.
47).

15. What is the effect of RA 11057 to prior interest?

- Prior interest that was perfected under prior law continues to be deemed perfected and remains effective
under RA 11057 notwithstanding that its creation did not comply with creation requirements of the PPSA
and its IRR until the earlier of:

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 a. The time the prior interest would cease to be perfected under prior law; and
b. The beginning of full implementation of the PPSA (IRR of RA No. 11057, Sec. 8.03).

II. REAL ESTATE MORTGAGE LAW

1. Definition and Characteristics

- REM is a contract whereby the debtor secures to the creditor the fulfillment of a principal
obligation, especially subjecting to such security immovable property or real rights over
immovable property in case the principal obligation is not complied with at the time stipulated.

a. Object of REM
- immovables and alienable real rights may be the object of the contract of mortgage.

b. Right to alienate mortgage credit

- the mortgage credit may be alienated or assigned to a third person, in whole or in part, with
the formalities required by law. However, a stipulation forbidding the owner from alienating
the immovable mortgaged shall be VOID.

2. Essential requisite

- The essential requisites are as follows:

a. The mortgage be constituted to SECURE the fulfillment of the principal obligation
b. The mortgagor be the ABSOLUTE OWNER of the thing mortgaged; and
c. The persons constituting the mortgage have the FREE DISPOSAL of their property, and in
the absence thereof, that they be legally authorized for the purpose.

- Note: registration in the registry of property is necessary to bind third person but not to the
validity of the contract.

III. GUARANTY

- A guaranty is a contract whereby a person, called the guarantor, binds himself to the creditor to fulfill
the obligation of the principal debtor in case the latter should fail to do so. (Art. 2047)

- If a guaranty is entered into without the knowledge or consent, or against the will of the principal
debtor, he may recover only insofar as the payment has been beneficial to the debtor creditor’s rights
such as those arising from a mortgage, guaranty or penalty. (Art. 2050)

1. Nature and extent of guaranty

a. Obligation secured by guaranty

- A guaranty may also be given as security for future debts, the amount of which is not yet
known; there can be no claim against the guarantor until the debt is liquidated. A conditional
obligation may also be secured. (Art. 2053)

- Continuing guaranty: Art. 2053 is the basis of continuing guaranty. A continuing guaranty is
one which is not limited to a single transaction, but which contemplates a future course of
dealing, covering a series of transaction, but which contemplates a future course of dealing,
covering a series of transactions, generally for an indefinite time or until revoked.

b. Parties to a guaranty
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 - By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.

- The creditor and guarantor are the principal parties to the contract of guaranty.

- A guaranty is not presumed; it must be express and cannot extend to more than what is
stipulated therein. (Art. 2055)

c. Excussion

- Rights and benefits of a guarantor:

i. benefit of excussion
ii. benefit of division
iii. right of indemnity or reimbursement
iv. right of subrogation
v. right of guarantor to proceed against debtor before payment
vi. right to contribution of guarantor who pays if there is solidary liability

- The benefit of excussion is the right in which the guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the property of the debtor, and has resorted to all
the legal remedies against the debtor. (Art. 2058)

- The excussion shall not take place: (Art. 2059 par. a to e)

i. If the guarantor has expressly renounced it;
ii. If he has bound himself solidarily with the debtor;
iii. In case of insolvency of the debtor;
iv. When he has absconded, or cannot be sued within the Philippines unless he has left
a manager or representative;
v. If it may be presumed that an execution on the property of the principal debtor
would not result in the satisfaction of the obligation.
vi. If he fails to INTERPOSE it as a defense before judgment is rendered against him
vii. When the debt is NATURAL obligation or unenforceable obligation
viii. If the guarantor does not set up the benefit against the creditor upon the latter’s
demand for payment from him;
ix. Where the pledge or mortgage has been given by him as Special security

- Duties of the guarantor before he may exercise the benefit of excussion:

i. In order that the guarantor may make use of the benefit of exclusion, he must set it
up against the creditor upon the latter's demand for payment from him,
ii. point out to the creditor available property of the debtor within Philippine territory,
sufficient to cover the amount of the debt. (Art. 2060)

- The guarantor having fulfilled all the conditions required in the preceding article, the creditor
who is negligent in exhausting the property pointed out shall suffer the loss, to the extent of
said property, for the insolvency of the debtor resulting from such negligence. (Art. 2061)

d. Right to protection (Guarantor’s protective remedy against the original debtor)

- The guarantor, even before having paid, may proceed against the principal debtor: (Art.
2071) (PAID-BIT)

i. When he is sued for the payment;

ii. In case of insolvency of the principal debtor;

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 iii. When the debtor has bound himself to relieve him from the guaranty within a
specified period, and this period has expired;
iv. When the debt has become demandable, by reason of the expiration of the period for
payment;
v. After the lapse of ten years, when the principal obligation has no fixed period for its
maturity, unless it be of such nature that it cannot be extinguished except within a
period longer than ten years;
vi. If there are reasonable grounds to fear that the principal debtor intends to abscond;
vii. If the principal debtor is in imminent danger of becoming insolvent.

In all these cases, the action of the guarantor is to obtain release from the
guaranty, or to demand a security that shall protect him from any proceedings by the
creditor and from the danger of insolvency of the debtor.

e. Right to indemnification (Art. 2066)

- The guarantor who pays for a debtor must be indemnified by the latter.

The indemnity comprises:

i. The total amount of the debt;

ii. The legal interests thereon from the time the payment was made known to the
debtor, even though it did not earn interest for the creditor;
iii. The expenses incurred by the guarantor after having notified the debtor that
payment had been demanded of him;
iv. Damages, if they are due

- The guarantor cannot compel the principal debtor to indemnify him for what he has paid:

i. When there is a Payment by a third person who does not intend to be reimburse
which is deemed as a DONATION
ii. Where the guaranty is constituted WITHOUT the KNOWLEDGE or against the
WILL of the principal debtor, the guarantor can recover only insofar as the
payment had been beneficial to the debtor.
iii. There is WAIVER on the part of the guarantor.

f. Right to subrogation (Art. 2067)

- The guarantor who pays is subrogated by virtue thereof to all the rights which the creditor
had against the debtor. If the guarantor has compromised with the creditor, he cannot
demand of the debtor more than what he has really paid.

g. Right of co-guarantors

- Article 2073. When there are two or more guarantors of the same debtor and for the same
debt, the one among them who has paid may demand of each of the others the share which is
proportionally owing from him.

If any of the guarantors should be insolvent, his share shall be borne by the others,
including the payer, in the same proportion.

The provisions of this article shall not be applicable, unless the payment has been
made by virtue of a judicial demand or unless the principal debtor is insolvent. (1844a)

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 - Article 2074. In the case of the preceding article, the co-guarantors may set up against the
one who paid, the same defenses which would have pertained to the principal debtor against
the creditor, and which are not purely personal to the debtor.

- Article 2065. Should there be several guarantors of only one debtor and for the same debt,
the obligation to answer for the same is divided among all. The creditor cannot claim from
the guarantors except the shares which they are respectively bound to pay, unless solidarity
has been expressly stipulated.

The benefit of division against the co-guarantors ceases in the same cases and for
the same reasons as the benefit of excussion against the principal debtor.

2. Extinguishment of Guaranty

- The guaranty is extinguished in the following circumstances:

i. The obligation of the guarantor is extinguished at the same time as that of the debtor, and
for the same causes as all other obligations. (Art. 2076)
ii. A release made by the creditor in favor of one of the guarantors, without the consent of
the others, benefits all to the extent of the share of the guarantor to whom it has been
granted. (Art. 2078)
iii. The guarantors, even though they be solidary, are released from their obligation
whenever by some act of the creditor they cannot be subrogated to the rights, mortgages,
and preference of the latter. (Art. 2080)
Note: The guarantor may set up against the creditor all the defenses which pertain to the
principal debtor and are inherent in the debt; but not those that are personal to the debtor.
(Art. 2081)
iv. If the creditor voluntarily accepts immovable or other property in payment of the debt,
even if he should afterwards lose the same through eviction, the guarantor is released.
(Art. 2077)
v. An extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty. (Art. 2079)

IV. SURETY

1. Concept

- It is an agreement whereby a party, called surety, guarantees the performance by another party,
called the principal or obligor, of an obligation or undertaking in favor of another party, called the
oblige.

2. Obligations secured

- While a surety is solidary liable with the principal debtor, the obligation to pay only arises upon
the principal debtor’s failure to pay. A surety of the debt; he promises to pay the principal debt of
the principal will not pay.

- The extent of surety’s liability is determined only by the clause of the contract of suretyship. It
cannot be extended by implication beyond the terms of the contract. (Zenith Insurance vs. CA,
1982)

3. Surety distinguished from guaranty

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 GUARANTY
As to what is insured The guarantor is the insurer of the
SOLVENCY of the debtor and thus
binds himself to pay if the principal is
unable to pay
As to Liability A guarantor’s liability depends upon
an independent agreement to pay the
obligation if the primary debtor fails
to do so.
As to assumption of A guarantor assumes only collateral
undertaking
As to Extent of Liability Secondarily liable
SURETY
A surety is an insurer of the DEBT and he
obligates himself to pay when the insurer
does not pay
A surety assumes the liability as a regular
party to the undertaking
A surety is an original promisor and debtor
from the beginning
Primarily liable

As to Discharge for A guarantor is not liable unless A surety will not be discharged either by
Lack of Notice notified of the default of the principal mere indulgence of the creditor of the
principal or by want of notice of the default
of the principal

As to Release from The guarantor are release from their Cannot claim release under Art. 2080
obligation obligation whenever by some act of
the creditor they cannot be subrogated
to the rights, mortgages and
preference of the latter.

As to Knowledge of A guarantor is bound to take notice of A surety is ordinarily held to know every
non-performance of the the non-performance of his principal default of his principal.
principal

4. Surety distinguished from joint and Solidary obligations

SOLIDARY OBLIGATION SURETY CONTRACT

As to Liability The solidary debtor is liable, not only
for the payment of the debt of another
but also for the payment of a debt
which properly is his own
As to Reimbursement If a solidary debtor pays, he can
compel his co-debtors to reimburse
him only their proportionate shares in
the debt
As to Extension of Time If the creditor grants an extension to
one of the solidary debtors without
the knowledge or consent of the
solidary debtors, the debtors are NOT
released from the obligation.
The surety is liable for the payment of the
debt of another
If the surety pays the debt, he can compel
the principal debtor to reimburse to him the
entire amount which he has paid.
If an extension of time is granted by the
creditor to the principal debtor for the
payment of the obligation without the
knowledge or consent of the surety, the
latter is released from the obligation.

V. LETTERS OF CREDIT (LoC)

1. Definition and Purpose

- A letter of credit is an engagement by a bank or other person made at the request of a customer
that the issuer will honor drafts or other demands for payment upon compliance with conditions
specified in the credit.

- The use of letter of credit serves to reduce the risk of non-payment of the price in a sale
transaction. It also reduces the risk of non-delivery of the goods. (2012 BAR)

2. Rule of Strict Compliance (2012 BAR)

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 - The issuing bank or the confirming bank, as the case may be, examine the Tender Documents
(including shipping documents) and must make sure that the terms and conditions of the LoC are
strictly complied with. There is no discretion on the part of the bank to waive any requirement.
The tender documents must not only be complete but they must on their faces be in compliance
with the terms of the Credit. Documents that are not stipulated as tender documents will not be
examined (Feati Bank vs. CA 1991)

3. Independence principle

- There are at least three (3) distinct and independent contracts involved in a letter of credit namely:

a. The contract of sale between the buyer and seller

b. The contract of the buyer with the issuing bank; and

 Here, the bank agrees to issue the LoC in favor of the seller to reimbursement or
payment by the buyer of whatever is paid to the seller plus proper consideration agreed
upon by the parties.

c. the letter of credit proper.

 here, it is the LoC proper, the bank obligates itself to pay the seller or to the order of the
seller (that is, it will honor the bills or drafts drawn by the seller) after presentation to
the bank of tender documents stipulated upon, which normally includes the document
of title.

- A direct consequence of the “independence principle” is the rule that the banks only deal with
documents and not with goods, services or obligations to which relate. Example: The bank has no
duty to verify whether what has been described in the LoC or drafts or shipping documents
actually tallies with what was loaded aboard the ship.
 Fraud Exception: Under the “independence principle” the applicant cannot enjoin the
payment of the obligation of the issuing bank under the LoC based on any irregularity or
non-performance of an obligation. The exception is when there is fraud or forgery in the
underlying transactions or the tender documents.

B. TRUTH IN LENDING ACT (RA 3765)

1. Purpose (Sec. 2)

- Section 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its citizens
from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost
with a view of preventing the uninformed use of credit to the detriment of the national economy.

- Rationale in the case of UCPB vs. Sps. Beluso (2017) – To protect the users of credit from lack of
awareness of the true and cost thereof, proceeding from the experience that banks are able to conceal
such true cost by hidden charges, uncertainty of interest rates, deduction of interest from the loaned
amount and the like.

2. Obligation of Creditors to person to whom credit is extended (Sec. 4) (2000, 2009 BAR)
- Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the
transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with
rules and regulations prescribed by the Board, the following information:
a. the cash price or delivered price of the property or service to be acquired;
b. the amounts, if any, to be credited as down payment and/or trade-in;

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 c. the difference between the amounts set forth under clauses (1) and (2);
d. the charges, individually itemized, which are paid or to be paid by such person in connection
with the transaction but which are not incident to the extension of credit;
e. the total amount to be financed;
f. the finance charge expressed in terms of pesos and centavos; and
g. the percentage that the finance bears to the total amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the obligation.

3. Covered and excluded transactions

- Any loan, mortgage, deed of trust, advance, or discount; any conditional sales contract; any contract to
sell, or sale or contract of sale of property or services, either for present or future delivery, under which
part or all of the price is payable subsequent to the making of such sale or contract; any rental-purchase
contract; any contract or arrangement for the hire, bailment, or leasing of property; any option,
demand, lien, pledge, or other claim against, or for the delivery of, property or money; any purchase, or
other acquisition of, or any credit upon the security of, any obligation of claim arising out of any of the
foregoing; and any transaction or series of transactions having a similar purpose or effect.

4. Consequences of non-compliance with obligation (Sec. 6) (1991 BAR)

- Any creditor who in connection with any credit transaction fails to disclose to any person any
information in violation of this Act or any regulation issued thereunder shall be liable to such person in
the amount of P100 or in an amount equal to twice the finance charged required by such creditor in
connection with such transaction, whichever is the greater, except that such liability shall not exceed
P2,000 on any credit transaction. Action to recover such penalty may be brought by such person within
one year from the date of the occurrence of the violation, in any court of competent jurisdiction. In any
action under this subsection in which any person is entitled to a recovery, the creditor shall be liable for
reasonable attorney's fees and court costs as determined by the court.

5. BAR:

- Disclosure Requirement (2000 and 2009 BAR) – the law assures full disclosure by requiring the lender
to give the borrower all the details regarding the transactions.

- 2009 BAR – The imposition of interest and finance charges is VOID of NOT disclosed in the
disclosure statement.

C. ANTI-MONEY LAUNDERING ACT

RA 9160 as amended by RA 10365

1. Policy of the law (Sec. 2)

- It is hereby declared the policy of the State to protect and preserve the integrity and confidentiality of
bank accounts and to ensure that the Philippines shall not be used as a money laundering site for the
proceeds of any unlawful activity. Consistent with its foreign policy, the State shall extend cooperation
in transnational investigations and prosecutions of persons involved in money laundering activities
whenever committed.

2. Covered institutions and their obligations (Sec. 3 as amended by RA 10927)

a. banks, non-banks, quasi-banks, trust entities, foreign exchange dealers, pawnshops, money changers,
remittance and transfer companies and other similar entities and all other persons and their subsidiaries
and affiliates supervised or regulated by the Bangko Sentral ng Pilipinas (BSP);

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 b. insurance companies, pre-need companies and all other persons supervised or regulated by the
Insurance Commission (IC);
c. (i) securities dealers, brokers, salesmen, investment houses and other similar persons managing
securities or rendering services as investment agent, advisor, or consultant, (ii) mutual funds, close-end
investment companies, common trust funds, and other similar persons, and (iii) other entities
administering or otherwise dealing in currency, commodities or financial derivatives based thereon,
valuable objects, cash substitutes and other similar monetary instruments or property supervised or
regulated by the Securities and Exchange Commission (SEC);
d. jewelry dealers in precious metals, who, as a business, trade in precious metals, for transactions in
excess of One million pesos (P1,000,000.00);
e. jewelry dealers in precious stones, who, as a business, trade in precious stones, for transactions in
excess of One million pesos (P1,000,000.00);
f. company service providers which, as a business, provide any of the following services to third parties:
(i) acting as a formation agent of juridical persons; (ii) acting as (or arranging for another person to act
as) a director or corporate secretary of a company, a partner of a partnership, or a similar position in
relation to other juridical persons; (iii) providing a registered office, business address or
accommodation, correspondence or administrative address for a company, a partnership or any other
legal person or arrangement; and (iv) acting as (or arranging for another person to act as) a nominee
shareholder for another person; and
g. persons who provide any of the following services:
i. managing of client money, securities or other assets;
ii. management of bank, savings or securities accounts;
iii. organization of contributions for the creation, operation or management of companies; and
iv. creation, operation or management of juridical persons or arrangements, and buying and selling
business entities.
Note: Notwithstanding the foregoing, the term ‘covered persons’ shall exclude lawyers and accountants
acting as independent legal professionals in relation to information concerning their clients or where
disclosure of information would compromise client confidences or the attorney-client
relationship: Provided, That these lawyers and accountants are authorized to practice in the Philippines
and shall continue to be subject to the provisions of their respective codes of conduct and/or professional
responsibility or any of its amendments.

3. Covered and suspicious transactions (Sec. 3 as amended by RA No. 10927)

- Covered transactions of the AMLA:

a. It is a transaction in cash or other equivalent monetary instrument involving a total amount in

excess of P500,000.00 within one banking day;
b. For casino cash transaction involving an amount in excess of P5 Million or its equivalent in any
other currency.
c. A transaction with or involving jewelry dealers, dealers in precious metals and dealers in precious
stones in cash or other equivalent monetary instrument exceeding 1 Million Pesos.

- Suspicious transactions:

a. There is no Underlying legal or trade obligation, purpose, or economic justification

b. The client is not properly identified
c. The amount involved is not commensurate with the business or financial capacity of the client
d. Taking into account all known circumstances, it may be perceived that the clients transaction is
Structured in order to avoid being the subject of reporting requirements under the Act.
e. Any circumstance relating to the transaction which is observed to Deviate from the profile of the
client and/or the client past transaction with the covered institution
f. The transaction is in any way related to an Unlawful activity or offense under the AMLA that is
about to be, is being or has been committed; or
g. Any transaction that is SIMILAR or analogous to any of the foregoing.

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 4. Money laundering; how committed; unlawful activities or predicate crimes (Sec. 3 & 4 as amended by
RA 10927)

- Money laundering can be committed by any person who knowing that any instrument or property
represent, involves, or relates to the proceeds of any unlawful activity:

a. Transacts said monetary instrument or property;

b. converts, transfers, disposes of, moves, acquires, possesses or uses said monetary instrument or
property;
c. conceals, disguises the nature, source, location, disposition, movement or ownership of or rights
with respect to said monetary instrument or property;
d. attempts or conspires to commit money laundering offenses
e. aids, abets, assists in or counsels the commission of the money laundering offenses;
f. performs or fails to perform any act as a result of which he facilitates the offense of money
laundering;
g. This is also committed by failure to report to AMLC by any covered person knowing that a
covered or suspicious transaction is required under AMLA to be reported thereto.

- Unlawful activity" refers to any act or omission or series or combination thereof involving or having
relation to the following: among others:

a. Kidnapping for ransom

b. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of Republic Act No. 9165, otherwise known as
the Comprehensive Dangerous Drugs Act of 2002
c. Section 3 paragraphs B, C, E, G, H and I of Republic Act No. 3019, as amended; otherwise
known as the Anti-Graft and Corrupt Practices Act;
d. Plunder
e. Robbery and extortion
f. Jueteng and Masiao
g. Piracy on the high seas
h. Qualified theft
i. Swindling
j. Smuggling
k. Violations under Republic Act No. 8792, otherwise known as the Electronic Commerce Act of
2000;
l. Hijacking and other violations;
m. Terrorism and conspiracy to commit terrorism
n. Bribery and Corruption of Public Officers
o. Malversation of Public Funds and Property Penal Code, as amended;
p. Forgeries and Counterfeiting

5. Anti-money Laundering council; functions (Sec. 7)

- Creation of Anti-Money Laundering Council (AMLC). – The Anti-Money Laundering Council is hereby
created and shall be composed of the Governor of the Bangko Sentral ng Pilipinas as chairman, the
Commissioner of the Insurance Commission and the Chairman of the Securities and Exchange
Commission as members. The AMLC shall act unanimously in the discharge of its functions as defined
hereunder:

a. to require and receive covered transaction reports from covered institutions;

b. to issue orders addressed to the appropriate Supervising Authority or the covered institution to
determine the true identity of the owner of any monetary instrument or property subject of a
covered transaction report or request for assistance from a foreign State, or believed by the
Council, on the basis of substantial evidence to be in whole or in part, whenever located,
representing, involving, or related to, directly or indirectly, in any manner or by any means, the
proceeds of an unlawful activity;

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 c. to institute civil forfeiture proceedings and all other remedial proceedings through the Office of
the Solicitor General;
d. to cause the filing of complaints with the Department of Justice or the Ombudsman for the
prosecution of money laundering offenses;
e. to initiate investigations of covered transactions, money laundering activities and other violations
of this Act;
f. to apply before the Court of Appeals, ex parte, for the freezing of any monetary instrument or
property alleged to be laundered, proceeds from, or instrumentalities used in or intended for use
in any unlawful activity as defined in Section 3(i) hereof;
g. to implement such measures as may be necessary and justified under this Act to counteract
money laundering;
h. to receive and take action in respect of, any request from foreign states for assistance in their own
anti-money laundering operations provided in this Act;
i. to develop educational programs on the pernicious effects of money laundering, the methods and
techniques used in money laundering, the viable means of preventing money laundering and the
effective ways of prosecuting and punishing offenders; and
j. to enlist the assistance of any branch, department, bureau, office, agency or instrumentality of the
government, including government-owned and –controlled corporations, in undertaking any and
all anti-money laundering operations, which may include the use of its personnel, facilities and
resources for the more resolute prevention, detection and investigation of money laundering
offenses and prosecution of offenders.

6. Safe harbor provision (Sec. 9c)

- Safe harbor provision provides that NO administrative, civil or criminal proceedings shall lie against any
person for having covered transaction report in the regular performance of his duties and in good faith
whether or not such reporting results in any criminal prosecution under this act or any other law.

7. Application for freeze orders (Sec. 10)

a. Who may apply

- The AMLC shall file an ex parte petition with the CA, through the Solicitor General, a petition for
the freezing of any monetary instrument or property that is in any way related to an unlawful
activity.

b. Effectivity
- The freeze order issued by the Cout of Appeals shall be effective immediately and shall not
exceed six (6) months. Provided, That if there is no case filed against a person whose account has
been frozen within the period determined by the Court of Appeals, not exceeding six (6) months,
the freeze order shall be seemed ipso facto lifted:

c. Duties of covered institutions:

i. Implement freeze order;
ii. Freeze related accounts
iii. Furnish Copy of Freeze order to owner or holder
iv. submit detailed return

8. Authority to inquire into bank deposits (Sec. 11)

- AMLC may inquire into or examine any particular deposit or investment with any banking institution
or non-bank financial institution upon order of any competent court in cases of violation of this Act
when it has been established that there is probable cause that the deposits or investments involved are
in any way related to a money laundering offense: Provided, That this provision shall not apply to
deposits and investments made prior to the effectivity of this Act.

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 - Note: By authority of the AMLC, the AMLC secretariat shall file with before the CA, through the
OSGm an ex parte application for the issuance of Bank Inquiry Order

- The AMLC shall issue an ex parte order authorizing the AMLC secretariat to inquire into or examine
any particular deposit or investment account, including related accounts, with any banking institution
on non-bank, financial institution and other subsidiaries. and affiliates when it has been established that
probable cause exists that the deposits or investments involved, including related accounts, are in any
way related to any of the following unlawful activities:

a. Kidnapping for ransom

b. Violation of RA 9165
c. Hijacking, destructive arson and murder
d. Terrorism and conspiracy to commit terrorism
e. Financing of terrorism

D. FOREIGN INVESTMENT ACT

REPUBLIC ACT No.7042 as amended by RA 8179

AN ACT TO PROMOTE FOREIGN INVESTMENTS, PRESCRIBE THE PROCEDURES FOR

REGISTERING ENTERPRISES DOING BUSINESS IN THE PHILIPPINES, AND FOR OTHER
PURPOSES

1. Policy of the law (Sec. 2)

- It is the policy of the State to attract, promote and welcome productive investments from foreign
individuals, partnerships, corporations, and governments, including their political subdivisions, in
activities which significantly contribute to national industrialization and socioeconomic development
to the extent that foreign investment is allowed in such activity by the Constitution and relevant laws.

2. Definition of Terms (Sec. 3)

a. Philippine national (2013 BAR)

- mean a citizen of the Philippines or a domestic partnership or association wholly owned by

citizens of the Philippines; or a corporation organized under the laws of the Philippines of which
at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held
by citizens of the Philippines; or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least sixty (60%) of the fund
will accrue to the benefit of the Philippine nationals: Provided, That where a corporation and its
non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the capital stocks outstanding and entitled to vote of
both corporations must be owned and held by citizens of the Philippines and at least sixty percent
(60%) of the members of the Board of Directors of both corporations must be citizens of the
Philippines, in order that the corporations shall be considered a Philippine national.

b. Foreign Investment

- shall mean as equity investment made by a non-Philippine national in the form of foreign
exchange and/or other assets actually transferred to the Philippines and duly registered with the
Central Bank which shall assess and appraise the value of such assets other than foreign
exchange.

c. Doing business in the Philippines (1995, 2002, 2013 BAR)

- shall include:

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 i. soliciting orders, service contracts, opening offices, whether called "liaison" offices or
branches;
ii. 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;
iii. participating in the management, supervision or control of any domestic business, firm,
entity or corporation in the Philippines;
iv. 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.

- 2002 BAR: Continuity test – doing business implies a community of commercial dealings and
arrangements and contemplates to some extent the performance of acts or works or the exercise of
some functions normally incident to and in progressive of, the purpose and object of its
organization.

d. Export Enterprise (2013 BAR)

- an enterprise wherein manufacturer, processor or service (including tourism) enterprise exports

(60%) or more of its output, or wherein a trader purchases products domestically and exports 60%
or more of such purchases.

e. Domestic Market Enterprise

- shall mean an enterprise which produces goods for sale, or renders services to the domestic
market entirely or if exporting a portion of its output fails to consistency export at least 60%
thereof.

3. Registration of investments of non-Philippine nationals (Sec. 5)

When may a non-Philippine national do business in the Philippines?

- Registration of Investments of Non-Philippine Nationals. - Without need of prior approval, a non-

Philippine national, as that term is defined in Section 3 a), and not otherwise disqualified by law may
upon registration with the Securities and Exchange Commission (SEC), or with the Bureau of Trade
Regulation and Consumer Protection (BTRCP) of the Department of Trade and Industry in the case of
single proprietorships, do business as defined in Section 3 (d) of this Act or invest in a domestic
enterprise up to one hundred percent (100%) of its capital, unless participation of non-Philippine
nationals in the enterprise is prohibited or limited to a smaller percentage by existing law and/or
limited to a smaller percentage by existing law and/or under the provisions of this Act.

4. Foreign investments in export enterprises (Sec. 6)

What are the rules governing foreign investments in export enterprises?

- Foreign Investments in Export Enterprises. - Foreign investment in export enterprises whose

products and services do not fall within Lists A and B of the Foreign Investment Negative List
provided under Section 8 hereof is allowed up to one hundred percent (100%) ownership.

What is the consequence if an export enterprise fails to meet the export ratio requirement?

- The SEC or BTRCP shall order the non-complying export enterprise to reduce its sales to the domestic
market to not more than forty percent (40%) of its total production; failure to comply with such SEC or
BTRCP order, without justifiable reason, shall subject the enterprise to cancellation of SEC or BTRCP
registration, and/or the penalties.

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 5. Foreign investments in domestic market enterprises (Sec. 7) (2013 BAR)

- Foreign Investments in Domestic Market Enterprises. – Non-Philippine nationals may own up to one
hundred percent (100%) of domestic market enterprises unless foreign ownership therein is prohibited
or limited by the Constitution and existing law or the Foreign Investment Negative List under Section
8 hereof

6. Foreign Investment Negative List (Sec. 8)

- List of Investment Areas Reserved to Philippine Nationals (Foreign Investment Negative List). – The
Foreign Investment Negative List shall have two (2) component lists: A and B:

a) List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the
Constitution and specific laws.

No FOREIGN EQUITY:

i. Mass media except recording and internet business

ii. Practice of professions including radiologic and x-ray technology, criminology, law and
Marine deck officers and marine engine officers
iii. Retail trade enterprises with paid up capital of less than 2,500 dollars
iv. Cooperatives
v. Organization and operation of private detective, watchmen or security guards agencies
vi. Small-scale training
vii. Utilization of marine resources in archipelagic waters, territorial sea and exclusive
economic zone as well a small-scale utilization of natural resources in rivers, bays and
lagoons
viii. Ownership, operation and management of cokpits
ix. Manufacture, repair, stockpiling and/or distribution of nuclear weapons
x. Manufacture, repair, stockpiling and/or distribution of biological, chemical and
radiologist weapons and anti-personal mines
xi. Manafacture of firecrackers and other pyrotechnic devises.

Up to 25% Foreign Equity

i. Private recruitment, whether local or overseas employment

ii. Contracts for the construction of defense-related structures.

Up to 30% Foreign Equity:

i. Advertising

Up to 40% Foreign Equity:

i. Contracts for the construction and repair of locally-funded public works except projects
which are foreign-funded or assisted and required to undergo international competitive
bidding.
ii. Exploration, development and utilization of natural resources
iii. Ownership of Private lands
iv. Operation of public utilities and such other like businesses or services not covered by the
definition of public utilities
v. Educational institutions other than those established by religious groups and mission
boards, for foreign diplomatic personnel and their dependents, and other foreign
temporary residents or short-term high-level skills development that do not form part of
the formal educations system;

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 vi. Culture, production, milling processing, trading except retailing of rice and corn and
acquiring, by barter, purchase or otherwise, rice and corn and by-products thereof;
vii. Contracts for the supply of materials, goods and commodities to government-owned or
controlled corporation, company, agency or municipal corporation;
viii. Operation of deed sea commercial fishing vessels
ix. Ownership of condominium units
x. Private radio communications network

b) List B shall contain the areas of activities and enterprises regulated pursuant to law:

Up to 40% foreign equity:

i. Manufacture, repair, storage and/or distribution of products and/or ingredients requiring

PNP clearance
ii. Manufacture, repair, storage and/or distribution of products requiring Department of
National defense clearance
iii. Manufacture and distribution of dangerous drugs
iv. Sauna and steam bathhouses, massage clinics and other like activities regulated by law
because of risks posed to public health and morals except wellness centers.
v. Domestic market enterprises with paid up equity capital of less than the equivalent of
200,000 dollars.
vi. Domestic market enterprises which involve advanced technology or employ at least 50
direct employees with paid-in equity capital of less than the equivalent of 100,000 US
dollars

E. INSOLVENCY LAWS

A. Concurrence and preference of credits

1. Meaning and concurrence and preference

- Concurrence of credits – when the same specific property of the debtor is subjected to the claims of
several creditors and the value of such property of the debtor is insufficient to pay in full all the
creditors.

- Preference of credit bestows upon the preferred creditor an advantage of having his credit satisfied
first ahead of other claims which may be established against the debtor. It is a method adopted to
determine and specify the order in which credits should be paid in the final distribution of the
proceeds of the insolvent’s asset.

2. Exempt properties

a. Present property
i. family home
ii. right to receive support
iii. properties exempt form execution under Rule 39, Sec. 13

b. Property in custodia legis

c. Property held for public uses

3. Classification of credits

a. Special preferred credits listed in Articles 2241 and 2242

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 b. Ordinary preferred credits listed in Art. 2244
- The specially preferred credits must be discharged first out of the proceeds of the property to
which they relate, before ordinary preferred creditors may lay claim to any part of such
proceeds.

c. Common credits (non-preferred) under Art. 2245

4. Order of preference of credits

There are two tier in order of preferences:

a. First tier – includes only taxes, duties and fees due on a specific movable or immovable property
b. Second tier – all other preferred (non-tax) credits. These credits are to be satisfied pari passu and
pro-rata, out of any residual value of the specific property to which such other credits relate.

B. Financial Rehabilitation and Insolvency Act of 2010 – RA 10142

- The FRIA which lapsed into law expressly repealed the Insolvency Law.

1. Definition of insolvency

- refer to the financial condition of a debtor that is generally unable to pay its or his liabilities as they
fall due in the ordinary course of business or has liabilities that are greater than its or his assets

- The term debtor includes sole proprietor, partnership or corporation. It does not include banks,
insurance companies, pre need companies and local government agencies or units

2. Suspension of payments

a. What is the remedy available to an insolvent individual debtor?

- An individual debtor who, possessing sufficient property to cover all his debts but foreseeing
the impossibility of meeting them when they respectively fall due, may file a verified petition
that he be declared in the state of suspension of payments (Sec. 94)

b. Prohibitions which will be imposed upon the debtor while the proceedings relative to the
suspension of payments are pending?
i. forbidding the individual debtor from selling, transferring, encumbering or disposing in any
manner of his property, except those used in the ordinary operations of commerce or of
industry in which the petitioning individual debtor is engaged;
ii. prohibiting the individual debtor from making any payment outside of the necessary or
legitimate expenses of his business or industry
c. What is suspension order?
- Upon motion filed by the individual debtor, the court may issue an order suspending any
pending execution against the individual debtor

3. Rehabilitation

- shall refer to the restoration of the debtor to a condition of successful operation and solvency, if it is
shown that its continuance of operation is economically feasible and its creditors can recover by
way of the present value of payments projected in the plan, more if the debtor continues as a going
concern than if it is immediately liquidated.

a. Types
i. Court-supervised rehabilitation: (a) Voluntary proceedings; (b) involuntary proceedings
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 Voluntary Rehabilitation Involuntary Rehabilitation
As to who may file 1. The owner of a sole Any creditor or group of creditors
proprietorship with a claim of, or the aggregated
of whose claim is, which is higher
2. The majority of the partners in a of:
partnership
1. At least P1,000,000.00
3. The corporation upon majority
vote of the BoD or BoT 2. At least 25% of the subscribed
representing at least ½ of the OCS capital stock or partners
contributions
4. An insolvent debtor

5. A group of solidary debtors in

certain cases

As to grounds of 1. Foresight of inability to meet 1. There is no genuine issue of

filing debts when they respectively fall
due
2. Financial distress that would
likely adversely affect financial
condition and/or operations
fact or law on the claims of the
petitioner and that the due and
demandable payments therein
have not been made for at least 60
days
2. The debtor has failed generally
to meet its liability as they fall
due; or

3. At least one creditor has

initiated foreclosure proceedings
against the debtor that will
prevent the paying its debts.

ii. Pre-negotiated rehabilitation (Sec. 76)

- An insolvent debtor, by itself or jointly with any of its creditors, may file a verified
petition with the court for the approval of a pre-negotiated Rehabilitation Plan which
has been endorsed or approved by creditors holding at least two-thirds (2/3) of the total
liabilities of the debtor, including secured creditors holding more than fifty percent
(50%) of the total secured claims of the debtor and unsecured creditors holding more
than fifty percent (50%) of the total unsecured claims of the debtor

iii. Out-of-court or Informal Restructuring Rehabilitation Plan (OCRA)

b. Commencement order
- If the court finds the petition for rehabilitation to be sufficient in form and substance, it shall
be within 5 working days from the filing of the petition issue a Commencement Order (CO).
The C.O. shall be effective for the duration of the rehabilitation proceedings.

c. Stay or suspension order - shall refer to an order issued in conjunction with the commencement
order that shall:

i. Suspend all actions or proceedings in court or otherwise, for the enforcement of Claims
against the debtor;
ii. Suspend all actions to enforce any judgment, attachment or other provisional remedies
against the debtor;
iii. Prohibit the debtor from Selling, encumbering, transferring or disposing in any manner
any of its properties except in the ordinary course of business; and
iv. Prohibit the debtor from making any Payment of its liabilities outstanding as of the
commencement date except as may be provided herein.

d. Rehabilitation receiver
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 - shall refer to the person or persons, natural or juridical, appointed as such by the court
pursuant to this Act and which shall be entrusted with such powers and duties as set forth in
Financial Rehabilitation Rules of Procedure.

- Where the rehabilitation receiver is a juridical entity, juridical entity and its designated
representative are solidary liable for all the obligations and responsibilities of a rehabilitation
receiver.

- The rehabilitation receiver shall be deemed to be an officer of the court with the principal duty
of:

i. preserving and maximizing the value of the assets of the debtor during the
rehabilitation proceedings.
ii. Determining the viability of the rehabilitation of the debtor
iii. Preparing and recommending a Rehabilitation Plan to the court
iv. Implementing the approved rehabilitation

e. Management committee

- When appointed the management committee shall have the power to take custody and control
all assets and properties owned or possessed by the debtor. It shall take the place of the
management and governing body of the debtor, and assume their powers, rights and
responsibilities. It may overrule or revoke the actions of the previous management or the
governing body of the debtor.

f. Rehabilitation plan (RP)

- refer to a plan by which the financial well-being and viability of an insolvent debtor can be
restored using various means including, but not limited to, debt forgiveness, debt rescheduling,
reorganization or quasi-reorganization, dacion en pago, debt-equity conversion and sale of the
business (or parts of it) as a going concern, or setting-up of new business entity as prescribed
in Section 62 hereof, or other similar arrangements as may be approved by the court or
creditors.

- The rehabilitation plan shall be deemed approved by the creditors only when it is approved by
each classes or creditors whose rights are adversely modified or affected by the plan.
Disapproval by at least one class of creditors shall produce the approval of the plan.

- The following are the rules in the approval of the Rehabilitation Plan:
i. The rehabilitation plan shall be deemed rejected unless approved by all classes of
creditors whose rights are adversely affected or modified by the plan;
ii. The plan shall be deemed approved by a certain class of creditors if members of the
said class holding more 50% of the total claims of the said class vote in favor of the
plan.

- There is failure of rehabilitation in the following cases:

i. Dismissal of the petition by the court
ii. Failure to submit RP
iii. RP is not confirmed by the court
iv. Under the RP submitted by the debtor, there is NO substantial likelihood that the
debtor can be rehabilitated within a reasonable period
v. The RP or its amendment approved by the court, the debtor fails to perform its
obligation
vi. There is finding that fraud was committed in securing the approval of the RP
vii. Failure of the debtor to comply with the Rules of Court

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 g. Cram down effect

- The cram-down effects provides that an OCRA that is approved pursuant to this Rule shall
have the same legal effect as the confirmation of a rehabilitation plan under a court-supervised
rehabilitation. The cram-down principle consists of two things:
i. The courts approval of the rehabilitation plan ever over the opposition of creditors
holding a majority of the total liabilities of the debtor, if in its judgment, the
rehabilitation of the debtor is FEASIBLE and opposition of the creditors is manifestly
unreasonable.
ii. The binding effect of the plan upon the debtor and all person who may be affected by
it, including the creditors, whether or not such persons have participated in the
proceedings or opposed the plan.

4. Liquidation

a. Types
i. Voluntary liquidation (Sec. 90) – initiated and applied for by the insolvent debtor himself
ii. Involuntary liquidation (Sec. 91) – are initiated by the creditors of the insolvent debtor after
sufficient demonstration that their claims are uncontested, due, and demandable.

b. Conversion of rehabilitation to liquidation proceedings

- During the pendency of court supervised or pre-negotiated rehabilitation proceedings, the

court may order the CONVERSION of REHABILITATION to LIQUIDATION proceedings
in the following cases:

1) Pursuant to the report of the rehabilitation receiver where (a) The debtor is
INSOLVENT; and (b) There is NO substantial likelihood for the debtor to be
successfully rehabilitated.
2) If NO RP is CONFIRMED within the said period
3) If the termination of proceedings is due to failure of rehabilitation or dismissal of the
petition for reasons other than technical ground;
4) By filing a MOTION in the same court where the rehabilitation proceedings are
pending to convert the rehabilitation proceedings into liquidation proceedings.
5) At any other time upon the RECOMMENDATION of the rehabilitation receiver
that the rehabilitation of the debtor is NOT feasible.

c. Liquidation order

- Section 112. Liquidation Order. - The Liquidation Order shall:

a) declare the debtor insolvent;

b) order the liquidation of the debtor and, in the case of a juridical debtor, declare it as
dissolved;
c) order the sheriff to take possession and control of all the property of the debtor, except
those that may be exempt from execution;
d) order the publication of the petition or motion in a newspaper of general circulation once
a week for two (2) consecutive weeks;
e) direct payments of any claims and conveyance of any property due the debtor to the
liquidator;
f) prohibit payments by the debtor and the transfer of any property by the debtor;
g) direct all creditors to file their claims with the liquidator within the period set by the rules
of procedure;
h) authorize the payment of administrative expenses as they become due;

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 i) state that the debtor and creditors who are not petitioner/s may submit the names of other
nominees to the position of liquidator; and
j) set the case for hearing for the election and appointment of the liquidator, which date
shall not be less than thirty (30) days nor more than forty-five (45) days from the date of
the last publication.

- Section 113. Effects of the Liquidation Order. - Upon the issuance of the Liquidation Order:

a) the juridical debtor shall be deemed dissolved and its corporate or juridical existence
terminated;
b) legal title to and control of all the assets of the debtor , except those that may be exempt
from execution, shall be deemed vested in the liquidator or, pending his election or
appointment, with the court;
c) all contracts of the debtor shall be deemed terminated and/or breached, unless the
liquidator, within ninety (90) days from the date of his assumption of office, declares
otherwise and the contracting party agrees;
d) no separate action for the collection of an unsecured claim shall be allowed. Such actions
already pending will be transferred to the Liquidator for him to accept and settle or
contest. If the liquidator contests or disputes the claim, the court shall allow, hear and
resolve such contest except when the case is already on appeal. In such a case, the suit
may proceed to judgment, and any final and executor judgment therein for a claim
against the debtor shall be filed and allowed in court; and
e) no foreclosure proceeding shall be allowed for a period of one hundred eighty (180) days.

d. Rights of secured creditors (Sec. 114)

- Rights of Secured Creditors. - The Liquidation Order shall not affect the right of a secured
creditor to enforce his lien in accordance with the applicable contract or law. A secured
creditor may:

a) waive his right under the security or lien , prove his claim in the liquidation proceedings
and share in the distribution of the assets of the debtor; or
b) maintain his rights under the security or lien:

e. Liquidator (Sec. 115)

- Election of Liquidator. - Only creditors who have filed their claims within the period set by the
court, and whose claims are not barred by the statute of limitations, will be allowed to vote in
the election of the liquidator. A secured creditor will not be allowed to vote, unless: (a) he
waives his security or lien; or (b) has the value of the property subject of his security or lien
fixed by agreement with the liquidator, and is admitted for the balance of his claim.

- The creditors entitled to vote will elect the liquidator in open court. The nominee receiving the
highest number of votes cast in terms of amount of claims, ad who is qualified pursuant to
Section 118 hereof, shall be appointed as the liquidator.

f. Liquidation of plan (Sec. 129)

- The Liquidation Plan. - Within three (3) months from his assumption into office, the
Liquidator shall submit a Liquidation Plan to the court. The Liquidation Plan shall, as a
minimum enumerate all the assets of the debtor and a schedule of liquidation of the assets and
payment of the claims.

- The Liquidation Plan and its implementation shall ensure the concurrence and prefererence of
credits as enumerated in the Civil Code.

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F. PHILIPPINE COMPETITION ACT
REPUBLIC ACT No. 10667

AN ACT PROVIDING FOR A NATIONAL COMPETITION POLICY PROHIBITING ANTI-

COMPETITIVE AGREEMENTS, ABUSE OF DOMINANT POSITION AND ANTI-COMPETITIVE
MERGERS AND ACQUISITIONS, ESTABLISHING THE PHILIPPINE COMPETITION
COMMISSION AND APPROPRIATING FUNDS THEREFOR

1. Definitions and scope of application

- Dominant position refers to a position of economic strength that an entity or entities hold which
makes it capable of controlling the relevant market independently from any or a combination of the
following: competitors, customers, suppliers, or consumers.

- Relevant market refers to the market in which a particular good or service is sold and which is a
combination of the relevant product market and the relevant geographic market, defined as follows:

(1) A relevant product market comprises all those goods and/or services which are regarded as
interchangeable or substitutable by the consumer or the customer, by reason of the goods and/or
services’ characteristics, their prices and their intended use; and

(2) The relevant geographic market comprises the area in which the entity concerned is involved in
the supply and demand of goods and services, in which the conditions of competition are
sufficiently homogenous and which can be distinguished from neighboring areas because the
conditions of competition are different in those areas.

2. Powers and Functions of the PCC (Sec. 12)

- Powers and Functions. — The Commission shall have original and primary jurisdiction over the
enforcement and implementation of the provisions of this Act, and its implementing rules and regulations.
The Commission shall exercise the following powers and functions:

a) Conduct inquiry, investigate, and hear and decide on cases involving any violation of this Act

b) Review proposed mergers and acquisitions , determine thresholds for notification, determine the
requirements and procedures for notification, and upon exercise of its powers to review, prohibit
mergers and acquisitions that will substantially prevent, restrict, or lessen competition in the
relevant market;

c) Monitor and undertake consultation with stakeholders and affected agencies for the purpose of
understanding market behavior;

d) Upon finding, based on substantial evidence, that an entity has entered into an anti-competitive
agreement or has abused its dominant position after due notice and hearing, stop or redress the same,
by applying remedies, such as, but not limited to, issuance of injunctions

e) Conduct administrative proceedings, impose sanctions, fines or penalties;

3. Prohibited Acts (Sec. 14)

a. Anti-competitive agreements (meaning those substantially hamper and stifle competition)

- Anti-Competitive Agreements.

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 a) PROHIBITED PER SE: The following agreements, between or among competitors, are per
se prohibited:

(1) Restricting competition as to price, or components thereof, or other terms of trade;

(2) Fixing price at an auction or in any form of bidding including cover bidding, bid
suppression, bid rotation and market allocation and other analogous practices of bid
manipulation;

b) PROHIBITED DEPENDING ON EFFECT: The following agreements, between or among

competitors which have the object or effect of substantially preventing, restricting or lessening
competition shall be prohibited:

(1) Setting, Kmiting, or controlling production, markets, technical development, or investment;

(2) Dividing or sharing the market, whether by volume of sales or purchases, territory, type of
goods or services, buyers or sellers or any other means;

c) CATCH ALL PROVISION: Agreements other than those specified in (a) and (b) of this
section which have the object or effect of substantially preventing, restricting or lessening
competition shall also be prohibited:

- An entity that controls, is controlled by, or is under common control with another entity or entities,
have common economic interests, and are not otherwise able to decide or act independently of each
other, shall not be considered competitors for purposes of this section.

b. Abuse of dominant position (Sec. 15)

- Abuse of Dominant Position. – It shall be prohibited for one or more entities to abuse their
dominant position by engaging in conduct that would substantially prevent, restrict or lessen
competition. Example of abuse:

a) Selling goods or services below cost with the object of driving competition out of the relevant
market:

b) Imposing barriers to entry or committing acts that prevent competitors from growing within
the market in an anti-competitive manner except those that develop in the market as a result of
or arising from a superior product or process, business acumen, or legal rights or laws;

c) Making a transaction subject to acceptance by the other parties of other obligations which, by
their nature or according to commercial usage, have no connection with the transaction;

d) Setting prices or other terms or conditions that discriminate unreasonably between customers
or sellers of the same goods or services, where such customers or sellers are
contemporaneously trading on similar terms and conditions, where the effect may be to lessen
competition substantially:

e) Imposing restrictions on the lease or contract for sale or trade of goods or services concerning
where, to whom, or in what forms goods or services may be sold or traded, such as fixing
prices, giving preferential discounts or rebate upon such price, or imposing conditions not to
deal with competing entities, where the object or effect of the restrictions is to prevent, restrict
or lessen competition substantially.

f) Making supply of particular goods or services dependent upon the purchase of other goods or
services from the supplier which have no direct connection with the main goods or services to
be supplied;

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 g) Directly or indirectly imposing unfairly low purchase prices for the goods or services of,
among others, marginalized agricultural producers, fisherfolk, micro-, small-, medium-scale
enterprises, and other marginalized service providers and producers;

h) Directly or indirectly imposing unfair purchase or selling price on their competitors,

customers, suppliers or consumers; and

i) Limiting production, markets or technical development to the prejudice of consumers:

- Provided, That nothing in this Act shall be construed or interpreted as a prohibition on having a
dominant position in a relevant market or on acquiring, maintaining and increasing market share
through legitimate means that do not substantially prevent, restrict or lessen competition.

- Provided, further, That any conduct which contributes to improving production or distribution of
goods or services within the relevant market, or promoting technical and economic progress while
allowing consumers a fair share of the resulting benefit may not necessarily be considered an abuse
of dominant position.

- Provided, finally, That the foregoing shall not constrain the Commission or the relevant regulator
from pursuing measures that would promote fair competition or more competition as provided in
this Act.

- No abuse/Valid Agreements:

a) Permissible franchising, licensing, exclusive merchandising or exclusive distributorship

agreements such as those which give each party the right to unilaterally terminate the
agreement; or

b) Agreements protecting intellectual property rights, confidential information, or trade secrets.

c. Prohibited mergers and acquisitions (Sec. 20)

- Prohibited. Mergers and Acquisitions. – Merger or acquisition agreements that substantially

prevent, restrict or lessen competition in the relevant market or in the market for goods or
services as may be determined by the Commission shall be prohibited.

d. Exceptions (Sec. 21)

- Exemptions from Prohibited. Mergers and Acquisitions. – Merger or acquisition agreement

prohibited under Section 20 of this Chapter may, nonetheless, be exempt from prohibition by the
Commission when the parties establish either of the following:

a) The concentration has brought about or is likely to bring about gains in efficiencies that are
greater than the effects of any limitation on competition that result or likely to result from the
merger or acquisition agreement; or

b) A party to the merger or acquisition agreement is faced with actual or imminent financial
failure, and the agreement represents the least anti-competitive arrangement among the known
alternative uses for the failing entity’s assets:

- Provided, That an entity shall not be prohibited from continuing to own and hold the stock or other
share capital or assets of another corporation which it acquired prior to the approval of this Act or
acquiring or maintaining its market share in a relevant market through such means without violating
the provisions of this Act;

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 - Provided, further, That the acquisition of the stock or other share capital of one or more
corporations solely for investment and not used for voting or exercising control and not to
otherwise bring about, or attempt to bring about the prevention, restriction, or lessening of
competition in the relevant market shall not be prohibited.

4. Covered Transactions

a) Thresholds for compulsory notification (Sec. 17)

- Parties to the merger or acquisition agreement wherein the value of the transaction exceeds one
billion pesos (P1,000,000,000.00) are prohibited from consummating their agreement until
thirty (30) days after providing notification to the Commission in the form and containing the
information specified in the regulations issued by the Commission.

- An agreement consummated in violation of this requirement to notify the Commission shall be

considered void and subject the parties to an administrative fine of one percent (1%) to five
percent (5%) of the value of the transaction.

- When the above periods have expired and no decision has been promulgated for whatever reason,
the merger or acquisition shall be deemed approved and the parties may proceed to implement or
consummate it.

- In the case of the merger or acquisition of banks, banking institutions, building and loan
associations, trust companies, insurance companies, public utilities, educational institutions and
other special corporations governed by special laws, a favorable or no-objection ruling by the
Commission shall not be construed as dispensing of the requirement for a favorable
recommendation by the appropriate government agency under Section 79 of the Corporation Code
of the Philippines.

- A favorable recommendation by a governmental agency with a competition mandate shall give

rise to a disputable presumption that the proposed merger or acquisition is not violative of this Act.

5. Determining the relevant market (Sec. 24)

- For purposes of determining the relevant market, the following factors, among others, affecting the
substitutability among goods or services constituting such market and the geographic area delineating
the boundaries of the market shall be considered:

a) The possibilities of substituting the goods or services in question, with others of domestic or foreign
origin, considering the technological possibilities, extent to which substitutes are available to
consumers and time required for such substitution;
b) The cost of distribution of the good or service, its raw materials, its supplements and substitutes
from other areas and abroad, considering freight, insurance, import duties and non-tariff
restrictions; the restrictions imposed by economic agents or by their associations; and the time
required to supply the market from those areas;
c) The cost and probability of users or consumers seeking other markets; and
d) National, local or international restrictions which limit access by users or consumers to alternate
sources of supply or the access of suppliers to alternate consumers.

6. Determining control or dominance market (Sec. 27)

- Market Dominant Position. – In determining whether an entity has market dominant position for
purposes of this Act, the Commission shall consider the following:

a) The share of the entity in the relevant market and whether it is able to fix prices unilaterally or to
restrict supply in the relevant market;

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 b) The existence of barriers to entry and the elements which could foreseeably alter both said barriers
and the supply from competitors;
c) The existence and power of its competitors;
d) The possibility of access by its competitors or other entities to its sources of inputs;
e) The power of its customers to switch to other goods or services;
f) Its recent conducts; and
g) Other criteria established by the regulations of this Act.

- There shall be a rebuttable presumption of market dominant position if the market share of an entity in the
relevant market is at least fifty percent (50%), unless a new market share threshold is determined by the
Commission for that particular sector.

7. Determining existence of anti-competitive conduct (Sec. 26)

- Determination of Anti-Competitive Agreement or Conduct. – In determining whether anti-competitive

agreement or conduct has been committed, the Commission shall:

a) Define the relevant market allegedly affected by the anti-competitive agreement or conduct,
following the principles laid out in Section 24 of this Chapter;

b) Determine if there is actual or potential adverse impact on competition in the relevant market
caused by the alleged agreement or conduct, and if such impact is substantial and outweighs the
actual or potential efficiency gains that result from the agreement or conduct;

c) Adopt a broad and forward-looking perspective, recognizing future market developments, any
overriding need to make the goods or services available to consumers, the requirements of large
investments in infrastructure, the requirements of law, and the need of our economy to respond to
international competition, but also taking account of past behavior of the parties involved and
prevailing market conditions;

d) Balance the need to ensure that competition is not prevented or substantially restricted and the risk
that competition efficiency, productivity, innovation, or development of priority areas or industries
in the general interest of the country may be deterred by overzealous or undue intervention; and

e) Assess the totality of evidence on whether it is more likely than not that the entity has engaged in
anti-competitive agreement or conduct including whether the entity’s conduct was done with a
reasonable commercial purpose such as but not limited to phasing out of a product or closure of a
business, or as a reasonable commercial response to the market entry or conduct of a competitor.

8. Forbearance (refrain) by the PCA

- Forbearance. – The Commission may forbear from applying the provisions of this Act, for a limited
time, in whole or in part, in all or specific cases, on an entity or group of entities, if in its determination:

a) Enforcement is not necessary to the attainment of the policy objectives of this Act;
b) Forbearance will neither impede competition in the market where the entity or group of entities
seeking exemption operates nor in related markets; and
c) Forbearance is consistent with public interest and the benefit and welfare of the consumers.

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