COMMERCE - branch of human activity; purpose is to bring products to the consumer through operations habitually and

with intent of gain

COMMERCIAL LAW - branch of private law which regulates the juridical relations arising from commercial acts

CHARACTERISTICS OF COMMERCIAL LAW:

1. universal
2. uniform
3. equitable
4. customary
5. progressive

PORTIONS OF CODE OF COMMERCE STILL APPLICABLE:

1. merchants; book of merchants and general provision of contracts
2. joint account association
3. commercial barter
4. transfers of non-negotiable credits
5. commercial contracts of overland transportation
6. letters of credit
7. maritime commerce

OTHERS:
1. Commerce - bringing products from the manufacturers to the consumers
2. Characteristics of Commerce:
a. habituality
b. rapidity - if period is fixed, debtor in delay without need of demand; if contract does not fix period, 10 days
c. intent to join
3. Merchant:
a. Individuals - legal capacity, 21 years, or subject to parental authority, habitually engaged in commerce
b. Juridical Persons - commercial and industrial company organized in accordance with law, habitually engaged
in business
4. General Rule: Minors cannot engage in commerce
Exceptions:
a. to continue business of deceased parents through guardian
b. court authorizes guardian to place minor and property in business
c. minor is an alien and his national law allows him to be a merchant
5. Which persons are not allowed to engage in commerce?
a. suffering accessory penalty of civil interdiction (reclusion perpetua and reclusion temporal)
b. those judicially declared insolvent until they can obtain their discharge
c. prohibited by Constitution and special laws
6. Aliens
a. capacitated under his national law to engage in business
b. engaged in the business in the Philippines not reserved for the Filipinos
c. after securing license and BOI certificate
7. Family Code: Either spouse may engage in business; when objected to by the other, court will look into valid grounds,
i.e. serious and moral grounds
8. BOI Certificate must be obtained by:
a. alien
b. foreign firm
9. Meaning of Philippine National
a. citizen
b. domestic corporation wholly owned and organized by Filipinos in the Philippines
 c. Filipino corporation where Filipino capital entitled to vote is at least 60%

10. Query: If a corporation is a shareholder of another corporation, how do you determine whether the latter corporation
is a Filipino national?

Answer: The following must concur -

a. At least 60% of the outstanding capital stock and entitled to vote of both corporations are held by citizens
of the Philippines
b. At least 60% of the Board of Directors of both corporations are Filipinos
11. Tenor of BOI Certificate
a. Business or activity to be engaged is consistent with the Investment Priorities Plan
b. Business will contribute to the sound and balanced development of the national economy in a self-sustaining basis
c. Business will not conflict with the Constitution and local laws
d. Business is not adequately exploited by Filipino nationals
e. No danger of monopolies/combinations in restraint of trade

12. Basic Principles/Conditions laid down by BOI

a. resident agent of foreign firm is a Filipino citizen
b. establishment of office in the Philippines
c. bringing assets tot he Philippine office as capital
d. complete set of accounting records

13. Merger and Consolidation subject to BOI requirements for the issuance of certificate:
When merger and consolidation result in ownership and control of non-Filipino nationals over more than 40% of the
capital of a consolidated corporation.

14. SEC License issued upon compliance with the following requirements:
a. proof of compliance with principle of reciprocity
b. BOI certificate
c. Applicant for license gives required information
articles of incorporation
by-laws
names and addresses of resident agents
principal place of business in the Philippines
d. proof of solvency
e. deposit acceptable securities to protect future creditors

RETAIL TRADE NATIONALIZATION LAW

(Note: Material on the Retail Trade Liberalization Law will not be included in this reviewer. Supplement to follow)

1. Retail Trade - any act, occupation, or calling of habitually selling direct to the general public, merchandise,
commodities, or goods for consumption

Jurisprudence has held that the term “retail” should be associated with and limited to goods for personal, family or
household use, consumption and utilization. The Retail Trade Nationalization Law refers to “consumption goods” or
“consumer goods” which directly satisfy human wants and desires and are needed for home and daily life. Excluded from
the law are those goods which are considered generally raw material used in the manufacture of other goods, or if not, as
one of the component raw material, or at least as elements utilized in the process of production and manufacturing.

2. Elements of What Constitutes Retail Trade:

a. The seller habitually engages in selling;
b. The sale is direct to the general public; and
c. The object of the sale is limited to merchandise, commodities or goods for consumption.

3. General Rule: After 1964, only Filipinos or corporations whose capital is 100% Filipino may engage in retail trade.
4. Exceptions, that is, instances when aliens may engage in retail trade in the Philippines:
a. manufacturer or processor if capital does not exceed P5,000.00;
b. farmer or agriculturist when selling his products;
c. manufacturer or processor selling to industrial or commercial users or consumers who use the produce to render
service to the general public or to produce or manufacture goods which are sold by them to the public;
d. hotel owners or keepers of restaurants included or incidental to the hotel business;
e. sale by a manufacturer or processor to the Government or its agencies, including government owned and controlled
corporations

5. Query: How to determine citizenship of shares of the corporation when they are not held directly by individuals,
but in turn held by another entity?

Answer: apply the GRANDFATHER RULE, to wit:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be
considered as Philippine nationality, 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. Thus,
if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or capital
respectively, of which belong to Filipino citizens, all of the said shares shall be recorded as owned by Filipinos. But, if let’s
say, 50% of the capital stock belongs to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and the
other 50,000 shares shall be recorded as belonging to aliens.

However, while a corporation with 60% Filipino and 40% foreign equity ownership is considered a Philippine national for
purposes of investment, it is not qualified to invest in or enter into a joint venture agreement with corporations or
partnerships, the capital or ownership of which under the Constitution or other special laws are limited to Filipino citizens
only. Hence, for purposes of the law, whatever the percentage of Filipino ownership in the owning corporation, the
foreign ownership would always render a portion of its holding in the company as foreign equity and would disqualify the
corporation to engage in retail trade.

ANTI-DUMMY ACT
1. The Act penalizes Filipinos who permit aliens to use them as nominees or dummies to enjoy privileges reserved for
Filipinos or Filipino corporations. Criminal sanctions are imposed on the president, manager, board member or persons
in charge of the violating entity and causing the latter to forfeit its privileges, rights and franchises.

2. Disqualified aliens cannot intervene in the management, operation, administration or control of the business
reserved to Filipinos whether as an officer, employee or laborer, with or without remuneration, except when:
a. alien takes part in technical aspects;
b. provided that no Filipino can do such technical work; and
c. with express authority from the President, upon the recommendation of the department head concerned.

3. By way of exception, the following may participate in management:

a. Aliens may be elected to the Board of Directors to the extent of their allowable share in the capital of the corporation
(in partially nationalized industries).
b. A registered enterprise may employ foreign nationals in supervisory, technical, and advisory positions for a period
of 5 years subject to extension.
c. Where majority of stocks of a pioneer enterprise is owned by foreign investors, the following positions may be held
by foreign nationals:
president
treasurer
general manager
equivalent positions
4. A Filipino common-law wife of an alien is not barred from engaging in the retail business provided she uses capital
exclusively derived from her paraphernal properties; however, allowing her common-law alien husband to take part in
the management of the retail business would be a violation of the law.

5. What doing business means:

a. soliciting orders, purchases, service contracts;
b. opening offices whether called liaison offices or branches;
c. appointing representatives or distributors who are domiciled in the Philippines or who in any calendar year stay in
the country for a period totaling 180 days or more;
d. participating in the management or supervision or control of any domestic firm, entity or corporation in the
Philippines;
e. any other act or acts that imply continuity in commercial dealings

6. When commissioned merchants/investors or commercial brokers act in their own name in selling foreign products,
the foreign firm manufacturing these products is not doing business in the Philippines.
7. When a local corporation or person acts in the name of a foreign firm, the latter is doing business in the Philippines.
8. The following are NOT doing business:
a. mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business;
b. exercise of rights as such investor;
c. having a nominee director or officer to represent interests in such corporation;
d. appointing a representative or distributor domiciled in the Philippines which transacts business in its own
name and for its own accounts.

TRUST RECEIPTS LAW 1. Purpose:

a. to encourage use of and to promote transactions based on trust receipts;
b. to regulate the use of trust receipts

2. Definition:
A written/printed document signed by the ENTRUSTEE in favor of the ENTRUSTER whereby the latter releases the
goods, documents or instruments tot he possession of the former upon the ENTRUSTEE’S promise to hold said goods in
trust for the ENTRUSTER, and to sell the goods, etc. WITH THE OBLIGATION TO TURN OVER THE PROCEEDS THEREOF TO
THE EXTENT OF WHAT IS OWING TO THE ENTRUSTER; or to return the goods if UNSOLD, or for other purposes.

3. Trust receipts are denominated in Philippine currency or acceptable and eligible foreign currency.
4. ENTRUSTER is not liable as principal or vendor under any sale or contract to sell made by the ENTRUSTEE.
5. Risk of loss is borne by the ENTRUSTEE.
6. Pending the duration of the trust agreement, the ENTRUSTER’S security interest cannot be prejudiced by claims of
creditors of the ENTRUSTEE.
7. Loss of goods pending the dispossession shall not extinguish the obligation to the ENTRUSTER for the value thereof.

LETTERS OF CREDIT
1. Kinds:
a. Commercial Letters of Credit
b. Traveler’s Letters of Credit

2. No protest required in case of dishonor.

3. Issued to definite persons and not to order, thus, non-negotiable.
4. Limited to a fixed account.

PRICE TAGS LAW

1. It requires articles of commerce sold at retail to bear prices.

JOINT ACCOUNTS

1. It exists when a merchant interests himself in the transaction of another merchant, contributing thereto the amount
of capital they may agree upon, and participating in the favorable or unfavorable results thereof in the proportion they
may determine.
2. Joint accounts do not adopt a firm name.
3. No suit may be maintained - investor and third persons dealing with the merchant conducting business.
4. It is not subject to any formal requirement for validity; it may be oral.

BULK SALES LAW

1. Purpose: meant to protect creditors of businessmen against preferential or fraudulent transfers
2. The law covers all transactions, whether done in good faith or not, or whether or not the seller is in a state of
insolvency, that fall within the description of what is a “bulk sale”.
3. Types of transactions which are treated as “bulk sales”:
a. Sale, transfer, mortgage or assignments of a stock of goods, wares, merchandise, provisions, or materials
otherwise than in the ordinary course of trade;
b. Sale transfer, mortgage or assignments of all, or substantially all, of the business of the vendor, mortgagor,
transferor, or assignor;
c. Sale, transfer, mortgage, or assignment of all, or substantially all, of the fixtures and equipment used in the
business of the vendor, mortgagor, transferor, or assignor.
4. Only creditors at the time of the sale in violation of the law are within the protection of the laws and creditors
subsequent to the sale are not covered.
5. Even if the transaction falls within the definition of “bulk sale”, the following are not deemed covered by the law:
a. If the vendor, mortgagor, transferor or assignor produces and delivers a written waiver of the provisions of
the law from his creditors as shown by verified statements;
b. The law does not apply to executors, administrators, receivers, assignees in insolvency, or public officers,
acting under process.
6. Obligations when transaction is a bulk sale:
a. The vendor must deliver to such vendee a written statement of:
 names and addresses of all creditors to whom said vendor or mortgagor may be indebted;
 amount of indebtedness due or owing to each of said creditors
b. The vendor must apply the purchase money to the pro-rata payment of bona fide claims of the creditors as shown
in the verified statement.
c. The seller, at least 10 days before the sale, shall:
o make a full detailed inventory of the goods, merchandise, etc., cost price of each article to be included in
the sale
o notify every creditor at least 10 days before transferring possession of the goods, of the price, terms and
conditions of the sale

7. Consequences of Violation of Requirements under #6 above stated:

a. When 6(a) above is not complied with, the sale itself is void; the seller will be criminally liable.
b. When 6(b) above is not complied with, the sale itself is also void; seller is also criminally liable.
c. When 6(c) is not complied with, the sale is not void; no criminal liability on the seller.

INSURANCE LAW
1. Laws applicable to insurance in the order of priority:
a. Insurance Code
b. Civil Code
c. General Principles prevailing on the subject in the US

2. Contract of Insurance - an agreement whereby one undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown contingent event
3. Contract of Suretyship - deemed to be an insurance contract within the meaning of the Insurance Code, only if made
by a surety who or which, as such, is doing an insurance business

4. Definition of “doing an insurance business”:

a. making or proposing to make, as insurer, any insurance contract;
b. making or proposing to make as a surety, any contract of suretyship as a vocation and not merely incidental
to any other legitimate business or activity of the surety;
c. doing reinsurance business;
d. doing or proposing to do any business in the substance equivalent to any of the foregoing in a manner
designed to evade the provisions of the Insurance Code.

5. Requisites of Insurance:
a. existence of an insurable interest;
b. risk of loss;
c. assumption of risk;
d. scheme to distribute losses; and
e. payment of premiums
· Note: If only a, b, and c are present, it is not a contract of insurance but a risk shifting device.

6. Characteristics of an insurance contract:

a. consensual

b. voluntary

c. aleatory - depends upon some contingent event; however, it is not a wagering nor a gambling contract

d. executed as to the insured after payment of the premium

e. executory as to insurer - not executed until payment for a loss

f. personal - each party takes into account the character, credit and the conduct of the other

g. conditional - liability is based on the happening of the event insured against

7. Parties to a contract of Insurance:

a. insurer - party who assumes the risk or undertakes to indemnify the insured or to pay a certain sum on the happening
of a specified contingency

b. insured - person in whose favor the contract is operative, and who is indemnified against, or is to receive a certain
sum upon the happening of a specified contingency

c. beneficiary - may or may not be the same as the insured

· What perils may be insured?

(a) any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest;
or

(b) any contingent or unknown event, whether past or future, which may create a liability against the person insured.

8. Every person has an insurable interest in the life and health of:

a. himself, his spouse and his children

b. any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest

c. any person under a legal obligation to him for the payment of money, or respecting property or services, of which
death or illness might prevent the performance or delay it

d. any person upon whose life any estate or any interest vested in him depends

9. Insurable Interest in Property may consist of:

a. an existing interest

b. an inchoate interest, founded on an existing interest

c. an expectancy, coupled with an existing interest out of which the expectancy arises

· Definition of Insurable Interest in Property: Interest in property, whether real or personal, or any relation thereto,
or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured.

10. Instances when Insurable Interest must exist:

a. Interest in Property insured must exist when the insurance takes effect and when the loss occurs, but need not exist
in the meantime.

b. Interest in the Life or Health of a Person Insured must exist when the insurance takes effect, but need not exist
thereafter or when the loss occurs.

c. Beneficiaries of Life Insurance need not have insurable interest in the life of the insured.

d. Beneficiaries of Property Insurance must have insurable interest in the property insured.

Category

Insurable Interest in Life Insurance

Insurable Interest in Property

1. basis

may be based on pecuniary interest, affinity, or consanguinity

based purely on pecuniary interest

2. when interest must exist

at the time the policy takes effect EXCEPT: life insurance taken by the creditor on the life of the debtor wherein interest
must also exist at the time of the loss

at the time the policy takes effect and at the time of the loss

3. amount of insurable interest

no limit EXCEPT: if insurable interest is based on creditor-debtor relationship (only to the extent of the credit or debt)

limited to the actual value of damage/injury/loss

11. General Rule: A change of interest in any part of a thing insured unaccompanied by a corresponding change in interest
in the insurance suspends the insurance to an equivalent extent, until the interest in the thing and the interest in the
insurance are vested in the same person.

Exceptions: a. In case of life, health, and accident insurance

b. when the change in interest results after the occurrence of an injury which results in a loss

c. a change of interest in one or more several distinct things, separately insured by one policy

d. a change in the interest by will or succession on the death of the insured (interest passes to the heirs)

e. a transfer of interest by one of several partners, joint owners in common who are jointly insured to the others (even
though it has been agreed that the insurance shall seize upon the alienation of the thing insured)

12. Revocation of Beneficiaries

· General Rule: Insurance contracts are revocable.

· Exception: Any person who is forbidden to receive any donation under Article 739 of the Civil Code cannot be named
beneficiary of a life insurance policy by the person who cannot make the donation to him.

· The following donations shall be void:

a. those made between persons who were guilty of adultery or concubinage at the time of the donation;

b. those made by persons found guilty of the same criminal offense, in consideration thereof;
c. those made to a public officer or his wife, descendants, ascendants, by reason of his office.

· Other Pertinent Provisions on Revocation:

(a) The termination of a subsequent marriage shall allow the innocent spouse to revoke the designation of the other
spouse who acted in bad faith as beneficiary in any insurance policy, even if such designation be stipulated as irrevocable.

(b) After the finality of the decree of legal separation, the innocent spouse may revoke the donations as well as the
designation of the latter as a beneficiary in any insurance policy, even if such designation is irrevocable. The revocation
of or change in the designation shall take effect upon written notification thereof to the insured. The action to revoke the
donation under this article must be brought within 5 years from the time the decree of legal separation has become final.

(c) The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal,
accomplice or accessory in willfully bringing about the death of the insured, in which event, the nearest relative of the
insured shall receive the proceeds of said insurance if not otherwise disqualified.

13. Suspension - a change of interest in any part of a thing insured unaccompanied by a corresponding change of interest
in the insurance suspends the insurance to an equivalent extent until the interest in the thing and the interest in the
insurance are vested in the same person.

14. Concealment - a neglect to communicate that which the party knows or ought to communicate

· General Rule: The insured is not required to communicate the nature (or kind) or the amount of his insurable interest
in the life or property insured to the insurer.

· Exception: a. When the insurer makes inquiry from the insured of the nature or amount of the latter’s insurable
interest, whether in life or property insurance;

b. insurance policy must specify the interest of the insured in the property insured, if he is not the absolute owner
thereof.

· A concealment, whether intentional or not, entitles the injured party to rescind a contract of insurance.

· Requisites:

(a) the party concealing must have knowledge of the facts concealed;

(b) the facts concealed must be material to the risk;

(c) the party is duty bound to disclose such fact to the other;

(d) the party concealing makes no warranty as to the facts concealed;

(e) the other party has no other means of ascertaining the facts concealed.
· Note: An insured need not die of the very disease he failed to reveal to the insurer. It is sufficient that the non-
revelation has misled the insurer in forming his estimate of the disadvantages of the proposed policy or in making his
inquiries in order to entitle the insurance company to avoid the contract.

· Note: The insured is under an obligation to disclose not only such material facts as are known to him, but also those
known to his agent where:

a. it was the duty of the agent to acquire and communicate information of the facts in question;

b. it was possible for the agent, in the exercise of reasonable diligence, to have made the communication before the
making of the insurance contract.

n Failure on the part of the insured to disclose such facts known to his agent, or wholly due to the fault of the agent, will
avoid the policy, despite the good faith of the insured.

15. Neither party to the insurance contract is bound to communicate information on the following matters except in
answer to the inquiries of the other:

a. those of which the other knows;

b. that which, in the exercise of ordinary care, the other ought to know and of which the former has no reason to
suppose his ignorance, i.e. political situation, general usages of trade;

c. those of which the other waives communication;

d. those which prove or tend to prove the existence of the risk excluded by a warranty and which are not otherwise
material;

e. those which relate to a risk excepted from the policy and which are not otherwise material.

· Neither party is bound to communicate his mere opinion, even upon inquiry, because such opinion would add
nothing to the appraisal of the application.

· Waiver of material facts may be:

(a) by the terms of the insurance; or

(b) by the neglect to make inquiry as to such facts, where they are distinctly implied in other facts which information is
communicated

· Materiality is to be determined not by the events but solely upon the probable and reasonable influence of the facts
on the party to whom the communication is due in forming his estimate of the disadvantages of the proposed contract or
in making his inquiries.

· Concealment, whether intentional or not, entitles the other party to rescind the contract.

16. Representation
 It is a factual statement made by the insured at the time of, or prior to, the issuance of the policy, to give information
to the insurer and otherwise induce him to enter into the insurance contract.

· It may be made orally or in writing.

· It may be made at the time of, or before, the issuance of the policy.

· It may be altered or withdrawn before the insurance is effected, but not afterwards.

· A representation cannot qualify an express provision in a contract of insurance but it may qualify an implied warranty.

· A representation as to the future is to be deemed a promise unless it appears that it was merely a statement of
belief or an expectation. (must be susceptible of present, actual knowledge)

· The statement of an erroneous opinion, belief or information, or of an unfulfilled intention, will not avoid the contract
of insurance, unless fraudulent.

· Right to rescind because of false representation:

a. must be exercised previous to the commencement of an action on the contract (the action referred to is that to
collect a claim on the contract)

b. misrepresentation, whether intentional or not, gives the right to rescind

· Incontestable Clause: 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 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.

· Exceptions: (a) absence of insurable risk

(b) cause of loss is an unexpected risk

(c) fraud

(d) non-payment of premium

(e) violation of conditions relating to naval or military services

(f) failure to comply with conditions subsequent to the occurrence of the loss

17. Warranties:

· General Rule: Non-performance of a promissory warranty avoids a contract of insurance.

· Exceptions:

a. when before the time for performance of the promissory warranty, a loss insured against occurs;

b. when before the time of the performance of the warranty, the act becomes unlawful;

c. when before the time of the performance of the warranty, said performance becomes impossible.

· A statement or a promise set forth in the policy or by reference incorporated therein, the non-fulfillment of which
in any respect and without reference to whether the insurer was in fact prejudiced by such non-fulfillment, renders the
policy voidable by the insurer, wholly irrespective of the materiality of such statement or promise.

Warranty

Representation

part of the insurance contract

collateral inducement

always written on the policy

maybe oral or written

conclusively presumed material

materiality must be proved

must be strictly complied with

requires substantial truth

made by the insured

may be made by insurer or insured

· Note: If there is a breach of warranty, even if the cause of the loss is a different risk, the insurer is entitled to rescind
the contract of insurance.

· Breach must refer to a material warranty, whether intentional or not.

18. Policy

· What is a Rider? It is an additional provision in a policy not part of the body of the printed form.
· Cover Note: written memorandum of the most important terms of a preliminary contract of insurance, intended to
give temporary protection pending the investigation of the risk by the insurer, or until the issuance of a formal policy.

· General Rule: Cover notes bind insurer temporarily pending the issuance of the policy.

· Exception: Where it is merely an acknowledgment on behalf of the company that the latter’s branch office had
received from the applicant the insurance premium and accepted the application subject for processing by the insurance
company and that the latter will either approve or reject the same.

· Kinds of Policies:

a. Open - the value of the thing insured is not agreed upon, but is left to be ascertained at the time of the loss

b. Valued - expresses on its face an agreement that the thing insured shall be valued at a specific sum

c. Running - contemplates successive insurance which provides that the object of the policy may be from time to time
defined especially as to the subject of insurance by additional statements or endorsements

n Note: If an amount is written on the face of an open policy, it is merely a determination of the maximum limit of
recovery and not as the value of the policy.

Category

Open Policy

Valued Policy

what needs to be proven in order to be able to claim

value of property upon loss

no need for proof of value of property upon loss

determining value of loss

value of property is to be ascertained upon loss

value of property upon loss is conclusively stipulated to a specified amount

· Period for commencing an action against the policy: Within 1 year from the time the cause of action accrues, i.e.,
from the time of rejection of the claim by the insurer. Any condition, stipulation, or agreement limiting the time to less
than 1 year is void.

· Grounds for Cancellation of a Policy by the Insurer:

For Policies Other than Life:

(1) prior notice of the cancellation to insured

(2) notice must be based on the ff. occurrences after effective date of the policy

(a) non-payment of premiums

(b) conviction of a crime arising out of acts increasing the hazard insured against

(c) discovery of fraud or material misrepresentation

(d) discovery of willful or reckless acts or omissions increasing the hazard insured against

(e) physical changes in the property insured which results in the property becoming uninsurable

(f) determination by the Commissioner that the continuation of the policy would violate or would place the insurer in
violation of the Insurance Code

(3) notice must be in writing

(4) it must be mailed or delivered to the insured at the address shown in the policy

(5) notice must state the ground relied upon and that upon written request of the insured, the insurer will furnish facts
on which the cancellation is based

· Renewal of the Policies Other than Life:

Insurer must mail or deliver to the insured notice of its intention not to renew the policy or to condition its renewal
upon reduction of limits or elimination of coverages within 45 days before the policy ends. Otherwise, insured entitled to
renew the policy upon payment of the premium due on the effective date of the renewal.

19. Premium

· General Rule: No policy is binding until the premium thereof has been paid.

· Exceptions: (a) in case of life or industrial life policy, whenever the grace period applies

(b) in case of estoppel

· Insurer is entitled to payment of premiums as soon as the thing insured is exposed to the perils insured against.

· When insurer entitled to Return of Premiums

a. when the contract is voidable on account of fraud or misrepresentation of the insurer;

b. when on account of facts, the existence of which the insured was ignorant without his fault

c. when by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy

d. when the insured has become a public enemy and the policy automatically canceled (on the ground of equity)

e. in case of over-insurance by several insurers (ratable return of premiums, proportioned to the amount by which the
aggregate sum insured in all policies exceed the insurable value of the thing at risk)
20. Loss

· When Insurer is Liable:

a. where the peril insured against was the proximate cause, although a peril not contemplated by the contract may
have been the remote cause or even the immediate cause of the loss

b. where the thing insured is rescued from the peril insured against that would otherwise have caused a loss, if, in the
course of such rescue, the thing is exposed to a peril not insured against, which permanently deprives the insured of its
possession in whole or in part

c. where loss is caused by efforts to rescue the thing insured from a peril insured against

d. insurer is not exonerated by a loss caused by simple negligence of the insured if the proximate cause of the loss is a
peril insured against

e. loss, the immediate cause of which is a peril insured against except when the proximate cause is an excepted peril

· When Insurer Not Liable:

a. where the peril insured against was only a remote cause

b. where the peril is specifically excepted, a loss which would not have occurred but for such peril is thereby excepted

c. loss caused by the connivance of the insured

d. loss caused by the willful act of insured

e. loss caused by insured’s negligence, if it amounts to bad faith

· General Rule: The insurer is not liable for a loss caused by the willful act of the insured.

· Exception: Suicide Clause in Life Insurance: Insurer liable in case insured committed suicide after the policy has been
in force for a period of 2 years from the date of its issue or last reinstatement. If insured kills himself within a period of 2
years, insurer is not liable.

· Exception to Exception: If suicide is committed in a state of insanity, regardless of the time of commission, the
insurer is liable.

21. Double Insurance - exists where the same person is insured by several insurers separately in respect to the same
subject and interest
· Requisites: a. person insured must be the same

b. existence of several insurers

c. subject matter insured must be the same

d. interest the same

e. risk insured against also the same

Over Insurance

Double Insurance

may be only one insurer

must be 2 or more insurers

insurance covers more than the value of insurable interest

insurance may or may not exceed the value of insurable interest

· The Code prohibits double insurance without the consent of the insurer.

· Liability of Insurer:

Insurance taken

from each insurer

---------------------------------- x value of property received = liability of insurer

total insurance

22. Reinsurance: A process by which an insurer procures a third person to insure him against loss or liability by reason
of such original insurance.

The original insured cannot recover from this insurance unless there is a specific grant, or assignment of, the
reinsurance contract in favor of the insured, or a manifest intention of the contracting parties to the reinsurance contract
to favor the insured.
· General Rule: The insurer who obtains reinsurance must communicate:

a. all the representations of the original insured; and

b. all the knowledge and information he possesses, whether previously or subsequently acquired which are material
to the risk

· Exception: under automatic reinsurance treaties

Reinsurance

Double Insurance

1. insurer becomes the insured

2. subject matter is the insured risk or liability

3. different risks and interests of insured

4. there must be consent of original

5. one who is original insured has no interest in the contract of reinsurance which is independent of the original contract
of insurance

1. insurer remains the insurer

2. subject matter is property

3. the same interest and risk are insured

4. insured has to give his consent

5. insured is the party in interest in all contracts

23. Marine Insurance: insures against perils of the sea, not of the ship

Perils of the Sea

Perils of the Ship

covered by marine insurance

not covered by marine insurance

denote nature accidents peculiar to the sea which do not happen by intervention of man nor are to be prevented by
human prudence

damage or losses resulting from:

1. natural and inevitable action of the sea

2. ordinary wear and tear of a ship, or

3. negligent failure of the ship owner to provide the vessel with proper equipment to convey the cargo under ordinary
conditions

· Owner of the Ship has Insurable Interest:

a. in the ship even if it has been chartered by one who promises to pay him in value in case of loss (insurer is liable for
what insured cannot recover from the charterer), even when hypothecated by bottomry (only the excess of its value over
the amount secured by bottomry) and

b. in the freightage, which according to the ordinary and probable course of things he would have earned but for the
intervention of a peril insured against or other peril incident to the voyage

· Charterer has insurable interest in the ship to the extent that he is liable to be damnified by its loss.

· Barratry: Any willful misconduct on the part of the masters or crew, in pursuance of some unlawful or fraudulent
purpose, without the consent of the owners and to the prejudice of the owner’s interest.

· Jettison: Intentional casting overboard of any part of a venture exposed to a peril, whether it be of the cargo, or the
ship’s furniture or tackle, in the hope of saving the rest of the venture.

· Insurable Interest in Marine Insurance: Determined when one will sustain loss from the destruction of the subject
matter or derive benefit from its preservation.

· Charter Party: Contract by virtue of which the owner or the agent of a vessel binds himself to transport merchandise
or persons for a fixed price. It has also been defined as a contract by virtue of which the owner or the agent of the vessel
for the transportation of goods or persons from one port to another.

· Loan on Bottomry: Contract in the nature of a mortgage whereby the owner of a ship borrows money for the use,
equipment or repair of the vessel for a definite term, and pledges the ship as a security for repayment, with maritime or
extraordinary interest on the account of the maritime risks to be borne by the lender. It is stipulated in such a contract
that if the ship be lost in the course of the specific voyage or during a specified limited time caused by any of the perils
enumerated in the contract, the lender shall resolutely lose his money.

· Loan on Respondentia: Contract akin to that of mortgage made on the goods on board the ship, and which are to
be sold or exchanged in the course of the voyage. The goods serve as the principal security.

· Freightage: Signifies all the benefits derived by the owner, carriage of his own goods, or those of others.

· Concealment: In marine insurance, information or the belief or expectation of a 3rd person, in reference to a material
fact is material.

n Concealment of the following merely exonerates the insurer from the resulting loss therefrom:

a. national character of the insured

b. liability of the thing insured to capture and detention

c. liability to seizure from breach of foreign laws of trade

d. want of necessary documents

e. use of false and simulated papers

· Implied Warranties:

a. that the ship is seaworthy - complied with if the ship is seaworthy at the time of commencement of risk, except: (a)
insurance for a specified length of time - at the commencement of every voyage it undertakes during that time; (b) cargo
to be transshipped at indeterminate port - each vessel upon which cargo is shipped is seaworthy at the commencement
of each particular voyage

b. that the vessel shall not engage in illegal venture

c. that the vessel shall not deviate from the course of the voyage insured

d. where the nationality or neutrality of a ship or cargo is expressly warranted, it is implied that the ship will carry the
requisite documents to show such nationality or neutrality and that it will not carry any documents which may cast
reasonable suspicion thereon

· Seaworthiness depends on:

a. nature of the ship

b. nature of the voyage

c. nature of the service

n Seaworthiness of the vessel is required only at the commencement of the risk

n Exceptions:

a. in a Time Policy - commencement of every voyage that must be undertaken

b. in a Cargo Policy - commencement of each particular voyage

c. in a Voyage Policy - commencement of each portion of the voyage

· Deviation

a. a departure from the course of the voyage insured

b. unreasonable delay in pursuing the voyage

c. commencement of an entirely different voyage

· When is Deviation proper?

a. when caused by circumstances over which neither the master not the owner of the ship has any control

b. when necessary to comply with a warranty or to avoid a peril whether it is insured against or not

c. when made in good faith for the purpose of saving human life or relieving another vessel in distress

d. when made in good faith and upon reasonable grounds of belief in its necessity to avoid a peril

· Loss

a. Actual Total Loss

n a total destruction of the thing insured

n the irretrievable loss of the thing by sinking or by being broken up

n any damage to the thing which renders it valueless tot he owner for which he held it

n any other event which effectively deprives the owner of possession, at the port of destination, of the thing insured

b. Constructive Total Loss - gives to the person insured the right to abandon
· Average - any extraordinary or additional expense incurred during the voyage for the preservation of the vessel,
cargo, or both and all damages to the vessel and cargo from the time it is loaded and the voyage commenced until it ends
and the cargo unloaded

· General Average - an expense or damage suffered deliberately in order to save the vessel, its cargo, or both from
the real or known risk

· Abandonment - act of the insured by which, after a constructive total loss, he declares the relinquishment to the
insured of his interest in the thing insured (where the cause of loss is a peril insured against)

(a) more than ¾ thereof in value is actually lost or would have been expended to recover it from the peril

(b) it is injured to such an extent as to reduce its value by more than ¾

(c) if the thing insured is the ship and the voyage cannot be lawfully performed without incurring an expense of more
than ¾ of the whole, or a risk which a prudent man would not undertake under the circumstances

(d) if the thing insured is cargo or freightage, and the voyage cannot be performed on another ship procured by the
master within a reasonable time and with reasonable diligence to forward the cargo without incurring an expense or a
risk as stated above

· Freightage cannot be abandoned unless ship is also abandoned.

· Requisites of a Valid Abandonment:

a. must be total and conditional

b. made within a reasonable time

c. explicit notice

d. coupled with actual abandonment

· Requisites for Valid Valuation in the Valued Marine Policy:

a. insured must have interest at risk

b. there must be no fraud on the insured’s part

· Notice of Abandonment:
a. may be oral or in writing (if oral, written notice must be submitted within 7 days from oral notice)

b. must be explicit

c. must specify the particular cause for abandonment

d. need not be accompanied by proof of interest or loss

· Acceptance of Abandonment

a. may be express or implied (i.e. silence for unreasonable length of time)

b. conclusive upon the parties and admits the loss and sufficiency of abandonment

c. irrevocable, unless the ground on which it is made is proved to be unfounded

· If insurer refuses to accept a valid abandonment - liable as upon actual total loss

· Upon actual abandonment

a. freightage earned before loss - belongs to the insurer of freightage

b. freightage earned after loss - belongs to insurer of ship

· Co-insurance: form of insurance in which the person who insures his property for less than the entire value is
understood to be his own insurer for the difference which exists between the true value of the property and the amount
of insurance

· Co-insurance applies only where the:

a. insurance taken is less than the actual value of the thing insured

b. loss is partial

· Primage - increase in freightage

24. Fire Insurance

 Insurer is liable for loss or damage caused by hostile fire (fire that escapes from the place where it was intended to
burn and ought to be in) and not that caused by friendly fire (fire which burns in a place where it is intended to burn).

· Scope of Fire Insurance:

a. fire

b. lightning

c. windstorms

d. tornado

e. earthquake

f. other allied risks

· When does alteration in the use or condition entitle the insurer to rescind the contract?

a. such alteration violates a provision in the policy

b. it was made without the insurer’s consent

c. it is done within the insured’s control, and it increases the risk of loss or damage

· Rules:

a. policy shall not protect the insured from injury consequent upon his negligent use or management of fire, so long as
it is confined to the place where it ought to be

b. if it escapes, even though the insured was negligent, the insurer is liable

c. even though a fire may remain in its proper place, it may become hostile if it by accident, becomes so extensive as
to be beyond control

· Options of the Insurer

a. purchase the property at appraised valuation

b. restore the property damaged - contract of insurance is discharged and parties enter into a new contract of insurance

25. Casualty Insurance: Any injury that is intended, unexpected and unusual, even though it results from an act or even
which was intelligently done.
· Insurer is Liable for death/injury to insured:

a. by his own hand while insane

b. by taking poison by mistake

c. by overdoes of drugs administered or taken by mistake, by ignorance or material pathological conditions

d. by unexpected bacterial infection consequent upon doing acts, even though such acts were intentionally done

e. by unprovoked violence of others

· Compulsory Motor Vehicle Liability Insurance

Persons subject to CMVLI:

a. motor vehicle owner or one who is the actual legal owner of a motor vehicle in whose name such vehicle is registered
with the LTO

b. land transport operator or one who is the owner of a motor vehicle or vehicles being used for conveying passengers
for compensation (including school buses)

· No Fault Indemnity Clause: The insurance company shall pay any claim for death or bodily injuries sustained by a
passenger or 3rd party without the necessity of proving fault or negligence of any kind subject to certain conditions. This
does not apply to property damage.

26. Suretyship - an agreement whereby the surety guarantees the performance of the principal or obligor of an obligation
or undertaking in favor of a 3rd party called the obligee

27. Life Insurance: an insurance in human life and insurance appertaining thereto or connected therewith may be
payable:

a. on the death of the insured

b. on his surviving a specified period

c. otherwise, contingently on the continuance or cessation of life

(b and c refer to endowment or annuities)

· Uses and Common Kinds of Life Insurance:

a. Whole Life or Ordinary Policies - here, the insured agrees to pay annual, semi-annual or quarterly premiums while
he lives. The insurer agrees to pay the face value of the policy upon the death of the insured.

b. Limited Payment Life Policy - premiums paid only for a specified period of years.

c. Term Policy - insurer’s liability arises only upon the death of the insured within the agreed term as period. If the
latter survives the period, the contract terminates and the insurer is not liable

d. Endowment Policy - insurer agrees to pay a certain sum to the insured if the latter outlives a designated period; if
he dies before that time, the proceeds are paid to the beneficiary

e. Life Annuity - debtor binds himself to pay an annual pension or income during the life of one or more persons in
consideration of a capital consisting of money or other property, whose ownership is transferred to him with the burden
of income

28. The Business of Insurance

a. Life or Endowment Policies

Grace Period - 30 days for the payment of any premium due after the first premium has been paid

Period of Incontestability - after the lapse of 2 years from the date of issue or date of approval of last reinstatement

Reinstatement of Policy - within 3 years from the date of default of premium, upon:

a. production of evidence of insurability, and

b. payment of all overdue premiums and any indebtedness to the company upon said policy

Exceptions:

a. if cash surrender value has been paid

b. if period of extension has expired

b. Claims Settlement

Unfair Claims Settlement Practices:

(a) knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverage at issue
(b) failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under
its policies

(c) failing to adopt or implement reasonable standards for the prompt investigation of claims arising under its policies

(d) no attempt in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability
has become reasonably clear

(e) compelling policy holders to institute suits to recover the amount due under its policies by offering with no justifiable
reason an amount substantially less than that ultimately recovered in suits brought by them

Proceeds of Life Insurance - payable within 60 days after:

(a) presentation of claims, and

(b) filing of proof of death (upon failure to pay interest, at the rate of 2 times the ceiling prescribed by the Monetary
Board unless based on the ground that the rate is fraudulent)

Proceeds of Policies other than Life - payable:

(a) upon proof of loss

(b) upon ascertainment of loss or damage (if not made within 60 days of proof of loss, payable in 90 days)

c. Power of Commissioner to Suspend/Revoke License

(a) if insurance contract is in unsound condition

(b) if it has failed to comply with the provisions of law or regulations obligatory upon it

(c) its conditions or methods of business s such as to render its proceedings hazardous to the public or to its policy
holders

(d) that its paid up capital stock, or its available cash assets, or its security deposits, as the case may be, is impaired or
deficient

(e) that the margin of solvency required of each company is deficient

Insurance Agent - any person who for compensation solicits or obtains insurance on behalf of any insurance company or
transacts for a person other than himself an application for a policy or contract of insurance to or from such company or
offers or assumes to act in negotiating of such insurance. He must be first licensed as such before doing any acts as
insurance agent.
Insurance Broker - any person for any compensation, commission or any other thing of value, acts, or aids in any manner
in soliciting, negotiating or procuring the making of any insurance contract or in placing risk or taking out insurance, on
behalf of an insured other than himself. A license is required.

WAREHOUSE RECEIPTS LAW

1. Warehouse - a building or place where goods are deposited and stored for profit.

2. Warehouseman - person lawfully engaged in the business of storing goods for profit.

· Only a warehouseman may issue warehouse receipts.

3. Warehouse Receipt - written acknowledgment by a warehouseman that he has received and holds certain goods
therein described in store for the person to whom it is issued.

4. Non-negotiable Receipt - receipt deliverable to a specified person.

5. Negotiable Receipt - receipt deliverable to order or to bearer.

6. Essential Terms which MUST be embodied in a Warehouse Receipt:

a. location of the warehouse

b. date of the issue of the receipt

c. consecutive number of the receipt

d. statement whether the goods received will be delivered to bearer, or a specified person, or his order

e. rate of storage charges

f. description of the goods or packages containing them for identification purposes

g. signature of the warehouseman

h. statement of the amount of advances made and of liabilities incurred for which the warehouseman claims as lien
7. Effect of omission of any of the essential terms:

a. The validity of the warehouse receipt is not affected.

b. The warehouseman shall be held liable for damages to those injured by his omission.

c. The negotiability of the warehouse receipt is not affected.

d. The issuance of a warehouse receipt in the form provided by the law is merely permissive and directory and not
mandatory in the sense that if the requirements are not observed, then the goods delivered for storage become ordinary
deposits.

8. Terms which may be inserted in a Warehouse Receipt: Any other terms except (a) those contrary to the provisions
of this Act; (b) those that would impair a warehouseman’s obligation to exercise that degree of care in the safekeeping of
the goods entrusted to him.

9. Marks to be made on a warehouse receipt:

a. A non-negotiable receipt must be clearly marked non-negotiable or not negotiable, otherwise, the holder of the
receipt who purchased it for value and who supposed it to be negotiable, may treat it as negotiable.

b. Duplicate receipts must be so marked, otherwise, the warehouseman is held liable for all damages suffered by a
holder believing the same to be the original.

10. Warranties of a warehouseman as to duplicate receipts:

a. The duplicate is an accurate copy of the original receipt.

b. Such original receipt is uncancelled at the date of the issue of the duplicate.

11. Effects of alteration on the liability of the warehouseman:

a. If the alteration is IMMATERIAL (the tenor of the receipt is not changed), whether fraudulent or not, authorized or
not, the warehouseman is liable on the altered receipt according to its original tenor.

b. If the alteration is MATERIAL but AUTHORIZED, the warehouseman is liable according to the terms of the altered
receipt.

c. If the alteration is MATERIAL, UNAUTHORIZED but INNOCENTLY MADE, the warehouseman is liable on the altered
receipt according to its original tenor.

d. If the alteration is MATERIAL and FRAUDULENTLY MADE, the warehouseman is liable:

(1) to the purchaser of the receipt for value and without notice of the alteration according to the tenor of the altered
receipt
(2) to the alterer, according to the terms of the original receipt

(3) to subsequent purchasers with notice of the alteration, according to the terms of the original receipt

12. Effects of misdescription of goods:

a. A warehouseman is under the obligation to deliver the identical property stored with him and if he fails to do so, he
is liable directly to the owner.

b. As against a bona fide purchaser of a warehouse receipt, the warehouseman is estopped from denying that he has
received the goods described in the receipt.

c. If the description consists merely of marks or label upon the goods or upon the packages containing them, the
warehouseman is not liable even if the goods are not of the kind as indicated in the marks or labels.

13. Principal Obligations of a Warehouseman:

a. To take care of the goods entrusted to his safekeeping

· General Rule: A warehouseman is required to exercise such degree of care which a reasonable careful owner would
exercise over similar goods of his own. He shall be liable for any loss or injury to the goods caused by his failure to exercise
such care.

· Exception: He shall not be liable for any loss or injury which could not have been avoided by the exercise of such
care.

· Exception to the Exception: He may limit his liability to an agreed value of the property received in case of loss. He
cannot stipulate that he will not be responsible for any loss caused by his negligence.

b. To deliver the goods to the holder of the receipt or the depositor upon demand, provided demand is accompanied
with:

(1) an offer to satisfy the warehouseman’s lien;

(2) an offer to surrender the negotiable receipt properly endorsed. If the receipt is non-negotiable, any person lawfully
entitled to the possession of the goods may be entitled to delivery without surrender of the receipt.

(3) a readiness and willingness to sign an acknowledgment that the goods have been delivered if such is requested by
the warehouseman.

14. Persons to whom goods must be delivered:

A. Persons lawfully entitled to the possession of the goods or his agent:

a. persons to whom a competent court has ordered the delivery of the goods
(1) where a negotiable instrument has been lost or destroyed, the court may order delivery to a person upon satisfactory
proof of such loss or destruction and upon proper posting of a bond to protect the warehouseman from any liability or
expense which he may incur by reason of the original receipt remaining outstanding.

(2) where more than one person claims title or possession of the goods the warehouseman may require all claimants to
interplead. The court will then order delivery to the person having a better right.

b. an attaching creditor - Goods, while in the possession of the warehouseman and covered by a negotiable receipt,
cannot be attached or levied upon under an execution unless:

(I) the negotiable receipt is first surrendered to the warehouseman, or

(ii) its negotiation is enjoined, or

(iii) the receipt is impounded by the court

c. to the purchaser in case of sale of the goods by the warehouseman to enforce his lien

d. to the purchaser where perishable or hazardous goods are sold at private or public sale

B. If goods are covered by a non-negotiable receipt:

a. a person entitled to the delivery by the terms of the receipt, or

b. one who has written authority from letter a

C. If goods are covered by a negotiable receipt, a person in possession of the receipt, the terms of which the goods are
deliverable:

a. to him or order

b. to bearer

c. indorsed to him

d. indorsed in blank by the person whom delivery was promised

15. When is there Misdelivery?

When the warehouseman delivers the goods to a person who is not in fact lawfully entitled to the possession of the
goods because:

a. the person does not fall under letter B or C above; or

b. the person falls under letter B or C but prior to delivery, the warehouseman had either:

(1) been requested by the person lawfully entitled to the delivery not to make such delivery, or
(2) had information that the delivery about to be made was to one not lawfully entitled to the possession of the goods

16. Effects of Misdelivery:

The warehouseman shall be liable for conversion to all having a right to property or possession of the goods.

17. What happens if there is proper delivery or partial delivery but the warehouseman fails to cancel the receipt or record
on the receipt of such partial delivery?

a. If goods covered by a negotiable warehouse receipt are delivered by a warehouseman but he fails to take the receipt
and cancel it, then he is still liable to one who purchases for value and in good faith such receipt.

b. If he makes partial delivery of the goods but fails to record the partial delivery on the receipt then he may still be
held liable for the entire receipt to one who purchases for value and in good faith such receipt.

18. Lawful excuses for refusal to deliver goods:

a. The warehouseman can refuse to deliver the goods if he has acquired title or right to the possession of the goods:

(1) directly or indirectly from a transfer made by the depositor at the time of the deposit for storage or subsequent
thereto; or

(2) from the warehouseman’s lien

b. If someone other than the depositor or person claiming under the depositor has a claim to the title or possession of
the goods and the warehouseman has information of such claim, the warehouseman shall be excused from liability for
refusing to deliver the goods either to the depositor or person claiming under him until he has had a reasonable time to
ascertain the validity of the adverse claim or to bring legal proceedings to compel all claimants to interplead.

c. The warehouseman will not be required to deliver the goods if such had been lost. But this is without prejudice to
liabilities which may be incurred by him due to such loss.

d. The warehouseman having a valid lien against the person demanding the goods may refuse to deliver the goods to
him until the lien is satisfied.

e. If goods have been lawfully sold or disposed of because of their perishable or hazardous nature, the warehouseman
shall not be liable for failure to deliver the goods.
19. A warehouseman cannot refuse to deliver goods to the depositor or to a person claiming under him on the ground
that adverse title to the goods belongs to a third person.

20. Rules as regards Co-mingling of Deposited Goods:

· General Rule: A warehouseman may not co-mingle goods belonging to different depositors or belonging to the same
depositor for which separate receipts had been issued.

· Exception: A warehouseman may co-mingle fungible goods of the same kind and grade provided he is authorized
by agreement or by custom.

21. Effect of Co-mingling of Goods:

a. The different owners become co-owners of the whole mass.

b. The warehouseman shall be severally liable to each depositor for the care and redelivery of his share of such mass
to the same extent and under the same circumstances as if the goods had been kept separate.

22. Remedies of a Creditor: (the debtor being the owner of the negotiable receipt)

Creditors of the depositors, before negotiation, may protect themselves by obtaining a writ of preliminary injunction
and serve the same on the depositor before he has a chance to negotiate the receipt. Once enjoined, there will be no
longer a danger that a 3rd person will be prejudiced so the goods may now be attached, levied upon, or that the vendor’s
lien or the right of stoppage in transit be exercised.

23. Warehouseman’s Lien

· Extent of Warehouseman’s Lien:

A warehouseman shall have a lien on goods deposited or on the proceeds thereof in his hands for:

a. all lawful charges for storage and preservation of the goods

b. all lawful claims for money advances, interest, insurance, transportation, labor, weighing, cooperating and other
charges and expenses in relation to such goods

c. all reasonable charges and expenses for notice and advertisements of sale and for sale of the goods where default
has been made in satisfying the warehouse lien

· Goods Subject to lien:

a. goods belonging to the depositor who is liable to the warehouseman as debtor whenever such goods are deposited
and

b. goods belonging to other persons stored by the depositor who is liable to the warehouseman as debtor with authority
to make a valid pledge

· How is a lien enforced?

a. by refusing to deliver the goods until the lien is satisfied

b. by causing the extrajudicial sale of the property and applying the proceeds to the value of the lien

c. by filing a civil action for unpaid charges or by way of counterclaim in an action to recover the property from him

· How is a lien lost?

a. when the warehouseman voluntarily surrenders possession of the goods without requiring payment of his lien; or

b. when the warehouseman wrongfully refuses to deliver the goods when a demand is made with which he is bound
to comply

24. Negotiation and Transfer of Receipts

· How do we negotiate a receipt deliverable to order?

a. by indorsing it in blank thereby making it deliverable to bearer or

b. by special indorsement - which would require further indorsements for further negotiations.

In both cases, the indorsements must be coupled with delivery.

· How do we negotiate a receipt deliverable to bearer?

There is no need to indorse for negotiation. Physical delivery of the instrument will suffice. But if the instrument is
indorsed specially, the bearer character of the receipt is destroyed and for further negotiation, there will be a need for
indorsement.

· Who may negotiate warehouse receipts?

a. the owner of the receipt, or

b. the person to whom possession of the receipt was entrusted to by the owner
· Rights acquired by a person to whom the receipt has been negotiated:

a. the title of the person negotiating the receipt over the goods covered by the receipt

b. the title of the person (depositor or owner) to whose order by the terms of the receipt the goods were to be delivered

c. the direct obligation of the warehouseman to hold possession of the goods for him, as if the warehouseman directly
contracted with him

· May non negotiable receipts be negotiated?

No, even if the receipt is indorsed, the transferee acquires no additional right. That is why they are called non
negotiable receipts. But they may be transferred or assigned by delivery.

· Rights of a person to whom a non negotiable receipt has been transferred:

a. the title to the goods as against the transferor

b. the right to notify the warehouseman of the transfer thereof and

c. the right thereafter to acquire the obligation of the warehouseman to hold the goods for him

· Distinction between a non negotiable receipt from a negotiable receipt with regard to attachment or execution upon
goods:

Non-negotiable Receipt

Negotiable Receipt

Prior to notification of the warehouseman by the transferor or transferee, the warehouseman is not bound to the
transferee whose right may be defeated by a levy of an attachment or execution upon the goods by the creditor of the
transferor or by a notification to such warehouseman of the subsequent sale of the goods.

The goods cannot be attached or levied under an execution unless the receipt be first surrendered to the warehouseman
or its negotiation enjoined.

· Rights of a person to whom a negotiable receipt has been transferred, not indorsed:

a. the right to the goods as against the transferor

b. the right to compel the transferor to indorse the receipt. But if the intention of the parties is that the receipt should
merely be transferred, the transferee has no right to require the transferor to indorse the receipt.
Note: Negotiation takes effect as of the time when the indorsement is actually made.

· Warranties of a person negotiating or transferring a receipt:

a. the receipt is genuine

b. he has a legal right to negotiate or transfer it

c. he has knowledge that would impair the validity or worth of the receipt and

d. he has a right to transfer the title to the goods and that the goods are merchantable

· A holder for security of a receipt (mortgagee or pledgee) who in good faith accepts payment of the debt from a
person does not warrant the genuineness of the receipt not the quality or quantity of the goods therein described.

· It is the duty of the purchaser, mortgagee or pledgee of goods for which a negotiable receipt has been issued to
require the negotiation of the receipt to him, otherwise his failure will have the same effect as an express authorization
on his part to the seller, mortgagor, or pledgor in possession of such receipt to make any subsequent negotiation. The
subsequent purchaser must have taken the receipt in good faith and for value.

· A bona fide purchaser of a negotiable warehouse receipt acquires title to the goods where he purchases from the
owner’s agent within the actual or apparent scope of his authority. In sum, negotiation is valid despite having been made
in breach of trust.

· Distinctions between a negotiable instrument and a negotiable warehouse receipt:

Negotiable Instrument

Negotiable Warehouse Receipt

When a negotiable instrument is altered deliberately, it becomes null and void.

When a warehouse receipt is altered, it is still valid but it may be enforced only in accordance with its original tenor.

If a negotiable instrument is originally payable to bearer, it will always remain so payable regardless of the way it is
indorsed, whether specially or in blank.

If a warehouse receipt, payable to bearer, is indorsed specially, it will be converted into a receipt deliverable to order and
can only be negotiated further by indorsement and delivery.
A holder in due course may be able to obtain a title better than that which the party who negotiated the instrument to
him had.

An indorsee even if a holder in due course obtains only such title as the person negotiating has over the goods.

The indorsement of a negotiable instrument has a double effect. It is at the same time a conveyance of the instrument
and a contract the indorser has with the indorsee that on certain conditions, the indorser will pay the instrument if the
party primarily liable fails to do so.

The indorsement of a warehouse receipt amounts merely to a conveyance by the indorser. Accordingly, an indorser of a
receipt shall not be liable to the holder if, for example, the warehouseman fails to deliver the goods because they were
lost due to his fault or negligence.

GENERAL BONDED WAREHOUSE LAW

· Any warehouseman receiving commodities for (a) storage; (b) milling; (c) co-mingling must:

a. obtain prior license from the Bureau of Commerce

b. file a bond in an amount equivalent to 33 1/3 % of the capacity of the warehouse against which bond depositors
may sue directly

c. open to the public, no discrimination allowed

d. liable for double market value should he accept goods in excess of the capacity of warehouse if goods are damaged
or destroyed

· Note: for palay and corn license, a bond with the National Grains Authority is required; also an insurance cover is
required.

Uniform Currency Law

1. Obligations Null and Void

a. obligations payable in gold/foreign currency

b. obligations payable in Philippine currency but measured in gold/foreign currency

2. Exempt Transactions

a. government to government transactions or with international banking institutions

b. transactions affecting high priority economic projects

c. forward exchange transactions between banks

d. import and export and other international banking, financial, investment and industrial transactions

3. Merchants and Commercial Transactions

· Classes of Investments:

a. Permitted - one allowed without need of prior authority from the Philippine Government. If registered status, invest
up to extent as not to affect its registered status. If enterprise not registered, investment not to exceed 40%.

b. Permissible - invest in excess of 40% in unregistered enterprise but with prior approval of BOI

c. Pioneer Area - (a) involves manufacturing, processing, production of product not produced at all/produced in non-
commercial scale; (b) uses a design, scheme, formula that is new and untried in the Phils.; (c) agricultural
activities/services essential to the attainment of food sufficiency; (d) produces non-conventional fuels/utilizes non-
conventional sources of energy (all others are non-pioneer)

4. Absolutely Disqualified to become Merchants

a. serving penalty of civil interdiction

b. insolvent

c. absolutely disqualified by special laws

5. Relatively Disqualified

a. judicial and prosecuting officials in active service

b. administrative, economic, military chiefs

c. government collection agents and custodian of funds

d. stock and commercial brokers

e. by special laws cannot trade in specified territories

6. Books a Merchant must keep

a. book of inventories and balances, statement of assets, liabilities and capital

b. journal of day to day operations

c. ledger for classifying accounts

d. copying book for letters and telegrams; if juridical person, include book of minutes and stock and transfer book

7. Probative Value of Merchant’s Book

a. evidence against merchants themselves

b. in case of conflicts between 2 books - that which s properly kept prevails

c. if one keeps books and the other does not and cannot explain why, the former prevails

d. if both books are properly kept and there is a conflict, other proofs can be resorted to

8. Commercial Contracts by Correspondence are perfected from the moment the offeree accepts the offer, even before
knowledge of said acceptance by the offeror. This does not apply to deposit, guaranty, sales, loan, agency, partnership.

9. Joint Account Partnership - business arrangement whereby 2 or more persons interest themselves in the business
of another by making contributions thereto and participating in the results thereof

a. only one member is ostensible, others are silent

b. no common name

c. only ostensible partners can sue/be sued

d. no juridical personality

Transportation Law

1. Contract of Transportation - contract whereby a certain person or association of persons obligate themselves to
transport persons, things, news, from one place to another for a fixed price

2. Parties to the Contract of Transportation:

a. Shipper - one who gives rise to the contract of transportation by agreeing to deliver the things or news to be
transported, or to present his own person or those of other or others in the case of transportation of passengers

b. Carrier/Conductor - one who binds himself to transport persons, things, or news, as the case may be, or one employed
in or engaged in the business of carrying goods for others for hire
3. Common Carrier - person, corporation, firm, association engaged in the business of carrying or transporting
passengers, goods or both, by land, water, air, for compensation, offering services to the public; must exercise
extraordinary diligence

Private Carrier - not engaged in the business of carrying; no public employment; undertakes to deliver
goods/passengers for compensation; requires only ordinary diligence

4. Requisites of Caso Fortuito

a. event independent of human will

b. occurrence makes it impossible for debtor to perform in normal manner

c. debtor free from aggravation/participation

d. impossible to foresee or avoid

5. Contributory negligence does not entitle passengers to recover moral/exemplary damages.

6. Bill of Lading - written acknowledgment of receipt of goods and agreement to transport them to a specific place to
a person named or his carrier

It is not indispensable to the creation of a contract of carriage. The contract itself arises from the moment goods
are delivered by shipper to carrier and the carrier agrees to carry them.

The function of the Bill of Lading: the legal basis of the contract between the shipper and carrier shall be the bills
of lading, by the contents of which all disputes which may arise with regard to their execution and fulfillment shall be
decided, no exceptions being admissible other than forgery or material errors in the drafting thereof.

Carrier’s responsibility starts from the moment he receives unconditionally the merchandise personally or through
an agent and lasts until he delivers them actually or constructively to the consignee or his agent.

Mere delay in the delivery of goods to consignee does not give right to refuse goods - only breach of contract, ergo
damages. If delay is unreasonable, then he may refuse to accept and make carrier liable for conversion.

7. Vessels - those engaged in navigation, whether coastwise or on the high seas, including floating docks, pontoons,
dredges, scows and any other floating apparatus destined for the services of the industry or maritime commerce

8. Persons Participating in Maritime Commerce:

a. ship owner and/or ship agent

b. captain or master

c. other officers of the vessel

d. supercargo

9. Liability of Ship owners and Ship agents:

a. civil liability for the acts of the captain

b. civil liability for contracts entered into by the captain to repair, equip and provision the vessel, provided that the
amount claimed was invested for the benefit of the vessel

c. civil liability for indemnities in favor of 3rd persons which may arise from the conduct of the captain in the care of
the goods which the vessel carried, as well as for the safety of the passengers transported

· Ship owner/ship agent not liable for the obligations contracted by the captain if the latter exceeds his powers and
privileges inherent in his position of those which may have been conferred upon him by the former. However, if the
amount claimed were made use of for the benefit of the vessel, the ship owner or ship agent is liable.

10. Doctrine of Limited Liability - liability of shipowners is limited to amount of interest in said vessel because of the real
and hypothecary nature of maritime law such that where the vessel is entirely lost, the obligation is extinguished.

Exceptions: (1) vessel is not abandoned

(2) claims under workmen’s compensation

(3) injury/damage due to shipowner’s fault

(4) vessel is insured

· The doctrine also applies for claims due to death or injuries to passengers, aside from claims for goods.

· In abandoning the vessel, there is no procedure to be followed. There is neither a prescriptive period within which
the ship owner can make the abandonment. He may do so for so long as he is not estopped from invoking the same or
do acts inconsistent with abandonment.

11. Roles of the Captain:

a. general agent of the ship owner

b. technical director of the vessels

c. represents the government of the country under whose flag he navigates

12. Loan on Bottomry - made by shipowner/ship agent guaranteed by vessel itself, repayable upon arrival at destination

13. Loan In Respondentia - taken on security of the cargo repayable upon the safe arrival at cargo destination

14. Accidents and Damages in Maritime Commerce:

a. Averages

b. Arrivals Under Stress

c. Collisions

d. Shipwrecks

15. Average:

a. all extraordinary or accidental expenses which may be incurred during the voyage for the preservation of the vessel
or cargo or both

b. all damages or deterioration which the vessel may suffer from the time it puts to sea at the port of departure until
it casts anchor at the port of destination, and those suffered by the merchandise from the time they are loaded in the port
of shipment until they are unloaded in the port of their consignment

16. Simple Average - expenses/damages caused to the vessel/cargo not inured to common benefit and profit of all the
persons interested in the vessel and her cargo; borne by respective owners

17. General Average - expenses/damages deliberately caused in order to save the vessel, its cargo or both from a real
and known risk

Requisites:

a. deliberately incurred

b. intended to save vessel and cargo or both

c. from real and known risk

d. there is success

18. Formalities for Incurring Gross Average:

a. there must be an assembly of the sailing mate and other officers with the captain including those with interests in
the cargo

b. there must be a resolution of the captain

c. the resolution shall be entered in the log book, with the reasons and motives and the votes for and against the
resolution

d. the minutes shall be signed by the parties

e. within 24 hours upon arrival at the first port the captain makes, he shall deliver one copy of these minutes to the
maritime judicial authority thereat

19. Arrivals under Stress - arrival of the vessel at a port not of destination on account of (a) lack of provisions; (b) well-
founded fear of seizure; (c) by reason of accident of the sea disabling it to navigate

When Not Lawful:

a. lack of provisions due to negligence to carry according to usage and customs

b. risk of enemy not well known or manifest

c. defect of vessel due to improper repair

d. malice, negligence, lack of foresight or skill of captain

20. Collision - impact of 2 vessels both of which are moving

21. Allision - striking of a moving vessel against one that is stationary

22. Cases of Collision:

a. due to the fault, negligence or lack of skill of the captain, sailing mate or the complement of the vessel - ship owner
liable for the losses and damages (Culpable Fault)

b. due to fortuitous event or force majeure - each vessel and its cargo shall bear its own damages (Fortuitous)

c. it cannot be determined which of the 2 vessels caused the collision - each vessel shall suffer its own damages, and
both shall be solidarily responsible for the losses and damages occasioned to their cargoes (Inscrutable Fault)

23. Error in Extremis - sudden movement made by a faultless vessel during the 3rd zone of collision with another vessel
which is at fault, even if the said movement is wrong, no responsibility will fall on said vessel
24. Shipwreck - denotes all types of loss/ wreck of a vessel at sea either by being swallowed up by the waves, by running
against another vessel or thing at sea or on coast where the vessel is rendered incapable of navigation

25. Salvage - the compensation allowed to persons by whose voluntary assistance a ship at sea or her cargo or both have
been saved in whole or in part from an impending peril, or such property recovered from actual peril or loss, in cases of
shipwrecks, derelict or recapture; a service which one person renders to the owner of a ship or goods by his own labor,
preserving the goods or ship which the owner or those entrusted with the care of them either abandoned in distress at
sea or are unable to protect and secure; a permit is required to engage in the salvage business

26. Derelict - a ship or cargo which is abandoned and deserted at sea by those who are in charge of it, without any hope
of recovering it, or without any intention of returning it

27. Elements of a Valid Salvage:

a. a marine peril

b. service voluntarily rendered when not required as an existing duty or from special contract

c. success, in whole or in part, or that the services rendered contributed to such success

28. Contract of Towage - contract whereby a vessel usually motorized pulls another from one place to another for
compensation. It is a contract of services.

29. Difference between Towage and Salvage:

Salvage

Towage

crew of salvaging ship is entitled to salvage, and can look to the salvaged vessel for its share

crew of the towing ship does not have any interest or rights with the remuneration pursuant to the contract

salvor takes possession and may retain possession until he is paid

tower has no possessory lien; only an action for recovery of sum of money

court has power to reduce the amount of remuneration if unconscionable

court has no power to change amount in towage even if unconscionable

Carriage of Goods by Sea Act

1. When Applicable:

a. contracts for the carriage of goods

b. by sea

c. to and from Philippine ports

d. in foreign trade

2. Notice of Loss or damage must be given in writing to the carrier or his agent at the port of discharge or at the time
of the removal of the goods into the custody of the person entitled to delivery. If the loss or damage is not apparent, the
notice must be given within 3 days of delivery. However, the carrier shall be discharged from all liability in respect of loss
or damage of goods unless suit is brought within 1 year after delivery of the goods or the date when the goods should
have been delivered. Notice of loss, if not given, that fact shall not affect or prejudice the right of the shipper to bring suit
within the 1 year prescriptive period.

Warsaw Convention

1. When Applicable:

a. international transport by air

b. transport of persons, baggage, or goods

2. Liabilities under the Convention:

a. damage sustained in the event of the death or wounding of a passenger taking place on board the aircraft or in the
course of any of the operations of embarking or disembarking

b. loss or damage to any check baggage or goods sustained during the transport by air

c. delay in the transport by air of passengers, baggage, or goods

· Enumeration of causes of action as above stated is not an exclusive list. (Northwest Airlines vs. Cancer)

3. Meaning of Transport by Air - period during which the baggage or goods are in charge of the carrier, whether in an
airport or on board an aircraft, or in the case of landing outside an airport, in any place whatsoever
4. Action for damages must be brought at the option of the plaintiff, either:

a. before the court of the domicile of the carrier;

b. court of principal place of business of carrier;

c. court where he has a place of business through which the contract has been made;

d. before the court at the place of destination

5. Convention provides for a limitation of liability:

a. for each passenger - limited to 125,000 francs

b. for goods and checked in baggage - limited to 250 francs per kilogram

c. for hand carry - limited to 5,000 francs per passenger

· When can you not avail of this limitation?

(1) willful misconduct

(2) default amounting to willful misconduct

(3) accepting passengers without ticket

(4) accepting goods without airway bill or baggage without baggage check

6. The right to damages shall be extinguished if an action is not brought within 2 years from the date of arrival at the
destination, or from the date on which the aircraft ought to have arrived, or from the date on which the transportation
stopped.

7. Notice requirement: damage to baggage : within 3 days from receipt

damage to goods: within 7 days from receipt

delay: within 21 days from receipt

· Failure to file written notice, no action shall lie against the carrier, save in the case of fraud on his part.

8. Notice Requirements:
COGSA

Code of Commerce

Warsaw Convention

loss/damage apparent

protest at time of receipt of goods

protest at time of receipt of goods

loss/damage not apparent

protest within 3 days from delivery

protest within 24 hours after receipt

damage of baggage

protest within 3 days from receipt

damage of goods

within 7 days from receipt

delay

within 21 days from receipt

Public Service Act

1. Every person that may own, operate, manage, control in the Philippines, for hire/compensation with general/limited
clientele whether permanent, occasional, accidental, and done for a general business purpose any common carrier,
shipyard, electric light, heat and power and public utility.

2. Public Utility - business or service engaged in regularly supplying the public with some commodity or service of public
consequence such as electricity, gas, water, transportation, telephone or telegraph service.

3. Prior Operator Rule - before permitting a new operator to invade the territory of another already established, the
prior operator must be given an opportunity to extend its service to meet the public needs in the matter of transportation.

4. Prior Applicant Rule - presupposes a situation where two interested persons apply for a CPC in the same community
over which no person has yet been granted a CPC to operate. If both applicants equal, then the applicant who applied
first will be given the CPC.

5. Distinctions between CPCs and CPCNs

Certificate of Public Convenience

Certificate of Public Convenience and Necessity

any authorization to operate a public service issued by the appropriate government agency

issued by the appropriate government agency to a public service to which any political subdivision has granted a franchise

an authorization issued by the proper government agency for the operation of public services for which no franchise,
either municipal or legislative is required by law

an authorization issued by the proper government agency for the operation of public services for which a franchise is
required by law

6. Requirements of CPC and franchise:

a. Filipino citizenship

b. financial capacity

c. public convenience
Corporation Law

1. Doctrine of Corporate Opportunity - a director is made to account to his corporation, gains and profits from
transactions entered into by him/another competing corporation in which he has substantial interest, which should have
been a transaction undertaken by the corporation. This s a breach of fiduciary relationship.

2. Doctrine of Piercing the Veil of Corporate Entity - it is to disregard for justifiable reasons by the state the fiction of
juridical personality of the corporation separate and distinct from the persons composing it

3. De Jure Corporation - corporation formed with all the requirements of law

4. De Facto Corporation - corporation defectively formed from a bona fide attempt to incorporate under the existing
law and exercises corporate powers

5. Corporation by Estoppel - a group of persons which holds itself out as a corporation and enters into a contract with
3rd persons on the strength of such appearance cannot be permitted to deny its existence in an action under said contract

6. Corporation by Prescription - body not lawfully organized as a corporation but has been recognized by immemorial
usage as a corporation with rights and duties maintainable by law (ex. Roman Catholic)

7. Trust Fund Doctrine - the subscribed capital stock of the corporation is a trust fund for the payment of debts of the
corporation which the creditors have the right to look up to satisfy their credits. Corporations may not dissipate this and
the creditors may sue the stockholders directly for their unpaid subscriptions

8. Voting Shares

a. Founders Shares - given rights and privileges not enjoyed by owners of other stocks; right to vote/be voted in the
election of directors shall not exceed 5 years

Non-Voting Shares

a. Preferred Shares - issued only with par value; given preference in distribution of assets in liquidation and in payment
of dividends and other preferences stated in the articles of incorporation

b. Redeemable Shares - expressly provided in articles; have to be purchased/taken up upon expiration of period of said
shares purchased whether or not there is unrestricted retained earnings

c. Treasury Stocks - stocks previously issued and fully paid for and reacquired by the corporation through lawful means
(purchase, donation, etc.)
9. Exceptions where holders of non-voting shares may vote:

a. amendments of articles of incorporation

b. adoption/amendment of by-laws

c. increase/decrease of bonded indebtedness

d. increase/decrease of capital stock

e. sale/disposition of all/substantially all corporate property

f. merger/consolidation of corporation

g. investment of funds in another corporation/another business purpose

h. corporate dissolution

10. Preferred Cumulative Participating Share of Stock - share entitling its holder to preference in the payment of dividends
ahead of common stockholders and to be paid the dividends ahead of common stockholders and to be paid the dividends
due for prior years and to participate further with common stockholders in dividend declarations

11. Promotion Stock for Services Rendered Prior to Incorporation Escrow Stock - stock deposited with a 3rd person to be
delivered to stockholder/assignor after complying with certain conditions - usually payment of full subscription price

12. Over-issued Stock - stock issued in excess of authorized capital stock; null and void

13. Watered Stock - stock issued gratuitously, money/property less than par value, services less than par value, dividends
where no surplus profits exist

14. Certificate of Stock - written acknowledgment by the corporation of the stockholder’s interest in the corporation. It
is the personal property and may be mortgaged/pledged. Transfer binds the corporation when it is recorded in the
corporate books. A stockholder who does not pay his subscription is not entitled to the issue of a stock certificate. The
total par value of the stocks subscribed by him should first be paid.

15. Chattel mortgage of shares registered with the Registrar of Deeds need not be registered in corporate books to bind
third parties because corporate books only cover absolute transfers. But the pledgee/mortgagee may not have voting
rights unless stated in the contract and registered in the corporate name.
16. Methods of Collection of Unpaid Subscription

a. call, delinquency and sale at public auction of delinquent shares

b. ordinary civil action

c. collection from cash dividends and other amounts due to stockholders if allowed by by-laws/agreed to by him

17. A corporation can reacquire stocks in the following cases:

a. eliminate fractional shares

b. corporate indebtedness arising from unpaid subscriptions

c. purchase delinquent shares

d. exercise of appraisal right

18. Right of Appraisal

a. amending articles, changing, restricting, enlarging stockholder’s rights/extending, shortening corporate life

b. sale/disposition of all/substantially all of corporate assets

c. merger and consolidation

d. investment of funds in another corporation/for a different purpose

19. Grounds for Rejection of Registration

a. not in prescribed form

b. purpose illegal, inimical

c. treasurer’s affidavit false

d. non-compliance with required Filipino stock ownership

20. Corporation must organize within 2 years from issuance of certificate of incorporation.

How to organize?
a. adoption of by-laws

b. election of Board of Directors

c. election of officers

But from issuance of certificate, it acquires juridical personality

21. Merger - one corporation absorbs the other and remains in existence while the other is dissolved

22. Consolidation - a new corporation is created and the consolidating corporations are extinguished

23. Theory of General Capacity - a corporation is said to hold such powers as are not prohibited/withheld from it by
general law

24. Theory of Special Capacity - the corporation cannot exercise powers except those expressly/impliedly given

25. Concession Theory - a group of persons wanting to create a corporation will have to execute documents and comply
with requirements set by the state before being given corporate personality; merely a privilege; state may provide causes
for which the privilege may be withdrawn

26. Acts requiring majority vote of stockholder:

a. filing of issue value of no par value share

b. adoption, amendment, repeal of by-laws

c. compensation and other per diems for directors

27. Where similar acts have been approved by the directors as a matter of general practice, custom and policy, the
general manager may bind the company even without formal authorization of the board of directors

28. Powers of stockholders:

a. a direct participation in management - where his vote is needed to approve certain corporate actions

b. indirect participation in management to vote or remove directors

c. proprietary rights

d. remedial rights

29. Voting Trust Agreement - an agreement between a group of stockholders and trustee for a term not exceeding 5
years in which control over the stocks is lodged in the trustee. The purpose is for controlling the voting.

a. in writing, notarized and filed with the SEC and the corporation

b. period not exceeding 5 years

c. cannot be entered into to circumvent the laws against monopolies, illegal combinations in restraint of trade in fraud

30. Cumulative Voting - the number of votes that a shareholder’s number of shares multiplied by the number of directors
may give all said votes to one candidate or he may distribute them as he may deem fit. Cumulative voting is a matter of
right in a stock corporation. In a non-stock corporation, it cannot be utilized unless allowed by the by-laws/articles

31. The power of removal of directors that may be exercised with or without cause cannot apply to the director
representing the minority shareholders. He may only be removed with cause.

32. General Rule: If surplus profits exceed the requirements the corporation shall declare dividends. This is compulsory
if the surplus is equal/or more than the paid-up capital.

Exceptions:

a. justified by approved expansion projects

b. prohibited by creditor to declare dividends

c. retention is necessary under existing circumstances

33. Business Judgment Rule - decisions made by a corporation’s management body shall not be interfered with even by
the courts unless such acts are oppressive/unconscionable as to violate the rights of the minority

34. Individual Suit - one brought to assert a right of a stockholder peculiar to himself

35. Representative Suit - brought by the stockholder in his own behalf and in behalf of other stockholders similarly
situated, having common cause against the corporation
36. Derivative Suit - brought by a stockholder for and in behalf of the corporation to protect/vindicate corporate rights
after he has exhausted intra-corporate remedies

Requisites:

a. cause of action in favor of the corporation

b. refusal of corporation to sue

c. injury to the corporation

· Although corporations dissolved have 3 years to wind up, they can convey their properties to a trustee who can
continue the suit beyond the 3 year period. The lawyer who handled the case in the trial court may be considered as
trustee for the dissolved corporation with respect to the matter in litigation only even if no appointment was extended to
him. (Selano vs. CA)

· In a case filed before dissolution, it may continue even beyond the 3 year period until final determination of litigation.
Otherwise, the corporation in liquidation would lose what justly belongs to them/be exempt from payment of obligations
because of a technicality.

37. Foreign Corporations

a. Doing Business - continuity of commercial dealings incident to prosecution of purpose and object of the organization.
Isolated, occasional or casual transactions do not amount to engaging in business. But where the isolated act is not
incidental/casual but indicates the foreign corporation’s intention to do other business, said single act constitutes
engaging in business in the Philippines

b. Instances when unlicensed foreign corporations can sue:

(1) isolated transactions

(2) action to protect good name, goodwill, and reputation of a foreign corporation

(3) contracts provide that Phil. Courts will be venue to controversies

(4) license subsequently granted enables foreign corporation to sue on contracts executed before the grant of the license

(5) recovery of misdelivered property

(6) where the unlicensed foreign corporation has a domestic corporation

38. Religious Corporations

a. Corporation Sole - special form of corporation; associated with the clergy and consists of 1 person only and his
successors; incorporated by law giving them legal capacity and advantage

b. Close Corporations - one whose articles provide that its shares shall not be held by more than 20 persons; its issued
stock shall be subject to one or more restrictions on transfer and shall not be listed in any stock exchange/make public
offering

c. Non-stock Corporation - one where no part of its income is distributable to its members and shall be used in
furtherance of the purpose of which it was organized

39. SEC Jurisdiction

a. original and exclusive jurisdiction

(1) fraudulent devices and schemes employed by directors detrimental to public interest

(2) intra-corporate disputes and with the state in relation to their franchise and right to exist as such

(3) controversies in the election, appointment of directors, trustees, etc.

(4) petition to be declared in a state of suspension of payments

b. Grounds for Suspension/Revocation of Certificate of Registration

(1) fraud in procuring registration

(2) serious misrepresentation as to objectives of corporation

(3) refusal to comply with lawful order of SEC

(4) continuous inoperation for at least 5 years

(5) failure to file by-laws within the required period

(6) failure to file reports

(7) other similar grounds

Revised Securities Act

(Material on the Securities Regulation Code of 2000 to follow)

1. General Rule: All securities before being offered for sale/actual sale to the public must first be registered and have
the proper permit.

Exception:

a. exempt securities

b. securities emanating from exempt transactions

2. Exempt Securities

a. issued by the government subdivisions/instrumentalities

b. issued by foreign government which the Philippines has diplomatic relations

c. issued by receiver/trustee of an insolvent approved by the court

d. issued by building and loan association

e. issued by receiver/trustee of an insolvent approved by the court

f. policy of insurance issued by insurance corporation supervised by the insurance commission

g. security/right/interest in real property including subdivision lot/condominium supervised by the Ministry of Human
Settlements

h. pension plans regulated by BIR/Insurance Commission

3. Exempt Transactions

a. judicial sale by execution, etc. in insolvency

b. sale of pledged property/foreclosed property to liquidate an obligation

c. isolated transactions on securities done by owner/agent

d. stock transfers emanating from mergers and consolidations

e. pre-incorporation subscription

f. securities issued by public service operator to broaden equity base

4. Grounds for Rejection of Registration

a. application incomplete/untruthful/omits to state a material fact

b. issuer/registrant insolvent, violated code/ SEC rules, engages in fraudulent transactions

c. issuer’s business not sound

d. officer, director, stockholders of issuers is disqualified

e. issue would prejudice the public

5. Grounds for Revocation

a. issuer insolvent

b. violated of Code/SEC rules

c. fraudulent transaction

d. dishonesty by issuer/misrepresented prospectus

e. does not conduct business in accordance with law

6. Acts Prohibited

a. manipulation of security prices

b. manipulation of deceptive devices

c. artificial measures of price control

d. fraudulent transactions

e. insider trading

f. false prospectus, communications, reports

Secrecy of Bank Deposits

1. Deposits in banks, including government banks, may not be inquired into by any person, except:

a. if depositor agrees in writing

b. impeachment cases

c. by court order in cases of bribery and dereliction of duty against public officials

d. deposit is subject of litigation

e. anti-graft cases
f. general and special examination of bank order of the Monetary Board of bank fraud or serious irregularity

g. re-examination made by an independent auditor hired by a bank to conduct its regular trust

Laws on Intellectual Creation

Copyright

1. What Works are not Protected:

a. any idea, procedure, system, method or operation, concept, principle, discovery, or mere data as such, even if they
are expressed, explained, illustrated or embodied in a work; news of the day or other miscellaneous facts, having the
character of mere items of press information, or any official text of a legislative, administrative or legal nature as well as
any official translation thereof

b. works of the government

c. statutes, rules, and regulations of government agencies and offices

d. speeches, lectures, sermons, addresses and dissertations, pronounced or rendered in courts of justices or nay
administrative agencies in deliberative assemblies and meetings of public character

2. Fair Use of a Copyrighted Work is not Infringement

a. for criticism, comment, news reporting, teaching, research, scholarship, and similar purposes

b. decompilation: the reproduction of the code and translation of the forms of the computer program with other
programs

3. Factors to Consider in Determining Fair Use:

a. purpose and character of the use, including whether such use is of a commercial nature or for no profit or educational
purposes

b. nature of the copyrighted work

c. amount and substantiality of the portion used in relation to the copyrighted work as a whole

d. effect of use upon the potential market for a value of the copyrighted work

4. Terms of the Protection

a. copyrighted work: lifetime of creator plus 50 years after death (to be computed on the 1st day of January of the
year following the death)
b. performances not incorporated in recordings: 50 years from end of year in which the performance took place

c. sound or image and sound recordings and performances incorporated therein: 50 years from end of the year in
which the recording took place

d. broadcasts: 20 years from the date the broadcast took place

5. Remedies for Infringement

a. injunction

b. actual damages, including legal costs and other expenses, as he may have incurred due to the infringement as well
as the profits the infringer may have made due to such infringement

c. impounding of articles during pendency of the action

d. destruction of all infringing copies and/or devices

e. moral and exemplary damages

6. Criminal Penalties

a. imprisonment of 1 to 3 years plus fine of P50,000 to P150,000 for the first offense

b. imprisonment of 3 years and 1 day to 6 years plus fine ranging from P150,000 to P500,000 for the 2nd offense

c. imprisonment of 6 years and 1 day to 9 years plus fine of P500,000 to P1,000,000 for the 3rd/subsequent offenses

IN ALL CASES, subsidiary imprisonment in cases of insolvency

7. Presumptions:

a. Presumption of copyright in the work of other subject matter to which the action related

b. Plaintiff is presumed to be the owner of the copyright

c. The natural person whose name is indicated on a work in the usual manner as the author shall, in the absence of
proof to the contrary, be presumed to be the author of the work. This is applicable even if the name is a pseudonym,
where the pseudonym leaves no doubt as to the identity of the author.

8. Prescription: No damages may be recovered after 4 years from time the cause of action arose.

Patents
1. Patentable Inventions - any technical solution of a problem in any field o human activity that is new, involve an
inventive step and is industrially applicable shall be patentable. It may be or may relate to as product, or process or an
improvement of any of the foregoing.

2. Non-Patentable Inventions

a. discoveries, scientific theories and mathematical methods

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

Exception: products and composition for use in any of these methods

d. plant varieties or animal breeds or essentially biological process for the production of plants and animals

Exception: micro-organisms and non-biological and micro-biological processes

e. aesthetic creations

f. contrary to public order or morality

3. Requisites of Patentability

a. new, novelty

b. involves an inventive step;

c. is industrially applicable

4. Novelty

The novelty requirement in the Code is absolute. Thus, an invention is not considered new if it forms part of a prior
art. A prior art consists of:

a. anything which has been made available to the public anywhere in the world before the filing date or the priority
date of the application, or

b. the whole contents of an application for a patent, utility model, or industrial design registration, published in the
IPO gazette, filed or effective in the Philippines, with a filing or priority date that is earlier than the filing or priority date
of the application, provided that the application which has validly claimed the filing date of an earlier application (priority
date) is prior art with effect as of the filing date of such earlier application, and provided further, that the applicant and
the inventor identified in both applications are not one and the same
5. Inventive Step - an invention involves an inventive step, if having regard to the prior art, it is not obvious to a person
skilled in the art at the time of the filing date of priority date of the application claiming the invention

6. Industrial Applicability - an invention is considered industrially applicable if it can be produced and used in the
industry

7. The First-to-File System - if 2 or more persons have made the invention separately and independently of each other,
the right to the patent belongs to the person who filed an application for such invention, or where 2 or more applications
are filed for the same invention, the right of the patent belongs to the person who has the earliest filing date or the earliest
priority date

Under this system, the patent is granted to the inventor who filed his patent application earlier than others thus
simplifying the determination of who is entitled to own the patent.

The First-to-File System increases the rights of the inventor by:

a. guaranteeing the confidentiality of the application prior to its publication

b. giving the inventor inchoate rights against an infringer after the publication of the application and before the grant
of the patent and

c. expanding the rights of the inventor to institute cancellation proceedings for the duration of the term of the patent.
Cancellation proceedings may be filed at any time during the term of the patent.

Under this system, the applicant declared by final court order as having the right to the patent may:

a. prosecute the application as his own application in place of the original applicant

b. file a new patent application in respect of the same invention

c. request that the application be refused or

d. seek the cancellation of the patent, if one has already been issued

8. What is the difference between novelty in patents and originality in copyright?

Novelty in Patents - even if you do not know of any previous creation, as long as a patent on the same creation has
already been published anywhere in the world, you cannot claim novelty. No access tot he other creation is no defense.

Originality in Copyright - even if there is same creation, as long as you do not copy your own creation, it is still
considered an original creation. No access to the previous creation is a defense.
9. Non-Prejudicial Disclosure

The disclosure of information contained in the application during the 12 months preceding the filing date or the
priority date of the application shall not prejudice the applicant on the ground of lack of novelty if such disclosure was
made by (a) inventor; (b) a patent office and the information was contained

10. Term of Patent - 20 years from the filing date of the application

11. Grounds for Compulsory Licensing:

a. national emergency or other circumstances of extreme urgency

b. where public interest, national security, health or the development of other vital sectors of the national economy
as determined by the appropriate agency of the government so requires

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

d. in case of public non-commercial use of the patent by the patentee, without satisfactory reason

e. if not being worked in the Philippines on a commercial scale

12. In case of Compulsory Licensing of Patents involving Semi-conductor Technology, the license may be granted only in
case of public non-commercial use or to remedy a practice determined after judicial or administrative process to be anti-
competitive

13. Utility Models - an invention qualifies for registration as a utility model if it is new and industrially applicable

- no inventive step required for registration

- no search and examination required

14. Term Protection - 7 years after the filing date of application without possibility of renewal

15. Industrial Design - any composition of lines or colors or any 3 dimensional form, whether or not associated with lines
or colors

Industrial Designs essentially dictated by technical or functional considerations to obtain a technical result or those
that are contrary to public order, health or morals shall not be protected
16. Term of Protection - 5 years from filing date of application, renewable for not more than 2 consecutive periods of 5
years each

Insolvency Law

1. Distinguish Suspension of Payment and Insolvency

Suspension of Payment

Insolvency

debtor has enough assets to meet liabilities but cannot meet them as they fall due

debtor has more liabilities than assets

always initiated by debtor

initiated by creditors/other persons if involuntary; initiated by debtor if voluntary

2. Fraudulent Preference - any act of insolvent which gives rise/has tendency to give preference to a creditor to the
assets of the insolvent prejudicial to the right of other creditors of said insolvent

3. Effect on Actions Upon Adjudication of Insolvency

a. suits pending in court

(1) secured obligations suspended until assignee appointed

(2) unsecured obligations terminated except to fix amount of obligation

(3) foreclosure suits pending continue

b. suit not yet filed - cannot be filed anymore, but claims may be presented to assignee

4. Debts and Obligations not Affected by Discharge of Insolvent

a. assessments due to national and local government

b. debts due to fraud/embezzlement

c. debts in which he is bound solidarily

d. alimony
e. corporate debts

f. debts not included in the schedule submitted by debtor

Chattel Mortgage Law

1. The law primarily governs chattel mortgage. Provisions on pledge of NCC in so far as not in conflict with CML also
govern chattel mortgages.

2. Chattel Mortgage may be rescinded for being in fraud of creditors.

3. Growing fruits are covered by chattel mortgage but they may not be pledged.

4. Machinery placed on plant or building owned by another can be the object of chattel mortgage.

5. General Rule: Chattel Mortgage cannot cover debts subsequently contracted.

6. Rules: Chattel Mortgage cannot cover debts subsequently contracted

a. registered in place where mortgagor resides and where property (chattel) is located. If mortgagor resides abroad,
register in place where property is located.

b. Motor Vehicles: register also in Land Transportation Office

c. Shares of Stock: place of domicile of corporation and shareholder. No need for notation in books of corporation

d. Vessels: Phil. Coastguard

7. To be valid against 3rd persons:

a. affidavit of good faith

b. contract must be registered

8. General Rule: In Chattel Mortgage, there is recovery of deficiency judgment.

 Exception: when Recto Law applies

9. Requisites of CML:

a. constituted to secure the fulfillment of principal obligation

b. mortgagor is absolute owner of the thing mortgaged

c. persons constituting the mortgage have the free disposal of the property and in the absence thereof, they be legally
authorized for the purpose

d. recorded to bind 3rd persons

10. Formal Requisites of CM:

a. substantial compliance with form in Sec. 5 of CML

b. signed by at least 2 witnesses

c. must contain an affidavit of good faith

d. certificate of oath (notarial acknowledgment)

11. Affidavit of Good Faith - where the parties severally swear that the mortgage is made for the purpose of securing the
obligation specified and for no other purpose and that the same is a just and valid obligation and not one entered into for
fraud

- property given in CM must be described to enable the parties or any other person after
reasonable inquiry and investigation to identify it

12. Future property may not be covered by CM but when such property is a:

a. renewal of, or in substitution for goods on hand when the mortgage was executed, or

b. purchased with proceeds (not of your own money) of said goods, said property may be covered by CM

13. Criminal Acts - removal of chattel to another city or province without written consent of mortgagee, selling property
already pledged, or mortgaged without written consent of mortgagee

14. A chattel mortgage may be foreclosed judicially or extra-judicially, in the latter case, before a notary or sheriff, or
creditor or mortgagee when stipulated, even without need of notice (when mortgagee forecloses)
15. Pactum Commissorium applies to Chattel Mortgage.

Private Corporation
NOVEMBER 3, 2010 LECTURE

Atty. Jesus Ramon M. Quevenco

TITLE I
GENERAL PROVISIONS
Definitions and Classifications

Section1. Title of the Code. – This Code shall be known as “The Corporation Code of the Philippines”.

Section2. Corporation defined. – A corporation is 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.

What are the attributes:

1. It is an artificial being with separate and distinct personality. Cross refer to Article 40 of the New Civil Code and
following on natural and juridical persons.

2. It is created by operation of law. The law being BP 68 or the general law as provided for by Article 12 Section 16 of
the 1987 Constitution. The Concession Theory states that a corporation is an artificial creature without any existence until
it has received the imprimatur of the State acting in according to law through the SEC. The life of the corporation is a
concession made by the state.

3. It has the right to succession – meaning that it has the capacity to have continuity of existence despite the change of
stockholders, members, board members or officers.

4. Powers attributes and properties – Theory of Special Capacities/Limited Capacity Doctrine provides that no
corporation shall possess or exercise any corporate power except those conferred by law, its Articles of Incorporation,
those implied from express powers and those as are necessary or incidental to the exercise of the powers so conferred.
The corporations capacity is limited to such express, implied or incidental powers. If the acts of the corporation is not one
of those expressed, implied or incidental powers, the act is ultra vires.

Section 3. Classes of corporations. – Corporations formed or organized under this Code may be stock or non‐stock
corporations. Corporations which have capital stock 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 are stock corporations. All other
corporations are non‐stock corporations.

Section 4. Corporations created by special laws or charters. – Corporations created by special laws or charters shall be
governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by
the provisions of this Code, insofar as they are applicable.

Sec. 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private
corporations. Government‐owned or controlled corporations may be created or established by special charters in the
interest of the common good and subject to the test of economic viability.
Classes of Corporations:

a) As to organizers: public – by the State only

private – by private persons alone or with the State

b) As to functions: public – government of a portion of the State

private – usually for profit making

c) As to governing law: public – Special Laws and the LGC

private – Law on Private Corporation BP 68

d) As to legal status:

1. De jure corporation – corporation organized in accordance with requirements of law.

2. De facto – a corporation where there exist a flaw in its incorporation. The requisites for its existence are: (i) the
existence of a valid law under which it may be incorporated, (ii) an attempt in good faith to incorporate, (iii) use of
corporate powers

e) Corporation by estoppel – group of persons which hold themselves out as a corporation and enters into a contract
with a third person on the strength of such appearance cannot be permitted to deny its existence in an action under said
contract. (This is not a real corporation)

Those who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners
(meaning up to their personal properties) Those who were not aware of the defect are liable only up to their investment.

On the other hand the SC in Lim vs. Phil Fishing Gear Industries Inc ruled that those who derived benefit from the
transaction made by the ostensible corporation despite knowledge of its legal defects may be held liable for the contract
they impliedly assented to or took advantage of.

f) Corporation by prescription – a corporation that was not formally organized as such but has been duly recognized
by immemorial usage as a corporation with rights and duties maintainable at law. Example: The Roman Catholic Church

g) As to existence of stocks – See section 3

h) As to laws of incorporation – (1) Domestic – corporation formed organized or existing under Philippine laws, (2)
Foreign - corporation formed organized or existing under any law other than those of the Philippines and whose laws allow
Filipino citizens and corporation to do business in its own country or state.

i) Corporation going public vs corporation going private – a corporation is deemed to be going public when it decides
to list its shares in the stock exchange. This includes corporation that will the initial public offering of its shares. It is going
private when it would restrict the shareholders to a certain group. This includes close or closely held corporation.

j) Other corporation:

1. Close corporation
2. Special Corporation

3. Educational Corporation

4. Religious Corporation (1) religious societies (2) corporation sole

Section 5. Corporators and incorporators, stockholders and members. – Corporators are those who compose a
corporation, whether as stockholders or as members. Incorporators are those stockholders or members mentioned in the
articles of incorporation as originally forming and composing the corporation and who are signatories thereof.

Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non‐stock corporation are
called members.

Components of a Corporation:

1. Incorporators – those mentioned in the Articles of Incorporation as originally forming and composing the corporation,
having signed the articles. They must be (a) natural persons (b) at least five but nor more than fifteen (c) must be of legal
age (d) majority must be residents of the Philippines (e) each must own at least one share. See Section 10 CCP.

2. Corporators – all the stockholders and members of a corporation including the incorporators who are still
stockholders

3. Stockholders and Members – stockholders are person who hold or own shares in a stock corporation while members
are those who compose a non‐stock corporation.

4. Directors and Trustees – The BOD is the governing body in a stock corporation while the BOT in a non‐stock
corporation. They exercise the powers of the corporation.

5. Corporate Officers – they are the officers who are identified as such in the Corporation Code, the Articles of
Incorporation or the By‐Laws of the Corporation.

6. Promoter – a self‐constituted organizer who finds an enterprise or venture and helps to attract investor, forms a
corporation and launches it in business. All with a view to promotion profits.

Section 6. Classification of shares. – The shares of stock of stock corporations may be divided into classes or series of
shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated
in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued
as “preferred” or “redeemable” shares, unless otherwise provided in this Code: Provided, further, That there shall always
be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par
value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no‐
par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the
corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock
may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may
fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions
shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non‐assessable and the holder of such
shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value
may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire
consideration received by the corporation for its no‐par value shares shall be treated as capital and shall not be available
for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal
requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be
equal in all respects to every other share.

Where the articles of incorporation provide for non‐voting shares in the cases allowed by this Code, the holders of such
shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by‐laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as
provided in this Code shall be deemed to refer only to stocks with voting rights.

Section 7. Founders’ shares. – Founders’ shares classified as such in the articles of incorporation may be given certain
rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be
voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to the
approval of the Securities and Exchange Commission. The five‐year period shall commence from the date of the aforesaid
approval by the Securities and Exchange Commission.

Section 8. Redeemable shares. – Redeemable shares may be issued by the corporation when expressly so provided in the
articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period,
regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms
and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the
certificate of stock representing said shares.

Section 9. Treasury shares. – Treasury shares are shares of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful
means. Such shares may again be disposed of for a reasonable price fixed by the board of directors.

D EFINITION OF TERMS

1. Capital stock, Legal Stock or Stated Capital - the amount fixed in the corporate charter to be subscribed and paid in
cash kind or property at the organization of the corporation or afterwards and upon which the corporation is to conduct
its operation.

2. Capital – the value of the actual property or estate of the corporation whether in money or property (its net worth
or stockholders equity or it is its assets less its liabilities)

3. Authorized capital stock – amount of capital stock as specified in the articles of incorporation. It is synonymous to
capital stock where the shares of the corporation has par value. If the shares of stock have no par value, the corporation
has no authorized capital stock.
4. Subscribed capital stock – the total amount of capital stock subscribed whether fully paid or not.

5. Outstanding capital stock – the portion of the capital stock issued to subscribers whether fully paid or partially paid
(as long as there is a binding subscription contract); except treasury shares

6. Unissued capital stock – the portion of capital stock that is not issued or subscribed. It does not vote and draws no
dividends.

7. Legal capital – the amount equal to the aggregate par value and/or issued value of the outstanding capital stock.
When par value shares are issued above par, the premium or excess is not to be considered part of the legal capital.
(Section 43)

8. Stated capital – the capital stock divided into no par value shares.

9. Paid up capital – the amount paid by the stockholders on subscription from unissued shares of the corporation.

Example 1: Corporation X

Articles of Incorporation: 1. Authorized capital stock P 1million

2. 10,000 shares

3. par value P 100/share

4. P 250,000 subscribed at time of incorporation

5. P 62,500 paid to treasurer per Section 13 CCP

Authorized Capital Stock, Capital stock, Legal Stock or Stated Capital – P 1 million

Subscribed. Outstanding or issued capital – P 250,000

Paid up capital – P62,500

Un‐issued capital stock – P750,000

Legal Capital – P 250,000

Example 2: Corporation X

Subscription of 2,500 shares paid in the amount of P250,000 (whether in cash or property or any consideration
allowed by law) constitutes the original capital of the corporation.

1. If the corporation made a profit of P 50 thousand, what would be the capital

2. If the corporation made a loss of P 50 thousand , what would be the capital

3. Suppose the corporation borrows P 150,000 from the bank what would be the subsequent effect on the capital after
(1) and (2) occurred. Look at Assets = Liabilities + Capital

4. What would be the capital stock and legal capital.

It remains constant at P 1 million and P250 thousand respectively.

STOCK OR SHARE OF STOCK – is one of the units into which capital stock is divided. It represents the right or interest
which the owner has:

1. in the management of the corporation

2. in the portion of the corporate earnings if and when segregated in the form of dividends

3. upon its dissolution and winding up in the remaining property and assets of the corporation

CLASSIFICATION OF SHARES

1. Common – the basic class of stock ordinarily and usually issued without extraordinary rights and privileges. The
owners are entitled to pro‐rata share in the profits.

2. Preferred shares – shares with a stated par value which entitle the holder to certain preferences over the holder of
common stock. The preferences may be as to (a) assets (b)dividends (c)as may be the determined by the BOD when
authorized to do so

Limitations of preferred shares:

i. If deprived of voting rights it shall still be entitled to vote on vital matters Section 6 par.6

ii. Must not be violative of the Code

iii. May be issued only with stated par value

iv. The BOD may fix the terms and conditions only when so authorized by the AOI

Kinds of preferred shares:

i. Cumulative – entitles the owner to payment of current dividends but also back dividends previously not paid
whether or not there was a declaration in the past years.

ii. Non‐cumulative – entitles the owner only to the current dividends before any other stockholders are paid the
same.

iii. Participating – entitles the owner to participate with common shares in excess distribution at a predetermined
or fixed ratio.

iv. Non participating – entitles the preferred owner to receive the stipulated dividends and no more.
v. Cumulative participating – a combination of the cumulative share and the participating share

Example: Non participating 300 preferred shares at a par value of P100 with a preferred rate of 10%. There are 700
common shares.

1. A dividend of P5,100 was declared. The non participating preferred share gets P3,000 (300x100x10%). The remaining
P2,100 is distributed among the 700 common shares.

2. A dividend of P11,400 was declared but this time the preferred shares are also participating. The guaranteed
dividend will first be distributed to the preferred shareholders (P3,000). From the balance of P8,400, the common shares
will get an allocation of P7,000.* The remainder of P1,400 will be shared by all the 1,000 shareholders, including the
preferred shareholders.

*Doctrine of Equality of Shares – all shares issued by the corporation are presumed to be equal and enjoy the same rights
and privileges and are subject to the same liabilities unless the AOI provide for distinctions in their treatment.

3. Voting Shares – shares with a right to vote

4. Non‐voting shares – shares with no right to vote. Denial of voting rights only for preferred and redeemable shares
provided that there shall always be a class of shares which have complete voting rights provided further par. 6 Section 6.

5. Shares in escrow – subject to an agreement where the shares are deposited to a third party until performance of a
certain condition or the happening of an event. Based on civil the Civil Code on express trust.

6. Par value share – shares with a value fixed in the AOI and the certificate of stocks.

7. No par value shares – shares having no par values but have issued value stated in the AOI. Note: (a)No par value shares
have the same rights as holders of par value stock. (b) It cannot have an issued price of less than P5.

8. Street Certificate – a stock certificate endorsed by the registered holder in blank and the transferee can command its
transfer to his name from the issuing corporation.

9. Convertible share – a share that is changeable by the stockholder from one class to another at a certain price and within
a certain period.

10. Fractional shares – a share with a value of less than one full share.

11. Promotion share – shares issued to promoters usually for services rendered in the launching or promoting the welfare
of the company.

12. Over‐issued stock – stocks issued in excess of the authorized capital stock. It is also known as spurious stock and its
issuance is considered null and void.

13. Watered stock – a stock issued not in exchange for its equivalent value either in cash, property, share, stock dividends
or services. Section 65 of the CCP. Water in the stock represent the difference in the FMV at the time of the issuance and
the par or issued value. Both par and no par stocks can thus be watered stock. Violates the “Trust Fund Doctrine”
14. Founders Share – shares classified as such in the AOI and issued to organizers or promoters of the corporation with
special preference in voting rights and dividends. But if exclusive right to vote and be voted as Director is granted the
privilege is subject to SEC approval and must not exceed 5 years from date of approval.

15. Redeemable shares – shares which the corporation can purchase or take up from their holders as expressly provided
for in the AOI and the certificate of stock at a fixed date or at the option of the issuing corporation, the holder or both.

Notes: (a) May be deprived of voting rights

(b) May be redeemed regardless of the existence of unrestricted retained earnings

(c) Redemption may not be made when the corporation is insolvent or when such would cause insolvency. “Trust Fund
Doctrine”

(d) When redeemable shares are reacquired, the same shall be considered retired and no longer issuable unless provided
for in the AOI.

16. Treasury Shares – shares of stock which have been issued and fully paid for but subsequently reacquired by the
corporation by purchase, redemption, donation or some other lawful means.

(a) treasury shares are not retired shares. They do not revert to the unissued shares of the corporation but are
regarded as property which may be reissued or resold at the price fixed by the BOD.

(b) if purchased from a stockholder it is in effect a return of the value of the investment of that stockholder and
this can only be done if there are surplus profits so that no impairment of capital will occur.

(c) if donated would amount to a surrender of the stock without getting value

(d) it need not be sold at par value or issued value but at the best obtainable price provided it is reasonable.
There can be no watering of treasury shares because it is not an original issuance.

(e) It has no voting rights nor is entitled to dividend while remaining in the treasury because equal distribution
of voting rights will be lost and that the corporation cannot declare dividends to itself.

Case17: Republic Planters Bank vs Agana, 269 SCRA 1, 1997 (Classification of Shares)

TITLE II

INCORPORATION AND ORGANIZATION

OF PRIVATE CORPORATIONS

Sec. 10.Number and qualifications of incorporators. – Any number of natural persons not less than five (5) but not more
than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation
for any lawful purpose or purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at
least one (1) share of the capital stock of the corporation.
Sec. 11.Corporate term. – A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation
unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of
incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the
articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) 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 Securities and Exchange Commission.

Sec. 12.Minimum capital stock required of stock corporations. – Stock corporations incorporated under this Code shall not
be required to have any minimum authorized capital stock except as otherwise specifically provided for by special law,
and subject to the provisions of the following section.

Foreign Stockholders

All the stockholders in a corporation may be foreigners except in fully or partially nationalized corporation. For example
a manufacturer that exports all its products can be wholly owned by foreigners.

Fully or partly nationalized corporations:

a) No foreign stockholder allowed in

1. Mass media except recording

2. Retail trade enterprise with paid up capital of less than US$ 2.5 million

3. Private security agencies

4. Small scale mining

5. Utilization of natural resources

6. Cockpits

7. Manufacture, repair, stockpiling and/or distribution of nuclear weapons(Art. 2 Section 8)

8. Manufacture of firecrackers and other pyrotechnic devices

b) 20% foreign equity – Private radio communications network

c) Up to 25% foreign equity

1. Private recruitment whether for local or overseas employment

2. Construction or repair of locally funded works

3. Construction of defense related structures

d) Up to 40% foreign equity

1. Exploration, development and utilization of natural resources

2. Realty companies and other corporations that own private lands

3. Operations and management of public utilities

4. Culture, production, milling, processing, trading except retail of rice and corn and by‐products

5. Adjustment companies

6. Sauna and steambath bathhouses, massage clinic and similar activities

e) Up to 60 % foreign equity

1. Financing companies

2. Investment houses

Sec. 13.Amount of capital stock to be subscribed and paid for the purposes of incorporation. – At least twenty‐five percent
(25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of
incorporation, and at least twenty‐five (25%) per cent of the total subscription must be paid upon subscription, the balance
to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date
or dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paid‐up capital be
less than five Thousand (P5,000.00) pesos.

Sec. 14.Contents of the articles of incorporation. – All corporations organized under this code shall file with the Securities
and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of
the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special
law:

1. The name of the corporation;

2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than
one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are he secondary
purpose or purposes: Provided, That a non‐stock corporation may not include a purpose which would change or contradict
its nature as such;
3. The place where the principal office of the corporation is to be located, which must be within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15);
7. The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors
or trustees are duly elected and qualified in accordance with this Code;
8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number
of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities
and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some
or all of the shares are without par value, such fact must be stated;
9. If it be a non‐stock corporation, the amount of its capital, the names, nationalities and residences of the contributors
and the amount contributed by each; and
10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient.

The Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless
accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least twenty‐five (25%)
percent of the authorized capital stock of the corporation has been subscribed, and at least twenty‐five (25%) of the total
subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least
twenty‐five (25%) percent of the said subscription, such paid‐up capital being not less than five thousand (P5,000.00)
pesos.

Sec. 15.Forms of Articles of Incorporation. – Unless otherwise prescribed by special law, articles of incorporation of all
domestic corporations shall comply substantially with the following form:
ARTICLES OF INCORPORATION
OF
__________________________
(Name of Corporation)

KNOW ALL MEN BY THESE PRESENTS:

The undersigned incorporators, all of legal age and a majority of whom are residents of the Philippines, have this day
voluntarily agreed to form a (stock) (non‐stock) corporation under the laws of the Republic of the Philippines;

AND WE HEREBY CERTIFY:

FIRST: That the name of said corporation shall be

“………………………………………., INC. or CORPORATION”;

SECOND: That the purpose or purposes for which such corporation is incorporated are: (If there is more than one purpose,
indicate primary and secondary purposes);

THIRD: That the principal office of the corporation is located in the City/Municipality of ………………………………………, Province
of ………………………………………….., Philippines;

FOURTH: That the term for which said corporation is to exist is ……………. years from and after the date of issuance of the
certificate of incorporation;

FIFTH: That the names, nationalities and residences of the incorporators of the corporation are as follows:

NAME NATIONALITY RESIDENCE

………………………………. ………………………………. ……………………………….

………………………………. ………………………………. ……………………………….

………………………………. ………………………………. ……………………………….

………………………………. ………………………………. ……………………………….

………………………………. ………………………………. ……………………………….

SIXTH: That the number of directors or trustees of the corporation shall be ………….; and the names, nationalities and
residences of the first directors or trustees of the corporation are as follows:

NAME NATIONALITY RESIDENCE

………………………………. ………………………………. ……………………………….

………………………………. ………………………………. ……………………………….

………………………………. ………………………………. ……………………………….

………………………………. ………………………………. ……………………………….

………………………………. ………………………………. ……………………………….

SEVENTH: That the authorized capital stock of the corporation is .…………………………………………. (P………………….) PESOS in
lawful money of the Philippines, divided into …………… shares with the par value of …………………………….. (P…………………..)
Pesos per share.

(In case all the share are without par value):

That the capital stock of the corporation is ……………………… shares without par value. (In case some shares have par value
and some are without par value): That the capital stock of said corporation consists of …………………… shares of which
………………….. shares are of the par value of ………………………… (P…………………) PESOS each, and of which …………………………..
shares are without par value.

EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock above stated has been subscribed as
follows:

Name of Subscriber Nationality No of Shares Amount

Subscribed Subscribed

……………………………. ……………….. …………………… …………………..

……………………………. ……………….. …………………… …………………..

……………………………. ……………….. …………………… …………………..

……………………………. ……………….. …………………… …………………..

……………………………. ……………….. …………………… …………………..

NINTH: That the above‐named subscribers have paid at least twenty‐five (25%) percent of the total subscription as follows:

Name of Subscriber Amount Subscribed Total Paid‐In

…………………………….. ……………………………….. ………………………….

…………………………….. ……………………………….. ………………………….

…………………………….. ……………………………….. ………………………….

…………………………….. ……………………………….. ………………………….

…………………………….. ……………………………….. ………………………….

(Modify Nos. 8 and 9 if shares are with no par value. In case the corporation is non‐stock, Nos. 7, 8 and 9 of the above
articles may be modified accordingly, and it is sufficient if the articles state the amount of capital or money contributed
or donated by specified persons, stating the names, nationalities and residences of the contributors or donors and the
respective amount given by each.)

TENTH: That ………………………………… has been elected by the subscribers as Treasurer of the Corporation to act as such
until his successor is duly elected and qualified in accordance with the by‐laws, and that as such Treasurer, he has been
authorized to receive for and in the name and for the benefit of the corporation, all subscription (or fees) or contributions
or donations paid or given by the subscribers or members.

ELEVENTH: (Corporations which will engage in any business or activity reserved for Filipino citizens shall provide the
following):

“No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the required percentage
of the capital stock as provided by existing laws shall be allowed or permitted to recorded in the proper books of the
corporation and this restriction shall be indicated in all stock certificates issued by the corporation.”

IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation, this ………………. day of …………………………,
19 ……….. in the City/Municipality of …………………………………., Province of …………………………………………., Republic of the
Philippines.

…………………………………….. ………………………………………

…………………………………….. ………………………………………

…………………………………………

(Names and signatures of the incorporators)

SIGNED IN THE PRESENCE OF:

…………………………………….. ………………………………………

(Notarial Acknowledgment)

TREASURER’S AFFIDAVIT

REPUBLIC OF THE PHILIPPINES )

CITY/MUNICIPALITY OF ) S.S.

PROVINCE OF )

I, ………………………………, being duly sworn, depose and say:

That I have been elected by the subscribers of the corporation as Treasurer thereof, to act as such until my successor has
been duly elected and qualified in accordance with the by‐laws of the corporation, and that as such Treasurer, I hereby
certify under oath that at least 25% of the authorized capital stock of the corporation has been subscribed and at least
25% of the total subscription has been paid, and received by me, in cash or property, in the amount of not less than
P5,000.00, in accordance with the Corporation Code.

…………………………………

(Signature of Treasurer)

SUBSCRIBED AND SWORN to before me, a Notary Public, for and in the City/Municipality of
……………………………. Province of ……………………………………, this …………. day of ……………………., 19 ……..; by
…………………………………….. with Res. Cert. No. ………………… issued at …………….. on …………………., 19 ……….

NOTARY PUBLIC
My commission expires on ………………………, 19 ……..

Doc. No. ……………;

Page No. ……………;

Book No. …………..;

Series of 19….. (7a)

Cases:

7. Lim vs. Philippine Fishing Gear Industries Ins 317 SCRA 723 1999 (Corporation by Estoppel)

8. Industrial Refractories Corporation vs. Refractories Corp of the Phil GR 122174 October 3, 2002 (Corporate Name)

Sec. 16.Amendment of Articles of Incorporation. – Unless otherwise prescribed by this Code or by special law, and for
legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of
the board of directors or trustees and the vote or written assent of the stockholders representing at least two‐thirds (2/3)
of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the
provisions of this Code, or the vote or written assent of at least two‐thirds (2/3) of the members if it be a non‐stock
corporation.

The original and amended articles together shall contain all provisions required by law to be set out in the articles of
incorporation. Such articles, as amended shall be indicated by underscoring the change or changes made, and a copy
thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact
that said amendment or amendments have been duly approved by the required vote of the stockholders or members,
shall be submitted to the Securities and Exchange Commission.

The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the date of
filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable
to the corporation.

Sec. 17.Grounds when articles of incorporation or amendment may be rejected or disapproved. – The Securities and
Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in
compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators a reasonable
time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds
for such rejection or disapproval:

1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed
herein;
2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to
government rules and regulations;
3. That the Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid if false;
4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied
with as required by existing laws or the Constitution.

No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi‐banking institutions,
building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities,
educational institutions, and other corporations governed by special laws shall be accepted or approved by the
Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect
that such articles or amendment is in accordance with law.

Sec. 18.Corporate name. – No corporate name may be allowed by the Securities and Exchange Commission if the proposed
name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already
protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended certificate of incorporation under the amended name.

Sec. 19.Commencement of corporate existence. – A private corporation formed or organized under this Code commences
to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and
Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators,
stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the
articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is
sooner dissolved in accordance with law.

Sec. 20.De facto corporations. – The due incorporation of any corporation claiming in good faith to be a corporation under
this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which
such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding.

Sec. 21.Corporation by estoppel. – All persons who assume to act as a corporation knowing it to be without authority to
do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof:
Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation
or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality.

On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that
there was in fact no corporation.

Sec. 22.Effects on non‐use of corporate charter and continuous inoperation of a corporation. – If a corporation does not
formally organize and commence the transaction of its business or the construction of its works within two (2) years from
the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a
corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a
period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or
certificate of incorporation.

This provision shall not apply if the failure to organize, commence the transaction of its businesses or the construction of
its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the
Securities and Exchange Commission.

What are the documents to be filed with the SEC

1. Articles of Incorporation

2. Treasurer’s Affidavit certifying that 25% of the total authorized capital stocks has been subscribed and at least 25%
of such has been full paid in cash or in property.

3. Bank certificate covering the paid up capital

4. Letter authority authorizing the SEC to examine the bank deposit and other corporate books and records to determine
the existence of paid up capital.

5. Undertaking to change the corporate name in case there is another person or entity with same or similar name that
was previously registered.
6. Certificate of authority from the proper government authority whenever appropriate, like the BSP for banks and
the Insurance Commission for insurance corporations.

What corporate name cannot be used?

1. Names which are identical, deceptively or confusingly similar to that of any existing corporation including
internationally known foreign corporation though not used in the Philippines.

2. Name already protected by law

3. Name which is contrary to law, morals or public policy

Note: A corporation which seeks to prevent another from using its name must show that (i) it acquired prior right to use
the name and (ii) the name is either of the three mentioned above. – Industrial Refractories Corp. of the Phil vs.
Refractories Corp. of the Philippines.

What is the importance of the principal place of business as stated in the AOI?

The principal place of business may determine the venue of court cases involving corporations. It may also determine if
service of summons and notices was properly made.

Rule 14 Section 11 Rules of Court. Specifies the officers as the ff: President, Managing Partner, General Manager,
Corporate Secretary, Treasurer or In‐House Counsel Mason vs CA GR 144662 October 13, 2003 For a foreign Corporation
service may be made on its designated resident agent or if none on the government official designated by law or on any
of its officers or agents within the Philippines. For public Corporations if the Republic of the Philippines on the Solicitor
General in other case on its executive head or such officer as the law or the court may direct.

What is the maximum term of a Corporate life?

A corporation has a maximum term of fifty years. It may be extended for a period not exceeding fifty years in any single
instance. No extension is allowed earlier than five years prior to the expiration of the term.

Problem

The AOI of a corporation to be registered in the SEC contained the following provisions:

Article 1 – The name of the corporation shall be TOHO Marketing Company

Comment: The SEC Rules require that corporate names should include the word Corporation or Incorporated or their
abbreviations Corp. or Inc.

Article 3 – The principal place of business shall be located in Region IVA in a city or municipality to be later designated by
the BOD

Comment: principal place of business should specify the municipality/city and province and not merely the region

Article 7 – The capital stock of the corporation is One Million Pesos Philippine Currency

Comment: The article must indicate the number of share into which the capital stock is divided if the par value if any as
well as those without par value.
Amendment of AOI

1. Procedure – Majority Vote of Directors or Trustees and written assent of the stockholders representing 2/3 of the
outstanding capital or 2/3 of members of non‐stock corporation.

2. Effectivity – Upon approval of the SEC or if not acted upon within six months from the date of filing provided the
delay is not attributable to the corporation.

3. The passage of statutes amending the Corporation Code or special laws may result in the amendment of the AOI
provided that no vested right is impaired.

By‐Laws

Relatively permanent and continuing rules of action adopted by the corporation for its own government and that of the
individuals composing it and those having the direction, management and control of its affairs, in whole or in part, in the
management and control of its affairs and activities.

Requisites of a valid by‐laws

1. Consistent with the CCP and other pertinent laws and regulations. Example, a provision in the by‐laws granting a
permanent seat in the Board of Directors to a particular individual is violative of the Code.

2. Consistent with the AOI. In case of conflict the provision of the AOI will prevail over any provision in the By‐laws.

3. It must be reasonable and not arbitrary or oppressive.

4. It must not disturb vested rights, impair contracts or property rights of stockholders or members or create obligations
unknown to law. Examples: (i) absolute restrictions on the right to transfer ownership of shares of stocks (ii) by‐law should
not be allowed to undermine the security of tenure of an employee by declaring the position non‐existent.

Adoption and Amendment of By‐Laws

1. May accompany the AOI and will be approved together by the SEC

2. Filed within one month from notice of issuance of the Certificate of Incorporation in which case it must be approved
by stockholders constituting a majority of the outstanding capital stock and a copy of the by‐laws signed by the approving
stockholders/members and certified by a majority of the BOD or BOT, countersigned by the Corporate Secretary must be
filed with the SEC.

3. Non‐filing within one month is a ground to forfeit franchise but will not result in automatic dissolution.

4. Amendment of the by‐law may be made by:

(a) Stockholders together with the board if majority of the board plus majority of outstanding capital stock concur.

(b) By the Board only if the power to amend is delegated by 2/3 of outstanding capital stock or 2/3 of the members.

Binding Effect of By‐Laws

1. As to the Corporation and its Components – binding not only upon the corporation but also on its stockholders,
mm=embers and those having direction, management and control of its affairs.
2. As to third persons – not binding unless there is actual knowledge. Third persons are not even bound to investigate
the content of the by‐laws because they are bound to know the by‐laws which are merely provisions for the government
of the corporation and notice to third persons is not presumed. Example: provision in the by‐laws enumerating the
signatories to a contract is not binding upon the third party who entered into a contract with the corporation represented
by its Chairman who was not part of the enumerated signatories.

CASES:

1. Loyola Grand Villas Homeowners Assn vs Court of Appeals 276 SCRA 681 1997 (Articles of Incorporation as against
By‐Laws)

2. Atrium Management Corporation vs Court of Appeals GR 109491, February 28, 2001 (Ultra Vires Act)

3.

4. Central Textile Mills vs. NWPC 260 SCRA 368 (1996) (Trust Fund Doctrine)

TITLE VI MEETINGS Sections 49–59

Meetings of Stockholders/Members

1. Regular meetings – annually and on a fixed date in the By laws. If none on any day in April for the purpose of electing
a new set of directors and trustees.

2. Special Meetings – any time deemed necessary in the by‐laws. To be held in the municipality or city where the
principal office of the corporation is located.

Meetings of Directors/Trustees

1. Regular – monthly unless the by‐laws provide otherwise

2. Special – held anytime upon call by the President or by any person authorized to call the meeting[JR1] in the by‐
laws.

3. Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the
by‐laws provide otherwise.

Quorum

1. General Rule – stockholders representing majority of the outstanding capital stock or majority of the members.

2. Exception – unless prescribed by the rules or by the by‐laws

3. Note – Once a quorum is called and the meeting is called to order, even if people walked out and the people left are
less than majority, the proceedings will be valid as long as there was a quorum when the meeting was called to order.

Requirements of a valid meeting

1. Proper place
2. Stated date and time or a reasonable time thereafter

3. Called by the proper person

a. Designated in the by‐laws

b. In the absence of such a designation, by a director or trustee or officer entrusted with the management of the
corporation

c. Stockholder or member upon order by the SEC whenever there is no person authorized

d. Special meeting for the removal of a director may be called by the Secretary, a stockholder or a member.

4. Previous Notice

a. For regular meetings – two weeks before the meeting

b. For special meetings – at least a week

c. Director/Trustees’ Meeting – whether regular or special at least one day prior

5. There must be a quorum

Voting Trust Agreement Section 59

An agreement in writing whereby one or more stockholders of a stock corporation transfer their share to any person or
persons or to a corporation having the authority to act as a trustee for the purpose of vesting in such trustee or trustees
voting or other rights pertaining to the shares for a certain period of time. The transferring stockholder parts with the
voting power only but retains the equitable or beneficial ownership. The voting trustee is merely vested with colourable
or fictitious title for the sole purpose of voting upon the stocks which he does not own.

Principal purpose: makes possible a unified control of the affairs of the corporation and a consistent policy by binding
stockholders to vote as a unit. It is also possible for a majority group of stockholders who transferred their individual
holding to voting trustee to dispose of their shares but still retain control of the corporation through the voting trustee
who shall have the power to vote as a unit the shares thus pooled.

Effects and Manner of Execution

1. The voting trust agreement transfer only voting rights and other rights pertaining to the share.

2. Title to the shares conveyed is transferred to the trustee on the books of the corporation

3. Certificate of stocks covered are surrendered and cancelled. New certificates are issued in the name of the voting
trustee with notation that they are issued pursuant to a VTA. In exchange the voting trustee executes “voting trust
certificates” in favour of the stockholder as proof of ownership

4. The voting trust certificates are intended to be and are transferable in the same manner as stock certificates subject
however to the VTA.

5. Upon the expiration of the agreed period the voting trust certificates as well as the certificates of stock in the name
of the trustee shall be cancelled and new certificates reissued in the name of the transferors.

[JR1]
TITLE VII STOCKS AND STOCKHOLDERS

Subscription Contract - Any contract for the acquisition of unissued stock in an existing corporation or a corporation still
to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties
refer to it as a purchase or some other contract.

How participation in a corporation is acquired:

1. By subscription contract in an existing corporation for the acquisition of unissued shares

2. By purchase from the corporation of treasury shares

3. By transfer from previous stockholder of the outstanding shares or existing subscription to shares

Stock Option – a privilege granted to a party to subscribe to a certain portion of the unissued capital stock of a corporation
within a certain period and under the terms and conditions of the grant exercisable by the grantee at any time within the
period granted. The grant requires approval by the SEC based on reasonableness of the plan, scheme, compensation or
consideration.

Liability of stockholders on unpaid subscription to corporate creditors:

1. Persons dealing with a corporation are presumed to know that they can have recourse only to the property of the
corporation and if the corporation is unable to meet its obligation, the stockholders cannot be compelled to make good
the deficiency.

2. In consonance with the trust fund doctrine, stock subscription are in the nature of a trust fund in the sense that they
are to be maintained unimpaired for the protection of corporate creditors.

3. The liability of a subscriber for the unpaid balance cannot be compensated or set‐off with the value of his shares nor
can stock dividend declared be applied as payment.

Rights of a Stockholder:

1. Right to attend and vote in person or by proxy at stockholders’ meeting (Sections 50, 58)

2. Right to elect and remove directors (Sections 24, 28)

3. Right to approve certain corporate acts (Sec 52 and various)

4. Right to adopt and amend or repeal the by‐laws or adopt new by‐laws (Section 46, 48)

5. Right to compel the calling of meetings when for any cause there is no authorized person to call such a meeting
(Section 50 last par)

6. Right to issuance of certificate or stocks or other evidence of stock ownership and be registered as a stockholder
(Sec 63)

7. Right to receive dividends when declared (Section 43)

8. Right to participate in the distribution of corporate assets upon dissolution (Sections 118–119)

9. Right to transfer of stocks in the corporate books (Section 63)

10. Right to pre‐emption in the issue of shares (Section 39)

11. Right to inspect corporate books and records (Section 74)

12. Right to be furnished the most recent financial statements upon request and to receive financial report of the
corporation’s operations (Section 75)

13. Right to bring individual and representative or derivative suits

14. Right to recover stock unlawfully sold for delinquency (Section 69)

15. Right to enter into voting trust agreements (Section 59)

16. Right to demand payment for the value of his shares and withdraw from the corporation in certain cases (Appraisal
rights Section 81)

17. Right to have the corporation voluntarily dissolved (Sections 118–119)

Section 61. Pre‐incorporation subscription. – A subscription for shares of stock of a corporation still to be formed shall be
irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent
to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer
period as may be stipulated in the contract of subscription: Provided, That no pre‐incorporation subscription may be
revoked after the submission of the articles of incorporation to the Securities and Exchange Commission. (n)

Kinds of subscription:

1. Pre‐incorporation subscription – See above

2. Post‐incorporation subscription – can be referred to 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 the subscription agreement provides otherwise.

3. Conditional subscription – subject to a condition which may be a past event unknown to the parties or a future
uncertain event which may or may not happen.

4. Absolute subscription - one not subject to any condition and where the subscriber becomes liable on the subscription
and acquires the right of a stockholder from the moment it is accepted.

5. Subscription with a special term – where the corporation agrees to do something the fulfilment of which not being
a condition precedent to the accrual of liability of the subscriber or the acquisition of rights as a stockholder.

Discuss: Ong Yong et al vs. David S. Tiu et al GR 144476 April 8, 2003 (Trust Fund Doctrine)

Section 62. Consideration for stocks. – Stocks shall not be issued for a consideration less than the par or issued price
thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following:

1. Actual cash paid to the corporation;

2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or issued value of the stock issued;

3. Labor performed for or services actually rendered to the corporation;

4. Previously incurred indebtedness of the corporation;

5. Amounts transferred from unrestricted retained earnings to stated capital; and

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

Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the
valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the
Securities and Exchange Commission.

Shares of stock shall not be issued in exchange for promissory notes or future service.

The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of
bonds by the corporation.

The issued price of no‐par value shares may be fixed in the articles of incorporation or by the board of directors pursuant
to authority conferred upon it by the articles of incorporation or the by‐laws, or in the absence thereof, by the stockholders
representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose. (5 and 16)

Section 63. Certificate of stock and transfer of shares. – The capital stock of stock corporations shall be divided into shares
for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and
sealed with the seal of the corporation shall be issued in accordance with the by‐laws. Shares of stock so issued are
personal property and may be transferred by delivery of the certificate or certificates endorsed by the owner or his
attorney‐in‐fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to
the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the
corporation. (35)

Section 64. Issuance of stock certificates. – No certificate of stock shall be issued to a subscriber until the full amount of
his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid. (37)

Notes:

Doctrine of Indivisibility of Subscription – The subscription is one entire indivisible and whole contract which cannot be
divided into portions.

Section 64 prohibits the pro rata application of partial payments made against the subscription agreement. In an old case
of Baltazar vs Lingayen Gulf Electric Cooperative (1965), the SC ruled that unless prohibited by its by‐laws, certificate of
stocks may be issued for less than the number of shares subscribed for provided the par value of the stocks represented
in the certificate has been fully paid.

In other words a corporation may (unless again prohibited by its by‐laws) consider partial payments made by subscribers
as:

a) Full payment for the corresponding number of shares, to the extent of par value covered by the payment

b) As payment pro‐rata to each and all the entire number of shares covered by the subscription.

The two alternatives cannot be availed of at the same time. Once an alternative mode is chosen it must be applied
uniformly to all stockholders similarly situated. (SEC Opinion)
Section 65. Liability of directors for watered stocks. – Any director or officer of a corporation consenting to the issuance
of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in
excess of its fair value, or who, having knowledge thereof, does not forthwith express his objection in writing and file the
same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to the corporation and its
creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value
of the same. (n)

Watered Stocks – defined as stocks issued for less than par or issued value. Solidary liability of consenting director or
officer.

When is a stock considered watered:

1. Issued without consideration or “bonus shares”

2. Issued as fully paid when the corporation has received a lesser sum of money than its par or issued value (discount
shares)

3. Issued for a consideration other than actual cash, such as property or service, the fair valuation of which is less than
its par or issued value

4. Issued as stock dividend when there are no unrestricted retained earnings or surplus to justify it.

Trust Fund Doctrine – the subscribed shares of stock of the corporation is a trust fund for the payment of debts of the
corporation which the creditors have the right ot look up to satisfy their credits and which the corporation may not
dissipate. The creditors may sue the stockholders directly for the latter’s unpaid subscription. The ‘trust fund” doctrine
considers this subscribed capital as a trust fund for the payment of the debts of the corporation, to which the creditors
may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital may be returned or
released to the stockholder (except in the redemption of redeemable shares) without violating this principle. Thus,
dividends must never impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor an
the corporation buy its own shares using the subscribed capital as the consideration therefore. (National
Telecommunications Commission v. Court of Appeals, et al., G.R. No. 127937, prom. July 28, 1999)

Another variation of the “trust fund” doctrine posits that any distribution of corporate assets as a consequence of
corporate liquidation are considered as held in trust by the recipient stockholder for the benefit of the creditors of the
corporation.

When applied:

1. Where the corporation has distributed its capital among the stockholders without providing for the payment of
creditors,

2. Where it has released the subscribers to the capital stock from their subscription,

3. Where it has transferred the corporate property in fraud of creditors, and

4. Where the corporation is insolvent.

Coverage of the TFD:

1. When the corporation is solvent, the TFD extends to the capital stock represented by the corporation’s legal capital
2. If the corporation is insolvent, the TFD extends to the capital stock of the corporation as well as all of its property
and assets.

Exception to the TFD: (The Code allows distribution of Corporate capital)

1. Amendment of Articles of Incorporation to reduce the authorized capital stock,

2. Purchase of redeemable shares by the corporation regardless of existence of unrestricted retained earnings,

3. Dissolution and eventual liquidation of the corporation,

4. In close corporation when there should be a deadlock and the SEC orders the payment of the appraised value of the
stockholder’s shares.

Section 66. Interest on unpaid subscriptions. – Subscribers for stock shall pay to the corporation interest on all unpaid
subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in the by‐laws. If no rate of
interest is fixed in the by‐laws, such rate shall be deemed to be the legal rate. (37)

Section 67. Payment of balance of subscription. - Subject to the provisions of the contract of subscription, the board of
directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to
the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it
may deem necessary.

Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made
on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on
such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal
rate on such balance, unless a different rate of interest is provided in the by‐laws, computed from such date until full
payment. If within thirty (30) days from the said date no payment is made, all stocks covered by said subscription shall
thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders
otherwise. (38)

Section 68. Delinquency sale. – The board of directors may, by resolution, order the sale of delinquent stock and shall
specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale
which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent.

Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by
registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of
general circulation in the province or city where the principal office of the corporation is located.

Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent
stock, the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless
the board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer
to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and
expenses of sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be transferred to
such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining
shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a
certificate of stock covering such shares.

Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription
together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction
of a share, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall
be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall
be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the
provisions of this Code.

Delinquency sale Section 68 CCP

Procedure for sale of delinquent stocks:

1. Resolution by the Board declaring payable the whole or a certain percentage of the unpaid subscription

2. Stockholders are given notice of the resolution. If there is no payment within 30 days from the notice the stocks
become delinquent and subject to sale

3. Resolution by the Board ordering the sale of delinquent stocks stating the amount due and the date, time and place
of sale with notice to delinquent stockholders not less than 30 days nor more than sixty days from said resolution.

4. The Notice of Sale shall be published as prescribed in the province or city where the principal office of the corporation
is located

5. Sale to the highest bidder at public auction, unless there is prior agreement to the contrary any dividend accruing
prior to the delinquency belong to the delinquent stockholder.

Meaning of “highest bidder” is the person offering at the sale to pay the full amount of the balance of the subscription
together with accrued interest if any and other attendant costs for the smallest number of shares or fraction of a share.
The highest bid must not be less than the full amount due. Only the number of shares which the bidder is willing to buy
shall be transferred to the highest bidder.

Example:

X subscribed to 5 shares with par value of P100, paid P300, but was unable to pay the balance even after it was
called. The stock was declared delinquent and the cost of the sale plus interest is set at P50 making a total of P250. A, B
and C are the prospective bidders.

Scenario 1: A P250 for two shares

B P250 for three shares

C P250 for four shares

Result - A is the highest bidder and gets the two shares. X retains three shares, and the Corporation is deemed
fully paid.

Scenario 2: A P 200 for two shares

B P 250 for four shares

C P 240 for three shares

Result – B is the highest bidder and gets four shares. X retains ownership of one share. Even if B bidded for five
shares he will still be the highest bidder but in this case X forfeits all his payments.

Right of the Corporation to reject bids – advertisement for bidders are simply invitation to make proposals and the
advertiser is not bound to accept the highest or lowest bid unless the contrary appears. (Article 1326 of the NCC).
Purchase by the Corporation – in the absence of bidders or failure, the corporation may purchase for itself the delinquent
stocks. The effects of this are (a) stockholder is released and his subscription is deemed fully paid (b) the stockholder
forfeits prior payments (c) purchase must be from unrestricted retained earnings in view of the Trust Fund doctrine

Forfeiture of stocks not authorized – delinquent stocks cannot be forfeited without the corporation paying for it. An
action in court may be brought to collect unpaid subscription under Section 70 CCP.

Section 69. When sale may be questioned. – No action to recover delinquent stock sold can be sustained upon the ground
of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless the party seeking to
maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest
from the date of sale at the legal rate; and no such action shall be maintained unless it is commenced by the filing of a
complaint within six (6) months from the date of sale. (47a)

Section 70. Court action to recover unpaid subscription. – Nothing in this Code shall prevent the corporation from
collecting by action in a court of proper jurisdiction the amount due on any unpaid subscription, with accrued interest,
costs and expenses. (49a)

Section 71. Effect of delinquency. – No delinquent stock shall be voted for be entitled to vote or to representation at any
stockholder’s meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to
dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with
accrued interest, and the costs and expenses of advertisement, if any. (50a)

Section 72. Rights of unpaid shares. – Holders of subscribed shares not fully paid which are not delinquent shall have all
the rights of a stockholder. (n)

Section 73. Lost or destroyed certificates. – The following procedure shall be followed for the issuance by a corporation
of new certificates of stock in lieu of those which have been lost, stolen or destroyed:

1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation
an affidavit in triplicate setting forth, if possible, the circumstances as to how the certificate was lost, stolen or destroyed,
the number of shares represented by such certificate, the serial number of the certificate and the name of the corporation
which issued the same. He shall also submit such other information and evidence which he may deem necessary;

2. After verifying the affidavit and other information and evidence with the books of the corporation, said corporation
shall publish a notice in a newspaper of general circulation published in the place where the corporation has its principal
office, once a week for three (3) consecutive weeks at the expense of the registered owner of the certificate of stock which
has been lost, stolen or destroyed. The notice shall state the name of said corporation, the name of the registered owner
and the serial number of said certificate, and the number of shares represented by such certificate, and that after the
expiration of one (1) year from the date of the last publication, if no contest has been presented to said corporation
regarding said certificate of stock, the right to make such contest shall be barred and said corporation shall cancel in its
books the certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof new certificate of stock,
unless the registered owner files a bond or other security in lieu thereof as may be required, effective for a period of one
(1) year, for such amount and in such form and with such sureties as may be satisfactory to the board of directors, in which
case a new certificate may be issued even before the expiration of the one (1) year period provided herein: Provided, That
if a contest has been presented to said corporation or if an action is pending in court regarding the ownership of said
certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in lieu thereof
shall be suspended until the final decision by the court regarding the ownership of said certificate of stock which has been
lost, stolen or destroyed.

Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought
against any corporation which shall have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to
the procedure above‐described. (R. A. 201a)
Merger and Consolidation

Common Forms of Corporate combinations:

1. Sale of assets – a union of corporation may be effected by one corporation selling all or substantially all of its assets
to another. Such sale is usually made in the course of the dissolution of the vendor corporation.

2. Lease of Assets – a corporation without being dissolved leases its property to another corporation for which the
lessor merely receives rental paid by the lessee corporation.

3. Sale of stock – the purpose of the holding company is to acquire a sufficient amount of stock of another corporation
for the purpose of acquiring control. The acquiring corporation is called the parent or holding company and the one whose
stocks were acquired the subsidiary corporation.

4. Merger – Two or more corporations unite and one corporation which retains its corporate existence absorbing or
merging in itself the other. It is the absorption of one corporation by another which survives.

5. Consolidation – two or more corporations unite, giving rise to a new corporate body and dissolving the constituent
corporations which cease to exist as separate corporations.

De facto merger – One corporation acquiring all or substantially all of the properties of another corporation and issues to
it as exchange, shares of stocks. The acquiring corporation ends up with the business enterprise of the selling corporation
while the latter only holds as its remaining asset shares of stock of the acquiring corporation which may then be distributed
as liquidating dividend to its stockholders.

Types of acquisitions:

1. “Assets Only” – the purchaser is interested only in the raw assets and properties of the business. It is not interested
in the entity of the corporate owner or on the goodwill or other factors relating to the business itself. The purchaser is
not liable for the debts of the selling corporation.

2. Business Enterprise – the transferee merely continues the same business of the transferor since he obtains the
earning capacity of the venture. The transferee is liable for all the debts and liabilities of the transferor.

3. Equity Level – the purchaser takes control and ownership of the business by purchasing the shareholdings of the
corporate owner. What the purchaser actually purchased is the ability to elect the members of the board of the
corporation which runs the business.

Legal Effects of Merger and Consolidation:

1. There is automatic assumption of the debts of the absorbed corporation or the constituent corporations which were
dissolved.

2. The absorbed or constituent corporations are ipso facto dissolved by operation of law without necessity of any
further act or deed.

3. Permits the transfer of the assets to the purchaser and the distribution of the consideration received in a single
operation.

4. Involves exchanges of property, that is assets in exchange for securities, without winding up the affairs of the
constituent corporation, in the sense that its assets are not distributed to the original stockholders.
5. Dissolution cannot be made to retroact to the date prior to the ratification of the stockholders, but the transfer of
assets and liabilities can retroact to the date of the Board Resolution.

6. Consent of the creditors are not necessary.

TITLE XIV DISSOLUTION

1. Signifies the extinguishment of its franchise to be a corporation and the termination of its corporate existence.

2. Condition of law and fact which ends the capacity of the body corporate to act as such and necessitate a liquidation
and extinguishment of all legal relations existing with respect of the corporate enterprise

3. Denotes the complete destruction of the corporation and within the contemplation of the law, is equivalent to its
death

Power to dissolve a corporation

1. A corporation may come to an end or its life extinguish only by the act or approval of the sovereign power by which
it was established

2. Being a creation of the state a corporation may only be dissolve with the consent of the state

3. Courts of one state do not have the power to dissolve a corporation created by another state

4. Dissolution of corporations is a matter for the legislature and normally not a matter of judicial cognizance

5. Philippine law authorizes dissolution of a corporation through judicial proceedings or permits dissolution by the
stockholders or members without judicial proceedings.

Dissolution may be:

1. De jure – a dissolution in law adjudged and determined by judicial sentence or brought about by the act or consent
of the sovereign power or which results from the expiration of the charter period of corporate life.

2. De facto – takes place in substance and in fact by reasons of insolvency, cessation of business, or suspension of all
operations and the corporation goes into liquidation still retaining its primary franchise to be a corporation. The mere
fact of cessation of business does not constitute a de facto dissolution if it is still solvent and has not gone into liquidation.

Legal steps in corporate dissolution

1. Termination of the corporate existence as far as the right to go on doing ordinary business is concerned,

2. The winding up of its affairs, the payment of debts and the distribution of its assets among the shareholders or
members and other persons interested. After winding up, the existence of the corporation is terminated for all purposes.

Modes of Corporate dissolution

1. Voluntary – may be effected by any of the following:

a) By the vote of the BOD/BOT and the stockholder/members where no creditors are affected (Section 118). Takes
effect upon the issuance of the Certificate of Dissolution.
b) By judgment of the SEC after hearing a petition for voluntary dissolution where creditors are affected (Section 119).
Takes effect when final judgment is rendered dissolving the corporation.

c) By amending the AOI to shorten the corporate term (Section 120). Takes effect upon approval of the amended AOI
or the expiration of the shortened term as the case may be.

d) In the case of a corporation sole by submitting to the SEC a verified declaration of dissolution for approval (Section
115). Takes effect upon approval of the verified declaration of dissolution, after which the corporation sole shall cease to
carry on its operations except for the purposes of winding up its affairs.

2. Involuntary – may be effected by any of the following:

a) Expiration of the term provided for in the original AOI. Upon dissolution by the expiration of the term in the original
AOI, a corporation ceases to exists de facto or de jure, except only for the purposes of winding up and liquidation. Its
corporate existence or juridical personality may no longer be extended. It is not necessary to seek the aid of the SEC or
the courts to terminate the corporation.

b) Failure to formally organize and commence the transaction of its business within two years from the date of
incorporation

c) By order of the SEC (Section 121) After filing of a verified complaint and proper notice and hearing:

i. Violations by a corporation – under section 144 any violation of the CCP not specifically penalized may result
in a dissolution after the appropriate proceedings before the SEC.

ii. Deadlocks in close corporation – the authority of the SEC in this case extends to the power to issue an order
of dissolution Section 104 par.1

iii. Mismanagement in a close corporation – upon instance of any stockholder of a close corporation the SEC may
order dissolution if it has validated acts which are illegal, fraudulent, dishonest, oppressive or prejudicial to the corporation
or any stockholder or whenever corporate assets are misapplied or wasted.

iv. Suspension or revocation of Certificate of Registration – In the following instances: 1. Fraud in the procurement
of the Certificate of Registration,2. Serious misrepresentation 3. Refusal to comply with lawful orders of the SEC 4.
Continuous operation for a period of five years 5. failure to file by‐laws within the prescribed period 6. Failure to file the
required reports within the prescribed periods.

3. Note: piercing the veil of corporate entity is not one of the causes by which a corporation may be dissolved.

SALE OF ASSETS IN ANTICIPATION OF VOLUNTARY DISSOLUTION

Allowed under Section 40.

1. The provisions of Section 40 allows the corporation to convert its assets to cash. It further allows the liquidation of
corporate debts from the proceeds of the sale. The reason being is that the exercise of the right to do business is a
voluntary one and if at any time it deems advisable, a corporation may cease business transactions, convert its assets to
cash and pay off debts. The execution of that purpose is a matter which concerns the corporation and its creditors alone.

2. The corporation cannot under express prohibition of Section 122, distribute any of its assets or property except upon
lawful dissolution and after payment of all debts and liabilities. This means that prior to the issuance of the Certificate of
Dissolution a corporation cannot lawfully distribute its assets to its stockholders.
DISSOLUTION BY QUO WARRANTO PROCEEDINGS

The power is implied in Section 20 of the CCP where the Solicitor General is authorized to bring a quo warranto proceeding
against a de facto corporation to oust it from the exercise of corporate powers and ultimately have it dissolved. It is not
clear whether it is the RTC or the SEC who has jurisdiction, the Interim Rules of RA 8799 omitted the phrase controversies
between the corporation and the state. Base on Section 20 of the CCP however it is not expressly require that quo
warranto proceedings must be brought before the SEC only.

LIQUIDATION SECTION 122

Nature and meaning of liquidation

1. Means the winding up of the affairs of the corporation by reducing its assets to money, settling with creditors and
debtors and apportioning the amounts of profit and loss.

2. A distribution of all assets is a winding up of the affairs of the corporation and is synonymous with liquidation.

3. Since stockholders are not co‐owners the liquidation process cannot be considered a partition of community property
but a transfer or conveyance of the title to the remaining assets to the individual stockholders.

METHODS OF CORPORATE LIQUIDATION

1. By the corporation itself – through the directors or trustees and executive officers to have charge of the winding up
operation. The law grants a period of three years within which to wind up, and claims by and against it not presented and
settled within that period becomes unenforceable. The law does not allow an extension period but a creditor with a
pending action may petition the proper court for the appointment of a receiver or trustee within the winding up period.
The effect is that the trustee or receiver may sue or be sued as such even beyond the three year period.

In the case of Gelano vs. CA, the counsel who prosecuted and defended the interest of the dissolved corporation may be
considered a trustee of the corporation with respect to the matter in litigation.

In the case of Reburiano vs CA, it was ruled that a suit commenced by the corporation itself during its existence should be
allowed to proceed to final judgment and execution.

There is nothing in Section 122 which requires SEC approval of distribution or liquidation of the assets of a dissolved
corporation. It is a matter of internal concern and falls within the powers of the directors or stockholders or the duly
appointed liquidation trustee.

2. By a receiver – the SEC may appoint a receiver to collect its assets and pay the debts of the corporation. The receiver
has the authority as is conferred by statute. The appointment of a receiver suspends the authority of the corporation, its
directors/trustees and officers over its properties. The receiver is not only the representative of the court but also of the
stockholders and the creditors. As trustee and agent he has the authority to vote the shares owned by the liquidated
corporation in other corporations.

Upon appointment of a receiver all allocations for claims against the corporation pending in any court, tribunal, board or
body is suspended. This includes labor claims, to enable the receiver to exercise his powers free from any judicial or
extrajudicial interference.

Receivership, unless otherwise specifically limited in duration, shall exist indefinitely until all the affairs of the corporation
have been settled and liquidated. The period of three years prescribed by Section 122 is not applicable.

3. By a trustee – by a resolution of the stockholders or members the liquidation of the corporation may be placed in
the hands of a trustee appointed at any time during the three year period after its dissolution. The resolution has the
effect of conveying all the corporate assets to the trustee. Where no time limit has been fixed, the trusteeship may
continue even after the expiration of the three year period and claims not barred by the Statute of Limitations can be
presented and allowed until the liquidation is terminated.

4. Where no receiver or trustee has been designated and the three year extended life has expired, the BOD or BOT
itself may be permitted to continue as “trustee” by legal implication until liquidation is terminated. In certain instances
even those having pecuniary interest in the corporate assets, including stockholders and creditors, may make proper
representation with the SEC for working out a final settlement of the concerns.

5. See again Gelano and Reburiano cases, where the counsel who represented and defended the interest of the
corporation may be considered a trustee at least with respect to the matter in litigation only.

PRIORITY IN THE DISTRIBUTION OF ASSETS

This becomes of importance only when the assets of the liquidated corporation is not sufficient to pay all claims. In such
an instance the order of distribution will be as follow:

1. Creditors are entitled to have all the assets distributed among themselves according to their respective rights and
priorities. (Preference of Credits). This is in accordance with the Trust Fund Doctrine.

2. Stockholders/Members/Directors or officers of the corporation who are also its creditors as a result of a proper and
legitimate loan or claim.

3. The remaining assets to be distributed to the stockholders or members in proportion to their respective shareholdings
or interest in the absence of any provision to the contrary.

4. Holders of preferred stocks continue to have preference over the common stockholders in the distribution of the
surplus proceeds.

5. The amount of capital refund will depend upon the financial health of the corporation. Thus a stockholder may get
more than his original investment or less or even none at all depending upon the failure or success of the business
enterprise.

6. After distribution to SH, and any legitimate debts of the corporation shall appear, the stockholders are liable to the
extent of the value of the assets received by them.

7. Any assets distributable to any creditor or stockholder or member which is unknown and cannot be found will be
escheated to the city or municipality where such assets are located.

8. The liquidation process is an internal concern which do not require prior approval by the SEC.

9. Refund of Investment:

a) Par value shares – unless expressly provided for in the AOI or by‐laws the amount due to the SH is the par value of
the share even if they were acquired at a much higher price

b) Without par value – refund will be based on the price paid for their acquisition, even if belonging to same class if
they were acquired at different times and different values, refund will still be based on the amounts respectively paid for
those shares.

c) Acquired through transfer from another stockholder – refund is not the amount paid to the prior stockholder but the
entitlement of the prior stockholder based on( a) and (b).
TITLE XV FOREIGN CORPORATIONS

Section 123 – Defines Foreign Corporation. The definition includes both the incorporation test and the reciprocity rule and
is significant for licensing purposes

Two test Applied in Filipinas Compana de Seguros vs Christern Huenefeld

1. Incorporation Test

2. Control test

Corporation may operate within the Jurisdiction of another State

1. With consent of the foreign State – “Consent Doctrine “ where every power that the corporation exercise in another
state depends for its validity upon the laws of the Sovereignty in which it is exercised.

2. Subject to conditions and restrictions it may Impose – in extending the privilege to the corporation the State may
impose conditions or restrictions it deems fit. Example the requirement of a license as a condition precedent to the right
to do

business.

Section 124

It is not permitted to transact or to do business in the Philippines until it has secured a license for that purpose from the
SEC and a certificate of authority from the appropriate government authority.

READ SECTION 125 REQUIREMENTS

OBJECTIVES OF THE REGULATION/WHY A LICENSE IS NECESSARY

1. To place them on an equality with domestic corporations

2. To subject them to inspection so that their condition may be known

3. To protect the residents of the State doing business with them by subjecting them to the courts of the State

4. Provisions of revenue requiring the payment of fees and taxes are only incidental.

Section 127–128

RESIDENT AGENT

1. An individual who must be of good moral character and of sound financial standing residing in the Philippines,

2. A domestic corporation lawfully transacting business in the Philippines designated in a written power of attorney by
a foreign corporation authorized to do business in the Philippines.

3. Only function – to receive in behalf of the corporation notices, summons and other legal processes in connection
with actions against such corporation.

GROUNDS FOR REVOCATION OF LICENSE

1. Failure to file annual reports required by the code

2. Failure to appoint and maintain a resident agent

3. Failure to inform the SEC of the change of residence of the Resident Agent

4. Failure to submit copies of the amended AOI or articles of merger and consolidation

5. A misrepresentation in material matters in the reports filed

6. Failure to pay taxes, imposts and assessments

7. Engage in business unauthorized by the SEC

8. Acting as dummy of a foreign corporation

9. Not licensed to do business in the Philippines

DOING OR TRANSACTING BUSINESS

The CCP does not define the phrase doing or transacting business

A. Jurisprudential Tests

1. Twin Characterization:

(a )whether the foreign corporation is maintaining or continuing in the Philippines the body or substance of the business
for which it was organized or whether it has substantially retired from it and turned it over to another, (Substance Test)
and

(b) whether there is continuity of commercial dealings and arrangements, contemplating 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 (Continuity Test)

2. Contract Test – whether the contracts entered into by the FC or by an agent acting under the control and direction of
the FC are consummated in the Philippines. For purpose of Section 133 of the CCP the FC must actually transact business
in the Philippines, that is perform specific business transaction within the Philippine territory on a continuing basis on its
own name and for its own account. This is an essential requisite for the Philippines to acquire jurisdiction over the FC and
thus require it to secure a Philippine business license.

B. Statutory Test

1. Foreign Investment Act of 1991 RA 7042

a. Soliciting orders, service contracts, opening offices whether called liaison offices or branches

b. Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay for a period
or periods totalling 180 days or more

c. Participating in the management, supervision or control of any domestic business, firm or entity or corporation in
the Philippines
d. Any other act or acts that imply a continuity of commercial dealings or arrangement and contemplates performance
of acts incident to and in progressive pursuit of commercial gain or of the purpose of the business organization.

C. Jurisprudential Rules

1. Doctrine of Isolated Transaction – FC even if unlicensed may sue or be sued on transactions or series of transactions
set apart from their common business in the sense that there is no intention to engage in a progressive pursuit of the and
object of the business.

2. Pari Delicto Rule – In the case of Top -Weld Mfg vs. ECED the SC denied the relief prayed for because the law was
circumvented or evaded when the parties entered into a contract despite the prohibition in RA 5455

3. Estoppel Rule – a party cannot question the capacity of a FC to institute an action where it had obtained benefits
from dealings with such FC and thereafter commits a breach and seeks to renege from his obligation (Merril Lynch vs CA
GR 978160 July 24, 1992

EFFECTS OF LACK OF LICENSE

A. ON SUITS

1. FC doing business

(a) May not sue or intervene in any action in any court or administrative agency in the Philippines

(b) May be sued in any valid cause of action recognized in the Philippines (under the doctrine of quasi‐estoppel by
acceptance of benefits

2. FC not doing business

(a) Generally it may not sue or be sued in any court or administrative agency in the Philippines

(b) However, it may sue or be sued for isolated transactions as well as for those which are casual or incidental thereto

B. ON CONTRACTS –the contracts contemplated are those which pass the “contract test” or those that make the FC as
one doing business in the Philippines

General Rule – the contracts are unenforceable. Enforceable only once license is secured.

Exception – when contracts are null and void for being contrary to law, morals, good customs, public order and public
policy.

INSTANCES WHEN FC MAY SUE IN PHILIPPINES WHETHER OR NO T LICENSED TO DO BUSINESS

1. To seek redress from an isolated business transaction

2. To protect its corporate reputation, name and goodwill

3. To enforce a right not arising out of a business transaction (ex. Torts that occurred in the Philippines)

4. When the parties have contractually stipulated that the Philippines is the venue of actions

5. When the party sued is barred by the principle of estoppels and/or the principle of unjust enrichment from
questioning the capacity of the FC
6. Recovery of misdelivered property

WITHDRAWAL OF A FC

1. All claims which have accrued in the Philippines have been paid, compromised or settled

2. All taxes, imposts, assessments and penalties if any lawfully due to the Philippine Government or any of its agencies
or political subdivisions have been paid

3. The petition for withdrawal of license have been published once a week for three consecutive weeks in a newspaper
of general circulation in the Philippines.

SECURITIES REGULATION CODE RA 8799 August 8, 2000

Chapter 1 Title and Definition

Chapter 2 Securities and Exchange Commission

Chapter Registration of Securities

Chapter 4 Regulation of Pre‐Need Plans

Chapter 5 Reportorial Requirements

Chapter 6 Protection of Shareholders’ Interest

Chapter 7 Prohibition of Fraud, Manipulation and Insider Trading

Chapter 8 Regulation of Securities Market Professionals

Chapter 9 Exchanges and Other Securities Trading Market

Section 32 – No entity is allowed to operate as an Exchange unless registered with the Commission

Section 33.2 – Requirements:

1. Must be a stock corporation

2. Must be engaged solely in the business of operating an exchange

3. No person must beneficially own more than 5% of the voting rights

4. No industry or business group must control more than 20% of the voting rights

5. Brokers in the Board shall comprise not more than 40%

6. Board of the Exchange to include the President and 51% composed of three independent directors and persons
representing the interest of issuers, investors and other market participants

Section 38 – Listing in the Exchange

1. Corporation with class of equity securities listed for trading or

2. Corporation with assets in excess of P50 million

3. Having 200 or more holders at least two hundred are holding shares at least 100 shares

4. Shall have at least two independent directors or 20% of the membership of the Board. Independent directors shall
mean person other than an officer or employee of the Corporation or any other individual having a relationship with the
Corporation which would interfere with his exercise of independent judgment.

Chapter 10 Registration, Responsibilities an d Oversight on Self‐Regulatory Organizations

Chapter 11 Acquisition and Transfer of Securities and Settlement of Transactions in Securities

Chapter 12 Margin and Credit

Chapter 13 General Provisions

PURPOSE

1. To establish a socially conscious free market that regulate itself

2. To encourage the widest participation of ownership in enterprises

3. To enhance the democratization of wealth

4. To promote the development of the capital market

5. To protect investors

6. To ensure full and fair disclosure about securities

7. To minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which
create distortion in the free market.

POWERS AND FUNCTIONS OF THE SEC – See page 323 Sundiang & Aquino

Transferred Jurisdiction: - see page 325

SECURITIES – shares participation or interest in a corporation or in a commercial enterprise or profit‐making venture and
evidenced by a certificate, contract or instrument whether written or electronic in character.

KINDS

1. Shares of stocks, bonds, debentures, notes evidence of indebtedness, asset‐backed securities

2. Investment contracts, certificates of interest or participation in a profit‐sharing agreement, certificate of deposit for
a future subscription

3. Fractional undivided interest in oil gas or other mineral rights

4. Derivatives like options and warrants

5. Certificates of assignments and participation, trust certificates, voting trust certificates or similar instruments
6. Proprietary or non‐proprietary membership certificates in corporation or

7. Other instruments as may in the future be determined by the SEC

Definition of Terms

1. Investment Contracts – a contract, transaction or scheme (collectively called contract) whereby a person invests his
money in a common enterprise and is led to expect profits primarily from the efforts of others. Examples in its very basic
form “viajeras going to Hongkong, Bangkok or Vietnam; fishing ventures or livestock raising. Elements of IC: (a) a
presumption that a contract is an IC arises whenever a person seeks to use the money of others on the promise of profits
(b) when two or more investors pool their resources, there is a common enterprise even if the promoter does not do
more than receiving a broker’s commission.

2. Derivatives – with respect to equity securities, means a financial instrument (including options and warrants) where
value depends on the interest in or performance of an underlying security, but which does not require any investment of
principal in the underlying security.

a) Options – gives the buyer the rights but not the obligations to buy or sell an underlying security at a predetermined
price, called the exercise or strike price on or before a predetermined date called the expiry date which can only be
extended according to exchange rules

b) Call options – are rights to buy and put options are rights to sell

c) Warrants – are rights to subscribe or purchase new shares or existing shares in a company on or before a
predetermined date called the expiry date which can only be extended in accordance with exchange rules. Warrants have
generally a longer exercise period than options.

3. Commodity futures contract – provides for the making or taking of delivery at a prescribe time in the future of a
specific quantity or and quality of a commodity or the cash value thereof which is customarily offset prior to the delivery
date. It includes standardized contracts which have the indicia of commodities futures, commodity options and
commodity leverage or margin contracts. Commodity means any goods articles, services, rights and interest, including
any group or index of any of the foregoing, in which commodity interest contracts are presently or in the future dealt in.

4. Other definitions read page 333 Sundiang Aquino

HOW DOES THE SRC ASSURE PROTECTION OF INVESTORS

1. Requiring full disclosure of information to the public regarding the securities that are being offered as well as the
issuers.

2. Filing and approval of the registration statement and the approval of the prospectus and the continuing duty to
regularly submit material information to the SEC.

3. Close monitoring of the securities and other circumstances that may affect the same as well as the persons involved
including brokers issuers the exchange itself to ensure compliance with pertinent laws and regulations

4. Prohibiting and penalizing different fraudulent practices and transactions

5. Providing the SEC with powers and functions,

CLASSES
1. Exempt securities and securities covered by exempt transaction

2. Securities which are not exempt or the sale of which is not an exempt transaction

REGISTRATION OF SECURITIES

General Rule : Registration statement duly filed and approved with the SEC is necessary before any securities may be sold
or offered for sale or distribution within the Philippines

READ SECTION 8.1

Exception: Exempt Securities and Transactions

a. Exempt Securities

1. any security issued or guaranteed by the GRP or by any political subdivision or agency thereof or by any person
controlled or acting as an instrumentality of the GRP

2.Any security issued or guaranteed by the government of any country which the GRP maintains diplomatic relations

3.Certificate issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body

4. any security or derivative the sale of which is by law is under the supervision and registration of which is under the
office of the Insurance Commission, HLURB or the BIR

5, any security issued by a bank except its own share of stock

6, Any securities added by the SEC by rule or regulation after public hearing

b. Exempt Transaction - Read Provision page 338 Sundiang

Notes:

1. The securities listed are exempt either because the issuer is an entity that could be trusted not to deceive the investor
or the issuer is regulated supervised or monitored by another government entity who could be expected to protect the
interest of the investors

2. The security involved in an exempt transaction is not in itself exempt but the circumstance under which the security
is sold make the requirement of registration under the SRC unnecessary in the public interest or for the protection of the
investors.

SECURITIES REGULATION CODE RA 8799 August 8, 2000

Chapter 1 Title and Definition

Chapter 2 Securities and Exchange Commission

Chapter 3 Registration of Securities

Chapter 4 Regulation of Pre‐Need Plans

Chapter 5 Reportorial Requirements

Chapter 6 Protection of Shareholders’ Interest

Chapter 7 Prohibition of Fraud, Manipulation and Insider Trading

Chapter 8 Regulation of Securities Market Professionals

Chapter 9 Exchanges and Other Securities Trading Market

Section 32 – No entity is allowed to operate as an Exchange unless registered with the Commission

Section 33.2 – Requirements:

1. Must be a stock corporation

2. Must be engaged solely in the business of operating an exchange

3. No person must beneficially own more than 5% of the voting rights

4. No industry or business group must control more than 20% of the voting rights

5. Brokers in the Board shall comprise not more than 40%

6. Board of the Exchange to include the President and 51% composed of three independent directors and persons
representing the interest of issuers, investors and other market participants

Section 38 – Listing in the Exchange

1. Corporation with class of equity securities listed for trading or

2. Corporation with assets in excess of P50 million

3. Having 200 or more holders at least two hundred are holding shares at least 100 shares

4. Shall have at least two independent directors or 20% of the membership of the Board. Independent directors shall
mean person other than an officer or employee of the Corporation or any other individual having a relationship with the
Corporation which would interfere with his exercise of independent judgment.

Chapter 10 Registration, Responsibilities and Oversight on Self‐Regulatory Organizations

Chapter 11 Acquisition and Transfer of Securities and Settlement of Transactions in Securities

Chapter 12 Margin and Credit

Chapter 13 General Provisions

PURPOSE

1. To establish a socially conscious free market that regulate itself

2. To encourage the widest participation of ownership in enterprises

3. To enhance the democratization of wealth

4. To promote the development of the capital market

5. To protect investors

6. To ensure full and fair disclosure about securities

7. To minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which
create distortion in the free market.

POWERS AND FUNCTIONS OF THE SEC – See page 323 Sundiang & Aquino

Transferred Jurisdiction: - see page 325

SECURITIES – shares participation or interest in a corporation or in a commercial enterprise or profit‐making venture and
evidenced by a certificate, contract or instrument whether written or electronic in character.

KINDS

1. Shares of stocks, bonds, debentures, notes evidence of indebtedness, asset‐backed securities

2. Investment contracts, certificates of interest or participation in a profit‐sharing agreement, certificate of deposit for
a future subscription

3. Fractional undivided interest in oil gas or other mineral rights

4. Derivatives like options and warrants

5. Certificates of assignments and participation, trust certificates, voting trust certificates or similar instruments

6. Proprietary or non‐proprietary membership certificates in corporation or

7. Other instruments as may in the future be determined by the SEC

Definition of Terms

1. Investment Contracts – a contract, transaction or scheme (collectively called contract) whereby a person invests his
money in a common enterprise and is led to expect profits primarily from the efforts of others. Examples in its very basic
form “viajeras going to Hongkong, Bangkok or Vietnam; fishing ventures or livestock raising. Elements of IC: (a) a
presumption that a contract is an IC arises whenever a person seeks to use the money of others on the promise of profits
(b) when two or more investors pool their resources, there is a common enterprise even if the promoter does not do
more than receiving a broker’s commission.

2. Derivatives – with respect to equity securities, means a financial instrument (including options and warrants) where
value depends on the interest in or performance of an underlying security, but which does not require any investment of
principal in the underlying security.

a) Options – gives the buyer the rights but not the obligations to buy or sell an underlying security at a predetermined
price, called the exercise or strike price on or before a predetermined date called the expiry date which can only be
extended according to exchange rules
b) Call options – are rights to buy and put options are rights to sell

c) Warrants – are rights to subscribe or purchase new shares or existing shares in a company on or before a
predetermined date called the expiry date which can only be extended in accordance with exchange rules. Warrants have
generally a longer exercise period than options.

3. Commodity futures contract – provides for the making or taking of delivery at a prescribe time in the future of a
specific quantity or and quality of a commodity or the cash value thereof which is customarily offset prior to the delivery
date. It includes standardized contracts which have the indicia of commodities futures, commodity options and
commodity leverage or margin contracts. Commodity means any goods articles, services, rights and interest, including
any group or index of any of the foregoing, in which commodity interest contracts are presently or in the future dealt in.

4. Other definitions read page 333 Sundiang Aquino

HOW DOES THE SRC ASSURE PROTECTION OF INVESTORS

1. Requiring full disclosure of information to the public regarding the securities that are being offered as well as the
issuers.

2. Filing and approval of the registration statement and the approval of the prospectus and the continuing duty to
regularly submit material information to the SEC.

3. Close monitoring of the securities and other circumstances that may affect the same as well as the persons involved
including brokers issuers the exchange itself to ensure compliance with pertinent laws and regulations

4. Prohibiting and penalizing different fraudulent practices and transactions

5. Providing the SEC with powers and functions,

CLASSES

1. Exempt securities and securities covered by exempt transaction

2. Securities which are not exempt or the sale of which is not an exempt transaction

REGISTRATION OF SECURITIES

General Rule : Registration statement duly filed and approved with the SEC is necessary before any securities may be sold
or offered for sale or distribution within the Philippines

READ SECTION 8.1

Exception: Exempt Securities and Transactions

a. Exempt Securities

1. any security issued or guaranteed by the GRP or by any political subdivision or agency thereof or by any person
controlled or acting as an instrumentality of the GRP

2.Any security issued or guaranteed by the government of any country which the GRP maintains diplomatic relations
 3.Certificate issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body

4. any security or derivative the sale of which is by law is under the supervision and registration of which is under the
office of the Insurance Commission, HLURB or the BIR

5, any security issued by a bank except its own share of stock

6, Any securities added by the SEC by rule or regulation after public hearing

b. Exempt Transaction - Read Provision page 338 Sundiang

Notes:

1. The securities listed are exempt either because the issuer is an entity that could be trusted not to deceive the investor
or the issuer is regulated supervised or monitored by another government entity who could be expected to protect the
interest of the investors

2. The security involved in an exempt transaction is not in itself exempt but the circumstance under which the security
is sold make the requirement of registration under the SRC unnecessary in the public interest or for the protection of the
investors.

GROUNDS FOR CANCELLATION OF REGISTRATION Read pages 341 Sundiang Aquino

CASES:

1. Bank of the Philippine Islands vs Securities and Exchange Commission GR 164641 December 20, 2007 (Corporate
Rehabilitation)

2. Union Bank of the Philippines vs Concepcion GR 160727 June 26, 2007 (Jurisdiction over Suspension of Payments)

3. Yujuico vs Quiambao GR 188639 January 29, 2007 (SEC Jurisdiction)

An intra‐corporate controversy is one which “pertains to any of the following relationships: (1) between the corporation,
partnership or association and the public; (2) between the corporation, partnership or association and the State in so far
as its franchise, permit or license to operate is concerned; (3) between the corporation, partnership or association and its
stockholders, partners, members or officers; and (4) among the stockholders, partners or associates themselves.”

[2007V68] ALDERITO Z. YUJUICO, BONIFACIO C. SUMBILLA, and DOLNEY S. SUMBILLA,

Petitioners, versus CEZAR T.QUIAMBAO, JOSE M. MAGNO III, MA. CHRISTINA F. FERREROS, ANTHONY K. QUIAMBAO,
SIMPLICIO T. QUIAMBAO, JR., ERIC C. PILAPIL, ALBERT M. RASALAN, and REGIONAL TRIAL COURT, BRANCH 48, URDANETA
CITY, Respondents.2007 Jan 291st DivisionG.R. No. 168639DECISION

In the proceedings before the appellate court, petitioners raised the following issues:

A. Only the SEC, not the RTC, has jurisdiction to order the holding of a special stockholders’ meeting involving an intra‐
corporate controversy;
B. Judge Meliton Emuslan had no authority to issue the assailed Order dated November 25, 2004 as Judge Aurelio Ralar,
Jr. was already the presiding judge of RTC, Branch 48, Urdaneta City;[12] and

C. Assuming Judge Emuslan had authority to issue the assailed Order, he nonetheless acted with grave abuse of discretion
amounting to lack or excess of jurisdiction.

Meanwhile, on the same day (December 10), as directed in the November 25, 2004 Order of Judge Emuslan, a special
stockholders’ meeting of STRADEC was held in Bayambang, Pangasinan wherein a new set of directors were elected for
the term 2004–2005, namely: Cezar T. Quiambao, Anthony K. Quiambao, and Simplicio T. Quiambao, Jr. Immediately
thereafter, the new directors elected the following officers: Cezar T. Quiambao as Chairman and President; Eric C. Pilapil
as Corporate Secretary; Anthony K. Quiambao as Corporate Treasurer; and Albert M. Rasalan as Assistant Corporate
Secretary.

On March 31, 2005, the Court of Appeals rendered a Decision[13] in CA‐G.R. SP No. 87785, dismissing the Petition for
Certiorari. It upheld the jurisdiction of the RTC over the controversy and sustained the validity of Judge Emuslan’s Order
of November 25, 2004. Petitioners’ motion for reconsideration was denied in a Resolution dated June 29, 2005.[14]

Hence, the instant Petition for Review on Certiorari.

FIRST, petitioners contend that the Court of Appeals erred in ruling that the RTC has the power to call a special
stockholders’ meeting involving an intra‐corporate controversy. They maintain that it is only the SEC that may do so to
be held under its supervision.

The respondents, in their comment, counter that the appellate court correctly ruled that the power to hear and
decide controversies involving intra‐corporate disputes, as well as to act on matters incidental and necessary thereto,
have been transferred from the SEC to the RTCs designated as Special Commercial Courts. It would be the height of
absurdity, they argue, to require the filing of a separate case with the SEC for the sole purpose of asking the said agency
to order the holding of a special stockholders’ meeting where there is already a pending case involving the same matter
before the proper court.

We agree with respondents.

Clearly, the RTC has the power to hear and decide the intra‐corporate controversy of the parties herein.
Concomitant to said power is the authority to issue orders necessary or incidental to the carrying out of the powers
expressly granted to it. Thus, the RTC may, in appropriate cases, order the holding of a special meeting of stockholders
or members of a corporation involving an intra‐corporate dispute under its supervision.

SECOND, petitioners assert that Judge Emuslan did not have the authority to issue the assailed Order of November 25,
2004 upon the appointment and assumption on “November 2, 2004” (should be November 12) by Judge Aurelio R. Ralar,
Jr. as the regular presiding judge of RTC, Branch 48, Urdaneta City.

It bears stressing that any act or order rendered by a judge without authority, such as the questioned November 25, 2004
Order, is no order at all. It is void. As such, it cannot be the source of any right nor the creator of any obligation. All
acts performed pursuant to it and all claims emanating from it have no legal force and effect.[24]

THIRD, petitioners further contend that even if Judge Emuslan had the authority to issue the challenged Order, still he
issued it with grave abuse of discretion amounting to lack or excess of jurisdiction. They lament that the Order effectively
disposed of the merits of the main case [Civil (SEC) Case No. U-14].

Unfortunately, despite the significance of this issue, the Court of Appeals totally ignored it by failing to render a ruling
thereon. Respondents, for their part, merely aver that Judge Emuslan “only had the best interest of STRADEC in mind”
when he issued the questioned Order. [25]
We find for petitioners.

The duty of the court taking cognizance of an application for a writ of preliminary injunction is to determine whether the
requisites necessary for the grant of such writ are present. The requisites for the issuance of a writ of preliminary
injunction are: (1) the applicant for such writ must show that he has a clear and unmistakable right that must be protected;
and (2) there exists an urgent and paramount necessity for the writ to prevent serious damage.[26]

In this case, Judge Emuslan’s November 25, 2004 Order, quoted earlier, is hazy and too unsubstantial to justify the issuance
of a writ of preliminary injunction.

It has been consistently held that there is no power the exercise of which is more delicate, which requires greater caution,
deliberation and sound discretion, or more dangerous in a doubtful case, than the issuance of an injunction. It is the
strong arm of equity that should never be extended unless to cases of great injury, where courts of law cannot afford an
adequate or commensurate remedy in damages.

Every court should remember that an injunction is a limitation upon the freedom of action of the defendant and should
not be granted lightly or precipitately. It should be granted only when the court is fully satisfied that the law permits it
and the emergency demands it [citations omitted]. Underscoring supplied)

We note that petitioners, in their answer with counterclaim, raised serious and valid defenses, among which is that the
action is premature since the principal office of STRADEC in Bayambang, Pangasinan is yet to be established, as authorized
by the SEC.[34] Obviously, pending the establishment of a principal office in Bayambang, Pangasinan, all the stockholders’
meetings of STRADEC have been properly held in their principal office in Pasig City.

Another weighty defense raised by petitioners is that the action has prescribed. One of the reliefs sought by respondents
in the complaint is the nullification of the election of the Board of Directors and corporate officers held during the March
1, 2004 annual stockholders’ meeting on the ground of improper venue, in violation of the Corporation Code. Hence, the
action involves an election contest, falling squarely under the Interim Rules of Procedure Governing Intra‐Corporate
Controversies under R.A. No. 8799. Sections 1 and 2, Rule 6 of the Interim Rules provide:

SEC. 1. Cases covered. – The provisions of this rule shall apply to election contests in stock and non‐stock corporations.

SEC. 2. Definition. – An election contest refers to any controversy or dispute involving title or claim to any elective office
in a stock or non‐stock corporation, the validation of proxies, the manner and validity of elections, and the qualifications
of candidates, including the proclamation of winners, to the office of director, trustee or other officer directly elected by
the stockholders in a close corporation or by members of a non‐stock corporation where the articles of incorporation or
by‐laws so provide. Underscoring supplied)

It is important to note that the Court of Appeals itself ruled that respondents’ action before the RTC, Branch 48, Urdaneta
City is an election contest, thus:

In sum, Judge Emuslan, in granting the writ of preliminary injunction, acted with grave abuse of discretion amounting to
lack or excess of jurisdiction.

WHEREFORE, we GRANT the instant petition and reverse the assailed Decision and Resolution of the Court of Appeals in
CA‐G.R. SP No. 87785.

The Order dated November 25, 2004 of Judge Meliton G. Emuslan, RTC, Branch 48, Urdaneta City in Civil (SEC) Case
No. U-14 and the special stockholders’ meeting and election held on December 10, 2004 in Bayambang, Pangasinan are
SET ASIDE.

The last actual peaceable uncontested status of the parties prior to the filing by respondents herein of Civil (SEC) Case No.
U-14 is RESTORED.
This case is REMANDED to the RTC, Branch 48, Urdaneta City for further proceedings with dispatch.

SO ORDERED.

4. Baviera vs Paglinawan GR 168380 February 8, 2007 (Violation of the SRC)

5. CEMCO Holdings Inc. Vs National Life Insurance Co. of the Philippines GR 171815 August 7, 2007 (Tender Offer Rule)

This Petition for Review under Rule 45 of the Rules of Court seeks to reverse and set aside the 24 October 2005 Decision[1]
and the 6 March 2006 Resolution[2] of the Court of Appeals in CA‐G.R. SP No. 88758 which affirmed the judgment[3]
dated 14 February 2005 of the Securities and Exchange Commission (SEC) finding that the acquisition of petitioner Cemco
Holdings, Inc. (Cemco) of the shares of stock of Bacnotan Consolidated Industries, Inc. (BCI) and Atlas Cement Corporation
(ACC) in Union Cement Holdings Corporation (UCHC) was covered by the Mandatory Offer Rule under Section 19 of
Republic Act No. 8799, otherwise known as the Securities Regulation Code.

The Facts

Union Cement Corporation (UCC), a publicly‐listed company, has two principal stockholders – UCHC, a non‐listed
company, with shares amounting to 60.51%, and petitioner Cemco with 17.03%. Majority of UCHC’s stocks were owned
by BCI with 21.31% and ACC with 29.69%. Cemco, on the other hand, owned 9% of UCHC stocks.

In a disclosure letter dated 5 July 2004, BCI informed the Philippine Stock Exchange (PSE) that it and its subsidiary ACC had
passed resolutions to sell to Cemco BCI’s stocks in UCHC equivalent to 21.31% and ACC’s stocks in UCHC equivalent to
29.69%.

In the PSE Circular for Brokers No. 3146–2004 dated 8 July 2004, it was stated that as a result of petitioner Cemco’s
acquisition of BCI and ACC’s shares in UCHC, petitioner’s total beneficial ownership, direct and indirect, in UCC has
increased by 36% and amounted to at least 53% of the shares of UCC, to wit[4]:

Particulars Percentage

Existing shares of Cemco in UCHC 9%

Acquisition by Cemco of BCI’s and ACC’s shares in UCHC 51%

Total stocks of Cemco in UCHC 60%

Percentage of UCHC ownership in UCC 60%

Indirect ownership of Cemco in UCC 36%

Direct ownership of Cemco in UCC 17%

Total ownership of Cemco in UCC 53%

As a consequence of this disclosure, the PSE, in a letter to the SEC dated 15 July 2004, inquired as to whether the Tender
Offer Rule under Rule 19 of the Implementing Rules of the Securities Regulation Code is not applicable to the purchase by
petitioner of the majority of shares of UCC.

In a letter dated 16 July 2004, Director Justina Callangan of the SEC’s Corporate Finance Department responded to the
query of the PSE that while it was the stance of the department that the tender offer rule was not applicable, the matter
must still have to be confirmed by the SEC en banc.
Cemco filed a motion for reconsideration which was denied by the Court of Appeals.

Hence, the instant petition.

Simply stated, the following are the issues:

1. Whether or not the SEC has jurisdiction over respondent’s complaint and to require Cemco to make a tender
offer for respondent’s UCC shares.

2. Whether or not the rule on mandatory tender offer applies to the indirect acquisition of shares in a listed
company, in this case, the indirect acquisition by Cemco of 36% of UCC, a publicly‐listed company, through its purchase of
the shares in UCHC, a non‐listed company.

3. Whether or not the questioned ruling of the SEC can be applied retroactively to Cemco’s transaction which
was consummated under the authority of the SEC’s prior resolution.

On the first issue, petitioner Cemco contends that while the SEC can take cognizance of respondent’s complaint on the
alleged violation by petitioner Cemco of the mandatory tender offer requirement under Section 19 of Republic Act No.
8799, the same statute does not vest the SEC with jurisdiction to adjudicate and determine the rights and obligations of
the parties since, under the same statute, the SEC’s authority is purely administrative. Having been vested with purely
administrative authority, the SEC can only impose administrative sanctions such as the imposition of administrative fines,
the suspension or revocation of registrations with the SEC, and the like. Petitioner stresses that there is nothing in the
statute which authorizes the SEC to issue orders granting affirmative reliefs. Since the SEC’s order commanding it to make
a tender offer is an affirmative relief fixing the respective rights and obligations of parties, such order is void.

Petitioner further contends that in the absence of any specific grant of jurisdiction by Congress, the SEC cannot, by mere
administrative regulation, confer on itself that jurisdiction.

Petitioner’s stance fails to persuade.

In taking cognizance of respondent’s complaint against petitioner and eventually rendering a judgment which ordered the
latter to make a tender offer, the SEC was acting pursuant to Rule 19(13) of the Amended Implementing Rules and
Regulations of the Securities Regulation Code, to wit:

13. Violation

If there shall be violation of this Rule by pursuing a purchase of equity shares of a public company at threshold amounts
without the required tender offer, the Commission, upon complaint, may nullify the said acquisition and direct the holding
of a tender offer. This shall be without prejudice to the imposition of other sanctions under the Code.

The foregoing rule emanates from the SEC’s power and authority to regulate, investigate or supervise the activities of
persons to ensure compliance with the Securities Regulation Code, more specifically the provision on mandatory tender
offer under Section 19 thereof.[7]

Another provision of the statute, which provides the basis of Rule 19(13) of the Amended Implementing Rules and
Regulations of the Securities Regulation Code, is Section 5.1(n), viz:

[T]he Commission shall have, among others, the following powers and functions:

xxxx
(n) Exercise such other powers as may be provided by law as well as those which may be implied from, or which are
necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and
purposes of these laws.

The foregoing provision bestows upon the SEC the general adjudicative power which is implied from the express powers
of the Commission or which is incidental to, or reasonably necessary to carry out, the performance of the administrative
duties entrusted to it. As a regulatory agency, it has the incidental power to conduct hearings and render decisions fixing
the rights and obligations of the parties. In fact, to deprive the SEC of this power would render the agency inutile, because
it would become powerless to regulate and implement the law. As correctly held by the Court of Appeals:

We are nonetheless convinced that the SEC has the competence to render the particular decision it made in this case. A
definite inference may be drawn from the provisions of the SRC that the SEC has the authority not only to investigate
complaints of violations of the tender offer rule, but to adjudicate certain rights and obligations of the contending parties
and grant appropriate reliefs in the exercise of its regulatory functions under the SRC. Section 5.1 of the SRC allows a
general grant of adjudicative powers to the SEC which may be implied from or are necessary or incidental to the carrying
out of its express powers to achieve the objectives and purposes of the SRC. We must bear in mind in interpreting the
powers and functions of the SEC that the law has made the SEC primarily a regulatory body with the incidental power to
conduct administrative hearings and make decisions. A regulatory body like the SEC may conduct hearings in the exercise
of its regulatory powers, and if the case involves violations or conflicts in connection with the performance of its regulatory
functions, it will have the duty and authority to resolve the dispute for the best interests of the public.[8]

For sure, the SEC has the authority to promulgate rules and regulations, subject to the limitation that the same are
consistent with the declared policy of the Code. Among them is the protection of the investors and the minimization, if
not total elimination, of fraudulent and manipulative devises. Thus, Subsection 5.1(g) of the law provides:

Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and
supervise compliance with such rules, regulations and orders.

Also, Section 72 of the Securities Regulation Code reads:

72.1. x x x To effect the provisions and purposes of this Code, the Commission may issue, amend, and rescind such rules
and regulations and orders necessary or appropriate, x x x.

72.2. The Commission shall promulgate rules and regulations providing for reporting, disclosure and the prevention of
fraudulent, deceptive or manipulative practices in connection with the purchase by an issuer, by tender offer or otherwise,
of and equity security of a class issued by it that satisfies the requirements of Subsection 17.2. Such rules and regulations
may require such issuer to provide holders of equity securities of such dates with such information relating to the reasons
for such purchase, the source of funds, the number of shares to be purchased, the price to be paid for such securities, the
method of purchase and such additional information as the Commission deems necessary or appropriate in the public
interest or for the protection of investors, or which the Commission deems to be material to a determination by holders
whether such security should be sold.

The power conferred upon the SEC to promulgate rules and regulations is a legislative recognition of the complexity and
the constantly‐fluctuating nature of the market and the impossibility of foreseeing all the possible contingencies that
cannot be addressed in advance. As enunciated in Victorias Milling Co., Inc. v. Social Security Commission[9]:

Rules and regulations when promulgated in pursuance of the procedure or authority conferred upon the administrative
agency by law, partake of the nature of a statute, and compliance therewith may be enforced by a penal sanction provided
in the law. This is so because statutes are usually couched in general terms, after expressing the policy, purposes,
objectives, remedies and sanctions intended by the legislature. The details and the manner of carrying out the law are
often times left to the administrative agency entrusted with its enforcement. In this sense, it has been said that rules and
regulations are the product of a delegated power to create new or additional legal provisions that have the effect of law.
Moreover, petitioner is barred from questioning the jurisdiction of the SEC. It must be pointed out that petitioner had
participated in all the proceedings before the SEC and had prayed for affirmative relief. In fact, petitioner defended the
jurisdiction of the SEC in its Comment dated 15 September 2004, filed with the SEC wherein it asserted:

This Honorable Commission is a highly specialized body created for the purpose of administering, overseeing, and
managing the corporate industry, share investment and securities market in the Philippines. By the very nature of its
functions, it dedicated to the study and administration of the corporate and securities laws and has necessarily developed
an expertise on the subject. Based on said functions, the Honorable Commission is necessarily tasked to issue rulings with
respect to matters involving corporate matters and share acquisitions. Verily when this Honorable Commission rendered
the Ruling that “ … the acquisition of Cemco Holdings of the majority shares of Union Cement Holdings, Inc., a substantial
stockholder of a listed company, Union Cement Corporation, is not covered by the mandatory tender offer requirement
of the SRC Rule 19,” it was well within its powers and expertise to do so. Such ruling shall be respected, unless there has
been an abuse or improvident exercise of authority.[10]

Petitioner did not question the jurisdiction of the SEC when it rendered an opinion favorable to it, such as the 27 July 2004
Resolution, where the SEC opined that the Cemco transaction was not covered by the mandatory tender offer rule. It was
only when the case was before the Court of Appeals and after the SEC rendered an unfavorable judgment against it that
petitioner challenged the SEC’s competence. As articulated in Ceroferr Realty Corporation v. Court of Appeals[11]:

While the lack of jurisdiction of a court may be raised at any stage of an action, nevertheless, the party raising such
question may be estopped if he has actively taken part in the very proceedings which he questions and he only objects to
the court’s jurisdiction because the judgment or the order subsequently rendered is adverse to him.

On the second issue, petitioner asserts that the mandatory tender offer rule applies only to direct acquisition of shares in
the public company.

This contention is not meritorious.

Tender offer is a publicly announced intention by a person acting alone or in concert with other persons to acquire equity
securities of a public company.[12] A public company is defined as a corporation which is listed on an exchange, or a
corporation with assets exceeding P50,000,000.00 and with 200 or more stockholders, at least 200 of them holding not
less than 100 shares of such company.[13] Stated differently, a tender offer is an offer by the acquiring person to
stockholders of a public company for them to tender their shares therein on the terms specified in the offer.[14] Tender
offer is in place to protect minority shareholders against any scheme that dilutes the share value of their investments. It
gives the minority shareholders the chance 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.[15]

Under Section 19 of Republic Act No. 8799, it is stated:

Tender Offers. 19.1. (a) Any person or group of persons acting in concert who intends to acquire at least fifteen percent
(15%) of any class of any equity security of a listed corporation or of any class of any equity security of a corporation with
assets of at least Fifty million pesos (P50,000,000.00) and having two hundred (200) or more stockholders with at least
one hundred (100) shares each or who intends to acquire at least thirty percent (30%) of such equity over a period of
twelve (12) months shall make a tender offer to stockholders by filing with the Commission a declaration to that effect;
and furnish the issuer, a statement containing such of the information required in Section 17 of this Code as the
Commission may prescribe. Such person or group of persons shall publish all requests or invitations for tender, or
materials making a tender offer or requesting or inviting letters of such a security. Copies of any additional material
soliciting or requesting such tender offers subsequent to the initial solicitation or request shall contain such information
as the Commission may prescribe, and shall be filed with the Commission and sent to the issuer not later than the time
copies of such materials are first published or sent or given to security holders.

Under existing SEC Rules,[16] the 15% and 30% threshold acquisition of shares under the foregoing provision was
increased to thirty‐five percent (35%). It is further provided therein that mandatory tender offer is still applicable even if
the acquisition is less than 35% when the purchase would result in ownership of over 51% of the total outstanding equity
securities of the public company.[17]

The SEC and the Court of Appeals ruled that the indirect acquisition by petitioner of 36% of UCC shares through the
acquisition of the non‐listed UCHC shares is covered by the mandatory tender offer rule.

This interpretation given by the SEC and the Court of Appeals must be sustained.

6. Queensland Tokyo Commodities Inc. and Collado vs Matsuda GR 159008 January 23, 2007 (Commodity Futures
Trading)

Exchange

Chapter 9 Exchanges and Other Securities Trading Market

Section 32 – No entity is allowed to operate as an Exchange unless registered with the Commission

Section 33.2 – Requirements:

1. Must be a stock corporation

2. Must be engaged solely in the business of operating an exchange

3. No person must beneficially own more than 5% of the voting rights

4. No industry or business group must control more than 20% of the voting rights

5. Brokers in the Board shall comprise not more than 40%

6. Board of the Exchange to include the President and 51% composed of three independent directors and persons
representing the interest of issuers, investors and other market participants

Section 38 – Listing in the Exchange

1. Corporation with class of equity securities listed for trading or

2. Corporation with assets in excess of P50 million

3. Having 200 or more holders at least two hundred are holding shares at least 100 shares

4. Shall have at least two independent directors or 20% of the membership of the Board. Independent directors shall
mean person other than an officer or employee of the Corporation or any other individual having a relationship with the
Corporation which would interfere with his exercise of independent judgment.

Unlawful Acts

1. For any beneficial owner, director, or officer to sell any security if the seller or the principal does not own or does
not deliver it within 20 days from the date of the sale. (section 23.5)

2. Manipulation of security prices (section 24.1)

3. Employment of manipulative or deceptive device of connivance in connection with purchase and sale of securities.
Execution of “short sale” “stop‐loss order” not in accordance with SEC rules. (section 24.2)
4. For any member of Exchange to directly or indirectly endorse or guarantee the performance of any “put” “call”
“straddle” “option” or “privilege” in relation to any security registered. (section 25)

5. Fraudulent transactions in the sale of securities (section 26)

6. For an insider to communicate material non‐public information about the issuer or security (section 27.3)

7. Unlawful tender offer (Section 27.4)

8. Use of extensive credit (section 48.1)

TENDER OFFER – a publicly announced intention by a person acting alone or in concert with other persons to acquire
equity securities of a public company. A tender offer by an acquiring person to stockholders of a public company for them
to tender their shares therein on the terms specified in the offer.

PUBLIC COMPANY – any corporation with a class of equity securities listed on an Exchange or with assets in excess of Fifty
Million Pesos and having 200 or more holders at least 200 of which are holding at least one hundred (100) shares of a class
its equity securities.

It is mandatory to make a tender offer for equity shares of public companies in an amount equal to the number of shares
that a person intends to acquire in the following circumstances:

1. Any person or group of persons acting in concert who intends to acquire 15% or more of equity shares in a public
company pursuant to an agreement made between or among the persons and one or more sellers.

2. Any person or group of persons acting in concert who intends to acquire 30% or more of equity shares in a public
company in one or more transactions within a period of 12 months. (Rule 19)

However under the amended IRR of the SRC such tender offer is mandatory in the following circumstances:

1. Any person or group of persons acting in concert who intends to acquire 35% or more of equity shares in a public
company pursuant to an agreement made between or among the persons and one or more sellers.

2. Any person or group of persons acting in concert who intends to acquire 35% or more of equity shares in a public
company in one or more transactions within a period of 12 months.

3. If any acquisition of even less than 35% would result in ownership of over 51% of the total outstanding equity
securities of a public company.

Note: threshold for single transaction has been raised to 35% from 15% and for creeping transactions from 30% to 35%.

RATIONALE FOR THE MANDATORY TENDER OFFER RULE

1. Tender offer is in place to protect minority shareholders against any scheme that dilutes the share value of their
investments.

2. It gives the minority shareholders the chance 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. (Cemco Holdings vs National Life
Insurance Company)
Devices and practices on manipulation of security prices identified under the SRC

a) To create a false or misleading appearance of active trading in any listed security traded in an Exchange or any other
trading market

1. Wash sale – by effecting any transaction in such security which involve no change in beneficial ownership

2. Matched orders – 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 colluding parties.

3. Market rigging or jiggling – by performing similar act where there is no change in beneficial ownership.

b) To effect alone or with others a series of transactions in securities that:

1. Raises the price to induce the purchase of a security whether of the same or a different class of the same issuer or
of a controlling, controlled or commonly controlled company by others.

2. Depresses their price to induce the sale of a security whether of the same or a different class of the same issuer or
of a controlling, controlled or commonly controlled company by others.

3. 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 other such 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 sale or purchase of such security.

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

e) To effect either alone or with 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 he price of such security unless otherwise allowed by this
code or by the rules of the Commission.

f) No person shall use or employ, in connection with the purchase or sale of any security, any manipulative deceptive
device or contrivance. Neither shall any short sale be effected nor any stop‐loss order be executed in connection with the
purchase or sale of any security except in accordance with such rules and regulations as the Commission may prescribe
as necessary or appropriate in the public interest or for the protection of investors.

INSIDER TRADING – the selling or buying of a security by an insider while possession of material non‐public information
with respect to the issuer or the security. It is considered unlawful unless:

1. The insider proves that the information was no t gained from such a relationship.

2. If the other party selling to or buying from the insider (or his agent) is identified, the insider proves:

a) That he disclosed the information to the other party

b) That he had reason to believe that the other party otherwise is also in possession of the information.
INSIDER:

1. A person who with respect to a particular security may be any of the following:

a) The issuer

b) The director or the officer of or a person controlling the issuer

2. A person whose relationship or former relationship to the issuer gives him access to material information about the
issuer or the security that is not generally available to the public

3. A government employee or director or officer of an Exchange, clearing agency and/or self‐regulatory organization
who has access to material information about the issuer or the security that is not generally available to the public

4. A person who learns such information by a communication from any of the foregoing insiders.

MATERIAL NON‐PUBLIC INFORMATION (Fact of Special Significance)

1. Information about the issuer or the security that has not been generally disclosed to the public and would be likely
to affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the
market to absorb the information.

2. Information about the issuer or the security which would be considered by a reasonable person important under
the circumstances in determining his course of action to buy, sell or hold security.

SUITABILITY RULE

The rule states that in recommending to a customer the purchase, sale or exchange of any security, a broker or dealer
shall have reasonable grounds to believe that the recommendation is suitable to such customer based on the facts
disclosed by the latter as to his other security holdings and his financial situations and needs.

MARGIN TRADING

A kind of trading that allows a broker to advance for the customer/investor part of the purchase price of the security and
to keep it as collateral for such advance.

The credit extended must be for an amount not greater than whatever is higher of:

1. 65% of current market price of the security or

2. 100% of the lowest market price of security during the preceding 36 calendar months but not greater than 75% of
the current market price. (section 48)

MARGIN

Sum of money or its equivalent placed in the hands of the broker by principal or persons on whose account the purchase
is to be made, as a security to the former against losses to which he may be exposed by a subsequent depression in the
market value of the stock.

Note: Trading on credit or “ margin trading” allows investors to buy more securities than their cash position would
normally allow. Investors pay only a portion of the purchase price of the securities. The broker advances for them the
balance of the purchase price and keeps the securities as collateral for the advance or loan.
 Brokers take these securities/stocks to their bank and borrow the balance “on it” since they have to pay in full
for the traded stock.

Hence increasing margins that is decreasing the amounts brokers may advance for the speculative
purchase and carrying of stocks is the most direct and effective method of discouraging an abnormal attraction of funds
into the stock market and achieving a more balanced use of such resources. (Abacus Securities vs. Ampil G.R. No. 160016
February 27, 2006)

INTERIM RULES OF PROCEDURE ON CORPORATE REHABILITATION EFFECTIVE DECEMBER 15,2000

Corporate Rehabilitation – a process to conserve and administer the corporation’s assets in the hope that it may eventually
be able to to recover from financial stress to solvency.

Nature of Proceedings – In rem, summary and non‐adversarial

A petition for rehabilitation is a special proceeding, the status or fact sought to be established is the inability of the
corporate debtor to pay its debts when they fall due so that a rehabilitation plan, containing the formula for the successful
recovery of the corporation may be approved in the end.

Applicability – these rules apply in petitions for rehabilitation filed by corporations, partnerships and associations pursuant
to PD 902=A

Venue – petitions for rehabilitation pursuant to these rules shall be filed in the RTC h having jurisdiction over the territory
where the debtor’s principal office is located.

STEPS

1. Filing a verified petition with the appropriate RTC by

a) Corporate debtor who foresees the impossibility of meeting its debts when they respectively fall due or

b) Creditors holding at least 25% of the Debtor’s total liability.

2. The following shall be annexed to the petition:

a) Audited financial statements at the end of its last fiscal year

b) Interim financial statement

c) Schedule of debts and liabilities

d) Inventory of assets

e) Rehabilitation plan

f) Schedule of payments and disposition of assets affected within 3 months preceding the filing of the petition

g) Schedule of cash flow for the last three months

h) Statement of possible claims

i) Affidavit of general financial condition

j) At least 3 nominations for rehabilitation receiver

k) Certificate under oath that directors and stockholders have irrevocably approved/consented to all actions/matters
necessary under the rehabilitation plan.

3. The court shall issue the stay order not later than 5 days from the filing of the petition which among others shall:

a) Appoint a rehabilitation receiver

b) Stay all actions for claims against the debtor which shall cover both secure and unsecured creditors

c) Set an initial hearing for the petition (not earlier than 45 days but not later than 60 days from filing of the petition

d) Direct the creditors to file their verified comment or opposition not later than 10 days before the initial hearing.
Their failure to do so would bar them from participation in the proceedings.

4. Publication of the stay order in a newspaper of general circulation once a week for 2 consecutive weeks.

5. Referral of rehabilitation plan to rehabilitation receiver

6. Meetings between corporate debtor and creditors. Discussion on the rehabilitation plan.

7. Submission of the final rehabilitation plan to the RTC for approval

8. The petition shall be dismissed, (which results into the automatic filing of the stay order unless RTC ordered
otherwise) if no rehabilitation plan is approved after 180 days from initial hearing.

9. Approval or disapproval of the rehabilitation plan by RTC.

STAY ORDER/AUTOMATIC STAY

Effect of appointment of a management committee or rehabilitation receiver.

All actions for claims against the corporation shall be suspended accordingly.

Purpose

To enable the management committee or the rehabilitation receiver to effectively exercise its powers free from any
judicial or extra judicial interference that might unduly hinder or prevent the rescue of the debtor company.

No definite duration deemed to apply during the entire period that the corporate debtor is under management committee
or the rehabilitation receiver.

1. All claims against corporations partnerships or associations that are pending before any court tribunal or board
without distinction as to whether or not a creditor is secured or unsecured shall be suspended effective upon the
appointment of a management committee or rehabilitation receiver.

2. The purpose for the suspension of the proceedings is to prevent a creditor from obtaining an advantage or preference
over another and to protect and preserve the rights of party litigants as well as the interest of the investing public or
creditors. Such suspension is intended to give enough breathing space for the management committee or rehabilitation
receiver to make the business viable again, without having to divert attention and resources to litigations in various fora.
3. All actions and claims against the corporation are suspended upon the appointment by the court of the management
committee or rehabilitation receiver. The stay order shall be effective from the time of its issuance to the dismissal of the
petition or termination of the rehabilitation proceedings. The suspension also covers employees claims.

4. The suspension covers all phases of the suit, be it before the trial court or any tribunal or before the Supreme Court.
Not just payment of claims but also proceedings of a suit are automatically sus pended.

5. This suspension shall not prejudice nor render ineffective the status of a secured creditor as compared to a totally
unsecured creditor. PD 902-A does not state anything to this effect. What it merely provides is that all actions for claims
against the corporation partnership or association shall be suspended. This should give the receiver a chance to
rehabilitate the corporation if there should still a possibility for doing so. However, in the event that rehabilitation is no
longer feasible and claims against the distressed corporation would eventually have to be settled, the secured creditors
shall enjoy preference over the unsecured creditors subject only to the provisions of the NCC on Concurrence and
Preference of Credits.

6. The order prohibits the debtor from selling, encumbering, transferring or disposing in any manner any of its
properties except in the ordinary course of business and from making any payment of its liabilities outstanding as of the
date of the filing of the petition.

7. The order likewise prohibits the debtor’s suppliers of goods and services from withholding supply of goods and
services in the ordinary course of business for as long as the debtor makes payment for the services and goods supplied
after the issuance of the stay order.

8. Upon motion or motu propio, the court may declare void any transfer of property or any other conveyance, sale,
payment or agreement made in violation of its stay order or in violation of these rules.

9. The stay order shall be effective from the date of its issuance to the dismissal of the petition or termination of the
rehabilitation proceedings. The petition shall be dismissed if no rehabilitation plan is approved by the court upon the
lapse of 180 days from the date of the initial hearing. The court may grant an extension beyond this point only if it appears
by convincing and compelling evidence that the debtor may successfully be rehabilitated.

REHABILITATION RECEIVER

A person appointed by the RTC in behalf of all the parties for the purpose of preserving and conserving the property and
preventing its possible destruction or dissipation, if it were left in the possession of any of the parties.

He acts in a fiduciary capacity and impartiality towards all interested.

He does not take over the management and control from the debtor, but shall closely oversee and monitor the operations
of the debtor during the pendency of the proceedings.

He shall not be subject to any action. Claim or demand in connection with any act done or omitted by him in good faith in
the exercise of his functions and powers conferred in the rules.

He may be dismissed by the court, upon motion or motu propio, on account of conflict of interest or on any grounds for
removing a trustee under the general principle of trusts.

EFFECTS OF THE REHABILITATION PLAN

1. The plan and its provisions shall be binding upon the debtor and all persons who may be affected by it, including
the creditors, whether or not such persons have participated in the proceedings or opposed the plan or whether or not
their claims have been scheduled.
2. The debtor shall comply with the provisions of the plan and shall take all actions necessary to carry out the plan.

3. Payments shall be made to the creditors in accordance with the provisions of the plan.

4. Contracts and other engagements between the debtor and its creditors shall be interpreted as continuing to apply
to the extent that they do not conflict with the provisions of the plan.

5. Any compromises on amounts or rescheduling of timing of payments by the debtor shall be binding on creditors
regardless of whether or not the plan is successfully implemented.

POWERS AND FUNCTIONS OF THE MANAGEMENT COMMITTE OR REHABILITATION RECEIVER

1. To take custody of and control over all the existing assets and property of such entities under management.

2. To evaluate the existing assets and liabilities, earnings and operations of such corporations, partnerships or
associations.

3. To determine the best way to salvage and protect the interest of the investors and creditors.

4. To study, review and evaluate the feasibility of continuing operations and structure and rehabilitate such entities if
determined to be feasible by the RTC.

5. To report and be responsible to the RTC until dissolved.

6. May overrule or revoke the actions of the previous management and board of directors of the entity under
management notwithstanding any provision of law, articles of incorporation or by‐laws to the contrary.

Mere disagreement among stockholders as to the affairs of the corporation would not in itself suffice as a ground for the
appointment of a management committee. At least where there is no imminent danger of loss of corporate property or
of any other injury to stockholders, management of corporate business should not be wrested away from duly elected
officers who are prima facie entitled to administer the affairs of the corporation, and placed in the hands of the
management committee. However, where the dissension among stockholders is such that the corporation cannot
successfully carry on its corporate functions, the appointment of a management committee becomes imperative. (Ramon
Jacinto and Jaime Colayco vs First Women’s Credit Corporation, GR 154049 August 28, 2003)
Persons taking part in Maritime Commerce

SHIPOWNER - Is the primarily liable for the damages sustained in the operation of the vessel.

- The owner of the vessel is civilly liable for the acts of the captain; and he can only escape from this civil liability by
abandoning his property in the ship and any freight that he might have earned on the voyage. ( arts. 587, 588, Code
Comm.)

- The owner of a vessel and the agent shall be civilly liable for the acts of the captain and for the obligations contracted
by the latter to repair, equip, and provision the vessel; provided the creditor proves that the amount claimed was invested
therein.

- Only the ship owner and the ship agent can make an abandonment.

However, in cases of co‐ownership of a vessel, its part owner may exempt himself from liability by the abandonment of
the part of the vessel belonging to him.

A charterer cannot make an abandonment of the ship as the character cannot be regarded as being in the place of the
owners or agents in matters relating to the responsibility pertaining to ownership and possession of the vessel.
Abandonment may be made so as to be exempted from liability in the following cases:
a. For civil liability to third persons arising from the conduct of the captain in the vigilance over the goods which the vessel
carried;
b. For the proportionate contribution of coowners of the vessel to a common fund for the results of the acts of the captain
referred to in Art. 587 of the Code of Commerce; and
c. For the civil liability incurred by the ship owner in case of collision.

Naviero - construed to include the shipowner, ship agent, and the charterer who is considered as owner pro hac vice.

- The code of commerce often times uses the term naviero to indicate the person liable. Must be understood to
refer to the person undertaking the voyage, who in one case may be the owner and in another the charterer.

Part Owners - Art. 589 If two or more persons should be part owners of a merchant vessel, a partnership shall be presumed
as established by the co‐owners.

This partnership shall be governed by the resolutions of the majority of the members.

If the part owners should not be more than two, the disagreement of views, if any, shall be decided by the vote
of the member having the largest interest. If the interests are equal, it should be decided by lot.

The person having the smallest share in the ownership shall have one vote; and proportionately the part owners
as many votes as they have parts equal to the smallest one.

A vessel may not be detained, attached or levied upon in execution in its entirety, for the private debts of a part
owner, but the proceedings shall be limited to the interest which the debtor may have in the vessel, without interfering
with the navigation.

Art. 590. The co‐owners of the vessel shall be civilly liable in the proportion of their interests in the common fund,
for the results of the acts of the captain, referred to in Art. 587.

Each co‐owner may exempt himself from this liability by the abandonment, before a notary, of the part of the
vessel belonging to him.

Art. 591. All the part owners shall be liable, in proportion to their respective ownership, for the expense of
repairing the vessel, and for the expenses which are incurred in virtue of a resolution of the majority.

They shall likewise be liable in the same proportion for the expenses for the maintenance, equipment, and provisioning
of the vessel, necessary for navigation.

ART. 592. The resolution of the majority with regard to the repair, equipment, and provisioning of the vessel in
the port of departure shall bind the minority, unless the minority members renounces their interests, which must be
acquired by the other co‐owners, after judicial appraisement of the value of the portion or portions assigned.

The resolutions of the minority relating to the dissolution of the partnership and sale of the vessel shall also be
binding on the minority.

The sale of the vessel must be made at public auction, subject to the provisions of the law of civil procedure,
unless co‐owners unanimously agree otherwise, saying always the right of repurchase and redemption provided for in
article 575.
 Art. 593. The owners of a vessel shall have the preference in her charter over the persons under the same
conditions and price. If two or more of them shall claim this price, the having the greater interest shall be preferred; and
should they have equal interests, the matter shall be decided by lot.

Art. 594. The co‐owner shall elect the manager who is to represent them in the capacity of ship agent.

The appointment of director or ship agent shall be revocable at the will of the members.

Ship Agent – the person entrusted with provisioning of the vessel, or represents her in the port in which she happens to
be.

- The code of commerce likewise makes the ship agent jointly and severally liable with the owner.

- The agent shall also be civilly liable for the indemnities in favour of third persons which arise from the conduct of
the captain in the care of the goods which the vessel carried; but he may exempt himself therefrom by abandoning the
vessel with all her equipment's and the freight he may have earned during the trip. (Art. 587.)

- The ship agent may discharge the duties of the captain of the vessel; subject every case to the provision to article
609.

If two or more co‐owners apply for the position of captain the disagreement shall be decided by a vote of the members;
and if the vote should result in a tie, it shall be decided in favour of the co‐owner having the larger interest in the vessel.

If the interest of the applicant should be equal, and there should be a tie, the matter shall be decided by lot.

- The ship agent shall come to terms with the captain, and shall contract in the name of the owners, who shall be
bound in all that refer to repairs, details of equipment, armament, provisions of food and fuel, and freight of the vessel,
and, in general, in all that relate to the requirements of navigation.

- Duty to account managing for an association shall render to his associates an account of the results of each voyage
of the vessel, without prejudice to always having the books and correspondence relating to the vessel and to its’ voyage
at their disposal.

Limitations

- A ship agent may not order new voyage or make contracts for a new charter, or insure the vessel, without the
authorization of its’ owner or resolution of the majority of the co‐owners, unless these powers were granted in him in the
certificate of his appointment.

If he insures the vessel without authorization therefore, he shall be subsidiarity liable for the solvency of the insurer.

Reimbursement and liabilities

Art. 600. After the account of the managing agent has been approved by a relative majority, the co‐owners shall
pay the expenses in proportion to their interest, without prejudice to the civil or criminal actions which the minority may
deem fit to institute afterwards.

In order to enforce the payment, the managing agent shall be entitled to an executor action (“accion ejecutiva”),
which shall be instituted by virtue of a resolution of the majority, and without further proceedings than the
acknowledgement of the signatures of the persons who voted for the resolution.
 Art. 601. Should there be any profits, the co‐owners may demand of the managing agent and the amount
corresponding to their interest by means of an executor action, without any other requisite than the acknowledgement
of the signatures on the instrument approving the account.

Art. 602. The ship agent shall indemnify the captain for all the expenses he may have incurred with funds of his
own or of others, for the benefit of the vessel.

e. Discharge of captain and crew.

The following provisions of the code of commerce are subject to provision of the Labor Code of the Philippines for those
who are employed for domestic transportation or commerce as well as the rules POEA for seamen who are hired for
overseas employment.

Art. 603. Before the vessel set out to the sea the ship agent may at his discretion discharge the captain and
members of the crew whose contracts are not for a definite period or voyage, paying them the salaries earned according
to their contracts, and without any indemnity whatsoever, unless there is an express and specific agreement in respect
thereto.

Art. 604. If the captain and any other member of the crew should be discharge during the voyage, they shall
receive their salary until they return to the port where the contract was made, unless there should be just cause for the
discharge, all accordance with article 636 and following of this code.

Art. 605. If the contracts of the captain and the members of the crew with the ship agent should be for a definite
period or voyage, they may not be discharge until after the fulfilment of their contracts, except for the reason of
insubordination in serious matters, robbery, theft, habitual drunkness, or damaged caused to the vessel or to its cargo
through malice or manifest or proven negligence.

Art. 606. If the captain should be a co‐owner of the vessel, he may not be discharged unless the ship agent return
to him the amount of his interest therein, which, in the absence of agreement between the parties, shall be appraised by
experts appointed in the manner established in the law of civil procedure.

Art. 607. If the captain who is the co‐owner should have obtained the command of the vessel by virtue of special
agreement contained in the articles of association, he may not be deprive of his office except for the causes mentioned
in article 605.

Art. 608. In case of the voluntary sale of the vessel, all contracts between the ship agent and the captain shall
terminate, reserving to the latter his rights and indemnity which may pertain to him, according to the agreements made
with the ship agent.

The vessel sold shall remain subject to the security of the payment of said indemnity if, after the action against
the vendor has been instituted, the latter is found to be insolvent.

Art. 588 Neither the shipowner nor the ship agent shall be liable for the obligations contracted by the captain, if the latter
exceeds the powers and privileges pertaining to him by reason of his position or conferred upon him by the former.

Nevertheless, if the amounts claimed were invested for the benefit of the vessel, the responsibility therefor shall
devolve upon its’ owner or agent.

Liability of Ship owners and Ship agents:

a. civil liability for the acts of the captain

b. civil liability for contracts entered into by the captain to repair, equip and provision the vessel, provided that the
amount claimed was invested for the benefit of the vessel

c. civil liability for indemnities in favor of 3rd persons which may arise from the conduct of the captain in the care of
the goods which the vessel carried, as well as for the safety of the passengers transported

· Ship owner/ship agent not liable for the obligations contracted by the captain if the latter exceeds his powers and
privileges inherent in his position of those which may have been conferred upon him by the former. However, if the
amount claimed were made use of for the benefit of the vessel, the ship owner or ship agent is liable.

Captain –

Concept.

The name of captain or master is given, according to the kind of vessel, to the person in charge of it.

The first denomination is applied to those who govern vessels that navigate the high seas or ships of large dimensions and
importance, although they be engaged in the coastwise trade.

Masters are those who command smaller ships engaged exclusively in the coastwise trade.

For the purposes of maritime commerce, the words "captain" and "master" have the same meaning; both being the chiefs
or commanders of ships.

A boat captain means a person authorized by MARINA to act as officer and/or in command of a boat /ship or has the
qualification/license to act as such.

Art. 609. — Captains, masters, or patrons of vessels must be Filipinos, have legal capacity to contract in accordance with
this code, and prove the skill capacity and qualifications necessary to command and direct the vessel, as established by
marine and navigation laws, ordinances or regulations, and must not be disqualified according to the same for the
discharge of the duties of the position.

If the owner of a vessel desires to be the captain thereof, without having the legal qualifications therefor, he shall
limit himself to the financial administration of the vessel, and shall intrust the navigation to a person possessing the
qualification required by said ordinances and regulations.

Triple roles of the captain –

a. The general agent of the shipowner ( he can sign bills of lading, agree upon fright rates and decide whether to take
cargo; enter into contracts with respect to the vessel);

b. the commander and the technical director of the vessel ( considered the most important because it has to do with the
operation of the vessel and protection of the passengers, crew and cargo);

c. government representative of the country under whose flag he navigates.

1. General agent of the ship owner

2. Technical director of the vessels

3. Represents the government of the country under whose flag he navigates

The captain has the fiduciary functions and as such has reasonable measure of discretionary authority to decide what the
safety of the ship and its crew and cargo specifically requires on a stipulated ocean voyage.
The responsibility of the captain remains even if the vessel is on a compulsory pilotage.

Grounds for discharge of a captain:

1. Insubordination in serious matters;

2. Robbery or theft;

3. Habitual drunkenness;

4. Damage caused to the vessel or to its cargo through malice or manifest or proven negligence.

OFFICERS AND CREW OF THE VESSEL.

a) Sailing mate/ First mate

b) Second mate

c) Engineers

d) Members of the crew

SUPERCARGOES - person who discharges administrative duties assigned to him by ship agent or shippers, keeping an
account and record of transaction as required in the accounting book of the captain.

DESERTION – an act by which a seaman deserts and abandons a ship or vessel before the expiration of his term of his duty
and without leave and without intention to return.

General Rule: The captain cannot contract loans on repondentia secured by the cargo, and should he do
so, the contract shall be void. Neither can he borrow money or bottomry for his own transactions,

Exceptions:
1. On the portion of the vessel he owns, provided, no money has been previously borrowed on the whole vessel, nor exists
any other kind of lien or obligation chargeable against her.
2. When he is permitted to do so, he must necessarily state what interest he has in the vessel.

DOCTRINE OF LIMITED LIABILITY

1. Ship owner and/or ship agent. A ship agent is the person entrusted with the provisioning of a vessel or who represents
her in the port in which she may be found.
2. Captain or master. He is the person in charge of the vessel and navigates it.
3. Other officers of the vessel
4. Supercargo. He is the person specially employed by the owner of a cargo to take charge of and sell to the best advantage
merchandise which has been shipped, and to purchase returning cargoes and to receive
freight, as he may be authorized.

Liability of ship owner is confined to that which he is entitled to abandon the vessel with all her equipment and the freight
he may have earned during the voyage and if they are lost, it suffices for his discharge. [No ship, no liability]

Exceptions:
1. Vessel is not abandoned (when the ship owner does acts inconsistent with abandonment e.g. salvage)
2. Ship owner agent/ agent allow his vessel to embark in an unseaworthy condition.
3. Claims under workmens compensation
4. Injury/damage due to ship owners fault
5. Vessel is insured
6. In case the voyage is not maritime but only in river or gulf
7. In case of the expenses for equipping, repairing or provisioning the vessel

NOTE: The doctrine also applies for claims due to death or injuries to passengers, aside from claims for
goods. In abandoning the vessel, there is no procedure to be followed. There is neither a prescriptive period within which
the ship owner can make the abandonment. He may do so for so long as he is not estopped from invoking the same or do
acts inconsistent with abandonment.

Charter party

CHARTER PARTY - a contract by which an entire ship or some principal part thereof is let by the owner to another person
for a specified time or use.

GENERAL CATEGORIES OR KINDS OF CHARTER PARTY

1. Bareboat or demise charter it involves the transfer of full possession and control of the vessel for the period covered
by the contract, the character obtaining the right to use the vessel and carry whatever cargo it chooses, while maintaining
and maintaining the vessel as well. Liable for damages:
charterer (acts as a private carrier)
2. Time charter it is a contract to use the vessel for a particular period of time, the character obtaining the right to direct
the movements of the vessel during the chartering period, although the owner retains
possession. It is considered a contract of affreightment. (Acts as a common carrier)
3. Voyage charter it is a contract for the hire of a vessel for one or a series of voyages usually for the purpose of transporting
goods for the charterer. The voyage charter is a contract of affreightment and is considered a private carriage. In a contract
of affreightment the ship owner is the one liable for damages. (Acts as a common carrier)

OWNER PRO HAC VICE demise charterer to whom the owner of the vessel has completely and
exclusively relinquished possession, command and navigation of the vessel. In this kind of charter, the
charterer mans and equips the vessel and assumes all responsibility for its navigation, management and
operation. He thus acts as the owner of the vessel in all important aspects during the duration of the
charter.

1. Civil liability for the acts of the captain

2. Civil liability for contracts entered into by the captain to repair, equip and provision the vessel, provided that the amount
claimed was invested for the benefit of the vessel
3. Civil liability for indemnities in favour of 3rd persons which may arise from the conduct of the captain in the care of the
goods which the vessel carried, as well as for the safety of the passengers transported
4. Damages in case of collision by reason of the fault, negligence or lack of skill of captain or any of the complement.
NOTE: Ship owner/agent not liable for the obligations contracted by the captain if the latter exceeds his powers and
privileges inherent in his position of those which may have been conferred upon him by the former. However, if the
amount claimed were made use of for the benefit of the vessel, the ship owner or ship agent is liable.

Warehouse Reciept
RIGHTS ACQUIRED BY A PERSON TO WHOM A NEGOTIABLE RECEIPT HAS BEEN NEGOTIATED

1. Title to the goods as the person negotiating or transferring the receipt could convey
2. Direct obligation of the warehouseman to hold possession of the goods for him as fully
as if the warehouseman contracted with him directly.

WAREHOUSEMAN’S LIEN 1. Object of the Lien on the goods deposited with him or on the proceeds thereof in his hands

2. Purpose for all lawful charges for storage and preservation of goods, money advanced
by him in relation to such goods such as expenses of transportation or labor.

3. Against what Property may the lien be enforced, all goods belonging to the person liable for the charges, as well as
against all goods belonging to others deposited by the person liable for the charges and could have validly pledged the
same.

4. Loss of lien by warehouseman - by surrendering the possession of the goods or refusing to deliver the goods when
demand is made with which he is bound to comply.

5. Effect of the sale of goods to satisfy the warehouseman’s lien or on account of the goods, perishable or hazardous
nature, warehouseman, after the sale, shall not be liable for failing to deliver the goods to the person lawfully entitled to
the goods, even if such receipt were negotiable. RULE AS TO COMMINGLING OF GOODS General Rule: Warehouseman
must keep the goods of the depositor separate from the goods of other depositors or from the goods of the same
depositor from a separate receipt (Ratio: to permit the inspection and redelivery of the goods deposited at all times)

Exceptions:

1. If the goods are fungible, i.e., any unit of the goods is, from its nature or by mercantile custom, treated as the equivalent
of any other unit

2. The commingling is authorized by agreement or by custom

RULE AS TO THE ATTACHMENT, GARNISHMENT, OR LEVY OF GOODS IN POSSESSION OF A WAREHOUSEMAN

General Rule: Goods in the possession of a warehouseman for which a negotiable receipt has been issued may be attached
by garnishment or be levied upon under an execution provided, the receipt covering the goods is first surrendered to the
warehouseman or its negotiation enjoined.

Exceptions:
1. Where the person who made the deposit is not the owner of the goods or is not a person whose act in conveying title
to them to a purchaser in good faith for value would bind the owner.

2. In an action filed by the owner of the goods for their recovery or delivery to him.

3. Where the attachment of the goods on deposit is made before the negotiable receipt is issued.

STEPS THAT A WAREHOUSEMAN COULD TAKE TO PROTECT HIMSELF FROM A MISDELIVERY

1. Warehouseman is entitled to reasonable time within which to ascertain the validity of the adverse claim or to bring
legal proceedings to compel the claimants to interplead
2. Warehouseman may require the claimants to interplead

WAREHOUSEMAN'S OBLIGATION TO DELIVER THE GOODS

1. Deliver to whom upon demand
a. Holder of the receipt for the goods
b. Depositor

2. The demand should be accompanied by:

a. An offer to satisfy the warehouseman's lien
b. An offer to surrender the receipt if it is negotiable
c. A readiness and willingness to sign an acknowledgement, when the goods are delivered, that they have been delivered
if such is requested by the warehouseman.

RULE ON ADDITIONAL TERMS IN THE RECEIPT

A warehouseman could add or insert any other terms to his receipt provided that;
1. such additional terms are not contrary to the provisions of the Act
2. they do not impair the degree of care in the safekeeping of the goods entrusted to him required under the Act.

Note: A warehouseman cannot provide in the warehouse receipt that the risk of loss of the goods by fire or theft shall be
for the depositor's account as that would be contrary to his obligation to keep the goods safe

TERMS OR INFORMATION THAT SHOULD BE CONTAINED IN A RECEIPT ISSUED BY THE WAREHOUSEMAN FOR THE
COMMODITY HE RECEIVES FOR STORAGE

Although the law does not prescribe any particular form, the receipt must at least contain the following:

1. Location of the warehouse

2. Date of Issue
3. Receipt number
4. Language to indicate if the receipt were negotiable or non-negotiable
5. Rate of storage charges
6. Description of goods or packages containing them
7. Signature of the warehouseman or his agent
8. Language indicating if the warehouseman is an owner solely or jointly with others, of the goods deposited and
9. Statement of advances made by the warehouseman for which he claims a lien

PURPOSE OF THE WAREHOUSE RECEIPTS LAW

1. to prescribe the rights and duties of a warehouseman

2. to regulate the relationship between a warehouseman and:

a. the depositor of the goods or
b. holder of a warehouse receipt for the goods or
c. the person lawfully entitled to the possession of the goods or
d. other persons.
Trust Reciepts Law
TRUST RECEIPT

a written or printed document signed and delivered by the entrustee in favor of the entruster, whereby the latter releases
the goods, documents or instruments over which he holds absolute title or a security interest to the possession of the
former, upon the entrustee's promise to hold said goods in trust for the entruster, and to sell or otherwise dispose of the
goods, etc. with the obligation to turn over the proceeds thereof to the extent of what is owing to the entruster; or to
return the goods if UNSOLD, or for other purposes.

PURPOSE OF THE TRUST RECEIPTS LAW

1. To encourage and promote the use of trust receipts as an additional and convenient aid to commerce and trade;
2. To provide for the regulation of trust receipts transactions in order to assure the protection of the rights and
enforcement of obligations of the parties involved therein; and,
3. To declare the misuse and/or misappropriation of goods or proceeds realized from the sale of goods, documents or
instruments released under trust receipts as a criminal offense punishable as estafa

CONTENTS OF A TRUST RECEIPT

A trust receipt need not be in any form but it must substantially contain the following:
1. A description of the goods, documents or instruments subject of the trust receipt

2. The total invoice value of the goods and the amount of the draft to be paid by the entrustee

3. An undertaking or a commitment of the entrustee:

a. to hold in trust for the entruster the goods, documents or instruments therein described
b. to dispose of them in the manner provided for in the trust receipt; and
c. to turn over the proceeds of the sale of the goods, documents or instruments to the entruster to the extent of the
amount owing to the entruster or as appears in the trust receipt or to return the goods, documents or instruments in the
event of their non-sale within the period specified therein.

4. The trust receipt may contain other terms and conditions agreed upon by the parties in addition to those hereinabove
enumerated provided that such terms and conditions shall not be contrary to the provisions of this Decree, any existing
laws, public policy or morals, public order or good customs.

5. Trust receipts are denominated in Philippine currency or acceptable and eligible foreign currency.
(http://www.pinoylawyer.org/t338-contents-of-a-trust-receipt#495)

NATURE OF THE TRUST RECEIPT AGREEMENT

1. A trust receipt agreement is merely a collateral agreement, the purpose of which is to serve as security for a loan.
2. In relation to a letter of credit, a letter of credit is a separate document from a trust receipt. While the trust receipt may
have been executed as a security on the letter of credit, still the two documents involve different undertakings and
obligations

Truth in Lending Act

Truth in Lending Act
PURPOSES OF THE LAW
1. To protect the debtor from the effects of misrepresentation and concealment;
2. To permit him to fully appreciate and evaluate the real cost of his borrowing; and
3. To avoid circumvention of usury laws.

The Truth in Lending Act (R.A. No. 3765), was enacted primarilyto protect its citizens from a lack of awareness of the true
cost of credit to the user by using a full disclosure of such cost with a view of preventing the uninformed use of credit to
the detriment of the national economy (Sec. 2, R.A. No.3765).

DUTIES OF THE CREDITOR UNDER THIS ACT

Under this Act, any person extending credit must give the debtor, in writing, a recital of:
1. Cash price,
2. Amount credited if on installment price,
3. The difference between the cash and installment price,
4. Recital of the finance charges and what these charges bear to the amount to be financed in percentage.

INFORMATION REQUIRED TO BE STATED [Sec. 4, RA 3765]

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 the following:

1. The cash price or delivered price of the property or service to be acquired. Meaning of cash price or delivered price:
- in case of trade transactions, it is the amount of money which would constitute full payment upon delivery of the
property or service purchased at the creditors
place of business
- in financial transactions, it is the amount of money received by the debtor upon
consummation of the credit transaction, net of finance charges collected at the
time the credit is extended, if any

2. The amounts, if any, to be credited as down payment and/or trade-in. DOWN PAYMENT
amount paid by the debtor at the time of the transaction in partial payment for the property
or service purchased TRADE-IN value of an asset, agreed upon by the creditor and debtor, given at the time of the
transaction in partial payment for the property or service purchased

3. 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.
Meaning of non-finance charges:
amounts advanced by the creditor for items normally associated with the ownership of the property or of the availment
of the service purchased which are not incident to the extension of credit.
in the case of the purchase of an automobile on credit, the creditor may advance the insurance premium as well as the
registration fee for the account of the debtor

4. The total amount to be financed.

Meaning of amount financed:
consists of the cash price plus nonfinance charge less the amount of the down payment and value of the trade-in

5. The finance charge expressed in terms of pesos and centavos.

Meaning of finance charge:
-includes interest, fees, collection charges, discounts, and such other charges incident to the extension of credit as the
Board may by regulation prescribe
-represents the amount to be paid by the debtor incident to the extension of credit such as interest or discounts, collection
fees, credit investigation fees, attorney's fees, and other service charges
-the total finance charge represents the difference between (1) the aggregate consideration (down payment plus
installments) on the part of the debtor, and (2) the sum of the cash price and non-finance charges
6. 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.

TRANSACTIONS NOT COVERED BY ACT [Sec. 3, CB Circ. 158]

Considering that the specific purpose of the law is the full disclosure of the true cost of credit, the following credit
transactions are outside the scope of the regulations:

1. Which do not involve the payment of any finance charge by the debtor
2. In which the debtor is the one specifying a definite and fixed set of credit terms such as bank deposits, insurance
contracts, sale of bonds, etc

EFFECT OF FAILURE TO ABIDE BY THE REQUIREMENTS OF THE LAW [Sec. 6, RA 3765]

1. A creditor who fails to disclose to any person any information in violation of the Act or any of its regulations 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
2. A Creditor shall be liable for reasonable attorneys' fees and court costs as determined by the court
3. Any person who willfully violates any provision of the Act or any of its regulations shall be fined by not less than P1,00
or more than P5,000 or imprisonment for not less than 6 months, nor more than one year or both
4. No punishment or penalty provided by the Act shall apply to the Philippine Government or any agency or any political
subdivision thereof

PRESCRIPTIVE PERIOD WITHIN WHICH A DEBTOR MAY RECOVER [Sec. 6(a), RA 3765]

Action to recover such penalty may be brought by borrower within one year from the date of the occurrence of the
violation, in any court of competent jurisdiction

EFFECT OF A FINAL JUDGMENT ON THE CREDITOR

A final judgment hereafter rendered in any criminal proceeding under this Act to the effect that a defendant has willfully
violated this Act shall be prima facie evidence against such defendant in an action or proceeding brought by any other
party against such defendant under this Act as to all matters respecting which said judgment would be an estoppel as
between the parties thereto.

OFFICERS TASKED WITH ENFORCING THE PROVISIONS OF THE LAW [Sec. 1, CB Circ. 431]
1. Central Bank (now Bangko Sentral ng Pilipinas) and its offices;
2. Department of Commercial and Savings Banks, with respect to commercial, savings and development banks, and
building and loan associations
3. Department of Rural Banks and Savings and Loan Associations, with respect to rural banks and savings and loan
associations
4. Office of Non-Bank Financial Intermediaries, with respect to non-bank financial institutions and other persons, whether
natural or juridical, covered by the Act and not otherwise assigned to the above departments
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