b.

Juridical Persons - commercial and industrial company organized

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in accordance with law, habitually engaged in business
and-special-commercial-law.html
COMMERCE - branch of human activity; purpose is to bring products 4. General Rule: Minors cannot engage in commerce
to the consumer through operations habitually and with intent of gain Exceptions:
COMMERCIAL LAW - branch of private law which regulates the a. to continue business of deceased parents through guardian
juridical relations arising from commercial acts b. court authorizes guardian to place minor and property in
business
CHARACTERISTICS OF COMMERCIAL LAW: c. minor is an alien and his national law allows him to be a merchant
1. universal
2. uniform 5. Which persons are not allowed to engage in commerce?
3. equitable a. suffering accessory penalty of civil interdiction (reclusion perpetua
4. customary and reclusion temporal)
5. progressive b. those judicially declared insolvent until they can obtain their
discharge
PORTIONS OF CODE OF COMMERCE STILL APPLICABLE: c. prohibited by Constitution and special laws
1. merchants; book of merchants and general provision of contracts
2. joint account association 6. Aliens
3. commercial barter a. capacitated under his national law to engage in business
4. transfers of non-negotiable credits
5. commercial contracts of overland transportation b. engaged in the business in the Philippines not reserved for the
6. letters of credit Filipinos
7. maritime commerce
c. after securing license and BOI certificate
OTHERS:
1. Commerce - bringing products from the manufacturers to the
consumers
2. Characteristics of Commerce: 7. Family Code: Either spouse may engage in business; when
a. habituality objected to by the other, court will look into valid grounds, i.e. serious
b. rapidity - if period is fixed, debtor in delay without need of and moral grounds
demand; if contract does not fix period, 10 days
c. intent to join

3. Merchant: 8. BOI Certificate must be obtained by:

a. Individuals - legal capacity, 21 years, or subject to parental
authority, habitually engaged in commerce a. alien
b. foreign firm c. bringing assets tot he Philippine office as capital
d. complete set of accounting records

9. Meaning of Philippine National 13. Merger and Consolidation subject to BOI requirements for the
a. citizen issuance of certificate:
b. domestic corporation wholly owned and organized by Filipinos
in the Philippines When merger and consolidation result in ownership and control
c. Filipino corporation where Filipino capital entitled to vote is at of non-Filipino nationals over more than 40% of the capital of a
least 60% consolidated corporation.

14. SEC License issued upon compliance with the following

10. Query: If a corporation is a shareholder of another corporation, requirements:
how do you determine whether the latter corporation is a Filipino a. proof of compliance with principle of reciprocity
national? b. BOI certificate
c. Applicant for license gives required information
Answer: The following must concur - n articles of incorporation
n by-laws
a. At least 60% of the outstanding capital stock and entitled to n names and addresses of resident agents
vote of both corporations are held by citizens of the Philippines n principal place of business in the Philippines
b. At least 60% of the Board of Directors of both corporations are d. proof of solvency
Filipinos e. deposit acceptable securities to protect future creditors

RETAIL TRADE NATIONALIZATION LAW

11. Tenor of BOI Certificate (Note: Material on the Retail Trade Liberalization Law will not be
a. Business or activity to be engaged is consistent with the included in this reviewer. Supplement to follow)
Investment Priorities Plan
b. Business will contribute to the sound and balanced development 1. Retail Trade - any act, occupation, or calling of habitually selling
of the national economy in a self-sustaining basis direct to the general public, merchandise, commodities, or goods for
c. Business will not conflict with the Constitution and local laws consumption
d. Business is not adequately exploited by Filipino nationals
e. No danger of monopolies/combinations in restraint of trade 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
12. Basic Principles/Conditions laid down by BOI refers to “consumption goods” or “consumer goods” which directly
a. resident agent of foreign firm is a Filipino citizen satisfy human wants and desires and are needed for home and daily
b. establishment of office in the Philippines 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 6. When commissioned merchants/investors or commercial
recommendation of the department head concerned. brokers act in their own name in selling foreign products, the foreign
firm manufacturing these products is not doing business in the
3. By way of exception, the following may participate in Philippines.
management:
a. Aliens may be elected to the Board of Directors to the extent of 7. When a local corporation or person acts in the name of a foreign
their allowable share in the capital of the corporation (in partially firm, the latter is doing business in the Philippines.
nationalized industries).
b. A registered enterprise may employ foreign nationals in 8. The following are NOT doing business:
supervisory, technical, and advisory positions for a period of 5 years a. mere investment as a shareholder by a foreign entity in domestic
subject to extension. corporations duly registered to do business;
c. Where majority of stocks of a pioneer enterprise is owned by b. exercise of rights as such investor;
foreign investors, the following positions may be held by foreign c. having a nominee director or officer to represent interests in
nationals: such corporation;
d. appointing a representative or distributor domiciled in the
president Philippines which transacts business in its own name and for its own
treasurer accounts.
general manager
equivalent positions TRUST RECEIPTS LAW 1. Purpose:

4. A Filipino common-law wife of an alien is not barred from a. to encourage use of and to promote transactions based on trust
engaging in the retail business provided she uses capital exclusively receipts;
derived from her paraphernal properties; however, allowing her b. to regulate the use of trust receipts
common-law alien husband to take part in the management of the
retail business would be a violation of the law. 2. Definition:

5. What doing business means: A written/printed document signed by the ENTRUSTEE in favor of
a. soliciting orders, purchases, service contracts; the ENTRUSTER whereby the latter releases the goods, documents or
b. opening offices whether called liaison offices or branches; instruments tot he possession of the former upon the ENTRUSTEE’S
c. appointing representatives or distributors who are domiciled in promise to hold said goods in trust for the ENTRUSTER, and to sell the
the Philippines or who in any calendar year stay in the country for a goods, etc. WITH THE OBLIGATION TO TURN OVER THE PROCEEDS
period totaling 180 days or more; THEREOF TO THE EXTENT OF WHAT IS OWING TO THE ENTRUSTER;
d. participating in the management or supervision or control of any or to return the goods if UNSOLD, or for other purposes.
domestic firm, entity or corporation in the Philippines;
e. any other act or acts that imply continuity in commercial dealings
3. Trust receipts are denominated in Philippine currency or agree upon, and participating in the favorable or unfavorable results
acceptable and eligible foreign currency. thereof in the proportion they may determine.

4. ENTRUSTER is not liable as principal or vendor under any sale or 2. Joint accounts do not adopt a firm name.
contract to sell made by the ENTRUSTEE.
3. No suit may be maintained - investor and third persons dealing
5. Risk of loss is borne by the ENTRUSTEE. with the merchant conducting business.

6. Pending the duration of the trust agreement, the ENTRUSTER’S 4. It is not subject to any formal requirement for validity; it may be
security interest cannot be prejudiced by claims of creditors of the oral.
ENTRUSTEE.
BULK SALES LAW
7. Loss of goods pending the dispossession shall not extinguish the 1. Purpose: meant to protect creditors of businessmen against
obligation to the ENTRUSTER for the value thereof. preferential or fraudulent transfers

LETTERS OF CREDIT 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
1. Kinds: within the description of what is a “bulk sale”.
a. Commercial Letters of Credit
b. Traveler’s Letters of Credit 3. Types of transactions which are treated as “bulk sales”:
a. Sale, transfer, mortgage or assignments of a stock of goods,
2. No protest required in case of dishonor. wares, merchandise, provisions, or materials otherwise than in the
3. Issued to definite persons and not to order, thus, non-negotiable. ordinary course of trade;
b. Sale transfer, mortgage or assignments of all, or substantially all,
4. Limited to a fixed account. 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,
PRICE TAGS LAW mortgagor, transferor, or assignor.

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
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 1. Laws applicable to insurance in the order of priority:
delivers a written waiver of the provisions of the law from his creditors a. Insurance Code
as shown by verified statements; b. Civil Code
b. The law does not apply to executors, administrators, receivers, c. General Principles prevailing on the subject in the US
assignees in insolvency, or public officers, acting under process.
2. Contract of Insurance - an agreement whereby one undertakes
6. Obligations when transaction is a bulk sale: for a consideration to indemnify another against loss, damage or
a. The vendor must deliver to such vendee a written statement of: liability arising from an unknown contingent event
names and addresses of all creditors to whom said vendor or
mortgagor may be indebted; 3. Contract of Suretyship - deemed to be an insurance contract
within the meaning of the Insurance Code, only if made by a surety
amount of indebtedness due or owing to each of said creditors who or which, as such, is doing an insurance business

b. The vendor must apply the purchase money to the pro-rata 4. Definition of “doing an insurance business”:
payment of bona fide claims of the creditors as shown in the verified a. making or proposing to make, as insurer, any insurance contract;
statement. b. making or proposing to make as a surety, any contract of
c. The seller, at least 10 days before the sale, shall: suretyship as a vocation and not merely incidental to any other
make a full detailed inventory of the goods, merchandise, etc., legitimate business or activity of the surety;
cost price of each article to be included in the sale c. doing reinsurance business;
d. doing or proposing to do any business in the substance
notify every creditor at least 10 days before transferring equivalent to any of the foregoing in a manner designed to evade the
possession of the goods, of the price, terms and conditions of provisions of the Insurance Code.
the sale
5. Requisites of Insurance:
7. Consequences of Violation of Requirements under #6 above a. existence of an insurable interest;
stated: b. risk of loss;
a. When 6(a) above is not complied with, the sale itself is void; the c. assumption of risk;
seller will be criminally liable. d. scheme to distribute losses; and
b. When 6(b) above is not complied with, the sale itself is also void; e. payment of premiums
seller is also criminally liable.
c. When 6(c) is not complied with, the sale is not void; no criminal · Note: If only a, b, and c are present, it is not a contract of
liability on the seller. insurance but a risk shifting device.

6. Characteristics of an insurance contract:

INSURANCE LAW a. consensual
b. voluntary
c. aleatory - depends upon some contingent event; however, it is 9. Insurable Interest in Property may consist of:
not a wagering nor a gambling contract a. an existing interest
d. executed as to the insured after payment of the premium b. an inchoate interest, founded on an existing interest
e. executory as to insurer - not executed until payment for a loss c. an expectancy, coupled with an existing interest out of which the
f. personal - each party takes into account the character, credit expectancy arises
and the conduct of the other
g. conditional - liability is based on the happening of the event · Definition of Insurable Interest in Property: Interest in property,
insured against whether real or personal, or any relation thereto, or liability in respect
thereof, of such nature that a contemplated peril might directly
7. Parties to a contract of Insurance: damnify the insured.
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 10. Instances when Insurable Interest must exist:
contingency a. Interest in Property insured must exist when the insurance takes
b. insured - person in whose favor the contract is operative, and effect and when the loss occurs, but need not exist in the meantime.
who is indemnified against, or is to receive a certain sum upon the b. Interest in the Life or Health of a Person Insured must exist when
happening of a specified contingency the insurance takes effect, but need not exist thereafter or when the
c. beneficiary - may or may not be the same as the insured loss occurs.
c. Beneficiaries of Life Insurance need not have insurable interest
· What perils may be insured? in the life of the insured.
d. Beneficiaries of Property Insurance must have insurable interest
(a) any contingent or unknown event, whether past or future, which in the property insured.
may damnify a person having an insurable interest; or
(b) any contingent or unknown event, whether past or future, which Category
may create a liability against the person insured.
Insurable Interest in Life Insurance
8. Every person has an insurable interest in the life and health of:
a. himself, his spouse and his children Insurable Interest in Property
b. any person on whom he depends wholly or in part for education 1. basis
or support, or in whom he has a pecuniary interest
c. any person under a legal obligation to him for the payment of may be based on pecuniary interest, affinity, or consanguinity
money, or respecting property or services, of which death or illness
might prevent the performance or delay it based purely on pecuniary interest
d. any person upon whose life any estate or any interest vested in
him depends 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.
· A statement or a promise set forth in the policy or by reference
· Exceptions: (a) absence of insurable risk incorporated therein, the non-fulfillment of which in any respect and
without reference to whether the insurer was in fact prejudiced by such
(b) cause of loss is an unexpected risk non-fulfillment, renders the policy voidable by the insurer, wholly
irrespective of the materiality of such statement or promise.
(c) fraud

(d) non-payment of premium

Warranty
(e) violation of conditions relating to naval or military services
Representation
(f) failure to comply with conditions subsequent to the occurrence
of the loss part of the insurance contract

collateral inducement

17. Warranties: always written on the policy

maybe oral or written

· General Rule: Non-performance of a promissory warranty avoids conclusively presumed material

a contract of insurance.
materiality must be proved
· Exceptions:
must be strictly complied with
a. when before the time for performance of the promissory
warranty, a loss insured against occurs; requires substantial truth

b. when before the time of the performance of the warranty, the made by the insured
act becomes unlawful;
may be made by insurer or insured
c. when before the time of the performance of the warranty, said
performance becomes impossible.
· 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:
Insurer must mail or deliver to the insured notice of its intention
For Policies Other than Life: 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.
(1) prior notice of the cancellation to insured Otherwise, insured entitled to renew the policy upon payment of the
premium due on the effective date of the renewal.
(2) notice must be based on the ff. occurrences after effective date
of the policy

(a) non-payment of premiums 19. Premium

(b) conviction of a crime arising out of acts increasing the hazard · General Rule: No policy is binding until the premium thereof has
insured against been paid.

(c) discovery of fraud or material misrepresentation · Exceptions: (a) in case of life or industrial life policy, whenever
the grace period applies
(d) discovery of willful or reckless acts or omissions increasing the
hazard insured against (b) in case of estoppel

(e) physical changes in the property insured which results in the · Insurer is entitled to payment of premiums as soon as the thing
property becoming uninsurable insured is exposed to the perils insured against.

(f) determination by the Commissioner that the continuation of the · When insurer entitled to Return of Premiums
policy would violate or would place the insurer in violation of the
Insurance Code a. when the contract is voidable on account of fraud or
misrepresentation of the insurer;
(3) notice must be in writing
b. when on account of facts, the existence of which the insured was
(4) it must be mailed or delivered to the insured at the address shown ignorant without his fault
in the policy
c. when by any default of the insured other than actual fraud, the
(5) notice must state the ground relied upon and that upon written insurer never incurred any liability under the policy
request of the insured, the insurer will furnish facts on which the
cancellation is based d. when the insured has become a public enemy and the policy
automatically canceled (on the ground of equity)
· Renewal of the Policies Other than Life:
e. in case of over-insurance by several insurers (ratable return of b. where the peril is specifically excepted, a loss which would not
premiums, proportioned to the amount by which the aggregate sum have occurred but for such peril is thereby excepted
insured in all policies exceed the insurable value of the thing at risk)
c. loss caused by the connivance of the insured

d. loss caused by the willful act of insured

20. Loss
e. loss caused by insured’s negligence, if it amounts to bad faith
· 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 · General Rule: The insurer is not liable for a loss caused by the
remote cause or even the immediate cause of the loss willful act of the insured.

b. where the thing insured is rescued from the peril insured against · Exception: Suicide Clause in Life Insurance: Insurer liable in case
that would otherwise have caused a loss, if, in the course of such insured committed suicide after the policy has been in force for a
rescue, the thing is exposed to a peril not insured against, which period of 2 years from the date of its issue or last reinstatement. If
permanently deprives the insured of its possession in whole or in part insured kills himself within a period of 2 years, insurer is not liable.

c. where loss is caused by efforts to rescue the thing insured from · Exception to Exception: If suicide is committed in a state of
a peril insured against insanity, regardless of the time of commission, the insurer is liable.

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 21. Double Insurance - exists where the same person is insured by
several insurers separately in respect to the same subject and interest
e. loss, the immediate cause of which is a peril insured against
except when the proximate cause is an excepted peril

· Requisites: a. person insured must be the same

· When Insurer Not Liable: b. existence of several insurers

a. where the peril insured against was only a remote cause c. subject matter insured must be the same

d. interest the same

e. risk insured against also the same

Over 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
Double Insurance insurance.

may be only one insurer The original insured cannot recover from this insurance unless
there is a specific grant, or assignment of, the reinsurance contract in
must be 2 or more insurers favor of the insured, or a manifest intention of the contracting parties
to the reinsurance contract to favor the insured.
insurance covers more than the value of insurable interest

insurance may or may not exceed the value of insurable interest

· General Rule: The insurer who obtains reinsurance must
communicate:

· The Code prohibits double insurance without the consent of the a. all the representations of the original insured; and
insurer.
b. all the knowledge and information he possesses, whether
· Liability of Insurer: previously or subsequently acquired which are material to the risk

· Exception: under automatic reinsurance treaties

Insurance taken Reinsurance

from each insurer Double Insurance

---------------------------------- x value of property received = 1. insurer becomes the insured

liability of insurer
2. subject matter is the insured risk or liability
total insurance
3. different risks and interests of insured 1. natural and inevitable action of the sea

4. there must be consent of original 2. ordinary wear and tear of a ship, or

5. one who is original insured has no interest in the contract of 3. negligent failure of the ship owner to provide the vessel with
reinsurance which is independent of the original contract of insurance proper equipment to convey the cargo under ordinary conditions

1. insurer remains the insurer

2. subject matter is property · Owner of the Ship has Insurable Interest:

3. the same interest and risk are insured 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
4. insured has to give his consent recover from the charterer), even when hypothecated by bottomry
(only the excess of its value over the amount secured by bottomry) and
5. insured is the party in interest in all contracts
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
23. Marine Insurance: insures against perils of the sea, not of the ship

· Charterer has insurable interest in the ship to the extent that he

Perils of the Sea is liable to be damnified by its loss.

Perils of the Ship

covered by marine insurance · Barratry: Any willful misconduct on the part of the masters or
crew, in pursuance of some unlawful or fraudulent purpose, without
not covered by marine insurance the consent of the owners and to the prejudice of the owner’s interest.

denote nature accidents peculiar to the sea which do not happen by

intervention of man nor are to be prevented by human prudence
· Jettison: Intentional casting overboard of any part of a venture
damage or losses resulting from: 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 b. unreasonable delay in pursuing the voyage
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 c. commencement of an entirely different voyage
documents which may cast reasonable suspicion thereon

· When is Deviation proper?

· Seaworthiness depends on:
a. when caused by circumstances over which neither the master
a. nature of the ship not the owner of the ship has any control

b. nature of the voyage b. when necessary to comply with a warranty or to avoid a peril
whether it is insured against or not
c. nature of the service
c. when made in good faith for the purpose of saving human life
or relieving another vessel in distress

n Seaworthiness of the vessel is required only at the commencement d. when made in good faith and upon reasonable grounds of belief
of the risk in its necessity to avoid a peril

n Exceptions:

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

undertaken
a. Actual Total Loss
b. in a Cargo Policy - commencement of each particular voyage
n a total destruction of the thing insured
c. in a Voyage Policy - commencement of each portion of the
voyage 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
· Deviation
n any other event which effectively deprives the owner of possession,
a. a departure from the course of the voyage insured at the port of destination, of the thing insured
b. Constructive Total Loss - gives to the person insured the right to
abandon
· Freightage cannot be abandoned unless ship is also abandoned.
· 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 · Requisites of a Valid Abandonment:

a. must be total and conditional

· General Average - an expense or damage suffered deliberately b. made within a reasonable time
in order to save the vessel, its cargo, or both from the real or known
risk c. explicit notice

d. coupled with actual abandonment

· 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) · Requisites for Valid Valuation in the Valued Marine Policy:

(a) more than ¾ thereof in value is actually lost or would have been a. insured must have interest at risk
expended to recover it from the peril
b. there must be no fraud on the insured’s part
(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 · Notice of Abandonment:
performed without incurring an expense of more than ¾ of the whole,
or a risk which a prudent man would not undertake under the a. may be oral or in writing (if oral, written notice must be submitted
circumstances within 7 days from oral notice)

(d) if the thing insured is cargo or freightage, and the voyage cannot b. must be explicit
be performed on another ship procured by the master within a
reasonable time and with reasonable diligence to forward the cargo c. must specify the particular cause for abandonment
without incurring an expense or a risk as stated above
d. need not be accompanied by proof of interest or loss

· Co-insurance applies only where the:

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

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

b. conclusive upon the parties and admits the loss and sufficiency
of abandonment · Primage - increase in freightage

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

be unfounded
24. Fire Insurance

Insurer is liable for loss or damage caused by hostile fire (fire

· If insurer refuses to accept a valid abandonment - liable as upon that escapes from the place where it was intended to burn and ought
actual total loss to be in) and not that caused by friendly fire (fire which burns in a place
where it is intended to burn).

· Upon actual abandonment

· Scope of Fire Insurance:
a. freightage earned before loss - belongs to the insurer of
freightage a. fire

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

c. windstorms

· Co-insurance: form of insurance in which the person who insures d. tornado

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 e. earthquake
property and the amount of insurance
f. other allied risks
 25. Casualty Insurance: Any injury that is intended, unexpected and
· When does alteration in the use or condition entitle the insurer unusual, even though it results from an act or even which was
to rescind the contract? intelligently done.

a. such alteration violates a provision in the policy

b. it was made without the insurer’s consent · Insurer is Liable for death/injury to insured:

c. it is done within the insured’s control, and it increases the risk of a. by his own hand while insane
loss or damage
b. by taking poison by mistake

c. by overdoes of drugs administered or taken by mistake, by

· Rules: ignorance or material pathological conditions

a. policy shall not protect the insured from injury consequent upon d. by unexpected bacterial infection consequent upon doing acts,
his negligent use or management of fire, so long as it is confined to even though such acts were intentionally done
the place where it ought to be
e. by unprovoked violence of others
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 · Compulsory Motor Vehicle Liability Insurance
hostile if it by accident, becomes so extensive as to be beyond control
Persons subject to CMVLI:

a. motor vehicle owner or one who is the actual legal owner of a

· Options of the Insurer motor vehicle in whose name such vehicle is registered with the LTO

a. purchase the property at appraised valuation b. land transport operator or one who is the owner of a motor
vehicle or vehicles being used for conveying passengers for
b. restore the property damaged - contract of insurance is compensation (including school buses)
discharged and parties enter into a new contract of insurance
· 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.
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.

Insurance Broker - any person for any compensation, commission or

any other thing of value, acts, or aids in any manner in soliciting, 5. Negotiable Receipt - receipt deliverable to order or to bearer.
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.
6. Essential Terms which MUST be embodied in a Warehouse
Receipt:

WAREHOUSE RECEIPTS LAW a. location of the warehouse

1. Warehouse - a building or place where goods are deposited and b. date of the issue of the receipt
stored for profit.
c. consecutive number of the receipt

d. statement whether the goods received will be delivered to bearer,

2. Warehouseman - person lawfully engaged in the business of or a specified person, or his order
storing goods for profit.
e. rate of storage charges

f. description of the goods or packages containing them for

· Only a warehouseman may issue warehouse receipts. 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, 15. When is there Misdelivery?
or
When the warehouseman delivers the goods to a person who is
(ii) its negotiation is enjoined, or not in fact lawfully entitled to the possession of the goods because:

(iii) the receipt is impounded by the court a. the person does not fall under letter B or C above; or

c. to the purchaser in case of sale of the goods by the warehouseman b. the person falls under letter B or C but prior to delivery, the
to enforce his lien warehouseman had either:

d. to the purchaser where perishable or hazardous goods are sold (1) been requested by the person lawfully entitled to the delivery not
at private or public sale 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
B. If goods are covered by a non-negotiable receipt:

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

16. Effects of Misdelivery:
b. one who has written authority from letter a
The warehouseman shall be liable for conversion to all having a
right to property or possession of the goods.

C. If goods are covered by a negotiable receipt, a person in

possession of the receipt, the terms of which the goods are deliverable:
17. What happens if there is proper delivery or partial delivery but the
a. to him or order warehouseman fails to cancel the receipt or record on the receipt of
such partial delivery?
b. to bearer
a. If goods covered by a negotiable warehouse receipt are delivered
c. indorsed to him 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
d. indorsed in blank by the person whom delivery was promised 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 · Goods Subject to lien:
separate.
a. goods belonging to the depositor who is liable to the
warehouseman as debtor whenever such goods are deposited and

22. Remedies of a Creditor: (the debtor being the owner of the b. goods belonging to other persons stored by the depositor who
negotiable receipt) is liable to the warehouseman as debtor with authority to make a valid
pledge
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 · How is a lien enforced?
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. 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
23. Warehouseman’s Lien
c. by filing a civil action for unpaid charges or by way of
· Extent of Warehouseman’s Lien: counterclaim in an action to recover the property from him

A warehouseman shall have a lien on goods deposited or on the

proceeds thereof in his hands for:
· How is a lien lost?
a. all lawful charges for storage and preservation of the goods
a. when the warehouseman voluntarily surrenders possession of
b. all lawful claims for money advances, interest, insurance, the goods without requiring payment of his lien; or
transportation, labor, weighing, cooperating and other charges and
expenses in relation to such goods b. when the warehouseman wrongfully refuses to deliver the goods
when a demand is made with which he is bound to comply
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
24. Negotiation and Transfer of Receipts

· How do we negotiate a receipt deliverable to order?

 b. the title of the person (depositor or owner) to whose order by
a. by indorsing it in blank thereby making it deliverable to bearer the terms of the receipt the goods were to be delivered
or
c. the direct obligation of the warehouseman to hold possession of
b. by special indorsement - which would require further the goods for him, as if the warehouseman directly contracted with him
indorsements for further negotiations.

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

· May non negotiable receipts be negotiated?

No, even if the receipt is indorsed, the transferee acquires no

· How do we negotiate a receipt deliverable to bearer? additional right. That is why they are called non negotiable receipts.
But they may be transferred or assigned by delivery.
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. · Rights of a person to whom a non negotiable receipt has been
transferred:

a. the title to the goods as against the transferor

· Who may negotiate warehouse receipts?
b. the right to notify the warehouseman of the transfer thereof and
a. the owner of the receipt, or
c. the right thereafter to acquire the obligation of the
b. the person to whom possession of the receipt was entrusted to warehouseman to hold the goods for him
by the owner

· Distinction between a non negotiable receipt from a negotiable

· Rights acquired by a person to whom the receipt has been receipt with regard to attachment or execution upon goods:
negotiated:

a. the title of the person negotiating the receipt over the goods
covered by the receipt 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 · Any warehouseman receiving commodities for (a) storage; (b)
milling; (c) co-mingling must:
When a negotiable instrument is altered deliberately, it becomes null
and void. a. obtain prior license from the Bureau of Commerce

When a warehouse receipt is altered, it is still valid but it may be b. file a bond in an amount equivalent to 33 1/3 % of the capacity
enforced only in accordance with its original tenor. of the warehouse against which bond depositors may sue directly

If a negotiable instrument is originally payable to bearer, it will always c. open to the public, no discrimination allowed
remain so payable regardless of the way it is indorsed, whether
specially or in blank. d. liable for double market value should he accept goods in excess
of the capacity of warehouse if goods are damaged or destroyed
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.
· Note: for palay and corn license, a bond with the National Grains
A holder in due course may be able to obtain a title better than that Authority is required; also an insurance cover is required.
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 Uniform Currency Law
at the same time a conveyance of the instrument and a contract the
indorser has with the indorsee that on certain conditions, the indorser 1. Obligations Null and Void
will pay the instrument if the party primarily liable fails to do so.
a. obligations payable in gold/foreign currency
The indorsement of a warehouse receipt amounts merely to a
conveyance by the indorser. Accordingly, an indorser of a receipt shall b. obligations payable in Philippine currency but measured in
not be liable to the holder if, for example, the warehouseman fails to gold/foreign currency
deliver the goods because they were lost due to his fault or negligence.

2. Exempt Transactions
GENERAL BONDED WAREHOUSE LAW
a. government to government transactions or with international a. serving penalty of civil interdiction
banking institutions
b. insolvent
b. transactions affecting high priority economic projects
c. absolutely disqualified by special laws
c. forward exchange transactions between banks

d. import and export and other international banking, financial,

investment and industrial transactions 5. Relatively Disqualified

a. judicial and prosecuting officials in active service

3. Merchants and Commercial Transactions b. administrative, economic, military chiefs

· Classes of Investments: c. government collection agents and custodian of funds

a. Permitted - one allowed without need of prior authority from d. stock and commercial brokers
the Philippine Government. If registered status, invest up to extent as
not to affect its registered status. If enterprise not registered, e. by special laws cannot trade in specified territories
investment not to exceed 40%.

b. Permissible - invest in excess of 40% in unregistered enterprise

but with prior approval of BOI 6. Books a Merchant must keep

c. Pioneer Area - (a) involves manufacturing, processing, a. book of inventories and balances, statement of assets, liabilities
production of product not produced at all/produced in non- and capital
commercial scale; (b) uses a design, scheme, formula that is new and
untried in the Phils.; (c) agricultural activities/services essential to the b. journal of day to day operations
attainment of food sufficiency; (d) produces non-conventional
fuels/utilizes non-conventional sources of energy (all others are non- c. ledger for classifying accounts
pioneer)
d. copying book for letters and telegrams; if juridical person, include
book of minutes and stock and transfer book

4. Absolutely Disqualified to become Merchants

7. Probative Value of Merchant’s Book Transportation Law

a. evidence against merchants themselves 1. Contract of Transportation - contract whereby a certain person
or association of persons obligate themselves to transport persons,
b. in case of conflicts between 2 books - that which s properly kept things, news, from one place to another for a fixed price
prevails

c. if one keeps books and the other does not and cannot explain
why, the former prevails 2. Parties to the Contract of Transportation:

d. if both books are properly kept and there is a conflict, other a. Shipper - one who gives rise to the contract of transportation by
proofs can be resorted to 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

8. Commercial Contracts by Correspondence are perfected from b. Carrier/Conductor - one who binds himself to transport persons,
the moment the offeree accepts the offer, even before knowledge of things, or news, as the case may be, or one employed in or engaged
said acceptance by the offeror. This does not apply to deposit, in the business of carrying goods for others for hire
guaranty, sales, loan, agency, partnership.

3. Common Carrier - person, corporation, firm, association engaged

9. Joint Account Partnership - business arrangement whereby 2 or in the business of carrying or transporting passengers, goods or both,
more persons interest themselves in the business of another by making by land, water, air, for compensation, offering services to the public;
contributions thereto and participating in the results thereof must exercise extraordinary diligence

a. only one member is ostensible, others are silent

b. no common name Private Carrier - not engaged in the business of carrying; no

public employment; undertakes to deliver goods/passengers for
c. only ostensible partners can sue/be sued compensation; requires only ordinary diligence

d. no juridical personality

4. Requisites of Caso Fortuito

a. event independent of human will Mere delay in the delivery of goods to consignee does not give
right to refuse goods - only breach of contract, ergo damages. If delay
b. occurrence makes it impossible for debtor to perform in normal is unreasonable, then he may refuse to accept and make carrier liable
manner for conversion.

c. debtor free from aggravation/participation

d. impossible to foresee or avoid 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
5. Contributory negligence does not entitle passengers to recover
moral/exemplary damages.

8. Persons Participating in Maritime Commerce:

6. Bill of Lading - written acknowledgment of receipt of goods and a. ship owner and/or ship agent
agreement to transport them to a specific place to a person named or
his carrier b. captain or master

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

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 9. Liability of Ship owners and Ship agents:
execution and fulfillment shall be decided, no exceptions being
admissible other than forgery or material errors in the drafting thereof. a. civil liability for the acts of the captain

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.
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 a. general agent of the ship owner

· Ship owner/ship agent not liable for the obligations contracted b. technical director of the vessels
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 c. represents the government of the country under whose flag he
the former. However, if the amount claimed were made use of for the navigates
benefit of the vessel, the ship owner or ship agent is liable.

12. Loan on Bottomry - made by shipowner/ship agent guaranteed

10. Doctrine of Limited Liability - liability of shipowners is limited to by vessel itself, repayable upon arrival at destination
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.
13. Loan In Respondentia - taken on security of the cargo repayable
Exceptions: (1) vessel is not abandoned upon the safe arrival at cargo destination

(2) claims under workmen’s compensation

(3) injury/damage due to shipowner’s fault 14. Accidents and Damages in Maritime Commerce:

(4) vessel is insured a. Averages

· The doctrine also applies for claims due to death or injuries to b. Arrivals Under Stress
passengers, aside from claims for goods.
c. Collisions
· In abandoning the vessel, there is no procedure to be followed.
There is neither a prescriptive period within which the ship owner can d. Shipwrecks
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.
15. Average:

a. all extraordinary or accidental expenses which may be incurred

11. Roles of the Captain: 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
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:

Requisites: a. lack of provisions due to negligence to carry according to usage

and customs
a. deliberately incurred
b. risk of enemy not well known or manifest
b. intended to save vessel and cargo or both
c. defect of vessel due to improper repair
c. from real and known risk
d. malice, negligence, lack of foresight or skill of captain
d. there is success

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

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

b. there must be a resolution of the captain

 his own labor, preserving the goods or ship which the owner or those
22. Cases of Collision: 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
a. due to the fault, negligence or lack of skill of the captain, sailing salvage business
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 26. Derelict - a ship or cargo which is abandoned and deserted at sea
cargo shall bear its own damages (Fortuitous) by those who are in charge of it, without any hope of recovering it, or
without any intention of returning it
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) 27. Elements of a Valid Salvage:

a. a marine peril

23. Error in Extremis - sudden movement made by a faultless vessel b. service voluntarily rendered when not required as an existing
during the 3rd zone of collision with another vessel which is at fault, duty or from special contract
even if the said movement is wrong, no responsibility will fall on said
vessel c. success, in whole or in part, or that the services rendered
contributed to such success

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 28. Contract of Towage - contract whereby a vessel usually motorized
vessel or thing at sea or on coast where the vessel is rendered pulls another from one place to another for compensation. It is a
incapable of navigation contract of services.

25. Salvage - the compensation allowed to persons by whose 29. Difference between Towage and Salvage:
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 Salvage
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 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
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.

court has power to reduce the amount of remuneration if

unconscionable Warsaw Convention

court has no power to change amount in towage even if 1. When Applicable:

unconscionable
a. international transport by air

b. transport of persons, baggage, or goods

Carriage of Goods by Sea Act

2. Liabilities under the Convention:
1. When Applicable:
a. damage sustained in the event of the death or wounding of a
a. contracts for the carriage of goods passenger taking place on board the aircraft or in the course of any of
the operations of embarking or disembarking
b. by sea
b. loss or damage to any check baggage or goods sustained during
c. to and from Philippine ports the transport by air

d. in foreign trade 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)
 (2) default amounting to willful misconduct

3. Meaning of Transport by Air - period during which the baggage (3) accepting passengers without ticket
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 (4) accepting goods without airway bill or baggage without baggage
whatsoever check

4. Action for damages must be brought at the option of the plaintiff, 6. The right to damages shall be extinguished if an action is not
either: 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
a. before the court of the domicile of the carrier; date on which the transportation stopped.

b. court of principal place of business of carrier;

c. court where he has a place of business through which the contract 7. Notice requirement: damage to baggage : within 3 days from
has been made; receipt

d. before the court at the place of destination damage to goods: within 7 days from
receipt

delay: within 21 days from receipt

5. Convention provides for a limitation of liability:
· Failure to file written notice, no action shall lie against the carrier,
a. for each passenger - limited to 125,000 francs save in the case of fraud on his part.

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

kilogram
8. Notice Requirements:
c. for hand carry - limited to 5,000 francs per passenger

· When can you not avail of this limitation?

COGSA
(1) willful misconduct
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.
Corporation Law

1. Doctrine of Corporate Opportunity - a director is made to account

5. Distinctions between CPCs and CPCNs to his corporation, gains and profits from transactions entered into by
him/another competing corporation in which he has substantial
Certificate of Public Convenience interest, which should have been a transaction undertaken by the
corporation. This s a breach of fiduciary relationship.
Certificate of Public Convenience and Necessity

any authorization to operate a public service issued by the appropriate

government agency 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
issued by the appropriate government agency to a public service to the corporation separate and distinct from the persons composing it
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 3. De Jure Corporation - corporation formed with all the
legislative is required by law requirements of law

an authorization issued by the proper government agency for the

operation of public services for which a franchise is required by law
4. De Facto Corporation - corporation defectively formed from a
bona fide attempt to incorporate under the existing law and exercises
corporate powers
6. Requirements of CPC and franchise:

a. Filipino citizenship
5. Corporation by Estoppel - a group of persons which holds itself
b. financial capacity 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
c. public convenience 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 9. Exceptions where holders of non-voting shares may vote:
corporation with rights and duties maintainable by law (ex. Roman
Catholic) a. amendments of articles of incorporation

b. adoption/amendment of by-laws

7. Trust Fund Doctrine - the subscribed capital stock of the c. increase/decrease of bonded indebtedness
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. d. increase/decrease of capital stock
Corporations may not dissipate this and the creditors may sue the
stockholders directly for their unpaid subscriptions e. sale/disposition of all/substantially all corporate property

f. merger/consolidation of corporation

8. Voting Shares g. investment of funds in another corporation/another business

purpose
a. Founders Shares - given rights and privileges not enjoyed by
owners of other stocks; right to vote/be voted in the election of h. corporate dissolution
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.)
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
 b. ordinary civil action

c. collection from cash dividends and other amounts due to

12. Over-issued Stock - stock issued in excess of authorized capital stockholders if allowed by by-laws/agreed to by him
stock; null and void

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

13. Watered Stock - stock issued gratuitously, money/property less
than par value, services less than par value, dividends where no surplus a. eliminate fractional shares
profits exist
b. corporate indebtedness arising from unpaid subscriptions

c. purchase delinquent shares

14. Certificate of Stock - written acknowledgment by the corporation
of the stockholder’s interest in the corporation. It is the personal d. exercise of appraisal right
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 18. Right of Appraisal
first be paid.
a. amending articles, changing, restricting, enlarging stockholder’s
rights/extending, shortening corporate life

15. Chattel mortgage of shares registered with the Registrar of Deeds b. sale/disposition of all/substantially all of corporate assets
need not be registered in corporate books to bind third parties
because corporate books only cover absolute transfers. But the c. merger and consolidation
pledgee/mortgagee may not have voting rights unless stated in the
contract and registered in the corporate name. d. investment of funds in another corporation/for a different
purpose

16. Methods of Collection of Unpaid Subscription

19. Grounds for Rejection of Registration
a. call, delinquency and sale at public auction of delinquent shares
a. not in prescribed form
b. purpose illegal, inimical

c. treasurer’s affidavit false 24. Theory of Special Capacity - the corporation cannot exercise
powers except those expressly/impliedly given
d. non-compliance with required Filipino stock ownership

25. Concession Theory - a group of persons wanting to create a

20. Corporation must organize within 2 years from issuance of corporation will have to execute documents and comply with
certificate of incorporation. requirements set by the state before being given corporate personality;
merely a privilege; state may provide causes for which the privilege
How to organize? may be withdrawn

a. adoption of by-laws

b. election of Board of Directors 26. Acts requiring majority vote of stockholder:

c. election of officers a. filing of issue value of no par value share

But from issuance of certificate, it acquires juridical personality b. adoption, amendment, repeal of by-laws

c. compensation and other per diems for directors

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
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:

23. Theory of General Capacity - a corporation is said to hold such
powers as are not prohibited/withheld from it by general law
a. a direct participation in management - where his vote is needed 31. The power of removal of directors that may be exercised with or
to approve certain corporate actions without cause cannot apply to the director representing the minority
shareholders. He may only be removed with cause.
b. indirect participation in management to vote or remove directors

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

Exceptions:
29. Voting Trust Agreement - an agreement between a group of
stockholders and trustee for a term not exceeding 5 years in which a. justified by approved expansion projects
control over the stocks is lodged in the trustee. The purpose is for
controlling the voting. b. prohibited by creditor to declare dividends

a. in writing, notarized and filed with the SEC and the corporation c. retention is necessary under existing circumstances

b. period not exceeding 5 years

c. cannot be entered into to circumvent the laws against 33. Business Judgment Rule - decisions made by a corporation’s
monopolies, illegal combinations in restraint of trade in fraud 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

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 34. Individual Suit - one brought to assert a right of a stockholder
fit. Cumulative voting is a matter of right in a stock corporation. In a peculiar to himself
non-stock corporation, it cannot be utilized unless allowed by the by-
laws/articles

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
 Revised Securities Act
39. SEC Jurisdiction

a. original and exclusive jurisdiction

(Material on the Securities Regulation Code of 2000 to follow)
(1) fraudulent devices and schemes employed by directors
detrimental to public interest

(2) intra-corporate disputes and with the state in relation to their 1. General Rule: All securities before being offered for sale/actual
franchise and right to exist as such sale to the public must first be registered and have the proper permit.

(3) controversies in the election, appointment of directors, trustees, Exception:

etc.
a. exempt securities
(4) petition to be declared in a state of suspension of payments
b. securities emanating from exempt transactions

b. Grounds for Suspension/Revocation of Certificate of Registration

2. Exempt Securities
(1) fraud in procuring registration
a. issued by the government subdivisions/instrumentalities
(2) serious misrepresentation as to objectives of corporation
b. issued by foreign government which the Philippines has
(3) refusal to comply with lawful order of SEC diplomatic relations

(4) continuous inoperation for at least 5 years c. issued by receiver/trustee of an insolvent approved by the court

(5) failure to file by-laws within the required period d. issued by building and loan association

(6) failure to file reports e. issued by receiver/trustee of an insolvent approved by the court

(7) other similar grounds f. policy of insurance issued by insurance corporation supervised
by the insurance commission
g. security/right/interest in real property including subdivision e. issue would prejudice the public
lot/condominium supervised by the Ministry of Human Settlements

h. pension plans regulated by BIR/Insurance Commission

5. Grounds for Revocation

a. issuer insolvent
3. Exempt Transactions
b. violated of Code/SEC rules
a. judicial sale by execution, etc. in insolvency
c. fraudulent transaction
b. sale of pledged property/foreclosed property to liquidate an
obligation d. dishonesty by issuer/misrepresented prospectus

c. isolated transactions on securities done by owner/agent e. does not conduct business in accordance with law

d. stock transfers emanating from mergers and consolidations

e. pre-incorporation subscription 6. Acts Prohibited

f. securities issued by public service operator to broaden equity a. manipulation of security prices
base
b. manipulation of deceptive devices

c. artificial measures of price control

4. Grounds for Rejection of Registration
d. fraudulent transactions
a. application incomplete/untruthful/omits to state a material fact
e. insider trading
b. issuer/registrant insolvent, violated code/ SEC rules, engages in
fraudulent transactions f. false prospectus, communications, reports

c. issuer’s business not sound

d. officer, director, stockholders of issuers is disqualified Secrecy of Bank Deposits

 b. works of the government
1. Deposits in banks, including government banks, may not be
inquired into by any person, except: c. statutes, rules, and regulations of government agencies and
offices
a. if depositor agrees in writing
d. speeches, lectures, sermons, addresses and dissertations,
b. impeachment cases pronounced or rendered in courts of justices or nay administrative
agencies in deliberative assemblies and meetings of public character
c. by court order in cases of bribery and dereliction of duty against
public officials

d. deposit is subject of litigation 2. Fair Use of a Copyrighted Work is not Infringement

e. anti-graft cases a. for criticism, comment, news reporting, teaching, research,

scholarship, and similar purposes
f. general and special examination of bank order of the Monetary
Board of bank fraud or serious irregularity b. decompilation: the reproduction of the code and translation of
the forms of the computer program with other programs
g. re-examination made by an independent auditor hired by a bank
to conduct its regular trust

3. Factors to Consider in Determining Fair Use:

Laws on Intellectual Creation a. purpose and character of the use, including whether such use
is of a commercial nature or for no profit or educational purposes
Copyright
b. nature of the copyrighted work
1. What Works are not Protected:
c. amount and substantiality of the portion used in relation to the
a. any idea, procedure, system, method or operation, concept, copyrighted work as a whole
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 d. effect of use upon the potential market for a value of the
miscellaneous facts, having the character of mere items of press copyrighted work
information, or any official text of a legislative, administrative or legal
nature as well as any official translation thereof
4. Terms of the Protection a. imprisonment of 1 to 3 years plus fine of P50,000 to P150,000 for
the first offense
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 b. imprisonment of 3 years and 1 day to 6 years plus fine ranging
death) from P150,000 to P500,000 for the 2nd offense

b. performances not incorporated in recordings: 50 years from c. imprisonment of 6 years and 1 day to 9 years plus fine of P500,000
end of year in which the performance took place to P1,000,000 for the 3rd/subsequent offenses

c. sound or image and sound recordings and performances IN ALL CASES, subsidiary imprisonment in cases of insolvency
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 7. Presumptions:

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

which the action related
5. Remedies for Infringement
b. Plaintiff is presumed to be the owner of the copyright
a. injunction
c. The natural person whose name is indicated on a work in the
b. actual damages, including legal costs and other expenses, as he usual manner as the author shall, in the absence of proof to the
may have incurred due to the infringement as well as the profits the contrary, be presumed to be the author of the work. This is applicable
infringer may have made due to such infringement even if the name is a pseudonym, where the pseudonym leaves no
doubt as to the identity of the author.
c. impounding of articles during pendency of the action

d. destruction of all infringing copies and/or devices

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

6. Criminal Penalties Patents

1. Patentable Inventions - any technical solution of a problem in b. involves an inventive step;
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 c. is industrially applicable
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
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

e. aesthetic creations
5. Inventive Step - an invention involves an inventive step, if having
f. contrary to public order or morality 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

3. Requisites of Patentability

a. new, novelty 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 15. Industrial Design - any composition of lines or colors or any 3
dimensional form, whether or not associated with lines or colors
b. where public interest, national security, health or the
development of other vital sectors of the national economy as Industrial Designs essentially dictated by technical or functional
determined by the appropriate agency of the government so requires considerations to obtain a technical result or those that are contrary to
public order, health or morals shall not be protected
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
16. Term of Protection - 5 years from filing date of application,
d. in case of public non-commercial use of the patent by the renewable for not more than 2 consecutive periods of 5 years each
patentee, without satisfactory reason

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

Insolvency Law

1. Distinguish Suspension of Payment and Insolvency

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

debtor has enough assets to meet liabilities but cannot meet them as
they fall due
13. Utility Models - an invention qualifies for registration as a utility
model if it is new and industrially applicable debtor has more liabilities than assets

- no inventive step required for registration always initiated by debtor

- no search and examination required initiated by creditors/other persons if involuntary; initiated by debtor if
voluntary
14. Term Protection - 7 years after the filing date of application without
possibility of renewal
2. Fraudulent Preference - any act of insolvent which gives rise/has f. debts not included in the schedule submitted by debtor
tendency to give preference to a creditor to the assets of the insolvent
prejudicial to the right of other creditors of said insolvent

Chattel Mortgage Law

3. Effect on Actions Upon Adjudication of Insolvency 1. The law primarily governs chattel mortgage. Provisions on pledge
of NCC in so far as not in conflict with CML also govern chattel
a. suits pending in court mortgages.

(1) secured obligations suspended until assignee appointed

(2) unsecured obligations terminated except to fix amount of 2. Chattel Mortgage may be rescinded for being in fraud of
obligation creditors.

(3) foreclosure suits pending continue

3. Growing fruits are covered by chattel mortgage but they may

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

4. Machinery placed on plant or building owned by another can

be the object of chattel mortgage.
4. Debts and Obligations not Affected by Discharge of Insolvent

a. assessments due to national and local government

5. General Rule: Chattel Mortgage cannot cover debts subsequently
b. debts due to fraud/embezzlement contracted.

c. debts in which he is bound solidarily

d. alimony 6. Rules: Chattel Mortgage cannot cover debts subsequently

contracted
e. corporate debts
a. registered in place where mortgagor resides and where property c. persons constituting the mortgage have the free disposal of the
(chattel) is located. If mortgagor resides abroad, register in place property and in the absence thereof, they be legally authorized for the
where property is located. purpose

b. Motor Vehicles: register also in Land Transportation Office d. recorded to bind 3rd persons

c. Shares of Stock: place of domicile of corporation and

shareholder. No need for notation in books of corporation
10. Formal Requisites of CM:
d. Vessels: Phil. Coastguard
a. substantial compliance with form in Sec. 5 of CML

b. signed by at least 2 witnesses

7. To be valid against 3rd persons:
c. must contain an affidavit of good faith
a. affidavit of good faith
d. certificate of oath (notarial acknowledgment)
b. contract must be registered

11. Affidavit of Good Faith - where the parties severally swear that the
8. General Rule: In Chattel Mortgage, there is recovery of deficiency mortgage is made for the purpose of securing the obligation specified
judgment. and for no other purpose and that the same is a just and valid
obligation and not one entered into for fraud
Exception: when Recto Law applies
- property given in CM must be described
to enable the parties or any other person after reasonable inquiry and
investigation to identify it
9. Requisites of CML:

a. constituted to secure the fulfillment of principal obligation

12. Future property may not be covered by CM but when such
b. mortgagor is absolute owner of the thing mortgaged property is a:

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

mortgage was executed, or
 Section2. Corporation defined. – A corporation is an artificial being
b. purchased with proceeds (not of your own money) of said goods, created by operation of law, having the right of succession and the
said property may be covered by CM powers, attributes and properties expressly authorized by law or
incident to its existence.

What are the attributes:

13. Criminal Acts - removal of chattel to another city or province
without written consent of mortgagee, selling property already 1. It is an artificial being with separate and distinct personality. Cross
pledged, or mortgaged without written consent of mortgagee 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

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)
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

15. Pactum Commissorium applies to Chattel Mortgage. to have continuity of existence despite the change of stockholders,
members, board members or officers.

4. Powers attributes and properties – Theory of Special

Private Corporation Capacities/Limited Capacity Doctrine provides that no corporation
NOVEMBER 3, 2010 LECTURE shall possess or exercise any corporate power except those conferred
by law, its Articles of Incorporation, those implied from express powers
Atty. Jesus Ramon M. Quevenco 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
TITLE I of those expressed, implied or incidental powers, the act is ultra vires.
GENERAL PROVISIONS
Definitions and Classifications Section 3. Classes of corporations. – Corporations formed or organized
under this Code may be stock or non‐stock corporations. Corporations
Section1. Title of the Code. – This Code shall be known as “The which have capital stock divided into shares and are authorized to
Corporation Code of the Philippines”. 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 Example 1: Corporation X
in the corporate charter to be subscribed and paid in cash kind or
property at the organization of the corporation or afterwards and upon Articles of Incorporation: 1. Authorized capital stock P
which the corporation is to conduct its operation. 1million

2. Capital – the value of the actual property or estate of the 2. 10,000 shares
corporation whether in money or property (its net worth or
stockholders equity or it is its assets less its liabilities) 3. par value P
100/share
3. Authorized capital stock – amount of capital stock as specified
in the articles of incorporation. It is synonymous to capital stock where 4. P 250,000
the shares of the corporation has par value. If the shares of stock have subscribed at time of incorporation
no par value, the corporation has no authorized capital stock.
5. P 62,500 paid to
4. Subscribed capital stock – the total amount of capital stock treasurer per Section 13 CCP
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 Authorized Capital Stock, Capital stock, Legal Stock or Stated Capital –
binding subscription contract); except treasury shares P 1 million

6. Unissued capital stock – the portion of capital stock that is not Subscribed. Outstanding or issued capital – P 250,000
issued or subscribed. It does not vote and draws no dividends.
Paid up capital – P62,500
7. Legal capital – the amount equal to the aggregate par value
and/or issued value of the outstanding capital stock. When par value Un‐issued capital stock – P750,000
shares are issued above par, the premium or excess is not to be
considered part of the legal capital. (Section 43) Legal Capital – P 250,000

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

9. Paid up capital – the amount paid by the stockholders on Example 2: Corporation X

subscription from unissued shares of the corporation.
 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 7. Manufacture, repair, stockpiling and/or distribution of nuclear
Code; Provided, That no extension can be made earlier than five (5) weapons(Art. 2 Section 8)
years prior to the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be determined by 8. Manufacture of firecrackers and other pyrotechnic devices
the Securities and Exchange Commission.
b) 20% foreign equity – Private radio communications network
Sec. 12.Minimum capital stock required of stock corporations. – Stock
corporations incorporated under this Code shall not be required to c) Up to 25% foreign equity
have any minimum authorized capital stock except as otherwise
specifically provided for by special law, and subject to the provisions of 1. Private recruitment whether for local or overseas employment
the following section.
2. Construction or repair of locally funded works
Foreign Stockholders
3. Construction of defense related structures
All the stockholders in a corporation may be foreigners except in fully
or partially nationalized corporation. For example a manufacturer that d) Up to 40% foreign equity
exports all its products can be wholly owned by foreigners.
1. Exploration, development and utilization of natural resources
Fully or partly nationalized corporations:
2. Realty companies and other corporations that own private lands
a) No foreign stockholder allowed in
3. Operations and management of public utilities
1. Mass media except recording
4. Culture, production, milling, processing, trading except retail of
2. Retail trade enterprise with paid up capital of less than US$ 2.5 rice and corn and by‐products
million
5. Adjustment companies
3. Private security agencies
6. Sauna and steambath bathhouses, massage clinic and similar
4. Small scale mining activities

5. Utilization of natural resources e) Up to 60 % foreign equity

6. Cockpits 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
 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.

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

Name of Subscriber Amount Subscribed Total Paid‐In 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)
(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 SIGNED IN THE PRESENCE OF:
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.) (Notarial Acknowledgment)

TENTH: That ………………………………… has been elected by the subscribers TREASURER’S AFFIDAVIT
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 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 CASES:
of Incorporation in which case it must be approved by stockholders
constituting a majority of the outstanding capital stock and a copy of 1. Loyola Grand Villas Homeowners Assn vs Court of Appeals 276
the by‐laws signed by the approving stockholders/members and SCRA 681 1997 (Articles of Incorporation as against By‐Laws)
certified by a majority of the BOD or BOT, countersigned by the
Corporate Secretary must be filed with the SEC. 2. Atrium Management Corporation vs Court of Appeals GR 109491,
February 28, 2001 (Ultra Vires Act)
3. Non‐filing within one month is a ground to forfeit franchise but
will not result in automatic dissolution. 3.

4. Amendment of the by‐law may be made by: 4. Central Textile Mills vs. NWPC 260 SCRA 368 (1996) (Trust Fund
Doctrine)
(a) Stockholders together with the board if majority of the board plus
majority of outstanding capital stock concur. TITLE VI MEETINGS Sections 49–59

(b) By the Board only if the power to amend is delegated by 2/3 of Meetings of Stockholders/Members
outstanding capital stock or 2/3 of the members.
1. Regular meetings – annually and on a fixed date in the By laws.
Binding Effect of By‐Laws If none on any day in April for the purpose of electing a new set of
directors and trustees.
1. As to the Corporation and its Components – binding not only
upon the corporation but also on its stockholders, mm=embers and 2. Special Meetings – any time deemed necessary in the by‐laws.
those having direction, management and control of its affairs. To be held in the municipality or city where the principal office of the
corporation is located.
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‐ Meetings of Directors/Trustees
laws because they are bound to know the by‐laws which are merely
provisions for the government of the corporation and notice to third 1. Regular – monthly unless the by‐laws provide otherwise
persons is not presumed. Example: provision in the by‐laws
enumerating the signatories to a contract is not binding upon the third 2. Special – held anytime upon call by the President or by any
party who entered into a contract with the corporation represented by person authorized to call the meeting[JR1] in the by‐laws.
its Chairman who was not part of the enumerated signatories.
3. Meetings of directors or trustees of corporations may be held
anywhere in or outside of the Philippines, unless the by‐laws provide a. For regular meetings – two weeks before the meeting
otherwise.
b. For special meetings – at least a week
Quorum
c. Director/Trustees’ Meeting – whether regular or special at least
1. General Rule – stockholders representing majority of the one day prior
outstanding capital stock or majority of the members.
5. There must be a quorum
2. Exception – unless prescribed by the rules or by the by‐laws
Voting Trust Agreement Section 59
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 An agreement in writing whereby one or more stockholders of a stock
majority, the proceedings will be valid as long as there was a quorum corporation transfer their share to any person or persons or to a
when the meeting was called to order. 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
Requirements of a valid meeting the shares for a certain period of time. The transferring stockholder
parts with the voting power only but retains the equitable or beneficial
1. Proper place ownership. The voting trustee is merely vested with colourable or
fictitious title for the sole purpose of voting upon the stocks which he
2. Stated date and time or a reasonable time thereafter does not own.

3. Called by the proper person Principal purpose: makes possible a unified control of the affairs of the
corporation and a consistent policy by binding stockholders to vote as
a. Designated in the by‐laws a unit. It is also possible for a majority group of stockholders who
transferred their individual holding to voting trustee to dispose of their
b. In the absence of such a designation, by a director or trustee or shares but still retain control of the corporation through the voting
officer entrusted with the management of the corporation trustee who shall have the power to vote as a unit the shares thus
pooled.
c. Stockholder or member upon order by the SEC whenever there
is no person authorized Effects and Manner of Execution

d. Special meeting for the removal of a director may be called by 1. The voting trust agreement transfer only voting rights and other
the Secretary, a stockholder or a member. rights pertaining to the share.

4. Previous Notice
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 Chapter 9 Exchanges and Other Securities Trading Market
capacity of the FC
Section 32 – No entity is allowed to operate as an Exchange
6. Recovery of misdelivered property unless registered with the Commission

WITHDRAWAL OF A FC Section 33.2 – Requirements:

1. All claims which have accrued in the Philippines have been paid, 1. Must be a stock corporation
compromised or settled
2. Must be engaged solely in the business of operating an exchange
2. All taxes, imposts, assessments and penalties if any lawfully due
to the Philippine Government or any of its agencies or political 3. No person must beneficially own more than 5% of the voting
subdivisions have been paid rights

3. The petition for withdrawal of license have been published once 4. No industry or business group must control more than 20% of
a week for three consecutive weeks in a newspaper of general the voting rights
circulation in the Philippines.
5. Brokers in the Board shall comprise not more than 40%
SECURITIES REGULATION CODE RA 8799 August 8, 2000
6. Board of the Exchange to include the President and 51%
Chapter 1 Title and Definition composed of three independent directors and persons representing
the interest of issuers, investors and other market participants
Chapter 2 Securities and Exchange Commission
Section 38 – Listing in the Exchange
Chapter Registration of Securities
1. Corporation with class of equity securities listed for trading or
Chapter 4 Regulation of Pre‐Need Plans
2. Corporation with assets in excess of P50 million
Chapter 5 Reportorial Requirements
3. Having 200 or more holders at least two hundred are holding
Chapter 6 Protection of Shareholders’ Interest shares at least 100 shares

Chapter 7 Prohibition of Fraud, Manipulation and Insider Trading 4. Shall have at least two independent directors or 20% of the
membership of the Board. Independent directors shall mean person
Chapter 8 Regulation of Securities Market Professionals 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
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

PURPOSE 3. Fractional undivided interest in oil gas or other mineral rights

1. To establish a socially conscious free market that regulate itself 4. Derivatives like options and warrants

2. To encourage the widest participation of ownership in enterprises 5. Certificates of assignments and participation, trust certificates,
voting trust certificates or similar instruments
3. To enhance the democratization of wealth
6. Proprietary or non‐proprietary membership certificates in
4. To promote the development of the capital market corporation or

5. To protect investors 7. Other instruments as may in the future be determined by the SEC

6. To ensure full and fair disclosure about securities Definition of Terms

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
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
SECURITIES REGULATION CODE RA 8799 August 8, 2000
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 Chapter 1 Title and Definition
an instrumentality of the GRP
Chapter 2 Securities and Exchange Commission
2.Any security issued or guaranteed by the government of any
country which the GRP maintains diplomatic relations Chapter 3 Registration of Securities

3.Certificate issued by a receiver or by a trustee in bankruptcy duly Chapter 4 Regulation of Pre‐Need Plans
approved by the proper adjudicatory body
Chapter 5 Reportorial Requirements
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 Chapter 6 Protection of Shareholders’ Interest
Insurance Commission, HLURB or the BIR
Chapter 7 Prohibition of Fraud, Manipulation and Insider Trading
5, any security issued by a bank except its own share of stock
Chapter 8 Regulation of Securities Market Professionals
6, Any securities added by the SEC by rule or regulation after
public hearing Chapter 9 Exchanges and Other Securities Trading Market

b. Exempt Transaction - Read Provision page 338 Sundiang Section 32 – No entity is allowed to operate as an Exchange
unless registered with the Commission
Notes:
Section 33.2 – Requirements:
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 1. Must be a stock corporation
regulated supervised or monitored by another government entity who
could be expected to protect the interest of the investors 2. Must be engaged solely in the business of operating an exchange

2. The security involved in an exempt transaction is not in itself 3. No person must beneficially own more than 5% of the voting
exempt but the circumstance under which the security is sold make the rights
requirement of registration under the SRC unnecessary in the public
interest or for the protection of the investors. 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]:
 1. Whether or not the SEC has jurisdiction over respondent’s
Particulars Percentage complaint and to require Cemco to make a tender offer for
respondent’s UCC shares.
Existing shares of Cemco in UCHC 9%
2. Whether or not the rule on mandatory tender offer applies
Acquisition by Cemco of BCI’s and ACC’s shares in UCHC 51% 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
Total stocks of Cemco in UCHC 60% company, through its purchase of the shares in UCHC, a non‐listed
company.
Percentage of UCHC ownership in UCC 60%
3. Whether or not the questioned ruling of the SEC can be
Indirect ownership of Cemco in UCC 36% applied retroactively to Cemco’s transaction which was consummated
under the authority of the SEC’s prior resolution.
Direct ownership of Cemco in UCC 17%
On the first issue, petitioner Cemco contends that while the SEC can
Total ownership of Cemco in UCC 53% take cognizance of respondent’s complaint on the alleged violation by
petitioner Cemco of the mandatory tender offer requirement under
As a consequence of this disclosure, the PSE, in a letter to the SEC Section 19 of Republic Act No. 8799, the same statute does not vest
dated 15 July 2004, inquired as to whether the Tender Offer Rule under the SEC with jurisdiction to adjudicate and determine the rights and
Rule 19 of the Implementing Rules of the Securities Regulation Code is obligations of the parties since, under the same statute, the SEC’s
not applicable to the purchase by petitioner of the majority of shares authority is purely administrative. Having been vested with purely
of UCC. administrative authority, the SEC can only impose administrative
sanctions such as the imposition of administrative fines, the suspension
In a letter dated 16 July 2004, Director Justina Callangan of the SEC’s or revocation of registrations with the SEC, and the like. Petitioner
Corporate Finance Department responded to the query of the PSE that stresses that there is nothing in the statute which authorizes the SEC to
while it was the stance of the department that the tender offer rule was issue orders granting affirmative reliefs. Since the SEC’s order
not applicable, the matter must still have to be confirmed by the SEC commanding it to make a tender offer is an affirmative relief fixing the
en banc. respective rights and obligations of parties, such order is void.

Cemco filed a motion for reconsideration which was denied by the Petitioner further contends that in the absence of any specific grant of
Court of Appeals. jurisdiction by Congress, the SEC cannot, by mere administrative
regulation, confer on itself that jurisdiction.
Hence, the instant petition.
Petitioner’s stance fails to persuade.
Simply stated, the following are the issues:
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 k) Certificate under oath that directors and stockholders have
in the RTC h having jurisdiction over the territory where the debtor’s irrevocably approved/consented to all actions/matters necessary
principal office is located. under the rehabilitation plan.

STEPS 3. The court shall issue the stay order not later than 5 days from
the filing of the petition which among others shall:
1. Filing a verified petition with the appropriate RTC by
a) Appoint a rehabilitation receiver
a) Corporate debtor who foresees the impossibility of meeting its
debts when they respectively fall due or b) Stay all actions for claims against the debtor which shall cover
both secure and unsecured creditors
b) Creditors holding at least 25% of the Debtor’s total liability.
c) Set an initial hearing for the petition (not earlier than 45 days but
2. The following shall be annexed to the petition: not later than 60 days from filing of the petition

a) Audited financial statements at the end of its last fiscal year 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
b) Interim financial statement would bar them from participation in the proceedings.

c) Schedule of debts and liabilities 4. Publication of the stay order in a newspaper of general circulation
once a week for 2 consecutive weeks.
d) Inventory of assets
5. Referral of rehabilitation plan to rehabilitation receiver
e) Rehabilitation plan
6. Meetings between corporate debtor and creditors. Discussion
f) Schedule of payments and disposition of assets affected within 3 on the rehabilitation plan.
months preceding the filing of the petition
7. Submission of the final rehabilitation plan to the RTC for approval
g) Schedule of cash flow for the last three months
8. The petition shall be dismissed, (which results into the automatic
h) Statement of possible claims filing of the stay order unless RTC ordered otherwise) if no
rehabilitation plan is approved after 180 days from initial hearing.
i) Affidavit of general financial condition
9. Approval or disapproval of the rehabilitation plan by RTC.
j) At least 3 nominations for rehabilitation receiver
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 The captain has the fiduciary functions and as such has reasonable
and/or in command of a boat /ship or has the qualification/license to measure of discretionary authority to decide what the safety of the ship
act as such. and its crew and cargo specifically requires on a stipulated ocean
voyage.
Art. 609. — Captains, masters, or patrons of vessels must be Filipinos,
have legal capacity to contract in accordance with this code, and prove The responsibility of the captain remains even if the vessel is on a
the skill capacity and qualifications necessary to command and direct compulsory pilotage.
the vessel, as established by marine and navigation laws, ordinances or
regulations, and must not be disqualified according to the same for the Grounds for discharge of a captain:
discharge of the duties of the position.
1. Insubordination in serious matters;
If the owner of a vessel desires to be the captain thereof,
without having the legal qualifications therefor, he shall limit himself to 2. Robbery or theft;
the financial administration of the vessel, and shall intrust the
navigation to a person possessing the qualification required by said 3. Habitual drunkenness;
ordinances and regulations.
4. Damage caused to the vessel or to its cargo through malice or
Triple roles of the captain – manifest or proven negligence.

a. The general agent of the shipowner ( he can sign bills of lading, OFFICERS AND CREW OF THE VESSEL.
agree upon fright rates and decide whether to take cargo; enter into
contracts with respect to the vessel); a) Sailing mate/ First mate

b. the commander and the technical director of the vessel ( considered b) Second mate
the most important because it has to do with the operation of the
vessel and protection of the passengers, crew and cargo); c) Engineers

c. government representative of the country under whose flag he d) Members of the crew
navigates.
SUPERCARGOES - person who discharges administrative duties
1. General agent of the ship owner assigned to him by ship agent or shippers, keeping an account and
record of transaction as required in the accounting book of the captain.
2. Technical director of the vessels
3. Represents the government of the country under whose flag he DESERTION – an act by which a seaman deserts and abandons a ship
navigates 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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